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63d CONGRESS : : 1st SESSION A P R I L 7 -D E C E M B E R 1, 1 9 1 3 SENATE DOCUMENTS VOL. 15 WASHINGTON : : GOVERNMENT PRINTING OFFICE : : 1913 63d C o n g re ss ) 1st Session SENATE ) j D ocu m e n t ( No. 232 BANKING AND CURRENCY HEARINGS BEFORE THE COMMITTEE ON BANKING AND CURRENCY UNITED STATES SENATE SIXTY-THIRD CONGRESS FIRST SESSION ON H. R. 7837 (S. 2639) A BILL TO PROVIDE FOR THE ESTABLISHMENT OF FEDERAL RESERVE BANKS, FOR FURNISHING AN ELASTIC CUR RENCY, AFFORDING MEANS OF REDISCOUNTING COM MERCIAL PAPER, AND TO ESTABLISH A MORE EFFECTIVE SUPERVISION OF BANKING IN THE UNITED STATES, AND FOR OTHER PURPOSES IN THREE VOLUMES VOL. I (IN D E X A T END OF VO LU M E III) WASHINGTON GOVERNMENT PRINTING OFFICE 1913 RESOLUTION BY ME. OWEN. In the Senate of t h e U n it e d S tates, November 6, 1913. Resolved, That the Committee on Banking and Currency is hereby authorized to have printed the indexed hearings by the Banking and Currency Committee of the Senate on the pending banking and currency bills (S. 2639 and H. E. 7837), bound in paper, as a Senate document, * * * Attest: J a m e s M. B a k e r , Secretary. ii COMMITTEE ON BANKING AND CURRENCY. UNITED STATES SENATE. ROBERT L. OWEN, Chairman . . Oklahoma. GILBERT M. HITCHCOCK . . . Nebraska. JAMES A. O’GORMAN . . . . New York. JAMES A. R E E D ..............................Missouri. ATLEE P O M E R E N E ..............................Ohio. JOHN F. SHAFROTH........................Colorado. HENRY F. HOLLIS . . . . New Hampshire. KNUTE N E L S O N .............................. Minnesota. JOSEPH L. B R I S T O W .................... Kansas. COE I. CRAWFORD . . . . South Dakota. GEORGE P. McLEAN . . . . . Connecticut. JOHN W. W E E K S .................... Massachusetts. Jam es W. B e lle r , Clerk. iii LIST OF WITNESSES. [Roman numerals indicate volume of hearings.] Aisthorpe, J. S. (vice president, Illinois Bankers’ Association, Cairo, 111.)---------------------------------------------------------------------------------------- iii ,2194-2202 Allen, William H. (New York, N. Y .)______________________________ i, 375-382 Ailing, Newton D. (vice president, National Nassau Bank, New York C ity)------------------------------------------------------------------------------------------- i, 406-456 Baldwin, W. W. (vice president, Chicago, Burlington & Quincy Rail road Co., Burlington, Iow a )__________________________________ iii , 2131-2137 Banfield, N. F. (vice president, First National Bank, Austin, Minn.)----------------------------------------------------------------------------------- i i i , 2449-2452 Barry, David (cashier, First National Bank, Johnstown, P a .)__ in , 2321-2334 Bassett, J. C. (president, Aberdeen National Bank, Aberdeen, S. D ak.)______________________________________________________ i i , 1657-1682 Berry, William H. (Chester, P a .)__________________________ 1,560-582,586-655 Blinn, Charles P. (president, Massachusetts Bankers’ Association, Bos ton, Mass.)----------------------------------------------------------------------------- ii , 1178-1220 Bolton, J. W. (president, The Rapids Bank, Alexandria, L a .)_____ii , 1571-1583 Bowman, Henry H. (president, Springfield National Bank, Springfield, M ass.)_______________________________________________________ ii , 1225-1248 Bucholz, W. H. (vice president, Omaha National Bank, Omaha, Nebr.)_______________________________________________________ iii , 2419-2432 Cannon, J. G. (president, Fifth National Bank, New York, N. Y .)_ iii , 2138-2191 Chapman, Joseph (vice president, Northwestern National Bank, Minne apolis, Minn.)____________________________________________________ I, 187-192 Clafiin, John (H. B. Claflin Co., New York C ity)___________________ i, 543-550 Clark, Hovey C. (Minneapolis, Minn.)___________________________ n, 1059-1068 Comstock, A. H. (vice president, Marshall-Wells Hardware Co., Duluth, Minn.)________________________________________________________ i i , 1050-1059 Conant, Charles A. (New York, N. Y .)----------------------------------------- i i , 1378-1513 Coxey, Jacob S. (Massillon, O hio)_______________________________ iii , 2967-2976 Crebs, John N. (Carmi, 111.)____________________________________ iii , 2229-2232 Crozier, Alfred Owen (College Hill, Cincinnati, O hio)-----------------iii , 2886-2905 Daniel, T. Cushing (Virginia)___________________ ii , 1159-1174; in , 3140-3152 Dawson, A. F. (president, First National Bank, Davenport, Io w a ), h i , 2082-2131 Dickson, T. H. (secretary, Mississippi Bankers’ Association, Jackson, M iss .)_____________________________________________________________ ii ,1645 Dos Passos, John R. (New York, N. Y .)____________________________ 1,491-497 Drury, F. A. (president, Merchants National Bank, Worcester, Mass.)________________________________________________________ 11,3221-1248 Fisher, Edmund D. (deputy comptroller, New York C ity)---------------------iii , 2487-2513, 3138-3140 Fisher, Irving (Yale University)__ ,_____________________________ii , 1129-1159 Flannagan, William W. (Montclair/ N. J .)__________ 1,738-808; iii , 2726-2729 IT LIST OF WITNESSES. V Foote, Francis W. (vice president, First National Bank of Commerce, Hattiesburg, Miss.)_________________________________ n, 1514-1532, 1613-1621 i, Forgan, James B. (president, First National Bank, Chicago, 111.)--------25-42, 44, 125-189, 198-200, 201, 277-283, 304-306 Fowler, C. A. N. (Elizabeth, N. J .)______________________________ 11,1863-1931 Frame, Andrew Jay (president, Waukesha National Bank, Waukesha, W is.)____________________________________________________________ 1,674-738 French, Nathaniel (Davenport, Iow a)___________________________II, 2069-2082 Frenzel, John P. (vice president, Merchants’ National Bank, Indian apolis, Ind.)__________________________________________________ 11,1533-1539 Frenzel, J. P_________________________________________ ii , 1610-1613,1628-1639 Gilbert, Alexander (president, Market & Fulton National Bank, New Y ork)________________________________________________________ xii,2733-2834 Hallock, James C. (Brooklyn, N. Y .)____________________________ n, 1684-1709 Harrington, Charles M. (Minneapolis, Minn.)______________________ 1,960-966 Harris, B. F. (vice president, First National Bank, Champaign, 111.)___ in 2202-2215 Hill. E. J__________________________________________________________ 1,283-287 Hulbert, E. D. (vice president, Merchants’ Loan & Trust Co., Chicago, 111.)__________________________________________________________ ii , 1094-1129 Ingle, William (vice president, Merchants & Mechanics National Bank, Baltimore, M d .)---------------------------------------------------------------------in, 2369-2419 Jenks, Jeremiah W. (New York University, New York C ity)___________ in, 2552-2634, 3153-3196 Jewett, H. C. (Aberdeen, S. D ak.)_______________________________ n, 1682-1681 Johnston, John T. M. (president, National Reserve Bank, Kansas City, M o .)____________________________________________________________ 1,109-123 Jones, Breekenridge (president, Mississippi Valley Trust Co., St. Louis, M o.)________________________________________________ 11,998-1038,1048-1050 Jones, Gordon (president. United States National Bank, Denver, Colo.)ni, 2259-2272, 2272-2281 Kenaston, F. E. (Minneapolis, Minn.)_____________________________ ii , 967-998 Kent, Fred I. (vice president, Bankers’ Trust Co., New York, N. Y . ) _______________________________________________________ m,2977-3002 Larrabee, F. S. (Farmers’ National Bank, Stafford, Kans.)______iii , 2356-2366, 3069-3071 Lassen, Alexander C. (president, Lassen Realty Co., New York, N. Y . ) _______________________________________________________ ii i , 3112-3125 Law, F. M. (First National Bank, Beaumont, T ex.)____________ in, 2334-2337 Long, Richard H. (Framingham, Mass.)_______________________ i n , 2835-2849 McCaleb, W. F. (president, West Texas Banking & Trust Co., San An tonio, T ex.)---------------------------------------------------------------------------- 11,1591-1610 McCulloch, J. L. (president, Marion National Bank, Marion, Ind.)_ n, 1621-1628 McMorries, Edwin (president. First National Bank, Meridian, M iss.)________________________________________________________ 11,1583-1591 McRae, Thomas C. (president, Bank of Prescott, A rk.)___________ n, 1275-1288 Maddox, Robert F. (vice president, American National Bank, Atlanta, G a.)_____________________________________________________________ i, 192-218 Marshall, F. E. (New York, N. Y .)___________________ i, 456-491; n, 1175-1177 Milliken, R. C. (monetary statistician, Washington, D. C .)_______in, 2453-2484 Moehlenpah, H. A. (president, Wisconsin Bankers’ Association, Clinton, W is.)_________________________________________________________ 11,1539-1565 Montgomery, S. B. (Quincy, 111.)____________________ in, 2192^2194, 2223-2225 Morawetz, Victor (New York, N. Y .)--------------------------- •------------in, 2635-2720 VI LIST OF WITNESSES. Moses, E. R. (president, Citizens’ National Bank, Great Bend, Kans.) _______________________________________________________ h i , 2366-2368 Mosher, Curtis L. (secretary, Citizens’ League ot Minnesota, Minne apolis, Minn.)_________________________________________________ 11,1091-1094 Newton, Oscar" (president, Jackson Bank, Jackson, M iss.)________ 11,1639-1645 Peck, L. T. (cashier, First National Bank of Hawaii, H onolulu)- in, 2875 2883 Perkins, Janies H. (president, National Commercial Bank, Albany, N. Y . ) _______________________________________________________ i ii ,2338 2349 Reynolds, George M. (president, Continental & Commercial National Bank, Chicago, 111.)________i, 198,199, 200, 224-257, 288-296, 297-306, 311-315 Rhodes, Bradford (president, First National Bank, Mamaroneck, N. Y . ) _______________________________________________________ m,3003-3013 Rogers, George W. (cashier, Bank o f Commerce, Little Rock, A rk .)__________________________________________ n,1565-1571; in, 2247 2259 Scott, J. T. (vice president, First National Bank, Houston, Tex.)__n, 1646-1656 Scudder, S. D. (vice president, Richmond Trust & Savings Co., Rich mond, V a .)__________________________________________________ h i , 2232-2247 Sexton, Henry D. (president, Southern Illinois National Bank, East St. Louis, 111.)___________________________________________________ i i , 2215-2223 Shibley, George H. (director, American Bureau of Political Research, Washington, D. C .)_________________________________ i i , 1724-1827; h i , 2534 Shields, Edward E. (secretary, group 2, Pennsylvania Bankers’ Associa tion, West Chester, P a .)_____________________________________ in , 3092-3111 Simmons, W. D. (chairman, banking and commerce committee of Cham ber of Commerce of United States, St. Louis, M o.)__in , 2484-2486, 2513-2519 Sprague, O. M. W. (Harvard University)_______________________________ i, 297, 306-310, 358-373, 497-534, 551-560 Swinney, Edward F. (president, First National Bank, Kansas City, Mo.) _______________________________________________________ in, 2037-205.2 Syme, F. J. (New York, N. Y .)_________________________________ iii , 2872-2875 Thomas, Charles Spalding (Senator from Colorado)------------------ iii , 2432-2449 Tilton, McLane, jr. (president, First National Bank, Pell City, Ala.) _______________________________________________________ iii , 2306-2321 Tregoe, J. H. (secretary, National Association of Credit Men, New York, N. Y .)________________________________________________________ ii , 1038-1048 Treman, Robert (president, Tompkins County National Bank, Ithaca, N. Y .)_______________________________________________________ iii , 2350-2356 Untermyer, Samuel (New York C ity)--------------------------------------------- i, 808-942 Untermyer, Samuel (New York, N. Y .)__________________________ i i , 1288-1369 Vanderlip, Frank A. (president, National City Bank, New York, N. Y .)__________________________________ ii , 1933-2037, 2052-2069, 2911-2967 Varney, Justin E. (vice president and cashier, Bay State National Bank, Lawrence, Mass.) --------------------------------------------------------------------- ii , 1248-1264 Vinson, Taylor (Huntington, W. V a .))__________________________ iii , 2849-2871 Wade, Festus J. (president, Mercantile Trust Co., St. Louis, Mo.) ___________________________________________________ I, 125-186, 141-187 Wells, Edward B. (Minneapolis, Minn.)____________________________ i, 942-960 Wexler, Sol. (vice president, Whitney Central National Bank, New Or leans, L a.)____________________ I, 42-109, 201-212, 219-224, 315-358, 373-374 Wheeler, H. A. (vice president, Union Trust Co., Chicago, 111.)_iii , 2519-2534 White, William C. (president, Illinois National BanK, Peoria 111.), iii , 2225-2229 Willis, Henry Parker (New York, N. Y .)_____________ iii , 3013-3068,3071-3088 Winston, F. G. (Minneapolis, Minn.)____________________________ ii , 1068-1076 Woodruff, George (president, First National Bank, Joliet, 111.), h i , 2281-2306 HEARINGS ON H. R. 7837. T U E SD A Y , SEPTEM BER 2 1913. C o m m it t e e on B a n k in g a n d Cu r r e n c y , U n it e d S t a t e s S e n a t e , Washington, D. 0 . Present: Senators Owen (chairman), Hitchcock, O’Gorman, Reed, Pomerene, Shafroth, Hollis, Nelson, Bristow, Crawford, McLean, and Weeks. The C h a i r m a n . Mr. Forgan, I believe, will act as the representa tive of the committee of the bankers’ conference, recently held in Chicago, and will introduce the different speakers to the committee, in the order in which they wish to follow; assigning to each one of them, I believe, a certain topic relating to the bill; and they have a printed copy of the bill which they will follow in dealing with these topics, and each member of this committee will be furnished with a copy of this proposed bill, with the recommendations made by the bankers* conierence; and the notes of the stenographer will follow the pages of the print which the bankers* committee have offered for use, so as to make the references intelligible. Mr. Forgan, the committee is now ready to have you present the matters which you wish to offer. Senator B r i s t o w . Mr. Chairman, it will be necessary for me to be in the Senate this afternoon, because the tariff bill is up for consider ation, and a number of amendments are coming up. I regret very much that the hearing has been called for a time when the members of the committee can not be present without neglecting their duties on the floor. I wanted to make this statement as a kind of protest against having these hearings at a time when we are considermg the amendments to the tariff bill, as well as being compelled to vote on that. I hope that the hearings will not be continued during the week, because it will be impossible for me to be present. I can not be in both places at the same time. Senator O 'G o r m a n . H o w many witnesses are there to be examined here to-day, Mr. Chairman? Mr. F o r g a n . There are seven members of this committee, and each of them desires to be heard on a specified subject. The C h a i r m a n . The Chair will state that after the conference held in Chicago a request was made that opportunity would be afforded to the representatives of that conference to be heard upon the matters involved in the so-called banking and currency bill; and after consultation with some of the members a response was sent to them by telegraph that the hearings could be had at 2 o’clock on Tuesday, September 2, 1913— beginning at 2 o’clock to-day. That occurred a week ago, at a time when it was hoped that the tariff bill would be substantially out of tlie way. Other persons 1 2 BANKING AND CURRENCY. were also invited to attend and be heard, including a number who had requested the privilege of being heard upon this question. The entire report of everything which will be said will, of course, be printed at once, and will be available for every Senator, so that not a word will be said that will not be at his disposal. Senator O 'G o r m a n . Could you not attend, Senator Bristow, with the understanding that you will be called into the Chamber if your presence there should .be required ? Senator B r i s t o w . A number of these amendments to the tariff bill have been passed over at my request in the Senate and T do not know when they may be called. So far as the statement of the chairman is concerned, that the record will be available for us to read, that is true; but a member of the committee ought to be present at the time of the hearing, so as to give what attention he can to the subject matter at the time. I endeavor to do that so far as I can, upon all of the committees of which I am a member. Since the House has not yet taken the bill up for consideration— unless they have done so to-day— and the Senate will not have the bill for several weeks, I can not understand why we should start in upon these hearings at the very time that the tariff is requiring our detailed attention; and I think it puts those of us who want to give our full time and attention to the currency question at a very great disadvantage The C h a i r m a n . The Chair will state that the House caucus having agreed upon the terms of a bill, the Chair thought that the time had arrived when the bill might be conveniently considered in the light of that action of the House caucus, which had continued its considera tion of the bill during the last three weeks. And the meeting was held in the present room (the room of the Committee on Appropria tions) so as to enable the members of the committee to attend roll calls in the Senate with convenience and without delay, instead of holding the meetings in the regular room of the Committee on Bank ing and Currency, which is removed from the Senate Chamber several blocks. Mr. S h a f r o t h . Mr. Chairman, the Senator from Kansas objected to proceeding with the hearing before this committee some two or three months ago, on the ground that he had to attend the sessions of the Senate when they had the tariff discussion under way; and it was largely on account of his suggestion that I felt that the hearings ought to go over at that time. But if we do not take up the hearings now I do not see that we can give any hearings at all; and while it is unfortunate that the Senator from Kansas can not attend as regularly as he would like, it seems to me that it would put the Senate to- a great disadvantage, and put these gentlemen wno have come here to great inconvenience, if we do not proceed with the hearing at the present time. I feel that we have tried to accommodate everybody— tried to have hearings, and at the same time tried to accommodate those gentlemen who tnought they might be inconvenienced. And inasmucn as we are in the same building, and a call of the Senate can be responded to in a minute, it seems to me that we should proceed with these hearings. Senator B r i s t o w . So far as the postponement having been made to suit my convenience is concerned, it seems to me that it is the BANKING AND CURBENCY. 3 duty of a Senator, when a great bill like the tariff bill is being con sidered on the floor of the Senate, that he make efforts to be there and give attention to the work of the Senate; and I do not believe it is a proper proceeding to hold hearings on a question of as great concern as this, and thereby make it impossible for a Senator who is interested in the tariff as well as the currency to do his duty by both measures. And I am not asking anything important for my personal con venience, and it does not come as a matter of personal convenience. I objected to these hearings at the time the tariff bill was being con sidered because it makes it impossible for a member of the Senate who is interested in both measures to give his attention properly to both of them. And the fact that the hearings have been called now simply makes it impossible for me to do that. So far as the hearings are concerned, I think we ought to have hearings— extensive hearings— but I do not think it would have been detrimental to the passage of this bill if the hearings could have been postponed until the Senate was through with the consideration of the tariff bill, which would not have been more than a week longer. And I want to enter my protest against the proceedings. I will be here as much as I can; but I can not be here as much as I would like to. The C h a i r m a n . The Chair expresses the hope that the Senator will, as far as his interest in the tariff permits, be present. We will promptly furnish him with copies of every word that is said. Senator H it c h c o c k . Mr. Chairman, I want to say that in my opinion the question of the hearings before this committee is a sub ject that ought to be passed upon by the committee itself, and I think it would have been wiser if the chairman had taken the sense of the committee before selecting any particular date for the hearings. It seems to me that every member of the committee has an equal right to have his convenience consulted, and I think it is a mistake not to do so. We are holding the hearings while the tariff is under con sideration, and yet I think that at an early meeting of the committee it was the sense of the committee that this was a matter to be postponed until the tariff was out of the way. Of course, I suppose we must now go on because these gentlemen are present from a distance. Senator B r i s t o w . I suppose so. Senator H it c h c o c k . But I think, so far as any future hearings are concerned, it ought to be submitted to a vote of the committee, and the committee ought to decide on that question because the hearings are not for the chairman alone, not for those who can be here, or for those who can stay away from the tariff debate; they are for all the members of the committee. The C h a i r m a n . The Chair will state that he understood it was agreeable to the committee, with the exception of the Senator from Kansas, who did express his dissent. Senator R e e d . Mr. Chairman, it seems to me that the whole thing resolves itself to this: The tariff debates have run on for many weeks. Many Senators have been obliged to absent themselves on committee work of various kinds and have undergone the hardships incident thereto. It has been determined by the party in majority that cur rency legislation shall be considered at this session. That being true, of course every day of delay by the committee is necessarily a delay of the entire Senate. Now, we have reached 4 BANKING AND CURRENCY. what is understood to be the last week of debate on the tariff. Nearly every important feature of the bill has been considered and debatea. We are engaged now in what may well be said to be the less important features of tne bill. And if we can get at this work and save four or five days* time, we will save that much time of the entire Senate. I appreciate the hardship of the Senator from Kansas in not being able to further participate in the debate. I appreciate the loss to the country. But I suggest that these hearings will not be over in a day. All that we do will be printed, and the Senator from Kansas can have the benefit, at least, of knowing what is transpiring, although we will lose the advantage of his counsel here during the time the statements are being made by the various gentlemen who have been invited here. I agree with the sentiment that is expressed by the Senator from Nebraska [Senator Hitchcock] that, of course, meetings of the com mittee ought not to be called without the members of the committee being consulted, if it was a matter of importance relating to the bill. But I do think that the chairman of a committee has a right to call a meeting; and I do not think the chairman of this committee overstepped the bounds of his authority at ail when he invited certain witnesses to appear before the committee. Now, if he were to limit the meeting to these particular witnesses, than I would think it a matter of some gravity; but that has not been done. And I think, Mr. Chairman, that we ought to go on, and if it is incon venient, or if it is discovered to be especially inconvenient, we can postpone part of the hearings for the rest of the week. The C h a i r m a n . The matter is, of course, entirely in the hands of the committee. I have called the committee together, in pursuance of the policy adopted by the conference of the Democratic Senators. Senator O ’G o r m a n . Mr. Chairman, I move that we proceed to the examination of the witnesses. (The motion was duly seconded and carried.) Senator N e l s o n . Before we proceed, Mr. Chairman, I wish the members of the committee could be provided with copies of the bill, so that they can follow the discussion in connection with the bill. The C h a i r m a n . That was arranged for. The copies are before the members of the committee; the bill that they are going to speak upon is before the committee. Senator N e l s o n . The bill as proposed by them ? The C h a i r m a n . Yes; they have a print of their own. Senator N e l s o n . I s that in this book [indicating pamphlet] ? The C h a i r m a n . Yes; showing the changes which the banked conference recommended. Senator N e l s o n . I s that the same as the House caucus b ill? The C h a i r m a n . No; this is the same that is in the Senate. Senator H it c h c o c k . But are there not any copies of the House caucus bill available ? Senator C r a w f o r d . Mr. Chairman, as the discussion proceeds, should we not have before us the exact text of the bill which these gentlemen are addressing their criticism to ? The C h a i r m a n . It is m the handbook which is before you. And also the House bill, the latest print, is available for the committee. Copies of it will now be laid before the members. Senator R e e d . That is the bill as it was after the termination of the caucus, which will be introduced by Mr. Glass. BANKING a n d c u r r e n c y . 5 Senator C r a w f o r d . Well, is that the bill which is printed b y this visiting committee here, and is it the same text as the House caucus b iH ? The C h a i r m a n . It is not identical; but it is identical except as to such modifications as were made in the House caucus. Senator C r a w f o r d . Well, some of those modifications are quite material, are they not? The C h a i r m a n . Yes; but that will be dealt with as they come before the committee. Both forms of the bill are before the members of the committee. Senator C r a w f o r d . I have the Glass bill here; and I have the other bill in this pamphlet. The C h a i r m a n . That includes everything. I think it would be well to insert in the record at this point, as Exhibit No. 1, the printed report adopted by the conference of bankers at Chicago. This report contains the banking and currency bill, as revised by the House com mittee for consideration of the Democratic caucus, with the modi fications therein recommended by the bankers' conference in Chicago. It also contains, I understand, a list of those present at the conference. E x h ib it No. 1. P ream ble. The Currency Commission of the American Bankers’ Association, charged with the duty of endeavoring to secure remedial banking legislation, and regarding the banking measure now pending in Congress as evidencing the earnest wish of the administration to give a wise law to the country, has profoundly desired to cooperate in every way. To this end, upon its invitation that the presidents of the forty-seven State bankers’ associations and that representatives of the one hundred and ninetyone clearing houses attend and unite in an expression, this joint body, composed of bankers from every section of the South and North, from coast to coast, representing country and city banks, State and National, and trust companies, after carefully considering the bill, has adopted the following: Whereas we recognize the imperative necessity of incorporating into the banking and currency system of this country those proven principles which will provide the most ample credit facilities with greatest safety and a currency based on gold which auto matically adjusts its volume to trade requirements, in order that the highest sta bility may be attained for our commerce, thereby assuring continuity of employment for the laborer and favorable markets for the producer—the fundamental basis of general prosperity; and Whereas although the pending measure has many excellent features and recognizes certain principles fundamental in any scientific banking system, yet it is believed that the application of those principles may in certain respects be made in ways that will more surely avoid a credit disturbance and more efficiently attain the desired benefits for the whole people; and Whereas we believe that to insure the successful operation of a new banking law it must be of such a character as to warrant a general acceptance of its provisions by existing banking institutions, both State and National, country and city, since the final test of the measure of success must be the strength and power for efficiently serving the interests of the entire country, which can alone be had from general participation of banks of all classes; and believing that the bill as now drawn will, by its onerous provisions, prevent State banks and many national banks from joining the system, and earnestly desiring to cooperate with the administration in bringing about the adoption of the most highly efficient plan: Therefore be it resolved, That we recommend the following changes in the bill as now published, convinced that, while not rendering the plan ideal, these changes would render organization more probable, would avoid a credit disturbance, and provide a system that would gradually develop into a great bulwark for the protec tion of our whole commerce, benefiting alike, and in equal measure, the laborer, the farmer, and the business man. 6 BANKING AND CURRENCY. It is the sense of this conference that one Federal reserve bank with as many branches as the commerce of the country may require, would be more effective; but if this be not obtainable we recommend that as few Federal reserve banks be established as possible, and not more than a total number of five. The further recommendations of the conference will more conveniently appear in the following altered copy of the bill. T he B C u r r e n c y B il l in C o n g r e s s a s R e v i s e d b y C o n s id e r a t io n b y t h e A d m in is t r a t io n C a u c u s , A a n k in g a n d m it t e e f o r the H ugust Com 11, 1 9 1 3 . o u se (The parts inclosed in heavy brackets Is the matter proposed to be stricken out and the parts in italics shows proposed amendments, all the alterations being recommended by the bankers’ conference.] To provide for the establishment of Federal reserve banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes. Be it enacted by the Senate and House of Representatives o f the United States of America in Congress assembled, That the short title of this act shall be the “ Federal reserve a c t .” federal reserve d is t r ic t s . S e c t i o n 2. That within ninety days after the passage of this act, or as soon there after as practicable, the Secretary of the Treasury, the Secretary of Agriculture, and the Comptroller of the Currency, acting as “ The Reserve Bank Organization Commit tee,” shall designate from among the resarve and central reserve cities now authorized by law a number of such cities to be known as Federal reserve cities, and shall divide the continental United States into districts, each district to contain one of such Fed eral reserve cities: Provided, That the districts shall be apportioned with due regard to the convenience and customary course of business of the community and shall not necessarily coincide with the area of such State or States as may be wholly or in part included in any given district. The districts thus created may be readjusted and new districts may from time to time be created by the Federal reserve board herein after established, acting upon a joint application made by not less than ten member banks desiring to be organized into a new district. The districts thus constituted shall be known as Federal reserve districts and shall be designated by number accord ing to the pleasure of the organization committee, and no Federal reserve district shall be abolished, nor the location of a Federal reserve bank changed, except upon the application of three-fourths of the member banks of such district. The organization committee shall, in accordance wich regulations to be established by itself, proceed to organize in each of the reserve cities designated as hereinbefore specified a Federal reserve bank. Each such Federal reserve bank shall include in its title the name of the city in which it is situated, as “ Federal Reserve Bank of Chicago,” and so forth. The total number of reserve cities designated by the organi zation committee shall be not [less than twelve, J more than five, and the organization committee shall be authorized to employ counsel and expert aid, to take testimony, to send for persons and papers, to administer oaths, and to make such investigations as may be deemed necessary by the said committee for the purpose of determining the reserve cities to be designated and organizing the reserve districts hereinbefore provided. Every national bank and state bank and trust company located within a given district [shall be required to ] may subscribe to the capital stock of the Federal reserve bank of that district a sum equal to [tw enty] ten per centum of its unimpaired capital, one-[fourth] half of such subscription to be paid in cash and one-[fourth within sixty days after said subscription is made. The remainder of the subscription or any part thereof shall become a liability of the subscriber, subject to call and pay ment thereof whenever necessary to meet the obligations of the Federal reserve bank] half subject to call upon sixty days1 previous notice. The unpaid portion of the sub scription or any part thereof shall become a liability of the subscriber subject to call upon 60 days1 previous notice under such terms and in accordance with such regulations as the board of directors of said Federal reserve bank may prescribe: Provided, That no Federal reserve bank shall be organized with a paid-up and unimpaired capital at the time of beginning business less in amount than $5,000,000. The organization committee shall have power to appoint such assistants and incur such expenses in carrying out the provisions of this act as it shall deem necessary, and such expenses shall be payable by the Treasurer of the United States upon voucher approved by the Secretary of the Treasury, and the sum of $100,000, or so much thereof as may be necessary, is hereby appropriated, out of any moneys in the Treasury not otherwise appropriated, for the payment of such expenses. BANKING AND CURRENCY. 7 STOCK ISSUES. S e c t i o n 3 . That the capital stock of each Federal reserve bank shall be divided into shares of $100. The outstanding capital stock shall be increased from time to time as subscribing banks increase their capital or as additional banks become subscribers, and shall be decreased as subscribing banks reduce their capital or cease to be stockholders. Each Federal reserve bank may establish branch offices under regulations of the Fed eral reserve board at points within the Federal reserve district in which it is located: Provided, That the total number of such branches shall not exceed one for each $500,000 of the capital stock of said Federal reserve bank. FEDERAL RESERVE BANKS. S e c t i o n 4 . That a sufficient number of national banks in a Federal reserve district having made and filed with the Comptroller of the Currency a certificate in the form required in sections fifty-one hundred and thirty-four and fifty-one hundred and thirtyfive of the Revised Statutes of the United States, such national banks shall become a body corporate, and as such, and in the name designated in such organization cer tificate, shall have power to perform all those acts and to enjoy all those privileges and to exercise all those powers described in section fifty-one hundred and thirty-six, Revised Statutes, save in so far as the same shall be limited by the provisions of this act. The Federal reserve banks so incorporated shall have succession for a period of twenty years from its organization, unless sooner dissolved by act of Congress. Every Federal reserve bank shall be conducted under the oversight and control of a board of directors, whose powers shall be the same as those conferred upon the boards of directors of national banking associations under existing law, not incon sistent with the provisions of this act. Such board of directors shall be constituted and elected as hereinafter specified and shall consist of nine members, holding office for three years, and divided into tnree classes, designated as classes A, B, and C. Class A shall consist of three members, who shall be chosen by and be representative of the stock-holding banks. Class B shall consist of three members, who shall be representative of the general public interests of the reserve district. Class C shall consist of three members, who shall be designated by the Federal reserve board, and who shall be legal residents of the district in which the Federal reserve bank is located. Directors of class A shall be chosen in the following manner: It shall be the duty of the chairman of the board of directors of the Federal reserve bank of the district in which each such bank is situated to classify the member banks of the said district who are stockholders in the said Federal reserve bank into three general groups or divisions. Each such group shall contain as nearly as may be one-third of the aggregate number of the banks holding stock in the Federal reserve bank of the said district and shall consist as nearly as may be of banks of similar cap italization. The said groups shall be designated by number at the pleasure of the chairman of the Federal reserve bank. At a regularly called directors’ meeting of each member bank in the Federal reserve district aforesaid the board of directors of such member bank shall elect by ballot one of its own members as a district reserve elector and shall certify his name to the chairman of the board of directors of the Federal reserve bank of the district. The said chairman shall establish lists of the district reserve electors, class A, thus named by banks in each of the aforesaid three groups and shall transmit one list to each such elector in each group. Every elector shall, within fifteen days of the receipt of the said list, select and certify to the said chairman from among the names on the list pertaining to his group, transmitted to him by the chairman, one name, not his own, as representing his choice for Federal reserve director, class A. The name receiving the greatest number of votes, not less than a majority, shall be designated by said chairman as Federal reserve director for the group to which he belongs. In case no candidate shall receive a majority of all votes cast in any district, the chair man aforesaid shall establish an eligible list, consisting of the three names receiving the greatest number of votes on the first ballot, and shall transmit said list to the electors in each of the groups of banks established by him. Each elector shall at once select and certify to the said chairman from among the three names submitted to him his choice for Federal reserve director, class A, and the name receiving the greatest number of such votes shall be designated by the chairman as Federal reserve director, class A. Directors of class B shall be chosen by the electors of the respective groups at the same time and in the same manner prescribed for directors of class A, except that 8 BANKING AND CTJBBENCY. they must be selected from a list of names furnished one by each member bank, and such names shall in no case be those of officers or directors of any bank or banking association. They shall not accept office as such during the term of their service as directors of the Federal reserve bank. They shall be fairly representative of the commercial, agricultural, or industrial interests of their respective districts. [T he Federal reserve board shall have power at its discretion to remove any director of class B in any Federal reserve bank if it should appear at any time that such director does not fairly represent the commercial, agricultural, or industrial interests of his district.! Three directors belonging to class C shall be chosen directly by the Federal reserve board, one of whom [shall be designated by said board as chairman of the board of directors of the Federal reserve bank of the district to which he is appointed and] shall be designated by said board as 4‘ Federal reserve agent.” He shall be a legal resident of the district for which he is [selected] elected and shall be a person of tested banking experience; [and in addition to his duties as chairman of the board of directors of the Federal reserve bank of the district to which he is appointed,] he shall be required to maintain under regulations to be established by the Federal reserve board a local office of said board, which shall be situated on the premises of the Federal reserve bank of the district. He shall make regular reports to the Federal reserve board, and shall act as its official representative for the performance of the functions conferred upon it by this act. He shall receive an annual compensation to be fixed by the Federal reserve board and paid monthly by the Federal reserve bank to which he is designated. Directors of Federal reserve banks shall receive, in addition to any compensation otherwise provided, a reasonable allowance for necessary expenses in attending meet ings of their respective boards, which amount shall be paid by the respective Federal reserve banks. Any compensation that may be provided by boards of directors of Federal reserve banks for members of such boards shall be subject to review by the Federal reserve board. The reserve bank organization committee may, in organizing Federal reserve banks for the first time, call such meetings of bank directors in the several districts as may be necessary to carry out the purposes of this act and may exercise the func tions herein conferred upon [the chairman of the board of directors o f] each Federal reserve [b a n k ] agent pending the complete organization of such bank. At the first meeting of the full board of directors of each Federal reserve bank after organization it shall be the duty of the directors of classes A and B and C, respec tively, to designate one of the members of each class whose term of office shall expire in one year from the first of January nearest to date of such meeting, one whose term of office shall expire at the end of two years from said date, and one whose term of office shall expire at the end of three years from said date. Thereafter every director of a Federal reserve bank chosen as hereinbefore provided shall hold office for a term of three years; but the [chairman of the board of directors] Federal reserve agent of each Federal reserve bank designated by the Federal reserve board, as hereinbefore described, shall be removable at the pleasure of the said board without notice, and his successor shall hold office during the unexpired term of the director in whose place he was appointed. Vacancies that may occur in the several classes of directors of Federal reserve banks may be filled in the manner provided for the original selec tion of such directors, such appointees to hold office for the unexpired terms of their predecessors. INCREASE AND DECREASE OP CAPITAL. S e c t i o n 5 . That shares of the capital stock of Federal reserve banks shall not be transferable, nor be hypothecated. In case a subscribing bank increases its capital, it shall thereupon subscribe for an additional amount of capital stock of the Federal reserve bank of its district equal to [tw en ty] ten per centum of the bank’s own in crease of capital, [te n ] fifty per centum of said subscription to be paid in cash in the manner hereinbefore provided for original subscription, and [t e n ] fifty per centum to become a liability of the subscribing bank according to the terms of the original subscription. A bank applying for stock in a Federal reserve bank at any time after the formation of the latter must subscribe for an amount of the capital of said reserve bank equal to [tw enty] ten per centum of the capital of said subscribing bank, pay ing therefor its par value in accordance with the terms prescribed by section two of this act. When the capital of any Federal reserve bank has been increased either on account of the increase of capital of the banks holding stock therein or on account of the increase in the number of stockholding banks, the board of directors shall make and execute a certificate to the Comptroller of the Currency showing said increase in capital, the amount paid in, and by whom paid. In case a subscribing bank BANKING AND CURRENCY. 9 reduces its capital it shall surrender a proportionate amount of its holdings in the capi tal of said Federal reserve bank, and in case a bank goes into voluntary liquidation it shall surrender all of its holdings of the capital of said Federal reserve bank. In either case the shares surrendered shall be canceled and the bank shall receive in payment therefor a sum equal to its cash paid subscriptions on the shares surrendered. S e c t i o n 6. That if any shareholder of a Federal reserve bank shall become insolvent and a receiver be appointed, the stock held by it in said Federal reserve bank shall be canceled and the balance, after deducting from the amount of its cash paid sub scriptions all debts due by such insolvent bank to said Federal reserve bank, shall be paid to the receiver of tne insolvent bank. Whenever the capital stock of a Federal reserve bank is reduced, either on account of a reduction in capital of any bank or of the liquidation or insolvency of any such bank, the board of directors snail make and execute a certificate to the Comptroller of the Currency showing such reduction of capital stock and the amount repaid to such bank. DIVISION OF EARNINGS. S e c t i o n 7. That after the payment of all necessary expenses and taxes of a Federal reserve bank, the shareholders shall be entitled to receive an annual dividend of [fiv e ] six per centum on the paid-in capital, which dividend shall be cumulative. One-half of the net earnings, after the aforesaid dividend claims have been fully met, shall be paid into a surplus fund until such fund shall amount to twenty per centum of the paid-in capital of such bank, and of the remaining one-half sixty per centum shall be paid to the United States and forty per centum to the member banks in the ratio of their average balances with the Federal reserve bank for the preceding year. Whenever and so long as the surplus fund of a Federal reserve bank amounts to twenty per centum of the paid-in capital and the shareholders shall have received the divi dends at the rate of [fiv e ] six per centum per annum hereinbefore provided for, sixty per centum of all excess earnings shall be paid to the United States and forty per centum to the member banks in proportion to their annual average balances with such Federal reserve bank; all earnings derived by the United States from Federal reserve banks shall constitute a sinking fund to be held for the reduction of the out standing [bonded] indebtedness of the United States, said reduction to be accom plished under regulations to be prescribed by the Secretary of the Treasury. Should a Federal reserve bank be dissolved or go into liquidation, the surplus fund of said bank, after the payment of all debts and dividend requirements as hereinbefore pro vided for, shall be paid to and become the property of the United States. Every Federal reserve bank incorporated under the terms of this act and the stock therein held by member banks shall be exempt from Federal, State, and local taxa tion, except in respect to taxes upon real estate. S e c t i o n 8 . That any national banking association heretofore organized may upon application at any time [within one year] after the passage of this act, and with the approval of the Comptroller of the Currency, be granted, as herein provided, all the rights, and be subject to all the liabilities, of national banking associations organized subsequent to the passage of this act: Provided, That such application on the part of such associations shall be authorized by the consent in writing of stockholders owning not less than a majority of the capital stock of the association. [A ny national banking association now organized which shall not, within one year after the passage of this act, become a national banking association under the provisions hereinbefore stated, or which shall fail to comply with any of the provisions of this act applicable thereto, shall be dissolved; but such dissolution shall not take away or impair any remedy against such corporation, its stockholders or officers, for any liability or penalty which shall have previously been incurred.] S e c t i o n 9. That any bank or banking association incorporated by special law of any State or of the United States, or organized under the general laws of any State or the United States, and having an unimpaired capital sufficient to entitle it to become a national banking association under the provisions of existing laws, may, by the con sent in writing of the shareholders owning not less than fifty-one per centum of the capital stock of such bank or banking association, and with the approval of the Comp troller of the Currency, become a national banking association under its former name with the addition of the word “ National” or the words “ National Banking Association” as provided by existing law or by any name approved by the comptroller. The directors thereof may continue to be the directors of the association so organized until others are elected or appointed in accordance with the provisions of the law. When the comptroller has given to such bank or banking association a certificate that the provi sions of this act have been complied with, such bank or banking association, and all its stockholders, officers, and employees, shall have the same powers and privileges, 10 BANKING AND CURRENCY. and shall be subject to the same duties, liabilities, and regulations, in all respects, as shall have been prescribed by this act or by the national banking act for associations originally organized as national banking associations. STATE BANKS AS MEMBERS. S e c t i o n 1 0. That from and after the passage of this act any bank or banking asso ciation or trust company incorporated by special law of any State, or organized under the general laws of any State or the United States, may make application to the reserve bank organization committee or the Federal reserve board [hereinafter created] for the right to subscribe to the stock of the Federal reserve bank organized within the Federal reserve district where the applicant is located. The reserve bank organization committee or the Federal reserve board may, at its discretion, subject to the provisions of this section, permit such applying bank to become a stockholder in the Federal reserve bank of the district in which such applying bank is located, or at its discretion may reject such application. Whenever the reserve bank organization committee or the Federal reserve board may permit such an applying bank to become a stockholder in the Federal reserve bank of the district in which the applying bank is located stock shall be issued and paid for under the rules and regulations in this act provided for national banks which become stockholders in Federal reserve banks. It shall be the duty of the reserve bank organization committee or the Federal reserve board to establish by-laws for the general government of its conduct in acting upon applications made by the State banks and banking associations and trust companies hereinbefore referred to for stock ownership in Federal reserve banks. Such by-laws shall require of applying banks not organized under Federal law that they comply with the reserve requirements and submit to the inspection and regulation providea for in this and other laws relating to national banks. No such applying bank shall be admitted to stock ownership in a Federal reserve bank unless it possesses a paid-up unimpaired capital sufficient to entitle it to become a national banking association in the place where it is situated, under the provisions of the national banking act, and conforms to the provisions herein prescribed for national banking associations of similar capitalization and to the regulations of the reserve bank organization committee or the Federal reserve board. If at any time it shall appear to the Federal reserve board that a banking association or trust company organized under the laws of any State or of the United States has failed to comply with the provisions of this section or the regulations of the board, it shall be within the power of the said board to require such banking association or trust company to surrender its stock in the Federal reserve bank in which it holds shares upon receiving from such bank the cash-paid subscriptions to the said shares in current funds, and said Federal reserve bank shall upon notice from the Federal reserve board be required to suspend the designated banking association or trust company from futher privileges of membership, and shall within thirty days of such notice cancel and retire its shares and make payment therefor in the manner herein provided. FEDERAL RESERVE BOARD. [ S e c t i o n 11. That there shall be created a Federal reserve board, which shall con sist of seven members, including the Secretary of the Treasury, the Secretary of Agri culture, and the Comptroller of the Currency, who shall be members ex officio, and four members chosen by the President of the United States, by and with the advice and con sent of the Senate. In selecting the four appointive members of the Federal reserve board, the President shall have due regard to a fair representation of different geo graphical divisions of the country. The four members of the Federal reserve board chosen by the President and confirmed as aforesaid shall devote their entire time to the business of the Federal reserve board and shall each receive an annual salary of $10,000, together with an allowance for actual necessary traveling expenses, and the Comptroller of the Currency, as ex officio member of said Federal reserve board, shall, in addition to the salary now paid him as comptroller, receive the sum of $ 5 ,0 0 0 annu ally for his services as a member of said board. Of the members thus appointed by the President not more than two shall be of the same political party, and at least one shall be a person experienced in banking. One shall be designated by the President to serve for two, one for four, one for six, and one for eight years, respectively, and thereafter each member so appointed shall serve for a term of eight years unless sooner removed for cause by the President. Of the four persons thus appointed, one shall be designated by the President as manager and one as vice manager of the Federal reserve board. The manager of the Federal reserve board, subject to the supervision of the Secretary of the Treasury and board, shall be the active executive officer of the Federal reserve board. J BANKING AND CURRENCY. 11 That there shall be created a Federal reserve board which shall consist o f seven members, including the Secretary of the Treasury, who shall be a member ex officio, and three members chosen by the President of the United States by and with the advice and consent of the Senate, and three members elected by the directors of the Federal reserve banks. In selecting the three appointive members of the Federal reserve board, the President shall have due regard to a fair representation of different geographical divisions of the country. The three mem bers of the Federal reserve board chosen by the President and confirmed as aforesaid, and the three members elected by the directors of the Federal reserve banks shall devote their entire time to the business of the Federal reserve board and except as to the governor and vice governor hereinafter provided for shall each receive an annual salary of $10,000, together with an allowance for actual necessary traveling expenses. Of the members thus appointed by the President and elected by the directors of the Federal reserve banks, two shall serve for three years, twofor six years, and twofor nine years, respectively, and thereafter each member so appointed shall serve for a term of nine years unless sooner removed for cause by the President. Of the six persons thus appointed, one shall be designated by the President as governor and one as vice governor of the Federal reserve board. The governor of the Federal reserve board, subject to the supervision of the Secretary of the Treasury and board, shall be the active executive officer of the Federal reserve board. The salary of the governor and vice governor of the Federal reserve board shall be fixed by the board of directors thereof. The Federal reserve board shall have power to levy semiannually upon the Federal reserve banks, in proportion to capital, an assessment sufficient to pay its estimated expenses for the half year succeeding the levying of such assessment, together with any deficit carried forward from the preceding half year. The first meeting of the Federal reserve board shall be held in Washington, District of Columbia, as soon as may be after the passage of this act, at a date to be fixed by the reserve bank organization committee. The Secretary of the Treasury shall be ex officio chairman of the Federal reserve board. No member of the Federal reserve board shall continue to hold office or to act as a director of any bank or banking institution or Federal reserve bank, and before entering upon his duties as a member of the Federal reserve board he shall certify under oath to the Secretary of the Treasury that he has complied with this requirement. Whenever a vacancy shall occur, other than by expiration of term, among the [fou r] three members of the Federal reserve board chosen by the President, as above provided, a successor shall be appointed by the President, with the advice and consent of the Senate, to fill such vacancy, and when chosen, shall hold office for the unexpired term of the member whose place he is selected to fill. Whenever a vacancy shall occur other than by expiration o f term among the three members of the Federal reserve board elected by the directors of the Federal reserve banks as above provided, a successor shall be elected by the said directors to fill such vacancy and when elected shall hold officefor the unexpired term of the member whose place he is selected to fill. The Federal reserve board shall annually make a report of its fiscal operation to the Speaker of the House of Representatives, who shall cause the same to be printed for the information of the Congress. Section three hundred and twenty-four of the Revised Statutes of the United States shall be amended so as to read b,s follows: “ There shall be in the Department of the Treasury a bureau charged, except as in this act otherwise provided, with the execu tion of all laws passed by Congress relating to the issue and regulation of currency issued by or through banking associations, the chief officer of which bureau shall be called the Comptroller of the Currency and shall perform his duties under the general direction of the Secretary of the Treasury, acting as the chairman of the Federal reserve board: ” Provided, however, That nothing herein contained shall be construed to affect any power now vested by law in the Comptroller of the Currency or the Secretary of the Treasury. S e c t io n 12. That the Federal reserve board hereinbefore established shall be authorized and empowered: (a) To examine at its discretion the accounts, books, and affairs of each Federal reserve bank and to require such statements and reports as it may deem necessary. The said board shall publish once each week a statement showing the condition of each Federal reserve bank and a consolidated statement for all Federal reserve banks. Such statements shall show in detail the assets and liabilities of the several institu tions, single and combined, and shall furnish full information regarding the character of the lawful money held as reserve and the amount, nature, and maturities of the paper owned by Federal reserve banks. (b) To permit [or, in time of emergency, require] Federal reserve banks to redis count the discounted prime paper of other Federal reserve banks[, all members of the board being present when such action is taken and consenting to the requirement. The exercise of this compulsory rediscount power by the Federal reserve board shall 9328°— S. Doc. 232, 63-1— vol 1------2 12 BANKING AND CURRENCY. be subject to an interest charge to the accommodated bank of not less than one nor greater than three per centum above the higher of the rates prevailing in the districts immediately affected J. <(c) To suspend for a period not exceeding thirty days (and to renew such suspen sion for periods not to exceed fifteen days) any and every reserve requirement specified in this act. (d) To supervise and regulate the issue and retirement of Federal reserve notes and to prescribe the form and tenor of such notes. [(e) To add to the number of cities classified as reserve and central reserve cities under existing law in which national banking associations are subject to the reserve requirements set forth in section twenty of this act; or to reclassify existing reserve and central reserve cities and to designate the banks therein situated as country banks at its discretion.] (f) To suspend the officials of Federal reserve banks and, for cause stated in writing with opportunity of hearing, require the removal of said officials for incompetency, dereliction of duty, fraud, or deceit, such removal to be subject to approval by the President of the United States. (g) To require the writing off of doubtful or worthless assets upon the books and balance sheets of Federal reserve banks. (h) To suspend, for cause relating to violation of any of the provisions of this act, the operations of any Federal reserve bank and appoint a receiver therefor. [(i) To perform the duties, functions, or services specified or implied in this act.] FEDERAL ADVISORY COUNCIL. [ S e c t i o n 1 3 . There is hereby created a Federal advisory council, which shall consist of as many members as there are Federal reserve districts. Each Federal reserve bank by its board of directors shall annually select one member of said council, who shall receive no compensation for his services, but may be reimbursed for actual necessary expenses. The meetings of said advisory council shall be held at Washing ton, District of Columbia, at least four times each year, and oftener if called by the Federal reserve board. The council may select its own officers and adopt its own methods of procedure, and a majority of its members shall constitute a quorum for the transaction of business. Vacancies in the council shall be filled by the respective reserve banks, and members selected to fill vacancies shall serve for the unexpired term. [The Federal advisory council shall have power (1) to meet and confer directly with the Federal reserve board on general business conditions; (2) to make oral or written representations concerning matters within the jurisdiction of said board; (3) to call for complete information and to make recommendations in regard to discount rates, redis count business, note issues, reserve conditions in the various districts, the purchase and sale of gold or securities by reserve banks, open market operations by said banks, and the general affairs of the reserve banking system.] r e d is c o u n t s . S e c t i o n 1 4. That any Federal reserve bank may receive from any of its stockhold ers or, solely for exchange purposes, from other Federal reserve banks deposits of cur rent funds in lawful money, national-bank notes, Federal reserve notes, or checks and drafts upon solvent banks, payable upon presentation. Upon the indorsement of any member bank any Federal reserve bank may discount notes and bills of exchange arising out of commercial transactions; that is, notes and bills of exchange issued or drawn tor agricultural, industrial, or commercial purposes, or the proceeds of which have been used for such purposes, the Federal reserve board to have the right to determine or define the character of the paper thus eligible for dis count, within the meaning of this act; but such definition shall not include notes or bills issued or drawn for the purpose of carrying or trading in stocks or bonds [ , or other securities]. Notes and bills admitted to discount under the terms of this paragraph must have a maturity of not more than sixty days. Upon the indorsement of any member bank any Federal reserve bank may discount the paper of the classes hereinbefore described having a maturity of more than sixty and not more than one hundred and twenty days, when its own cash reserve exceeds thirty-three and one-third per cent of its total outstanding demand liabilities exclusive of its outstanding Federal reserve notes by an amount to be fixed by the Federal reserve board; but not more than fifty per cent of the total paper so discounted for any member bank shall have a maturity of more than ninety days. Upon the indorsement of any member bank any Federal reserve bank may discount acceptances of such banks which are based on the exportation or the importation of BANKING AND CURRENCY. 13 goods and which mature in not more than six months and bear the signature of at least one member bank in addition to that of the acceptor. The amount so discounted shall at no time exceed one-half the capital of the bank for which the rediscounts are made. The aggregate of such notes and bills bearing the signature or indorsement of any one person, company, firm, or corporation rediscounted for any one bank shall at no time exceed ten per centum of the unimpaired capital and surplus of said bank; but this restriction shall not apply to the discount of bills of exchange drawn in good faith against actually existing values. Any national bank may, at its discretion, accept drafts or bills of exchange drawn upon it [having] at not more than six months sight [to run] and growing out of transactions involving the importation or exportation of goods; but no bank shall accept such bills to an amount equal at any time in the aggregate to more than one-half the face value of its paid-up and unimpaired capital. OPEN-MARKET OPERATIONS. S e c t io n 15. That any Federal reserve bank may, under rules and regulations pre scribed by the Federal reserve board, purchase and sell in the open market, either from or to domestic or foreign banks, firms, corporations, or individuals, prime bankers’ bills, and bills of exchange of the kinds and maturities by this act made eligible for rediscount, and cable transfers. Every Federal reserve bank shall have power (a) to deal in gold coin and bullion both at home and abroad, to make loans thereon, and to contract for loans of gold coin or bullion, giving therefor, when necessary, acceptable security, including the hypoth ecation of United States bonds; (b) to invest in United States bonds, [and bonds issued by any State, county, district, or municipality;] (c) to purchase from member banks and to sell, with or without its indorsement, bills of exchange arising out of commercial transactions, as hereinbefore defined, payable in foreign countries, but such bills of exchange must have not exceeding ninety days to run and must bear the signature of two or more responsible parties, of which the last shall be that of a member bank; (d) to establish each week, or as much oftener as required, subject to review and determination of the Federal reserve board, a rate of discount to be charged by such bank for each class of paper, which shall be fixed with a view of accommodating the commerce of the country; and (e) with the consent of the Federal reserve board, to open and maintain banking accounts in foreign countries and estab lish agencies in such countries wheresoever it may deem best for the purpose of pur chasing, selling, and collecting foreign bills of exchange, and to buy and sell with or without its indorsement, through such correspondents or agencies, prime foreign bills of exchange arising out of commercial transactions which have not exceeding ninety days to run and which bear the signature of two or more responsible parties. g o v e r n m e n t d e p o s it s . S e c t io n 16. That all moneys now held in the general fund of the Treasury except the 5% fund for the redemption of outstanding national-banJc notes shall, upon the direc tion of the Secretary of the Treasury, within twelve months after the passage of this act, be deposited in Federal reserve banks, which banks shall act as fiscal agents of the United States; and thereafter the revenues of the Government shall be regularly deposited in such banks, and disbursements shall be made by checks drawn against such deposits. The Secretary of the Treasury shall, subject to the approval of the Federal reserve board, from time to time, apportion the funds of the Government among the said Federal reserve banks, distributing them, as far as practicable, equitably between different sections, and may, at their joint discretion, charge interest thereon and fix, from month to month, a rate, never less than one-half of one per centum per annum, which shall be regularly paid by the banks holding such deposits: Provided, That no Federal reserve bank shall pay interest upon any deposits except those of the United States. No Federal reserve bank shall receive or credit deposits except from the Govern ment of the United States, its own member banks, and, to the extent permitted by this act, from other Federal reserve banks. All domestic transactions of the Federal reserve banks involving a rediscount operation or the creation of deposit accounts shall be confined to the Government and the depositing and Federal reserve banks, with the exception of the purchase or sale of Government [or State] securities or of gold coin or bullion. 14 BANKING AND CURRENCY. NOTE ISSUES. [ S e c t io n 17. That Federal reserve notes, to be issued at the discretion of the Fed eral reserve board for the purpose of making advances to Federal reserve banks as here inafter set forth and for no other purpose, are hereby authorized. The said notes shall be obligations of the United States and shall be receivable for all taxes, customs, and other public dues. They shall be redeemed in gold or lawful money on demand at the Treasury Department of the United States, in the city of Washington, District of Columbia, or at any Federal reserve bank. [A ny Federal reserve bank may, upon vote of its directors, make application to the local Federal reserve agent for such amount of the Treasury notes hereinbefore pro vided for as it may deem best. Such application shall be accompanied with a tender to the local Federal reserve agent of collateral security to protect the notes for which application is made equal in amount to the sum of the notes thus applied for. The collateral security thus offered shall be notes and bills accepted for rediscount under the provisions of sections 14 and 15 of this act, and the Federal reserve agent shall each day notify the Federal reserve board of issues and withdrawals of notes to and by the Federal reserve bank to which he is accredited. The said Federal reserve board shall be authorized at any time to call upon a Federal reserve bank for additional security to protect the Federal reserve notes issued to it. [Whenever any Federal reserve bank shall pay out or disburse Federal reserve notes issued to it as hereinbefore provided, it shall segregate in its own vaults and shall carry to a special reserve account on its books gold or lawful money equal in amount to thirty-three and one-third per centum of the reserve notes so paid out by it, such reserve to be used for the redemption of said reserve notes as presented; but any Federal reserve bank so using any part of such reserve to redeem notes shall immediately carry to said reserve account an amount of gold or lawful money sufficient to make said reserve equal to thirty-three and one-third per centum of its outstanding Treasury notes. Notes so paid out shall bear upon their faces a distinctive letter and serial number, which shall be assigned by the Federal reserve board to each Federal reserve bank. Whenever Federal reserve notes issued through one Federal reserve bank shall be received by another Federal reserve bank they shall be returned for redemption to the Federal reserve bank through which they were originally issued, or shall be charged off against Government deposits and returned to the Treasury of the United States, or shall be presented to the said Treasury for redemption. No Federal reserve bank shall pay out notes issued through another under penalty of a tax of ten per centum upon the face value of notes so paid out. Notes presented for redemption at the Treasury of the United States shall be paid and returned to the Federal reserve banks through which they were originally issued, and Federal reserve notes received by the Treasury otherwise than for redemption shall be exchanged for lawful money out of the five per centum redemption fund hereinafter provided and returned as hereinbefore provided to the reserve bank through which they were originally issued. [T he Federal reserve board shall have power, in its discretion, to require Federal reserve banks to maintain on deposit in the Treasury of the United States a sum in gold or lawful money equal to five per centum of such amount of Federal reserve notes as may be issued to them under the provisions of this act; but such five per centum shall be counted and included as part of the thirty-three and one-third per centum reserve hereinbefore required. The said board shall also have the right to grant in whole or in part or to reject entirely the application of any Federal reserve bank for Federal reserve notes; but to the extent and in the amount that such application may be granted the Federal reserve board shall, through its local Federal reserve agent, deposit Federal reserve notes with the bank so applying, and such bank shall be charged with the amount of such notes and shall pay such rate of interest on said amount as may be established by the Federal reserve board; and the amount of such Federal reserve notes so issued to any such bank shall, upon delivery, become a first and paramornt lien on all the assets of such bank. [A n y Federal reserve bank may at any time reduce its liability for outstanding Federal reserve notes by the deposit of Federal reserve notes, whether issued to such bank or to some other reserve bank, or lawful money of the United States, or gold bullion, with any Federal reserve agent or with the Treasurer of the United States; and such reduction shall be accompained by a corresponding reduction in the required reserve fund of lawful money set apart for the redemption of said notes and by the release of a corresponding amount of the collateral security deposited with the local Federal reserve agent. [A n y Federal reserve bank may at its discretion withdraw collateral deposited with the local Federal reserve agent for the protection of Federal reserve notes deposited BANKING AND CT7BBENCY. 15 w i t h i t , and shall at the same time substitute other collateral of equal value approved by the Federal reserve agent under regulations to be prescribed by the Federal reserve board.J That Federal reserve bank notes to be issued by 'permission of the Federal reserve board by Federal reserve banks are hereby authorized. The said notes shall be obligations of the Federal reserve banks of issue and shall be receivable by all national and Federal reserve banks and for all taxes, customs, and other public dues. They shall be redeemed in gold on demand by the bank of issue. Any Federal reserve bank, upon vote of its directors and within a limit prescribed by the Federal reserve board, may issue such amount of the notes hereinbefore provided for as it may deem best. Whenever any Federal reserve bank shall pay out Federal reserve bank notes issued by it as hereinbefore provided, it shall segregate in its own vaults and shall carry to a special reserve account on its books gold equal in amount to 40 per centum of the Federal reserve bank notes so paid out by it, such reserve to be used for the redemption oj said Federal re serve bank notes; but any Federal reserve bank so using any part oj such reserve to redeem notes shall immediately carry to said reserve account an amount of gold sufficient to make said reserve equal to 40 per centum of its outstanding Federal reserve bank notes, except as herein provided. The full amount of such note issues by each of said banks shall at all times be covered by such notes and bills of exchange and such bank acceptances as the Federal reserve banks are by section 14 of this act empowered to discount with the endorsement of member banks or by such prime bankers’ bills and bills of exchange payable in foreign countries as the Federal reserve banks are by section 15 of this act permitted to purchase in the open market; but nothing herein provided shall prevent the exchange of said Federal reserve bank notes Jor gold of equal amount or the issue of said Federal reserve bank notes for the purchase of a like amount of gold. Notes so paid out shall bear upon theirfaces the name of the issuing bank. Whenever the gold reserve is 40 per centum or more, such notes may be issued without tax; whenever such reserve shall fall below 40 per centum and shall be between 87\ per centum and 40 per centum, such deficiency of reserve shall bear a tax of interest at the rate of 1\ per centum per annum; andfor each 2\ per centum or part thereof offurther reduction of reserve an additional tax of interest at the rate of 1\ per centum per annum on such deficiency of reserve shall be paid into the Treasury of the United States; and whenever and while such reserve shall be reduced to 33% per centum of such outstanding notes, no further issue of such notes shall be made. Whenever Federal reserve bank notes issued by one Federal reserve bank shall be received by another Federal reserve bank they shall be returned for redemption to the Federal reserve bank by which they were originally issued, and at its expense for transportation. No Fed eral reserve bank shall pay out notes issued by another under penalty nf a tax of 10 per centum upon the face value of notes so paid out. The amount of such Federal reserve bank notes so issued by any such Federal reserve bank shall become a first and paramount lien on all the assets of any such Federal reserve bank. It shall be the duty of every Federal reserve bank to receive on deposit, at par [and without charge for exchange or collection,] checks and drafts drawn upon [any of its depositors or by any of its depositors upon any other depositor and checks and drafts drawn by any depositor in ] any other Federal reserve bank [upon lunds to the credit of said depositor in said reserve bank last mentioned. The Federal reserve board shall make and promulgate from time to time regulations governing the transfer of funds at par among Federal reserve banks, and may at its discretion exercise the func tions of a clearing house for such Federal reserve banks, or may designate a Federal reserve bank to exercise such functions, and may also require each such bank to exer cise the functions of a clearing house for its shareholding banks.] S e c t io n 18. That so much of the provisions of section fifty-one hundred and fiftynine of the Revised Statutes of the United States, and section four of the act of June twentieth, eighteen hundred and seventy-four, and section eight of the act of July twelfth, eighteen hundred and eighty-two, and of any other provisions of existing stat utes, as require that before any national banking association shall be authorized to commence banking business it shall transfer and deliver to the Treasurer of the United States a stated amount of United States registered bonds be, and the same is hereby, repealed. r e f u n d in g b o n d s . S e c t i o n 19. That upon application the Secretary of the Treasury shall exchange the two per centum bonds of the United States bearing the circulation privilege deposited by any n a t io n a l banking association with the Treasurer of the United 16 BANKING AND CUBBENCY. States as security for circulating notes for three per centum bonds of the United States without the circulation privilege, payable after twenty years from date of issue, and exempt from Federal, State, and municipal taxation Doth as to income and principal. No national bank shall, in any one year, present two per centum bonds for exchange in the manner hereinbefore provided to an amount exceeding five per centum of the total amount of bonds on deposit with the Treasurer by said bank for circulation purposes. Should any national bank fail in any one year to so exchange its full quota of two per centum bonds under the terms ot this act, the Secretary oi the Treasury may permit any other national bank or banks to exchange bonds in excess of the five per centum aforesaid in an amount equal to the deficiency caused by the failure of any one oj* more banks to make exchange in any one year, allotment to be made to applying banks in proportion to their holdings of bonds. At the ex piration of twenty years from the passage of this act every holder of United States two per centum bonds then outstanding shall receive payment at par and accrued interest. After twenty years from the date of the passage of this act national-bank notes still remaining outstanding shall be recalled and redeemed by the national banking associations issuing the same within a period and under regulations to be prescribed by the Federal reserve board, and notes still remaining in circulation at the end of such period shall be secured by an equal amount of lawful money to be deposited in the Treasury of the United States by the banking associations originally issuing such notes. Meanwhile every national bank may continue to apply for and receive circulating notes from the Comptroller of the Currency based upon the de posit of two per centum bonds or of any other bonds bearing the circulation privilege; but no national bank shall be permitted to issue other circulating notes except such as are secured as in this section provided or to issue or to make use of any substitute for such circulating notes in the form of clearing-house loan certificates, cashier’s checks, or other obligation. [ bank reserves. [ S e c t io n 20. That within sixty days from and after the date when the Secretary of the Treasury shall have officially announced, in such manner as he shall elect, the fact that a Federal reserve bank has been established in any designated district, every national banking association within said district which shall have subscribed for stock in such Federal reserve bank shall deposit with the Federal reserve bank therein as a part of its required le se rv e an amount not less than three per centum of its own total demand liabilities, exclusive of circulating notes, and at the end of fourteen months from the date thus fixed by the Secretary of the Treasury shall in; crease the said three per centum to five per centum. Such reserve may at any time be increased, but shall at no time be allowed to fall below the amounts aforesaid. [From and after the date fixed by the Secretary of the Treasury as aforesaid, it shall be the duty of national banking associations now or hereafter classified as country banks and situated outside of central reserve and reserve cities to maintain a reserve equal to fifteen per centum of the aggregate amount of their deposits. Such reserve shall consist of five per centum of lawful money held actually in their own vaults and for a period of fourteen months from the date aforesaid shall consist of at least three per centum and thereafter of at least five per centum, with its district Federal reserve bank. The remainder of the fifteen per centum reserve hereinbefore required may for a period of thirty-six months from and after the date fixed by the Secretary of the Treasury, as hereinbefore provided, consist of balances due from national banka in reserve or central reserve cities as now defined by law. From and after a date thirty-six months subsequent to the date fixed by the Secretary of the Treasury, as hereinbefore provided, the said remainder of the fifteen per centum reserve required of country banks shall consist either of lawful money in its own vaults or of balances on deposit with the Federal reserve bank of its district, or both. [ b a n k s in r e s e r v e c it ie s . [From and after the date announced by the Secretary of the Treasury of the estab lishment of the Federal reserve bank in any district it shall be the duty of the national banks located in the reserve cities of suen district to maintain for a period of sixty days a reserve of twenty-five per centum of their outstanding deposits and perma nently thereafter a reserve of twenty per centum of their outstanding deposits. For sixty days from the date announced by the Secretary of the establishment of the reserve bank in such district each national bank located in the reserve cities thereof shall maintain in its own vaults, in lawful money, a sum equal to twelve and one-half per centum of its outstanding deposits and thereafter a sum of lawful money equal BANKING AND CURRENCY. 17 to ten per centum of its deposits. The additional required legal reserve above the lawful money required in its own vaults may be kept either with the Federal reserve bank in its district or with an approved reserve agent in the central reserve cities, for a period not exceeding thirty-six months from the organization of the Federal reserve bank in such district, and thereafter five per centum of such reserve shall be kept with the Federal reserve bank of the district or in the vaults of the member bank subject to the reserve requirements of this act: Provided, however, That the credit balance of three per centum and five per centum, respectively, of its deposits required to be kept with the Federal reserve bank of its district, as hereinbefore provided, shall not be diminished. [CENTRAL RESERVE CITY BANKS. [Every national bank located in a central reserve city shall maintain for a period of sixty days a reserve equal to twenty-five per centum of its deposits and thereafter it shall maintain a reserve equal to twenty per centum of its deposits. Of this required reserve five per centum may consist of a deposit with the Federal reserve bank of the district, the balance being in lawful money in its own vaults, and after sixty days from the passage of this act, at the bank’s option, one-half of this required reserve may consist of a credit balance with the said Federal reserve bank, but at no time shall the reserve of lawful money be less than ten per centum of the bank’s deposits: Provided, however, That the required credit balance of three per centum and five per centum, respectively, to be maintained with the Federal reserve bank of its district, as hereinbefore provided, shall not be diminished. J It shall be the duty of all member banks to main'ain reserves, as hereinafter stated, against all demand deposits which shall include time deposits maturing 'Within forty-five days, to wit: Country banks, 12 per cent; reserve city banks, 18 per cent; central reserve city banks, 20 per cent. in the case of a country bank such reserve shall consist of not less than 4 per centum of lawful money in its vault, and not less than 4 per centum with its district Federal reserve bank; 4 per cent may consist of balances duefrom reserve agents approved by the Comptroller of the Currency. In the case of a reserve city bank, such reserve shall consist of not less than 6 per centum lawful money in its vault, and not less than 6 per centum with its district Federal reserve bank. Six per cent may consist of balances due from reserve agents approved by the Comptroller of the Currency. In the case of a central reserve city bank, such reserve shall consist of not less than 10 per centum lawful money in its vaults and not less than 10 per centum with its district Federal reserve bank. Provided, That when the date is set by the Secretary of the Treasury, and officially an nounced, the deposits of reserve hereinbefore required to be placed with Federal reserve banks shall be made as follows: One-third within sixty days, one-third within fourteen months, and one-third within twenty-six months after such date. [ S e c t io n 21. That so much of sections two and three of the act of June twentieth, eighteen hundred and seventy-four, entitled “ An act fixing the amount of United States notes providing for a redistribution of the national bank currency, and for other purposes,” as provides that the fund deposited by any national banking asso ciation with the Treasurer of the United States for the redemption of its notes shall be counted as a part of its lawful reserve as provided in the act aforesaid, be, and the same is hereby, repealed. And from and after the passage of this act such fund of five per centum shall in no case be counted by any national banking association as a part of its lawful reserve. J S e c t io n 22. That every Federal reserve bank shall at all times have on hand in its own vaults, in gold or lawful money, a sum equal to not less than thirty-three and one-third per centum of its outstanding demand liabilities exclusive of its circulating notes otherwise hereinbejore provided for. The Federal reserve board may notify any Federal reserve bank whose lawful reserve shall be below the amount required to be kept on hand to make good such reserve; and if such bank shall fail for thirty days thereafter so to make »ood its lawful reserve, the Federal reserve board may appoint a receiver to wind up the business of said bank. BANK EXAMINATIONS. S e c t io n 23. That the examination of the affairs of every national banking associa tion authorized by existing law shall take place at least twice in each calendar year and as much oftener as the Federal reserve board shall consider necessary in order 18 BANKING AND CURRENCY. to furnish, a full and complete knowledge of its condition. The Secretary of the Treasury may, however, at any time direct the holding of a special examination. The person assigned to the making of such examination of the affairs of any national banking association shall have power to call together a quorum of the directors of such association, who shall, under oath, state to such examiner the character and circumstances of such of its loans or discounts as he may designate; and from and after the passage of this act all bank examiners shall receive fixed salaries, the amount whereof shall be determined by the Federal reserve board and annually reported to Congress. But the expense of the examinations herein provided for shall be assessed by the Federal reserve board upon the associations examined in proportion to assets or resources held by such associations upon a date during the year in which such examinations are held to be established by the Federal reserve board. [The Comp troller of the Currency shall so arrange the duties of national-bank examiners that no two successive examinations of any association shall be made by the same examiner. J In addition to the examinations made and conducted by the Comptroller of the Currency, every Federal reserve bank may, with the approval of the Federal reserve board, arrange for special or periodical examination of the member banks within its district. Such examination shall be so conducted as to inform the Federal reserve bank under whose auspices it is carried on of the condition of its member banks and of the lines of credit which are being extended by them. Every Federal reserve bank shall at all times furnish to the Federal reserve board such information as may be demanded by the latter concerning the condition of any national banking association located within the district of the said Federal reserve bank. [The Federal reserve board shall as often as it deems best, and in any case not less frequently than four times each year, order an examination of national banking associations in reserve cities. Such examinations shall show in detail the total amount of loans made by each bank on demand, on time, and the different classes of collateral held to protect the various loans, and the lines of credit which are being extended by them.J Upon joint application of ten member banks the Federal reserve board shall order a special examination and report of the condition of any Federal reserve bank. S e c t io n 24. That no national bank shall hereafter make any loan or grant any gratuity to any examiner of such bank. Any bank offending against this provision shall be deemed guilty of a misdemeanor and shall be fined not more than $5,000, and a further sum equal to the money so loaned or gratuity given; and the officer or officers of a bank making such loan or granting such gratuity shall be likewise deemed guilty of a misdemeanor and shall be fined not to exceed $5,000. Any examiner accepting a loan or gratuity from any bank examined by him shall be deemed guilty of a mis demeanor and shall be fined not more than $5,000, and a further sum equal to the money so loaned or gratuity given; and shall forever thereafter be disqualified from holding office as a national-bank examiner. No national-bank examiner shall perform any other service for compensation while holding such office. No officer or director of a national bank shall receive or be beneficiary, either directly or indirectly, of any fee (other than a legitimate fee paid an attorney at law for legal services), commission, gift, or other consideration for or on account of any loan, pur chase, sale, payment, exchange, or transaction with respect to stocks, bonds, or other investment securities or notes, bills of exchange, acceptances, bankers’ bills, cable transfers or mortgages made by or on behalf of a national bank of which he is such officer or director. Any person violating any provision of this section shall be pun ished by a fine of not exceeding $5,000 or by imprisonment not exceeding five years, or both such fine and imprisonment, in the discretion of the court having jurisdiction. Except so far as already provided in existing laws this provision shall not take effect until six months after the passage of this act. [ S e c t io n 25. That from and after the passage of this act the stockholders of every national banking association shall be held individually responsible for all contracts, debts, and engagements of such association, each to the amount of his stock therein, at the par value thereof in addition to the amount invested in such stock. The stockholders in any national banking association who shall have transferred their shares or registered the transfer thereof within sixty days next before the date of the failure of such association to meet its obligations shall be liable to the same extent as if they had made no such transfer; but thia provision shall not be construed to affect in any way any recourse which such shareholders might otherwise have against those in whose names such shares are registered at the time of such failure. Section fifty-one hundred and fifty-one, Revised Statutes of the United States, is hereby reenacted except in so far as modified by this section.| BANKING AND CURRENCY. 19 LOANS ON FARM LANDS. S e c t i o n 2 6. That any national banking association not situated in a reserve city or central reserve city may make loans secured by improved and unencumbered farm land, and so much of section fifty-one hundred and thirty-seven of the Revised Statutes as prohibits the making of such loans by banks so situated shall be, and the same is hereby, repealed; but no such loan shall be made for a longer time than [n in e ] twelve months, nor for an amount exceeding fifty per centum of the actual value of the property offered as security, and such property shall be situated within the Federal reserve district in which the bank is located. Any such bank may make such loans in an aggregate sum equal to twenty-five per centum of its capital and surplus, or fifty per centum of its time deposits. The Federal reserve board shall have power from time to time to add to the list of cities in which national banks shall not be permitted to make loans secured upon real estate in the manner described in this section. SAVINGS DEPARTMENT. [ S e c t io n 27. That any national banking association may, subsequent to a date one year after its becoming a stockholder in a Federal reserve bank, make application to the Comptroller of the Currency for permission to open a savings department. Such application shall set forth that the directors of said national bank have by a majority vote apportioned a specified percentage of their paid-in capital and surplus to said savings department and to that end have segregated specified assets for the purposes of said department, or that cash capital for the said savings department has been ob tained by subscription to additional issues of the capital stock of said national bank: Provided, That the sum in assets or in cash thus set apart for the uses of the proposed savings department aforesaid shall in no case be less than $25,000, or than a sum equal to twenty per centum of the paid-up capital and surplus of the said national bank. [I n making the application aforesaid any national banking association may further apply for power to act as trustee for mortgage loans subject to the conditions and limi tations herein prescribed or to be established as hereinafter provided. [Whenever the Comptroller of the Currency shall have approved any such applica tion as hereinbefore provided, he shall so inform the applying bank, and thereafter the organization and business conducted or possessed by said bank at the time of making said application, except such as has been specifically segregated for the savings department, and subsequent expansions thereof shall be known as the commercial department of the said bank. National banks may increase or diminish their capital stock in the manner now provided by law, but whenever such general increase or reduction of the capital sto( k of any na ional bank operating upon the provisions of this section shall be made such increase or reduc ion shall be apportioned between the commercial and savings department of the said bank as its board of directors shall prescribe, notice of such increase or reduction and of the apportionment thereof being forthwith given to the Comptroller of the Currency; and any such national bank may increase or diminish the capital already apportioned to either its savings or commercial department to an extent not inconsistent with the provisions of this section, notifying the Comptroller of the Currency as hereinbefore provided. The savings department for which authority has been solicited and granted shall have control of the cash or assets apportioned to it as hereinbefore provided, and shall be organized under rules and regulations to be prescribed by the Comptroller of the Currency. [Both the savings and commercial departments so created shall, however, be under the control and direction of a single board of directors and of the general officers of said bank. [A ll business transacted by the commercial department of any such national bank shall be in every respect subject to the limitations and requirements provided in the national banking act as modified by this act, and such business shall henceforward be known as commercial business. [The savings department of each such national bank shall be authorized to accu mulate and loan the funds of its depositors, to receive deposits of current funds, both time and demand, to loan any funds in its possession upon personal or real estate security, and to collect the same with interest, and to declare and pay dividends or interest, both upon demand and time deposits. The Federal reserve board is hereby authorized to exempt the savings departments of national banking associations from any and every restriction upon classes or kinds of business laid down in the national 20 BANKING AND CURRENCY. banking act, and it shall be the duty of the said board within one year after its organ ization to prepare and publish rules and regulations for the conduct of business by such savings departments, conforming to the best standards prescribed by the legis lation of the several States: Provided, That such rules and regulations shall not be inconsistent with the provisions of this section. All business transacted by the savings departments of national banks shall be designated and known as savings bank business. [Nothing in this section contained shall be construed to authorize any such savings department to purchase, invest in, or hold bonds, securities, or evidences of indebted ness, public or private, except as follows: [(a) First mortgages or deeds of trust on real estate, including farm lands, and the notes or bonds for whose protection such mortgages or deeds of trust may have been given: Provided, That such mortgages, deeds, notes, or bonds shall have when pur chased not more than five years to run and provided further that the total debt se cured by such instruments shall not exceed fifty per centum of the assessed value of the real estate upon which they constitute a lien. [(b ) Bonds or interest-bearing notes of the United States or bonds or notes for whose payment the faith of the United States is pledged both as to principal and interest. [(c ) Bonds of any State of the United States: Provided, That for ten years prior to the purchase of such bonds by savings bank department the State issuing the same shall not have defaulted in the payment of any part either of principal or of interest thereon. [(d ) Bonds of any city, county, or town: Provided, That such city, county, or town shall at the time when said bonds are purchased by a savings bank department have more than twenty-five thousand inhabitants, the United States census next preceding such investment being taken as evidence of the possession of said number of inhabitants: And provided further, That such city, county, or town shall not have defaulted in the payment of any part of the principal or interest of its bonded debt within ten years prior to the making of the investment aforesaid. The total bonded indebtedness of such city, county, or town shall not at the time of such investment exceed five per centum of the assessed valuation therein and such bonds shall have been issued pursuant to the law of the State in which such city, county, or town is situated. [(e ) First-mortgage bonds of any steam or street railway, public utility, or industrial corporation operating partly or wholly in the United States: Provided, That the same shall have been approved by the Comptroller of the Currency. [(f) First-mortgage bonds or deeds of trust issued by any real estate corporation: Provided, That no such bond issue or deed of trust shall exceed in amount fifty per centum of the assessed value of the real estate upon which it constitutes a lien. [The Federal reserve board shall have power further to define the conditions under which the said mortgages, deeds of trust, notes, bonds, and other securities herein before enumerated may be purchased by any such savings bank department, and may at its discretion make and issue lists of such securities having its approval, or may list securities in which savings bank department aforesaid shall be prohibited from invest ing. Such lists may be published in any manner deemed best by the said Federal reserve board. shall be the duty of every national bank to maintain with respect to the demand liabilities of its commercial department the reserve applicable thereto, as provided by the national banking act and by this act. shall be the duty of every national bank to maintain, with respect to all deposit liabilities of its savings department, a cash reserve in lawful money equal to not less than four per centum of its total deposit liabilities, and every national bank authorized to maintain a savings department is hereby exempted from the reserve requirements of the national banking act and of this act in respect to the said deposit liabilities of its savings department, except as in this section provided. [Every national bauk anthorized to operate a commercial department and a savings department under the provisions of this section shall segregate in its vaults the lawful money reserve of each such department and shall separately maintain, report, and account for such reserve. Whenever any such department, whether savings or com mercial, shall deposit current funds with other banks, such deposits shall be credited upon the books of such other banks as made by and belonging to the department of the depositing bank by which or in whose interest they were originally made and shall be paid only upon the order of such department. No department of any such national bank shall receive deposits from any other department of the same bank. 21 BANKING AND CURRENCY. . P * shall be the duty of every national bank to maintain separate books of account for each of its departments and to segregate and keep separate and distinct in each such department the cash, securities, investments, and property thereto belonging, and each such department shall iij the transaction of its business and the making of its investments be exclusively governed and controlled by the provisions of law and the regulations of the Federal reserve board or of the Comptroller of the Currency specifically made and provided with reference thereto. [A ny national bank authorized under the provisions of this section to maintain a savings department may make and publish rules and regulations defining the condi tions under which deposits shall be received and paid by such savings department. Such regulations may specify the period of notices which such department may at its option require for the withdrawal of such deposits: Provided, That no such deposits shall be subject to a requirement of less than sixty days’ notice of withdrawal. The said rules and regulations shall be subject to the approval of the Comptroller of the Currency and he shall have power to direct their alteration at his discretion. [Every officer, director, or employee of any national bank who knowingly or will fully violates any of the provisions of this section shall be guilty of a felony, and on conviction thereof shall be punished by a fine not exceeding $5,000 or by imprison ment not exceeding two years. J FOREIGN BRANCHES. S e c t io n 28. That any national banking association possessing a capital of $1,000,000 or more may file application with the Federal reserve board, upon such conditions and under such circumstances as may be prescribed by the said board, for the purpose of securing authority to establish branches in foreign countries for the furtherance of the foreign commerce of the United States and to act, if required to do so, as fiscal agents of the United States. Such application shall specify, in addition to the name and capital of the banking association filing it, the foreign country or countries or the dependencies of the United States where the banking operations proposed are to be carried on and the amount of capital set aside by the said banking association filing such application for the conduct of its foreign business at the branches proposed by it to be established in foreign countries. The Federal reserve board shall have power to approve or to reject such application if in its judgment the amount of capital proposed to be set aside for the conduct of foreign business is inadequate or if for other reasons the granting of such application is deemed inexpedient. Every national banking association which shall receive authority to establish branches in foreign countries shall be required at all times to furnish information con cerning the condition of such branches to the Comptroller of the Currency upon demand, and the Federal reserve board may order special examinations of the said foreign branches at such time or times as it may deem best. Every such national banking association shall conduct the accounts of each foreign branch independently of the accounts of other foreign branches established by it and of its home office, and shall at the end of each fiscal period transfer to its general ledger the profit or loss accruing at each such branch as a separate item. S e c t io n 29. That all provisions of law inconsistent with or superseded by any of the provisions of this act be, and the same are hereby, repealed. DELEGATES PRESENT AT THE CONFERENCE. C u r r e n c y C o m m i s s io n , A m e r ic a n B an kers’ A s s o c ia t io n . MEMBERS PRESENT. A. B. Hepburn, chairman of board, Chase National Bank, New York City, chairman. James B. Forgan, president First National Bank, Chicago, 111., vice chairman. Festus J. Wade, president Mercantile Trust Company, St. Louis, Mo. Joseph T. Talbert, vice president National City Bank, New York City. George M. Reynolds, president Continental & Commercial National Bank, Chicago, 111. John Perrin, of Perrin, Drake & Riley, bankers, Los Angeles, Cal. Luther Drake, president Merchants National Bank, Omaha, Nebr. Sol. Wexler, vice president Whitney Central National Bank, New Orleans, La. E. F. Swinney, president First National Bank, Kansas City, Mo. Joseph A. McCord, vice president Third National Bank, Atlanta, Ga. J. F. Sartori, president Security Trust & Savings Bank, Los Angeles, CaL Levi L. Rue, president Philadelphia National Bank, Philadelphia, Pa. E. L. Howe, vice president Princeton Bank, Princeton, N. J. Frederick E. Farnsworth, New York, secretary. Arthur Reynolds, vice president of the association. J. Fletcher Farrell, treasurer of the association. 22 BANKING AND CTJBBENCY. R epresentatives o r S tate B a n k e r s ' A s s o c i a t i o n s P r e s e n t . State. Banking affiliations. Arkansas., J. D. Covey.., California. John Perrin.., J. F. Sartori.., Connecticut............... District of Columbia. E. J. Hill......... W. T. Galliher. John Poole___ Georgia...................... L. P. Hillyer.. Illinois....................... J. D. Phillips. Richard L. Crampton. J. S. Aisthorpe.......... . John B. Jackson......... Indiana.......... J. L. McCulloch.......... Iowa............... J. L. Edwards........... . E. L. Johnson............. ITngftft....... W. J. Bailey.............. . Louisiana....... Sol. Wexler. Maryland....... Wm. C. Page........ Massachusetts. Michigan........ Minnesota___ Chas. B. Blinn, jr. A. G. Bishop........ G. H. Richards... N. F. Banfield___ Mississippi.... J. F. Flournoy, jr .. . Missouri......... R. S. Hawes............ Nebraska....... Geo. F. Sawyer....... New Jersey... W. M. Van Deusen.. New Y o rk .... A. B. Hepburn. J. T. Talbert............... North Carolina.............. Geo. A. Haldemess.. . Ohio................................ S. D. Fitton................ Oregon........................... E. A. W yld................. Pennsylvania................. M. I. McCreight.......... South Carolina............... Bright Williamson___ South Dakota................ J. E. Platt................... N. E. Frandlin........... M. P. Beebe................ J. C. Basset................. Tennessee....................... F. M. Mayfield............ I. B. Tigritt................. Texas............................. Nathan Adams........... Utah............................... Frank Knox................ Virginia.......................... Oliver J. Sands........... West Virginia................ J. S. Hfll...................... President Arkansas Bankers’ Association Cashier Benton County National Bank, Bentonville. Member currency commission, American Bankers’ Association, Los Angeles. President Security Trust and Savings Bank, Los Angeles. Member currency commission, American Bankers’ Association. Vice President National Bank of Norwalk. President American National Bank, Washington. Second vice president the District of Columbia Bankers7 Association. President Federal National Bank, Washington. D. C., and secretary District of Columbia Bankers’ Associa tion. President Georgia Bankers’ Association. Vice president American National Bank, Macon, Ga. President Illinois Bankers’ Association. Vice president and cashier Green Valley Bank, Green Valley, 111. Secretary Illinois Bankers’ Association, Chicago. Chairman executive council Illinois Bankers’ Associa tion, Cairo. Chairman legislative committee Illinois Bankers’ Association, Anna. President Indiana Bankers’ Association. President Marion National Bank, Marion, Ind. President Merchants National Bank, Burlington, Iowa. Waterloo, Iowa, of the Leavitt and Johnson Trust Com pany. President Kansas Bankers’ Association. Vice president Exchange National Bank, Atchison, Kans. Vice president Whitney Central National Bank, New Orleans. Member currency commission, American Bankers’ Association. President Maryland Bankers’ Association. President Calvert Bank, Baltimore. Vice president National Union Bank, Boston. President Genesee County Savings Bank, Flint. Secretary Minnesota Bankers’ Association. Vice president First National Bank, Austin, Minn. Member Minnesota Bankers’ Association currency com mittee. President Mississippi Bankers’ Association. Cashier First National Bank, Canton, Miss. Vice president Missouri Bankers’ Association. Vice president Third National Bank, St. Louis. President Nebraska Bankers’ Association. Saline County Bank, Western, Nebraska. Cashier National Newark Banking Company, Newark, N. J. Chairman currency committee. Chairman of the board, Chase National Bank, New York. Member currency commission of the American Bankers Association. Vice president National City Bank, New York. Member currency commission, American Bankers’ Association. President North Carolina Bankers’ Association. President Farmers’ Banking and Trust Company Tarboro, N. C. President Ohio Bankers’ Association. President First National Bank, Hamilton, Ohio. Vice president Security Savings and Trust Company Portland. President Deposit National, Dubois, Pa. President South Carolina Bankers’ Association. President Bank of Darlington S. C. Secretary South Dakota Bankers’ Association. First National Bank, Deadwood. President Bankers’ Association of South Dakota. President Bank of Ipswich, Ipswich, S. Dak. President Aberdeen National Bank, Aberdeen. Currency committee. Secretary Tennessee Bankers’ Association. Representative Tennessee Bankers’ Association. President Texas Bankers’ Association. Cashier American Exchange National Bank, Dallas. President National Bank of the Republic, Salt Lake. President Utah State Bankers’ Association. President American National Bank, Richmond Va. Secretary West Virginia Bankers’ Association. Cashier Nationa ICity Bank, Charleston. BANKING AND CURRENCY. 23 R e p r e s e n t a t iv e s of St a t e B a n k e r s ’ A ssoc iation s P r e s e n t — Continued. State. Delegate Wisconsin...................... Banking affiliations. H. A. Moehlenpah___ President State association. Cashier Citizens Bank, Clinton, Wis. Geo. D. Bartlett......... Secretary State association. E. M. Wing................. American Bankers’ Association Council, La Crosse, Wis. A. J. Frame................ President Waukesha National Bank, Waukosha, Wis. R e p r e s e n t a t iv e s City and State. of Cl e a r i n g H Delegate. Aberdeen, S. Dak.......... C. A. Russell............... C. I. Bruner................ James H. Perkins....... Ledyard Cogswell....... W. H. Fuqua.............. Robt. F. Maddox....... Jos. A. McCord............ Chas. T. Crane .......... W. P. G. Har iing Alfred L. Ripley........ Buffalo, N. Y ................. Willard F. Hopkins... H. S. Kaufman........... E. M. Scott................. B. F. Harris................ .............. Charles G. Dawes....... W. T. Fenton............. Cincinnati, Ohio............ C. A. Hinsch............... Chicago, 111 Cleveland, Ohio............. J. J. Sullivan............... E. R. Fancher............ L. F. Kiesewetter....... Theo. S. Huntington.. Dallas, Texas................. Nathan Adams........... Danville, 111................... M. J. Wolford.............. Davenport, Iowa........... J. H. Hass................... Columbus, Ohio............ Decatur 1*1 . . . Des Moines, Iowa.......... 0. B. Gorin ............... Homer A. Miller......... R. A. Crawford........... J. C. Rounds............... Arthur Reynolds........ Detroit, Mich................. George H. Russel........ Erie, Pa......................... R. J. Moorhead........... Evansville, Ind............. Henry Reis................. o use A ss o c ia t io n s P r e s e n t . Banking affiliations. President Citizens Trust and Savings Bank. President clearing house association. Vice President First-Second National Bank. President National Commercial Bank. President New York State National Bank. President First National Bank. President elearing house. Representing Atlanta Clearing House Association. Vice president Third National Bank, Atlanta, Ga. Member Currency Commission. President Farmers and Merchants National Bank. President First National Bank. Vice president Merchants National Bank. Vice president Third National Bank. Cashier City National Bank. Secretary and manager Canton Clearing House Asso ciation. President Security Savings Bank. Vice president First National Bank. President Central Trust Company of Illinois. Vice president National Bank of the Republic. President Fifth-Third National Bank. President clearing house. President Central National Bank. Vice president Union National Bank. Vice president Ohio National Bank. Vice president Huntington National Bank. Cashier American Exchange National Bank. President Palmer National Bank. President Scott County Savings Bank. President Davenport Clearing House. President Milliken National Bank. President clearing house. President Iowa National Bank. President Valley National Bank. President Citizens National Bank. President Des Moines National Bank. Vice president American Bankers’ Association. President Peoples State Bank. President Security Savings and Trust Company. President Old State National Bank. Vice-president Evansville Clearing House. Cashier National Bank of Flint. Vice president First National Bank. German American National Bank. Vice president Fort Worth National Bank. Flint, Mich.................... Brace J. MacDonald .. Ft. Wayne, Ind............. C. H. Worden............. Samuel M. Foster____ Ft. Worth, Texas.......... N oah Harding............ J. L. Johnson.............. W. E. Connell............. President First National Bank. Galveston, Texas.......... J. W. Hoopes.............. Vice president City National Bank. Vice president Galveston Clearing House. Hamilton, Ohio............. S.D.Fitton.................. President First National Bank of Hamilton. Delegate Hamilton Clearing House. Hartford Conn.............. Lucius A. Barbour___ President Charter Oak National Bank. Hastings, Nebr.............. C. C. Lane................... President Exchange National Bank. President clearing house. Hattiesburg, M iss......... F. W. Foote................ Vice president National Bank of Commerce. Houston, T exas............ J. T. Scott................... Vice president First National Bank President clearing house. Indianapolis, Ind ....... S. A. Fletcher............. President Fletcher American National Bank. President clearing house association. Jacksonville, 111.......... M F. Dunlap.............. President Ayers National Bank. Jackson, Miss........... Oscar Newton............. President Jackson Bank. Kansas City, Mo........... Geo. S. Hovey............ President Inter State National Bank. . W. Goebel.............. President Commercial National Bank E. F. Swinney............ President First National Bank. Member currency commission of American Bankers’ Association. Lexington, K y ......... J. W. Porter................ Cashier First and City National Bank. Lincoln, N ebr. ......_ S. H. Burnham....... President First National Bank. Little Rock, Ark ....... Geo. W. Rogers....... Cashier Bank of Commerce. 24 BANKING AND CTJBBENCY. R e p r e s e n t a t iv e s Macon, Ga............. McAlester, Okla... Memphis, Tenn ... Meridian Miss___ Milwaukee, W is. . . Minneapolis, Minn. Montclair, N. J ... Muskogee, Okla. New Castle, P a ... New Orleans, La. C l e a r in g H Delegate. City and State. Los Angeles, Cal... Louisville, K y ....... of Stoddard Jess......... L. C. Murray.......... E. L. Swearingen.. John H. Leathers.. L. P. Hillyer.......... Sam. L. Morley___ S. E. Ragland........ W alker Broach____ J. W. P. Lombard. Wm. Bigelow......... F. A. Chamberlain. C. T. Jaffray....... Joseph Chapman., Robt. L. Cox....... H. H. Ogden........ David Jameson... J. H. Fulton....... . Sol. Wexler.......... New York, N Y ........ Omaha, Nebr............ Pasadena. Cal........... Peoria, 111.................. William Woodward. F. H. Davis.............. A. E Edwards......... Fred Luth y.............. Pittsburgh, Pa.......... Chas. McKnight. Portland, Oreg......... Providence. R. I....... Reading, Pa.............. Richmond Va.......... E. A. W yld.............. Moses J Barber....... Randolph S. Week.. Julien H. Hill.......... John M. Miller, jr ... Oliver J. Sands........ Thos. B. McAdams. Henrv C. Brewster.. Chandler Starr......... Rochester, N. Y ....... Rockford, 111............. J. D. Waterman. Sacramento, Ca'........ Saginaw, Mich.......... St Joseph, Mo.......... St Louis, Mo............ Stoddard Jess (special rep.) George B Morley....... R. T. Forbes.............. Graham G. Lacy....... Walker Hill............... Festus J. Wade......... Salt Lake City, Utah Geo. H. Prince. J. W. Lusk....... T. W B oyer... Savannah, Ga........ Wm. M. Davant. Seattle, Wash........ Sioux City, Iowa... St. Paul, Minn.......... Frank K n o x ... South Bend, Ind... M. F. Backus......... John McHugh........ George S. Parker... Jacob Woolverton.. Spokane, Wash___ Springfield, 111....... Superior, Wis........ Syracuse, N. Y ___ J. P. M. Richards.. E. W. Payne........... Wm. B. Banks....... Arthur W. Loasby.. Tacoma, Wash...... Toledo, Ohio.......... Chas. R. M cKay.. Spencer D. Carr... Topeka, Kans....... Vicksburg, Miss__ F. M. Bonebrake.. W. Thos. R ose.... Washington, D. C.. W. T. Galliher.... Waterbury, Conn.. F. W. Judson....... Wheeling, W. V a.. Robert C. Dalzell. Youngstown, Ohio. Texarkana, Texas. Mason Evans... J. A. Pondrom., ouse A s s o c ia t io n s P r e s e n t — Continued Banking affiliations. Vice president First National Bank. President American National Bank-. President First National Bank. President Louisville National Banking Company. Vice president American National Bank. Vice president McAlester Trust Company. Vice president Central State National Bank. Vice president First National Bank. President National Exchange Bank. Vice president First National Bank. President Security National Bank. President clearing house. Vice president First National Bank. Vice president Northwestern National Bank. Montclair Trust Company. President First National Bank. President Citizens' National Bank. President Commercial National Bank. Vice president Whitney Central National Bank. Member currency commission of American Bankers' Association. President Hanover National Bank. Vice president First National Bank. Cashier First National Bank. President Merchants National Bank. Representing Peoria Clearing House Association. President Western National Bank. President Pittsburgh Clearing House Association. Vice president Security Savings and Trust Company. Vice president Merchants National Bank. Cashier Farmers National Bank. Cashier National State and City Bank. Vice President First National Bank. President American National Bank. Cashier Merchants National Bank. Vice president Traders National Bank. Cashier Winnebago National Bank. President Rockford Clearing House. President Forest City National Bank. Vice president clearing house. Vice president First National Bank, L oj Angelas. President Second National Bank. President First National Bank. Vice president Tootle-Lemon National Bank. President Mechanics-American National Bank. President St. Louis Clearing Housa. Member currency commission o Amar.can Banking Association. Chairman board, Merchants Nationa Bank. Merchants National Bank. Cashier Continental National Bank. President Salt Lake City Clearing House. President National Bank of the Republic. Secretary Salt Lake City Clearing House Association Cashier Merchants National Bank. President Savannah Clearing House. President National Bank of Commerce. President First National Bank. President Live Stock National Bank. President St. Joseph County Savings Bank and South Bend Clearing House. President Spokane and Eastern Trust Company. President State National Bank. President First National Bank. First National Bank and president Syracuse Clearing House. Tacoma Clearing House. President National Bank of Commerce. Vice president clearing house. Vice president Merchants National Bank. Vice president and manager American Bank and Trust Company. President clearing house. President American Nationa Bank. Washington Clearing House. Assistant cashier Waterbury National Bank. Clearing House Association. Cashier City Bank of Wheeling and president clearin j house. President Commercial National Bank. Vice president Texarkana National Bank. BANKING AND CURRENCY. 25 STATEMENT OF JAMES B. FORGAN, PRESIDENT OF THE FIRST NATIONAL BANK, CHICAGO, ILL. Mr. F o r g a n . Mr. Chairman and gentlemen of the committee, we appear before you as a committee of seven bankers, appointed at a conference called by the currency commission of the American Bank ers’ Association, held in Chicago, August 22 and 23, 1913. All the State bankers’ associations and all the clearing houses in the country were asked to send representatives to the conference; and appended to the report which has been submitted to you will be found a list of the delegates present. Senator R e e d . Mr. Chairman, I would like to request now that order be maintained in this room. If there is anybody here who desires to converse, I suggest that they go out into the hall. The C h a i r m a n . This hearing is very important, the Chair will state to visitors; and we hope therefore that silence will be observed, so that the speakers can be distinctly heard. Mr. Forgan, will you proceed ? Mr. F o r g a n . We appear before you primarily as representatives of the banks. We would, however, respectfully remind you that the bankers of the country come into close relation with three important classes of the community, whose interests it is their business to study, and as far as possible harmonize on an equitable basis. These are the bank stockholders, who supply the capital; the thrifty and indus trious members of the community, who supply the bank deposits; and commercial, industrial, and agricultural borrowers, whose busi ness development and prosperity depend largely on the credits given them by the banks. Senator W e e k s . Mr. Chairman, I would like to ask if the witness wishes to be interrupted from time to time by questions, or to com plete his statement before he is asked questions ? The C h a ir m a n . What is your pleasure, Mr. Forgan? Mr. F o r g a n . Well, I am not much of a speaker, and I would rather get through with it, if it is not inconvenient to the committee; and then either I or any other member of our committee will be glad to answer any questions. The C h a i r m a n . The committee, of course, has the right, if it sees fit, to interrupt a witness, but unless there is some particular reason, I assume that that will not be done. Senator C r a w f o r d . I suggest that where a statement has been carefully prepared and is written, we get the effect of it and its mean ing better by allowing the speaker to finish it, and then have the inquiries follow the reading of the paper. The C h a i r m a n . The Chair is of the opinion that that is within the discretion of the committee, and the witness will proceed. Mr. F o r g a n . These three classes combined form a large percentage of the population, and bankers fully realize that the general pros perity of the country depends upon the maintenance of proper rela tions between them and the banks. The business of the banks is to exchange credits with the public. It is therefore essential that, as a working basis, mutual confidence between them and the public should be maintained. Bankers would be shortsighted indeed, if, ignoring these fundamental relations, 26 b a n k in g and currency. they should approach the study of banking and currency legislation with purely selfish motives and solely from their own side of the subject. It is the duty of the directors and officers of the bank to study the interests of the millions of their savings and other depos itors, for whom they are trustees, as well as those of their share holders and of their borrowers. Hence, as the chosen representatives of the banks, we claim that in a very real sense, we represent the interests of all whose patronage the banks rely on for success, and especially the interests of the innu merable hosts, of thrifty and desirable citizens who manifest their confidence in the banks by trusting them with deposits aggregating more than $20,000,000,000. Individually bankers do not experience the much-talked-of distrust of the banks. Rather they duly appre ciate the confidence evinced by the public by placing such an enor mous line of deposits with the banks under their management, and they are keenly impressed with the responsibility such a trust imposes upon them. As chairman of this committee, I now hand each of you a copy of the report unanimously adopted at our Chicago conference, the preamble to which reads as follows: The currency commission of the American Bankers’ Association, charged with the duty of endeavoring to secure remedial banking legislation and regarding the bank ing measure now pending in Congress as evidencing the earnest wish of the adminis tration to give a wise law to the country, has profoundly desired to cooperate in every way. To this end, upon its invitation that the presidents of the 47 State bankers’ associations and that representatives of the 191 clearing houses attend and unite in an expression, this joint body composed of bankers from every section of the South and North, from coast to coast, representing country and city banks, State and National and trust companies, after carefully considering the bill has adopted the following: Whereas we recognize the imperative necessity of incorporating into the banking and currency system of this country those proven principles which will provide the most ample credit facilities with greatest safety and a currency based on gold which automatically adjusts its volume to trade requirements, in order that the highest stability may be attained for our commerce, thereby assuring continuity of employment for the laborer and favorable markets for the producer—the funda mental basis of general prosperity; and Whereas although the pending measure has many excellent features and recognizes certain principles fundamental in any scientific banking system, yet it is believed that the application of those principles may in certain respects be made in ways that will more surely avoid a credit disturbance and more efficiently attain the desired benefits for the whole people; and Whereas we believe that to insure the successful operation of a new banking law it must be of such a character as to warrant a general acceptance of its provisions by existing banking institutions, both State and National, country and city, since the final test of the measure of success must be the strength and power for efficiently serving the interests of the entire country which can alone be had from general par ticipation of banks of all classes; and believing that the bill as now drawn will, by its onerous provisions, prevent State banks and many National banks from joining the system, and earnestly desiring to cooperate with the administration in bringing about the adoption of the most highly efficient plan: Therefore be it Resolved, That we recommend the following changes in the bill as now published, convinced that, while not rendering the plan ideal, these changes would render organ ization more probable, would avoid a credit disturbance, and provide a system that would gradually develop into a great bulwark for the protection of our whole com merce, benefiting alike, and in equal measure, the laborer, the farmer, and the busi ness man. It is the sense of this conference that one Federal reserve bank with as many branches as the commerce of the country may require, would be more effective; but if this be not obtainable we recommend that as few Federal reserve banks be established as possible, and not more than a total number of five. BANKING AND CUBEENCY. 27 The duty of explaining to you the reason for these various changes has been divided among the members of this committee. To each member of the committee has been assigned one or more features of the measure in which changes are suggested. We will run through the bill and I will call upon the members of our committee to explain the changes as they occur. They can be further discussed at your leasure as we proceed, and any questions in regard to them the memers of the committee desire to ask we will be pleased to answer. The first suggested change is in connection with the number of Federal reserve banks, and it has been assigned to me to give our reasons for thinking that one Federal reserve bank, with as many branches as the commerce of the country may require, would be more effective than a greater number, but if that be not obtainable our reasons for recommending that there be as few as possible, and not more than five at the outside. Some one has said that the most economical, scientific, and effective method of handling the gold reserves of the banks of the country would be to consolidate them into one large reservoir for the protec tion of all. The current operations between the banks and the cen tral reservoir would cause but a ripple on the surface, while the great, staple mass of gold would inspire public confidence in all the banks for the protection of which it is held. For years the central object of banking reform in this country has been to find some practical method of mobilizing and controlling the lawful money reserves of the banks for the protection of them all, instead of relying upon each to individually acquire, maintain, and protect its own. The great defect of our present system and the prime cause of our periodical disturbances is that each of the 25,000 banks now in exist ence, having no adequate means of protecting its reserves, or of re plenishing them when they fall below its legal requirement, must enter into competition with all the rest for an amount sufficient for its individual needs. Whenever a financial strain becomes general, a scramble among the banks for lawful money occurs, which begets fear, and panic follows. The citizens of each community measure the strength of their local banks by the amount of cash they hold. The banks, realizing this, undertake to strengthen their position by increasing their cash holdings— which, however, no one can accom plish without, to the same extent, decreasing the cash holdings of some other bank. What is necessary is terestablish a system whereby this public method of estimating the strength of banks will be changed from measuring their solidity by the amount of lawful money they carry, to basing their estimate on the facilities possessed by the bank for promptly getting either lawful money, or a circulating medium that will, for all practical purposes, pass current in public estimation, as being as good as lawful money. This, it is believed, could be accomplished by consolidating a sufficient amount of the lawful money reserve of the banks in a central institution which would deal directly with the banks. It would be necessary that such an institution should have the right to protect its own resources, and those of the banks for which it acts, by using a circulating medium protected by an adequate gold reserve, and covered by the commercial assets it would acquire from the banks against the circulation with which it supplies them. 9328°— S. Doc. 232,63-1—vol 1------ 3 E 28 BANKING AND CURRENCY. That one institution with a sufficient number of branches scattered over the country would more effectually perform these functions than a greater number seems to us an inevitable conclusion. The entire country, divided into districts, could have proper representation on the central board of management, insuring that the interests of all sections would have equal and equitable consideration. It would be quite practicable to meet the requirements of the ^various districts through properly equipped branches, even more efficiently than they could be met through separate regional insti tutions. The establishing of a number of such institutions would divide the consolidated cash reserves of the banks into as many dif ferent ownerships as there are separate institutions. As no individ ual bank can now increase its gold or lawful money without to the same extent decreasing the gold or lawful money of some other bank, so wdth these regional institutions no one of them could strengthen its cash reserves without drawing them from and depleting to the same extent the reserves of another. On the other hand, one central institution with branches could distribute the gold or lawful money reserves over the country, as circumstances might call for, without change of ownership. The money would belong to the same institution, irrespective of where it might be located or what branch had custody of it. Chicago could be supplied with money from New York without publicly attracting attention to the fact that New York’s reserves had decreased and Chicago’s had increased by the transaction. The published state ment of the one institution would simply show that it owned so much more gold in Chicago and so much less in New York, while its per centage of cash reserve money on hand to total liabilities would not necessarily be changed at all. This would not be the case if the Chicago institutions were en tirely separate and distinct from the New York institutions. The Chicago institution’s lawful money requirements could not be sup plied by a withdrawal from the New York institutions without diminishing to an equal extent the amount of the latter’s lawful money on hand. In times of financial stress, when each regional institution would be husbanding its resources for the benefit of its own constituents, this might produce an undesirable and awkward situation, the interests of the various sections of the country being at variance. Such a condition would be intensified in direct ratio to the num ber of regional institutions established. A very practical reason why it would be wiser to start with not more than 5 Federal reserve banks is that the reserve bank organ ization committee might find it difficult, if not impossible, to comply with the requirement that it should organize not less than 12. It might be fairly assumed that few, if any, of the State banking insti tutions would immediately after the passage of the act voluntarily subscribe for their proportionate amount of the capital stock of the Federal reserve bank and contribute their quota of the required reserve deposits to be placed in these banks. It would seem that business prudence and conservatism would cause them to postpone action until the Federal reserve banks are organized, are doin^ business, and are able to demonstrate the advantages to be derived from being connected with them. BANKING AND CUBEENCY. 29 If this is a reasonable assumption in regard to the probable action of the State banking institutions the reserve bank organization com mittee would have to rely exclusively on the national banks, under the more or less compulsory obligation imposed on them, under the Federal reserve act, requiring them, within 12 months, to contribute the necessary capital and the minimum reserve deposit, or accept one of the alternatives of dissolution, or continuing tneir business under State charters. Should the subscriptions to the capital stock of Federal reserve banks be thus restricted, it would be necessary that practically all national banks should remain in the system and sub scribe for it. It is stipulated in the act, that there shall not be less than 12 Federal reserve banks, with a minimum capital of $5,000,000 each, which calls for a minimum aggregate subscription of $60,000,000. It is, however, evident that in the larger districts much more than the minimum capital would be necessary. The geographic division of the country adopted in the comptroller's statement of June 4, 1913, discloses that the following would be the regional contributions on account of capital: New England States..................................................................................... $10, 000, 000 Eastern States................................................................................................ 33, 000, 000 Southern States.............................................................................................. 17, 000, 000 Mid-West States............................................................................................. 28, 000, 000 Western States............................................................................................... 7, 000, 000 Pacific States................................................................................................. 10, 000, 000 These amounts are exactly 10 per cent on the capital of these dif ferent districts, the total being $105,000,000. Senator B r i s t o w . Have you got that figured out by States? Mr. F o r g a n . No; by districts. I took them from the comptroller’s report. Senator R e e d . Y ou follow the same line and groups as the Comp troller of the Currency, do you ? Mr. F o r g a n . Yes, sir; the statement of the Comptroller of the Currency shows these figures. Senator B r i s t o w . Would it be convenient for you to formulate an estimate by States and submit that as a part of your remarks ? Mr. F o r g a n . I could do it; yes, sir. The C h a i r m a n . I will call the attention of the Senator from Kansas to the fact that the document which I gave him gives the entire record of each State in every particular, including the reserves, and all their capital stock. Senator N e l s o n . I think the report of the Comptroller of the Cur rency groups them in the same way. The C h a i r m a n . It is given both ways, individually and by groups. Senator N e l s o n . Individually and by groups'? Mr. F o r g a n . Yes, sir; individually and by groups. Senator N e l s o n . If you will examine that statement you will find that it has what you desire. Mr. F o r g a n . A Federal reserve bank, therefore, could not be capi talized for less, in our opinion, than the following minimum amounts: Federal reserve bank of New York.............................................................. $25,000, 000 Federal reserve bank of Chicago.................................................................. 20, 000,000 Federal reserve bank of St. Louis................................................................ 15,000, 000 Federal reserve bank of Boston.................................................................... 10, 000, 000 Federal reserve bank of San Francisco........................................................ 10, 000, 000 Federal reserve bank of New Orleans.......................................................... 10, 000, 000 Federal reserve bank of Philadelphia.......................................................... 10,000,000 30 BANKING AND CURRENCY. And there would be five others in different parts of the country, at $5,000,000 each, making $25,000,000, and requiring a total of $125,000,000. It would thus require $20,000,000 more than would be provided if every national bank should become a subscriber. The chairman of our currency commission, Mr. Hepburn, of New York, who presided at our conference, in his opening address stated the practical reasons for not having such a number of Federal reserve banks so clearly and forcibly that I will, even at the risk of some repetition, conclude what I have to say on this branch of the subject by quoting him. He said: The measure recognizes and adopts the principles of a central bank. Indeed, if it works out as the sponsors of the law hope, it will make all incorporated banks together joint owners of a central dominating power. Why, then, should not the principle, once recognized, be correctly applied? Why should not the law create one central bank, which should have branches wherever there is commercial need for them? Such a plan would be simpler, less cumbersome, more certain in operation, and far more efficient. There would then be no need to give the Federal reserve board authority to direct one section of the country to loan money to another, for the central authority would then control all the deposits and all the loans, and they would make loans to those sections of the country where most needed. There would then be no need to authorize the apportionment of United States Treasury deposits to dif ferent sections of the country. Those deposits would thus be in one central bank and would flow naturally to that section of the country which needed them. As matters stand to-day, whenever stringency in the money market exists our 25,000 banks begin competing with one another m an effort to strengthen their cash reserves. In doing so, they intensify the stringency and aggravate the trouble. The tendency of individual banks to strengthen their position is natural and inevitable. In reviewing the proposed legislation, one of the most natural questions, then, is whether the establishment of these regional reserve banks will remedy or aggravate that condition. Will there not naturally and inevitably be competition between the regional reserve banks, competition between the 12 sections of the country, and will we not in the end have competition for cash holdings between individual banks added to the competition of section against section, reserve bank against reserve bank? The framers of the measure evidently recognize that danger and seek to palliate it by giving the Federal reserve board authority to force one reserve bank to loan to another. Under the conditions that would exist would not the exercise of that authority fail to accomplish the just distribution of funds? Is there not strong prob ability that in exercising that authority factors would be created that would endanger the smooth working and permanency of the whole plan? With a single central reserve bank with branches reserve money of all the branches deposited with that central institution would count in the aggregate, no matter with which branch it was deposited or through which branch it was loaned. With such a single central bank the controlling board might place its reserves in the section of the country where most needed. This shifting of funds would be accomplished with out ostentation and without notoriety; whereas if the Federal reserve board should require, as it might do, under this proposed law, one Federal reserve bank to loan money to another Federal reserve bank, that could not be done without attracting attention to the borrowing locality in a way that would operate to the prejudice of that locality. On the other hand, how simply and easily and naturally this appor tionment of funds would be made to fit the requirements of different localities through one central bank with branches. Gentlemen of the committee, I thank you very much. That is all that we desire to say upon that branch of the subject. The C h a i r m a n . Who is the next speaker you would like to present, Mr. Forgan ? Mr. F o r g a n . Mr. Wexler. The C h a i r m a n . Mr. Sol. Wexler, o f New Orleans, La. Senator R e e d . Mr. Chairman-----The C h a i r m a n . The Senator from Missouri. Senator R e e d . May I ask a question here ? I notice a statement there in your remarks, Mr. Forgan, I think it was in the quotation BANKING AND CURRENCY. 31 which you were making, to the effect that if we had five or more reserve banks they would ultimately come under one control— at least, that is the way I understood it. Will you kindly refer us to that sentence again ? Mr. F o r g a n . That would ultimately come under one control? Senator R e e d . I thought there was such a statement in what you quoted. Mr. F o r g a n . I think not, sir. Senator N e l s o n . I understood it to mean “ practically” under one control. Mr. F o r g a n . Oh, that was at the beginning. Senator R e e d . That is what I mean—for all practical purposes; it was somewhere in that quotation which you read. Mr. F o r g a n . It was iia the quotation of Mr. A. Barton Hepburn’s remarks, yes; just at the beginning of them, I think. It says: The measure recognizes and adopts the principles of a central bank. Indeed, if it works out as the sponsors of the law hope, it will make all incorporated banks together joint owners of a central dominating power. Senator R e e d . Well, Mr. Forgan, what do you understand that to mean ? Mr. F o r g a n . I understand it to mean that the Federal reserve board will be in control of whatever number of reserve banks were established, and that as the banks were the owners of the capital of all these reserve banks they would be owners of them and they would be under one central control. Senator R e e d . Well, do you anticipate in the plan which the banks have outlined (I have not read it yet, having had no opportunity to do so), whom do you propose to have constitute this central con trolling power, to which the paragraph you have just read refers? Mr. F o r g a n . Would you allow that question to' stand until we come to it? There is a gentleman here who will address the com mittee on our behalf on that one special subject. Senator N e l s o n . That is another branch of the discussion. Mr. F o r g a n . Yes; that is a subject upon which there is another gentleman here who will address you. Senator R e e d . I did not intend to argue the matter. I was merely trying to get at the meaning of this phrase which you read. Mr. F o r g a n . Yes, sir. Senator R e e d . Whether it means that these 12 reserve banks would, in the end, be controlled, for all practical purposes, by a central dominating power, and that power a bankers’ power; or whether it means that it would be under-----Mr. F o r g a n (interposing). No; the banks would have merely a representation on the board. Senator R e e d (continuing). Or whether it would be controlled by the Government. Mr. F o r g a n . Well, in this bill—when we come to that question— we ask for a minority representation; that is, if there are to be seven members of the board, we ask a representation of three out of the seven. Senator N e l s o n . But, Mr. Forgan, as I understand, without reference to the composition of that board, whether it remains as it is now in the bill or is modified as you suggest, this statement 32 BANKING AND CUBEENCY. which you have quoted is based upon the fact that the board in any event under this bill would have control of the entire system ? Mr. F o r g a n . Yes, sir. Senator N e l s o n . And if money were short in one regional bank it could be transferred to the other, and vice versa ? Mr. F o r g a n . Yes, sir. Senator N e l s o n . I s that not what you mean by that statement? Mr. F o r g a n . Yes, sir. Senator N e l s o n . I thought that was what Mr. Forgan meant. Mr F o r g a n . And when we come to it in these hearings it will be seen that our recommendation is that we should have a minority representation on that board. Senator R e e d . Well, does that suggestion that you have just read to us, the second time at my request, embrace the idea merely of the transfer of surpluses from one of the central banks to another under the guiding hand of whoever has been selected to constitute the central board, or does that expression mean something more than that, that after all there would be a central dominating force, and that dividing the system into 12 parts does not much change it from what it would be operating as one integer— as one thing? Mr. F o r g a n . Well, if the bankers were to get the representation which they want— because they think they are entitled to it, in con sequence of their ownership— of course the bankers would have a minority representation on that board; and if we only had one reserve bank (which we argue for) that would work itself out auto matically. The question would never be before the board of the interests of one part of the country as antagonistic to those of another part, because the duty of the board would be to consider the necessi ties of all the country from time to time as they arose and to meet the necessities as they arose. Senator R e e d . Perhaps I can put my question in a different form, which has been suggested to me by the Senator to my right [Senator Weeks]: Do you not mean whether there is 1 bank or 12 regional banks, that after all they will inevitably come under one central control ? Mr. F o r g a n . Yes, sir; that is the meaning, decidedly the meaning; yes, sir. Senator N e l s o n . And you mean that, without reference to the fact whether the board is as constituted in the bill, or with the addi tions which have been suggested ? Mr. F o r g a n . In the bul, or with the additions. Senator S h a f r o t h . Mr. Forgan, the representation on the Federal reserve board which your convention has recommended, does it mean that the persons representing that interest shall be engaged in banking ? Mr. F o r g a n . Yes, sir; that it be left to the banks to appoint them, and of course they would be likely to appoint bankers from among themselves. Senator S h a f r o t h . And you ask for three members upon the board ? Mr. F o r g a n . Three; yes, sir. Senator S h a f r o t h . I s it not a fact, Mr. Forgan, that the Bank of England has no banker upon its board of directors ) BANKING AND CTJBBENCY. 33 Mr. F o r g a n . Well, it has no representative of any chartered bank. Senator S h a f r o t h . I s that not also true of all of the European banks that are central banks, namely, that they have no members of the banking fraternity that are in active business upon the board ? Mr. F o r g a n . It has the representatives of some of the largest private banking firms in the world on the board of the Bank of England. Senator S h a f r o t h . Well, are there any on the Bank of France or the Bank of England ? Mr. F o r g a n . They are on the Bank of England. Senator S h a f r o t h . Well, I understand not. Mr. F o r g a n . Well, I can assure you that there are; there are six of them that are representatives now of— they are called ‘ ‘merchants” but they are representatives of the largest private banking firms there are in the world. Senator S h a f r o t h . The Bank of England, as I understand it, has as directors only those who have £500 invested stock and have a mercantile business of $100,000; they must have that much in the mercantile business before they can become directors of the Bank of England ? Mr. F o r g a n . There is nothing in the law under which the Bank of England is established to prevent any representative of another incorporated bank being on the board. Senator S h a f r o t h . Well, is it a fact? Mr. F o r g a n . It is only the practice. Senator S h a f r o t h . Yes. Well, the practice has been that they should not be on the board, has it not ? Mr. F o r g a n . That the representatives of an incorporated bank should not be on the board; that is the practice. Senator Cr a w f o r d . Mr. Forgan, is not the reason for that because the Bank of England does not want entangling alliances with any other bank ? It uses its discount------ Mr. F o r g a n (interposing). Yes, sir. Senator Cr a w f o r d (continuing). It uses its discount power as a check on them, and therefore does not want to be involved? Mr. F o r g a n . Yes, sir; and it does not want a member of the board of a bank that is going to offer a bill for discount to pass upon that bill. Senator N e l s o n . Mr. Chairman, I want to suggest that we go into this question when the gentleman who has come here with the com mittee of bankers to take up that branch of the bill is making his statement; that would seem to be the more logical course to pursue. Senator P o m e r e n e . Mr. Chairman, I want to make a motion before we adjourn, and that is that when the time arrives for the committee to interrogate the witnesses we proceed alternately to question them: First, the chairman examining the witness; and next, the next ranking member on one side of table, and then the ranking member on the other side, and so on, until all the members of the committee have concluded the questions they desire to ask. It seems to me that this method of questioning the witness is entirely unfair to the witness, and it is very unfair to the committee. (Whereupon the committee took a recess of 10 minutes, after which the following proceedings were had:) 34 BANKING AND CURRENCY. The C h a i r m a n . The Senator from Colorado would like to ask you one or two questions. Mr. F o r g a n . Yes, sir. Senator S h a f r o t h . I s it not a fact, Mr. Forgan, that the reason bankers are not upon the board of directors of these central European banks, is because the power of those banks is to raise or lower the rate of discount, and that would give an advantage to the banker who happened to be upon the board to have this Knowledge in ad vance, and that he might use it to the advantage of his banking institution; and is not that arrangement satisfactory to all the banks, so that one bank will have no advantage over another bank ? Mr. F o r g a n . I would have to be frank with you. I could not answer that question. I am not sufficiently familiar with the work ing of the European banks to know. I would have to draw upon my imagination for it. I do not know. Senator S h a f r o t h . From what I have read of the workings of those European central banks, that have the right of lowering or raising the rate of discount, that is the reason they do not permit a banker to be upon the board, not but what they could get great knowledge from him, but because of his interest in a banking institu tion, which could be used to his bank’s advantage, in the event the discount was raised or lowered. We all know that in raising the dis count you produce a little bonus and bonds rise and stocks rise, and if the knowledge is given to a banker in advance you can readily see that he could use it to the advantage of his bank, and it is on that account that the bankers throughout the whole Empire or throughout the nation first insist that no banker should be on there, unless he is a retired banker. Mr. F o r g a n . That may be so, sir. Senator S h a f r o t h . Y ou are not familiar with it? Mr. F o r g a n . No, sir; I am not sufficiently familiar with it to give an answer. Senator H it c h c o c k . Mr. Forgan, I would like to ask you why a central bank should be limited to one institution in this country any more than for continental Europe ? Would not the 12 regional banks in this country correspond to the 12 national banks of the continent of Europe ? Mr. F o r g a n . We expect the banks of continental Europe to com pete with each other, and they are in active competition with each other; we do not expect in this country to establish competing districts one with the other. Senator H it c h c o c k . I s it not true that the banks of Europe cooperate with each other ? Mr. F o r g a n . Not to any such extent as to influence them in any way in the management oi their banks. The C h a i r m a n . The witness will suspend. There is another call of the Senate and voting is going on and we will have to suspend. (Whereupon the committee took a short recess, after which the following proceedings were had:) Senator P o m e r e n e . I desire, before the witness proceeds, to renew my motion to the effect that after the witness has made his state ment, that if there is any cross-examination desired the chairman BANKING AND CURRENCY. 35 first cross-examine and then that we alternate from side to side of the table in the order of the seniority of Senators on the committee. The C h a i r m a n . Gentlemen of the committee, you have heard the motion proposing that the cross-examination of witnesses shall pro ceed in order of seniority of the members on the committee, so as to prevent confusion. What is your pleasure ? (The motion was carried.) Mr. F o r g a n . The next material change we have to suggest occurs on page 6, section 2. Senator H it c h c o c k . Before you go to that, Mr. Forgan, I would like to continue. I had merely got started on that question which I commenced to ask you. I understood you to make an argument that it would not be possible or desirable for a number of independent regional banks to exist in the United States. Mr. F o r g a n . I did not say it was not possible for them to exist. Senator H it c h c o c k . Not desirable? Mr. F o r g a n . Not desirable. Senator H it c h c o c k . That the result of having them more or less independent would be that they would compete with each other in gathering reserves as independent banks now compete with each other ? Mr. F o r g a n . Yes, sir. Senator H it c h c o c k . And I asked you whether the condition in Europe did not controvert that idea. Mr. F o r g a n . I think not. Senator H it c h c o c k . The Bank of England and the Bank of France and the Reichsbank and the other banks of European coun tries perform a similar function; that implies the reserves, and they afford currency to the country and to the banks that operate with them, and do they not also cooperate with each other in emergencies ? Mr. F o r g a n . I think they very violently compete with each other for reserve money—-very strongly compete with each other. Senator H it c h c o c k . Compete to the extent of slightly raising or lowering the rate of interest. They do not do that in concert, so that where the money is needed most the money goes most ? Mr. F o r g a n . Y ou do not think they do it in concert. We have some that do. Senator H it c h c o c k . Has it not been a fact that the Bank of France has come to the relief of the Bank of England in emergencies ? Mr. F o r g a n . Oh, yes; at least they did at the time of the Baring Bros.’ failure. Senator H it c h c o c k . Recently in Europe, when credits were contracted in Berlin, did not the Bank of France arrange to have credit extended through the Swiss bank to the German bank? Mr. F o r g a n . I am not aware of that transaction, but I am aware of the fact that the French as a whole did not help Germany very much, but the very reverse, by withdrawing money from Germany. Senator H it c h c o c k . But did she not at the same time place that money in Switzerland so that Switzerland might extend the credit to the Berlin banks ? Mr. F o r g a n . I should want to be clearly and fully posted on all these facts about that before I could express an opinion on it, and I am not so informed. 36 BANKING AND CURRENCY. Senator H it c h c o c k . Do you express it as an opinion that the indeendence between the great banks of Europe is detrimental to the usiness of the world ? Mr. F o r g a n . Detrimental to the business of the world? Senator H it c h c o c k . Yes. Mr. F o r g a n . Oh, no; but they are different countries, different sets of citizens, and different peoples altogether, that they represent. Senator H it c h c o c k . Business nows readily between them, they are in very close contact, and both France and Germany together are not as large as the United States in territory. Mr. F o r g a n . I do not see any analogy between them at all and the United States. Senator N e l s o n . If you will allow me, Senator, to say there is one great difference. Our national banks are banks of issue, and theirs are not, outside of these big national banks— outside of the centra] bank. They are just banks of discount and deposit. Senator H it c h c o c k . I am now speaking to the point that we now propose to create these regional reserve banks, which are to perform some of the functions toward the banks in their territory that are now performed by the great banks of Europe to the banks in their own territory. Mr. Mo r g a n . Even if they did that, all that I have said would be true— they would enter into competition and it would not be necessary that they should. They could serve the whole country much better if the central organization had the interest of the whole country before them in all the transactions as they came before them, and loaned the money as it was wanted— placed the money where it was wanted in this country. Senator H it c h c o c k . Europe is generally held up to us as a model, and in Europe we have these great banks, in what you might term competition with each other, and yet it works satisfactorily. Mr. F o r g a n . That is between nations. If we had one central reserve bank, it would be infinitely stronger to compete with the other banks of the world, as compared to 12; that is an argument in favor of having the one. That is the way that it appears to my mind. The C h a i r m a n . Before leaving that point, under the rule adopted by the committee, it will be in order for the members, if they desire, to question the witnes ?in the order of their seniority. Senator O’Gorman ? Senator Reed ? Senator R e e d . I may want to ask something later on, but I will waive it now. Senator P o m e r e n e . Just one question, which I wanted to ask. I take it from what you said that you prefer one central bank rather than one or more regional banks ? Mr. F o r g a n . Yes, sir; with branches, wherever necessary. Senator P o m e r e n e . Waiving, for the time being, the method of appointment of this reserve board, if you had the one central bank, of course it would be controlled by the one board ? Mr. F o r g a n . Yes, sir. Senator P o m e r e n e . And if you had the 12 regional banks, the 12 regional banks would be under the control of this same board. Now, I would like you to point out the difference between the one bank, under the control of one board, and 12 regional banks under the control of one board. E BANKING AND CURRENCY. 37 Mr. F o r g a n . The first thing that appeals to me, in answering that question, is in regard to the reserves of the banks. The reserves would belong to one institution— the gold would belong to one insti tution, if it wras one institution with, I should say, 12 branches; and therefore it might control these reserves better. Take the transfer of money from New York to Chicago, and from Chicago to San Francisco, and from San Francisco to New Orleans, without the change of ownership, as I have already explained. Wherever that money was lying, it would belong to one institution, and the same percentage of gold to total liabilities assumed would exist, whereas if they got into competition with each other, one might be down below its reserves, and the other above, and in that way you get competition among them for the reserve money of the country, which, if it was all in one reservoir— I use this as an illustration—it would not be all in one reservoir, but it would be in a number of reser voirs owned by the same institution, and it would serve the purpose of the whole country. Senator P o m e r e n e . Mr. Forgan, as I understand this scheme, where you have the 12 or more regional banks, the plan of the bill is that this reserve board will have the right to compel one re gional bank to loan to another regional bank as the necessities of the occasion should require, and that they shall fix the rate of interest. Now, then, is it not practically one board in control of 12 reservoirs, and is not the difference, in fact, in the number rather than any material difference ? Mr. F o r g a n . N o ; there is a very serious material difference that I have been trying to explain. I do not think I can put it any plainer than I have put it in what I have already said. Senator O ’ G o r m a n . There is this difference, Mr. Forgan. If you have 12 reserves, as contemplated in this bill, you have 12 separate and distinct organizations, and while they are under the control of a central reserve board, it is quite natural that the officials in those several separate organizations will have special interests in their own localities, and while they would have to submit under the provisions of this bill to the final decisions of the central board in Washington, there wTould doubtless be many instances where they would bear protest, feeling that their own localities were being prejudiced by the action of the central board ? Mr. F o r g a n . Yes, sir. Senator O ’ G o r m a n . While, on the other hand, if you have a cen tral organization, it would not be required to consult another organ ization, but simply make its direction, which would have to be respected by its branch. Mr. F o r g a n . That is very well expressed, sir. I wish 1 was as ready with my answers to give that explanation; unfortunately, I am not. 1 am always afraid of committing myself to something that I do not understand. The C h a i r m a n . Are there any other members of the committee who desire to ask Mr. Forgan any questions about that first subject before we leave it ? Senator R e e d . Are there any advantages, to your mind, at all in having 12 reserve banks with the organizations provided in the bill; that is, separate organizations ? Mr. F o r g a n . 1 do not know of any. 38 BANKING and currency. Senator R e e d . And you think that, in any event, the 12 organ izations would all come under one control in the end, just as one bank is under one control ? I take it, therefore, that you think these 12 organizations are in the nature of unnecessary machinery. Mr. F o r g a n . I think so; yes, sir. Senator N e l s o n . If you are through, Senator Reed, I will ask a question. Would it not lead to this, in practical operation, Mr. Forgan, that, in the first place, there would be some friction in the matter of distribution of Government funds among the several reserve banks ? One might claim that it got less than its share. Mr. F o r g a n . Yes, sir. Senator N e l s o n . Then, would not this difficulty arise: Suppose that a reserve bank at Minneapolis should be well supplied with funds, and suppose the reserve bank at New Orleans lacks funds, and suppose the board should order a transfer of funds directly or indirectly from Minneapolis to New Orleans, would not it lead to some friction? Mr. F o r g a n . It would lead to a great deal of friction. Senator N e l s o n . Would not the Minneapolis reserve bank feel they were discriminated against and that it was not fair to transfer their funds to New Orleans ? Mr. F o r g a n . Yes, sir. And, to follow that idea up, the Minneap olis banks might at that time be compelling their customers to dispcse of their wheat in order to turn it into money for local necessities, while down in New Orleans they might be holding their cotton and borrowing the money for that purpose, and they would be enabled to carry their cotton, while Minneapolis would have to sacrifice their wheat. Senator O 'G o r m a n . Mr. Forgan, I would like to ask one more ques tion: If the central board is to be controlled entirely by Government officials, would the banking interests prefer to have a central organiza tion without the reserve banks, or would they prefer to have reserve banks plus the central bank, assuming that in any event the central organization would be controlled entirely by appointees of the Presi dent ? Mr. F o r g a n . I think they would rather have a central organiza tion even in that case. Senator O ’G o rm a n . Even if it be a Government-controlled organi zation ? Mr. F o r g a n . Yes, sir. Senator C r a w f o r d . May 1 ask a question ? The C h a irm a n . The Senator from South Dakota desires to ask a question. Senator C r a w f o r d . Mr. Forgan, I would like your opinion as to whether or not, if the subscriptions were optional on the part of the banks instead of being coercive, there would, in your judgment, be a doubt as to whether a sufficient number of banks would volun tarily subscribe to this stock to furnish the amount of capital required here in this system ? Mr. F o r g a n . Well, I think, if the bill was made attractive enough to the banks, that sufficient national banks and the State banks would also come in. Senator C r a w f o r d . I mean that if it is allowed to become a law in its present form, with this mandatory provision changed so that it would be optional, would, in your opinion, enough national banks BANKING AND CURRENCY. 39 voluntarily subscribe or banks of any sort voluntarily subscribe to yield the necessary amount of capital? Mr. F o r g a n . I am sorry to say that I do not believe they would voluntarily supply sufficient capital. Senator C r a w f o r d . Well, just one other question. For instance, in the community which I represent there are no banks except small country banks, it being a purely agricultural State, with no large cities and no large commercial transactions such as you have in manufacturing and commercial centers, the capital of these banks running from $25,000 to $100,000. They loan their money to a constituency that borrows for a longer period than this class of paper called “ prime” paper and “ commercial” paper. Do you think it would cripple this bill and prevent the raising of sufficient capital if an exception was made in it under which those small country banks might have the option to subscribe or not to subscribe, and would it not then be possible to secure the capital by simply making the ex ception in their cases ? Mr. F o r g a n . So that the banks in the larger cities would subscribe enough capital? Senator C r a w f o r d . The little banks who can not use the redis count provisions of this bill or get any benefit of that— do you think it would obstruct the success of the bill to make an exception ? Mr. F o r g a n . I will answer to this extent, at least, that I think the greatest objection to the bill and the banks that are least likely to come into it are small country banks, for the reasons that you have given. Senator C r a w f o r d . What benefit would the little country banks, who do not deal in this kind of paper, get from these reserve banks ? Mr. F o r g a n . Practically n one. Senator C r a w f o r d . Do you think that it is fair to compel them to furnish capital for banks that they can not use or from which they can get no benefit? Mr. F o r g a n . I think not. The C h a ir m a n . Are there any other questions by members of the committee ? Senator R e e d . Mr. Forgan, you used the expression in your advocacy of one bank, “ one bank authorized to issue circulating medium protected by an adequate gold reserve ” ? Mr. F o r g a n . Yes, sir. Senator R e e d . I take from that that you think this one central bank that you advocate should have authority and a right to issue a circulating medium ? Mr. F o r g a n . Yes, sir. Senator R e e d . Would you retire the notes which the Government now has out ? Mr. F o r g a n . That is a subject that another gentleman is to address you on. Senator R e e d . Unfortunately, I am afraid you are going to divide yourselves up-----Mr. F o r g a n . We take these subjects up as they come in the bill. It would require quite a long explanation to go into that; there is a gentleman here who is going to do it for you. Senator R e e d . Would you mind saying what you think is an adequate reserve ? 40 BANKING AND CURRENCY. Mr. F o r g a n . We recommend in the bill, when we come to it, 40 per cent. Senator R e e d . Forty per cent ? Mr. F o r g a n . Yes, sir. Senator R e e d . Thank you. Mr. F o r g a n . The next material change-----Senator W e e k s . I think this may come in at this point as well as any other. It is well known that the administration desires to have public control of such reserve banks as are organized, and bankers who are furnishing the capital to the reserve banks think that they should be represented in the reserve board. Have you considered whether it would be a desirable and fair method of adjustment of that difference for the banks of the country who are furnishing the capital to select a list of 50 or 100 men, we will say, those who have no direct connection with banks at the time, and submit that list to the Presi dent, and he appoint the reserve board from that list ? Mr. F o r g a n . That would be a very good modification of it. Senator W e e k s . If you are not prepared to answer that finally, I wish you would think of it seriously, because I would like to have you make a definite reply to it to-morrow or the next day or some other time. Senator P o m e r e n e . May I ask a question in that connection, along the same lines. Senator Weeks’s thought is evidently and Mr. Forgan’s thought is that the bankers should have the right to suggest the names of the members of this reserve board. What reason is there for giving that power to the bankers in connection with the naming of this reserve board that would not apply with equal force to the suggestion that the railroad companies should suggest the names of the persons from whom the Interstate Commerce Commission were to be selected ? Mr. F o r g a n . The railroad companies do not part with the initiative control of their business, as we would have to do. We supply the capital. We own all the capital in the banks, and own all the deposits in the banks, with the exception of the Government’s deposits. It is our money, and we believe it to be a well-recognized principle that the owners of property are entitled to some say in the management of it. Senator P o m e r e n e . The railroads own the railroads ? Mr. F o r g a n . Yes. Senator P o m e r e n e . And all the capital invested. Why should not they fix the rules for. transportation ? Mr. F o r g a n . I do not really know why they should not. Senator N e l s o n . I want to call your attention to the fact that the railroads in the first instance initiate and fix the rate, and it is simply subject to review by the board— the Interstate Commerce Com mission. Senator P o m e r e n e . But the board is not named or even suggested by the railroad companies. Senator N e l s o n . N o ; but the powers are different. One is simply a board of review to review the action of the railroad companies in fixing the rates, in the first instance. Senator O ’ G o r m a n . Senator, you might add that under our inter state regulations there is no provision that the United States Gov ernment gets any part of the earnings of the railroads, as is provided in this bin as introduced in the House. BANKING AND CURRENCY. 41 Senator R e e d . And he may further suggest that the Government is not required to deposit any of its money with the railroad com panies, from time to time, in order to enable them to do business. Senator H it c h c o c k . If suggestions are in order, I would suggest there is an appeal from the decisions of the Interstate Commerce Commission, and there is no appeal from this board under this scheme. I would like to ask Mr. Forgan, before he stops, whether he has some one who is going to discuss the subject of furnishing this capital ? Mr. F o r g a n . Yes, sir. Senator N e l s o n . He has a man elected for every one of these sub jects, and we are getting ahead of him. Mr. F o r g a n . Every one of these subjects has been arranged for, and you want me to take the powder away from these gentlemen, and I do not want to do it. Senator H it c h c o c k , i want to ask some questions on that subject, but I will defer them for the present. Senator S h a f r o t h . Mr. Forgan, do you think that inasmuch as a banker representing a banking institution, being on this central board in Washington, which has the power of lowering or raising the dis count, that it would give him an advantage, and his banking institu tion an advantage to know in advance that the rate would be increased or decreased ? Mr. F o r g a n . I do not think the increasing or decreasing of the rate of the central institution would have much effect on the business of the other banks at all. Senator S h a f r o t h . I s it not a fact that in the European banks where the rate is increased or decreased there is a corresponding rise or decline in the market of all securities nearly, and if that is true, does it not give an advantage to the bank which is represented by that man, by which that bank can obtain advantages over other banks-----Mr. F o r g a n . I think not. Senator S h a f r o t h (continuing). Dealing in bonds or stocks ? Mr. F o r g a n . I do not think so, sir. I do not see any advantage in it. I would not consider it any advantage. The C h a i r m a n . Y ou m a y proceed, Mr. Forgan. Mr. F o r g a n . The next material change we have to suggest occurs on page 6 of our report, section 2, and I will ask Mr. Sol. Wexler, vice president of the Whitney Central National Bank, of New Orleans, La., to explain to you our reason for reducing the subscription to the capital of the Federal reserve banks from 20 per cent of the unim paired capital of the subscribing banks to 10 per cent, and requiring one-half of such subscription to be paid in cash and one-half subject to call upon 60 days* previous notice. Mr. T\ exler will also expl-ain the change which occurs in section 4, at the bottom of page 8, and give you our reasons for believing that the Federal reserve board should not have power to remove any director of class B in any Federal reserve bank, and why the Federal reserve agent should not also be the chairman of the board of directors of the Federal reserve banks. Senator W e e k s . Mr. Chairman, before Mr. Forgan takes his seat, I want to ask him a question. The C h a i r m a n . Just a moment. would like to ask you a question. Senator Weeks, of Massachusetts, 42 BANKING AND CURRENCY. Senator W e e k s . I would like to ask him a question about what he has been discussing. Mr. Forgan, you stated, in commencing, that certain State banking associations and others were invited to meet the currency committee of the American Bankers’ Association at Chicago ? Mr. F o r g a n . Yes, sir. Senator W e e k s . Did all of the associations invited accept the invitation and send representatives ? Mr. F o r g a n . I understand there were representatives there of 37 States, and 117 cities or towns and clearinghouses. Senator W e e k s . They came from all sections of the United States ? Mr. F o r g a n . From all sections of the United States. There is a list of them to be found at the end of the report. Senator W e e k s . Was the report made a unanimous one? Mr. F o r g a n . Absolutely. Senator W e e k s . Was there any dissent whatever to that report? Mr. F o r g a n . N o dissent whatever. Senator W e e k s . Do you know that any members there were opposed to any conclusions to which you came ? Mr. F o r g a n . N o , sir; they were asked if there were any they should stand up. After the vote had been taken and decided in the affirmative, in order to make sure that there was no dissenting voice, the chairman asked anyone that did not approve of the action to rise, and he waited for quite a while and no one arose. Senator W e e k s . Then, we may assume that this is the unanimous judgment of the representatives of the different banking associations m tne United States ? Mr. F o r g a n . I think so, sir. We present it as such. In further answer to Senator Weeks all these changes were voted on as they occurred, and as we are bringing them before you now, and there was not a dissenting vote in connection with any of the sections; and then after all had been passed upon separately it was put to a vote as a whole and there was no dissent. STATEMENT OF SOL. WEXLER, VICE PRESIDENT WHITNEY CENTRAL NATIONAL BANK, NEW ORLEANS, LA. Mr. W e x l e r . Mr. Chairman and gentlemen of the committee, coming as I do from an entirely different section from the gentleman who has just spoken to you, and our section of the country doing somewhat a different class of business, being more particularly agri cultural than that represented by Mr. Forgan, before passing on to the particular matters which have been given me for attention I would like, with your permission, to say just a word on a matter which Mr. Forgan has discussed with you. There were one or two points raised which I feel have not been quite sufficiently cleared in the minds of the committee. One very important one was the question asked by the gentleman as to whetner or not the fact that a banker was a mem ber of the Federal reserve board might not give his bank an advantage over other banks in being aware of any change in the discount rate m advance. Senator S h a f r o t h . Yes, sir. Mr. W e x l e r . It has never been contemplated at any time that any man interested in any bank in the United States should become a BANKING AND CUftiwx^CY. 43 member of the board of directors of the Federal reserve board. We admit that there might be an advantage in that, but any banker who might be appointed on such board wornd necessarily have to sever his connection with any banking institution with which he might have been theretofore connected. That, however, would be no good reason why a banker of tried experience, who has been successful in his bank ing career, should not be a member of the Federal reserve board, because he is distinctly better qualified to serve the banking interests of the country and the people at large by reason of that experience than would a man who has never had any banking experience. The banking business, gentlemen, is a profession. It is not a business in which any man can engage simply by renting a place and having a counter and putting some money in a safe. It is a profession. It must be learned by many years of practical experience, many hard knocks, and frequently many severe losses before the necessary experi ence has been acquired; and the board ol directors of the bank of which I am vice president would not elect as its executive officer a merchant, or a farmer, or an engineer, or a man in any other line of business as the head of that bank to run it, and no more should the Federal reserve board be composed entirely of men without necessary banking experience. They should be men who have been tried long in the business; who have proven their success. Senator S h a f r o t h . There is no question about that, and I under stood Mr. Forgan to say that there should be a certain number of these bankers. Mr. W e x l e r . Precisely. Senator S h a f r o t h . All I wanted to direct attention to is this, that in European banks it is not that way, and it should not be in this. A banker to be a member of this board should retire. Mr. W e x l e r . He would have to retire. In regard to the Euro pean banks, the personnel of the board of the Bank of England is made up of what is known as private bankers, the largest banking business in England is done by private bankers. They are bankers in thorough touch with international banking all over the world. They are accepting bankers of the world who furnish the credit for the importation and exportation of merchandise. Every man should have had a peculiar training for being upon the board of the bank, such as the Bank of England, which is dealing with the vast colonial possessions of England and with the whole world at large. Senator S h a f r o t h . Just a moment. “ Peculiar training’’ as to what ? Mr. W e x l e r . A s merchant bankers. The C h a i r m a n . Just a moment, Mr. Wexler. You do not under stand that this bill precludes a man from this board who has had training and experience as a banker ? Mr. W e x l e r . No, I do not; but I do not think that quite sufficient rovision has been made that there must be a number of men who ave had that training. I think that is sine qua non to the success of the institution. The next point that occurred to me: I recognize it-----Mr. F o r g a n . Would you allow me a word ? The idea occurred to me which did not occur when I was asked the question by the gentle man to the chairman’s left, that this board is to devote all of its time to the Federal reserve board— to the management of the affairs of E 9328°— S. Doc. 232, 63-1—vol 1------ 4 44 AND CURRENCY. these institutions— and they are to be paid what is supposed to be an adequate salary for their services. The directors of the Bank of England do not get salaries. Senator S h a f r o t h . N o ; but unless there is some provision that required them to dispose of their assets in a bank, they could still devote their time to it and be connected with the bank in the inter ests of the bank. That seems to me to be precluded if your theory as to directors or the members of this central board should prevail. Mr. F o r g a n . I agree with what Mr. Wexler has said, that they should be disassociated with other banks. Mr. W e x l e r . Entirely. My attention has been called to the fact that in my remarks I might be discussing subjects that have been allotted to some other gentleman. So, I am going to proceed to the discussion of the sub ject which has been allotted to me. We have to deal in connection with this subject with probably 24,000 to 25,000 banks eligible to membership in this system. Of this number some 17,000 are State banks, upon which no coercive nor compulsory measure will prevail to make them come into the organization. In order that any currency or banking scheme shall be a success, it is imperative that there shall be general participa tion and cooperation among the banks of the country. In order to have this general cooperation and participation there must be some distinct advantage to banks in coming into the system, or at least there must be no disadvantage to them in coming into it. That must be recognized by everyone at present here. Now, for the purpose of making the proposition more attractive, particularly to the smaller banks throughout the country, we have suggested that the capital requirement to be contributed by banks be reduced from 20 per cent of the capital of the respective banks to 10 per cent of the capital. We believe that if your bill is amended to that ex tent that quite a number more banks would come in than would come in if the requirement is 20 per cent. We have understood that it is the opinion of the framers of the bill, and we concur in that opinion, that it will probably never be neces sary to call for more than the first 10 per cent. That being the case, why is it necessary to intimidate this great number of banks by imposing upon them this additional possible liability? In many sections of the South and West— the sections of the country which are now under the most rapid development— the withdrawal of 20 per cent of the capital is looked upon by many as being quite a hard ship, and while that argument may be met by the statement that these banks will have the discount privilege in the Federal reserve bank, and that they may fill this void created by borrowing the deficiency, but they have an additional liability by borrowing from the Federal reserve banks, and no bank feels nearly as much disposed to borrow money for the purpose of lending at it does to lend money out of its own resources. It is impossible to even approximate the amount of capital that will be furnished to the Federal reserve banks, whether under the 20 per cent requirement or the 10 per cent require ment, until we know how many of the suggestions which are being made by this committee here to-day are going to be adopted. From the expressions which I have had from a great many southern banks, without any influence whatever having been used upon them, most BANKING AND CURRENCY. 45 of them entirely voluntary expressions on their part, I do not believe unless the greater portion of these amendments which we are suggest ing be adopted, that many of them, particularly the State banks, will come into the system; and I fear very much that a great many national banks will go out of the national system and become State banks. Therefore, it is quite imperative that every one of these sug gestions be given very serious consideration, and particularly this one requiring only an obligation of liability on the part of the contributing banks of 10 per cent. We have suggested that 5 per cent should be immediately paid in in cash, and the remaining 5 per cent subject to call of 60 days’ notice. If the bill is so amended that it will strike favorably that great number of banks throughout the country, it may never become neces sary to call for more than the original 5 per cent, which would be a distinct advantage, as it would enable the bank to accumulate much more rapidly the 20 per cent surplus required under the bill; it would enable them to make a distribution of the surplus earnings of the various contributing banks over and above the dividends which you have named to be paid upon the stock, which in itself is not deemed to be adequate, but it would enable a larger distribution to the Government as its share of the profits to be applied to the retire ment of the greenbacks and the national-bank notes. If the bill is made so attractive that a great number of banks will come into the system, and only the first call of 5 per cent is found to be adequate, it will be a distinct advantage; if it is not adequate, then the other 5 per cent may be called upon 60 days’ notice, and then the liability ceases; and there certainly can be no good reason for imposing this liability, which very few banks care to assume, when there is almost not the slightest shadow of a chance of its being called, yet it is a liability which every bank will have to recognize. I have calculated that if all of the important suggestions which this committee is making should be adopted, that at least 80 per cent of the national banks and 50 per cent of the State banks and the trust companies would come into the system. If that were the case, 10 per cent would produce about $130,000,000 of capital, which, in my opinion, would be adequate. The necessity for the larger capital of the Federal reserve banks does not exist to the same extent that it does for National and State banks, for the reason that capital of the National and State banks is fixed in their charters and can not be increased except by a vote of the stockholders, but the capital of these Federal reserve banks is movable, in the sense that as new banks are started over the country they may come into the system. There would be constantly increased capital of these Federal reserve banks, and under the provisions which you have the surplus must be built up to 20 per cent of the total capital and constantly maintained there, so that you will have a constantly increasing capital, if the bill is properly drawn, and a con stantly increasing surplus. I believe that the acceptance of this suggestion will add to instead of diminishing the amount of capital that will be furnished to the regional banks, by resaon of the fact that a greater number of banks will come into the system, and it must be admitted that the greater the number of banks coming into the system the more efficient and more cohesive the bank will be. To my mind, these are reasons 46 BANKING AND CURRENCY. sufficient to justify you in making the change which we hare sug gested on that point. We next come to the provision of the bill, as drawn, that provides that the directors of class B, namely, those elected to represent the agricultural and commercial interests of the country may be removed by the Federal reserve board if it is found that they do-not properly represent the agricultural and commercial interests. This provision is, in our opinion, fraught with considerable future embarrassment, if not possible danger. These particular directors, known as directors of class B, will be in constant fear of removal, and upon every loan upon which they will be called to vote they will naturally be influenced as to how the Federal reserve board will look upon their action, instead of being governed entirely by their sound judgment as to whether or not they should pass favorably or adversely upon the particular proposition, as it is presumed that they will want to hold their positions. There can be but one guide to the action of a director of class B in voting upon a proposition, and that i3 his own honest opinion as to whether or not the loan is safe and sound and should be made. Now, let us presume that an agricultural loan js presented and he votes against it upon his honest conviction that such a loan should not be made, and that the bank presenting such a loan should make a complaint to th^ Federal reserve board. Who in the Federal reserve board shah pass upon whether or not this director has been in good faith in declining this credit ? Credit itself is a very delicate matter. A man extending credit can not always give a distinct and definite reason why he declines. The extending of credit is frequently a matter of intuition, what is commonly called a “ hunch,” and a man feeling that way fre quently takes the negative and safer side of the proposition, without really being able often to give a definite reason why he has done so, and very often we find that those intuitions are very correct. In any event, I doubt very much if the Federal reserve board, unfa miliar with the local conditions, located many miles from the regional bank, which may have declined the particular proposition, and perhaps composed of a number of men untrained in the extending of credit— I doubt very much if they would be in a position to pass upon the motive of the particular director, and if his motive has been honest in declining a loan of that kind, even though he might have made a mistake, he certainly should not be subject to removal. We take the position that as the directors of class A and of class B have been elected by the shareholders of the Federal reserve banks they should only be removed by these shareholders. I am rather of the opinion that there is not any particular class of business that requires any special representation upon a board of that character. The bankers who are going to pass upon the loans presented to them by various banks are not going to pass upon loans made to themselves; they are not going to pass upon loans made to any bank in which they are interested, but they are going to pass upon loans made by other banks, to whom? To farmers, and merchants, and manufacturers, and others. Why should there exist any prejudice? Where is the necessity for a particular class of directors representing a particular class of borrowers? How ever, there is no objection to distinguishing these classes, but I BANKING AND CURRENCY. 47 think there is a distinct objection to allowing them to be removed at the pleasure of the Federal reserve board. My idea of the strongest function of the directors of class B is to keep in touch with the agricultural and commercial conditions of the various sections tributary to the particular regional banks, and to see to it that loans are not made when the conditions do not justify that loan, rather than to see that loans are made. The law, furthermore, as written, provides that the agent of the Federal reserve board shall be the chairman of the board of directors of the Federal reserve bank to which he is assigned. The position as chairman of the board in many corporations is higher in authority than the position of president. He presides over meetings of boards of directors and upon him would therefore devolve the necessity of presenting to the board the various details of the business and matters coming before it for action. As the agent of the Federal reserve board will not be the active manager of the bank, he will not be in position to properly act as the chairman of such a board. He will not be sufficiently familiar with the details. Senator R e e d . Who will be the active manager? Mr. W e x l e r . The governor or president elected by the board, as is provided by the bill. Chairmen of boards of directors are either in active management of the institutions, or they are mere figureheads rewarded with the position for past services rendered; and it is practically a notice that they have passed their time of usefulness, except in an advisory capacity. In fact, the chairman ship of a board of directors in many corporations, particularly in banks, is the twilight, the retirement of that particular officer; it is the first step on the road to his effacement. As I have said, as the Federal reserve agent will not be the re sponsible active manager of the bank nor an officer to be rewarded for past services, he should not be the chairman of the board, but should be what he really is intended for—the agent of the Federal reserve bank, its representative, its supervisor, to see that the bank is properly, safely, and economically administered, that it main tains the required reserve, that it obeys the law, and serves the public. It should be the mouthpiece of the Federal reserve board to the Federal reserve bank, and of the latter to the former. But his position should never be one to create a conflict in author ity or of prestige between himself and the president or governor. I am rather of the opinion that while he should be present at all meet ings of the stockholders, directors, and committees, he should not vote. I do not think that he should bear any part of the responsi bility of management. I think he should be outside of the manage ment and there as the watchdog of the Federal reserve board, to see that the management does its duty. If he is a member of the board and votes upon what action may be taken, he is responsible in part for the management. I think it would be a good thing if he were present at all meetings without voting. It would keep him in absolute touch with what was going on and enable him to report it back to the Federal reserve board; m fact, his duties to be similar to those of the Comptroller of the Currency at the present time. 48 b a n k in g and currency. These, gentlemen, are the reasons for these suggestions which we have just discussed. There is no particular advantage to any bank coming into the system to have you carry those out. They are simply in the direction of having a more sound and workable bill. It will not put a single dollar more into the earnings of any bank, but it will make for a better institution, which is all we are striving for; and these suggestions are made in absolute good faith, with no ulterior or selfish motive, for the good of the Federal reserve board and of the Federal reserve banks and of the public to be served, and simply with a view of endeavoring to take out of this bill which you have constructed the bad timber and bad material, not with a view of tearing down the structure but simply taking out the defective parts ana supplying sound parts in place of them. That is all. I thank you. The Ch a i r m a n . Senator Hitchcock, do you care to ask any ques tions? Senator H it c h c o c k . Mr. Wexler, do you think that the bank capital of the United States to-day is adequate, considering the volume of business and the amount of deposits taken ? Mr. W e x l e r . In some sections of the country it is entirely ade quate. In other sections it is very inadequate. In the Eastern States and in some of the Middle Western States I think there is adequate capital. In the Southern States and the far Western States it seems to me it is quite inadequate. It is in our section of the country, for which reason we are borrowers. Senator H it c h c o c k . There has been a growing disparity between the capital of the national banks and the deposits that they receive, and is that constantly diminishing the comparative size of the capital to the detriment of the depositors? Mr. W e x l e r . I do not think the capital is diminishing, but as you have said, perhaps the deposits are increasing, which is making the relative proportion of capital to deposits somewhat smaller than ordinary. Senator H it c h c o c k . I will give you the figures. At the present time the capital of the national banks represents 12 per cent of their total deposits. Ten years ago it was 16 per cent; 10 years before that it was 30 per cent; 10 years before that it was 38 per cent. Is not that constantly diminishing relative size of capital detrimental ? Mr. W e x l e r . It would be were it not for the fact that— take the figures of surplus increase during the same period and I think you will find that the surplus of banks has increased as much or probably more than the ratio of capital to deposits has diminished. A bank rarely ever— it does occasionally, but the great majority of banks do not— increases its capital, and pays but small dividends and con stantly increases its surplus to create a greater security to the depositor. Senator H it c h c o c k . That is true— that is, it would modify it somewhat—but while including the surplus and the capital it would only be 20 per cent of the deposits at the present time. Under those circumstances I want to ask you if you think it is wise to withdraw from these banks so large a portion of the capital with which they are doing business ? Mr. W e x l e r . I think that a contribution of 20 per cent is too large, *and I have suggested that the amount be cut to 10 per cent; and if BANKING AND CURRENCY. 49 a sufficient number of banks come in, the first 5 per cent call may be sufficient. Twenty per cent margin to the depositor— the ratio of capital and surplus to deposits—is, in my opinion, quite adequate. That would mean that the value of loans of a bank would have to shrink 20 per cent before the depositor could lose a cent. Senator H it c h c o c k . I s it not a fact that in European banks a much broader margin of safety is observed ? Mr. W e x l e r . I do not think so. Senator H it c h c o c k . That is true of the Bank of France, is it not ? Mr. W e x l e r . But you can not compare those banks with the various national and State banks scattered over the United States. If you want to make comparisons of that kind, you must make your comparison with the Federal reserve bank that we would like to see established in this country. Senator H it c h c o c k . What do you think of the idea of providing in this bill that a portion of the capital shall be furnished and sup plied outside of the banks ? Mr. W e x l e r . I do not think that it would do at all, because the moment that you furnish any portion of the capital from the general public, the next suggestion would be that the general public would ask for the discounting privilege, and the moment you did that, you would require such an intricate organization for the carrying on of the business of this bank and you would come in direct competition with all of the other banks of the United States, that you would create in the end, if it resulted the way I think it would, a monopoly of the banking business in fche hands of this particular institution. And I doubt very much if the commerce of the country would like to feel that its whole commercial welfare was dependent upon one institution. Senator R e e d . D o you think that this bill as proposed and with the amendments which your committee suggests would be a good bill for the country ? Mr. W e x l e r . I do. Senator R e e d . D o you think it would be a good bill for the bankers ? Mr. W e x l e r . I do. Senator R e e d . D o you agree with Mr. Forgan that a better scheme would be one central bank ? Mr. W e x l e r . I do, most emphatically. Senator R e e d . D o you think that any part of the virtue of this bill consists in the fact that if it is not one central bank it approxi mates or approaches that idea more than the present condition ? Mr. W e x l e r . I think one would be better than two; and right on down the line, with the fewer number you have the better it will be. Senator R e e d . Your preference would be one? Mr. W e x l e r . One. Senator R e e d . And your second preference would be two ? Mr. W e x l e r . Yes, sir. Senator R e e d . But you think you could stand 12 ? Mr. W e x l e r . Y ou will meet practical difficulties in the carrying out of that bill, if you pass it with 12, that you gentlemen do not see now, but which we see, having figured it out on a piece of paper. You are going to have difficulty in dividing up the country with 50 BANKING AND CURRENCY. respect to these regions. Do you appreciate the difficulty? That each town is going to want to have one of these regional banks ? There are going to be overwhelming difficulties and embarrassments. Senator R e e d . That, however, is aside from the question of------Mr. W e x l e r . The question of economics, yes. Senator R e e d . That has to do with the difficulty of putting the plan in operation; but what I am trying to get your idea on— and I think I have got it, now— is the reason you bankers favor this bill as amended, or one reason, and that is that it means a concentration of the capital, and the nearer it comes to being concentrated in one place, the better you like it. Mr. W e x l e r . The concentration of capital, and especially of reserve. Senator R e e d . Yes. You get a bank— head and heart and center— in other words. Mr. W e x l e r . It is very much like the illustration, if you will remember, Senator Reed, of the old man who, when he was about to die, called his seven sons up and he had a bundle of seven sticks, and he asked them all to try to break them, and none of them could. He pulled one out after the other and broke them up, and they said, u That is easy.” That is the proposition. If we get all these reserves in one spot, we will have a bank with the largest gold reserve of any country in the world, and we will have so strong a commercial and financial center that France and England and Germany will be insignificant to us in importance in the commerce of the world. But if we scatter these in 12 institutions, owned by 12 different States, you are bound to have competition between them. Human nature is the same every where, and this provision that you have here for requiring one Federal reserve bank to discount for another is going to involve these banks in endless difficulties. If you come to a Federal reserve bank in New Orleans and think that they must discount for the Federal reserve bank in California, and the Federal reserve bank in New Orleans is not in a condition to discount, I would tell you: “ I will not do it. This money belongs to other stockholders, and I have not the right to take this money out of their pockets and send it to California.” You would be up against just that proposition. Senator R e e d . Let me follow that a little bit. I just want to get your ideas. If you had a Federal reserve bank in New Orleans and one in California, and the California bank called for aid and you got orders from the controlling board to send them a million dollars, you would decline to do it if you thought your bank could not afford to do it? Mr. W e x l e r . Precisely. Senator R e e d . You added to that this statement, that it would not be right; you would decline, because you would not take the money from that district and send it to another district. Suppose you had one central bank. This money would not have been in New Orleans at all; it would have been in Washington or some other place where that bank is situated. Do you think that is preferable ? Mr. W e x l e r . Yes, sir. There would have been no more in New Orleans than what was needed in New Orleans, and no more in the other place than what was needed in the other place, and if the money all belonged to one set of stockholders it would be properly within the province of this board to distribute it where it was needed, all over the country. BANKING AND CURRENCY. 51 Senator R e e d . But it would originally all have been sent from these various places out of their respective communities to some central point, and to that extent would have bled those communities of that money? Mr. W e x l e r . Only constructively, not actually. For instance, the head of the Federal reserve bank, or the central bank, if we should have one, would be in Washington, and they would establish not 12 branches, but probably 200 branches throughout the United States, and the money would be kept in these various branches in the United States. With the central board, having the control, fixing the rate of discount for its branches, raising and lowering it according to condi tions, and directing the management of all these various branches, there would be one ownership, one reserve, one statement, and there would be such a vast base upon which the credit of the country would rest that it would be impregnable. Senator R e e d . I catch that point; but about the distribution of money. You met what I suggested by the further suggestion that we would not have one central bank, but one central bank with many arms reaching in every direction ? Mr. W e x l e r . Precisely. Senator R e e d . S o let us say that one had 12 arms. Why would not the first 12 branches, as were originally proposed in this bill, the 12 systems, be substantially identical in regard to the matter of the distribution of money? Mr. W e x l e r . Because of the difference in ownership. The essen tial thing is the ownership of the bank. If you will permit the capital to be contributed to the 12 regional banks "to be put into the Federal reserve board, and the stock issued from that Federal reserve board, and let it apportion it among the 12 banks, then the situation would be identical. Senator R e e d . D o you think that would be preferable ? Mr. W e x l e r . That would be a central bank. You come right back, then, to that proposition. But suppose, now, Mobile, which is a sister city of ours, and a people of whom we are very fond, should get into hard straits and need money badly. If we had it, we would be glad to rediscount it for it. Senator R e e d . And strain yourselves a little to do it ? Mr. W e x l e r . And strain ourselves a little to do it; but if we had our local reserve loaned up to the handle ourselves, we would say, “ We are sorry, but we can not help you.” We would have to say that. That would be a duty upon us, because if we broke ourselves in trying to help somebody else, the only criticism wrould be to say, “ You did a foolish act.” Nobody would say, uYou did a generous act.” Senator R e e d . I think I catch your point. I want to ask you now about another matter. Of course you have examined this bill and you have spoken about the chairman of the board of directors’ duty under this bill. Of course the chairman is one of the men ap pointed by the Federal reserve board. Mr. W e x l e r . Yes, sir. Senator R e e d . Y ou say that, generally, the chairman of the board in the ordinary practice of banking is not an important individual unless the chairman of the board happens also to be the president of the bank ? Mr. W e x l e r . Or the active manager. 52 BANKING AND CURRENCY. Senator R e e d . As you understand this plan, is there anything in it that would take away from the president of the bank that degree of management and control whien the president of a bank ordi narily has when he is backed up by a board of directors that are in harmony with him, or the majority of which is in harmony with him ? Mr. W e x l e r . Nothing, except the fact that the chairman will reside. The chairman of a board, as you understand, presides at the oard meetings. What is the object of a board meeting? At the meeting of the board of directors, after the minutes are read and the loans are read that have been made, and loans are submitted and assed upon and the details of the institution are discussed, etc.: ere is the chairman of the board; he is not a member of the man agement at all; he is in no position to bring these matters to the attention of the board. That is the duty of the governor. Senator R e e d . He is, under this bill, so much o f a figurehead that he is not even in good condition to lay the business of the bank before the board of directors ? Mr. W e x l e r . Absolutely not. Senator R e e d . Then, if I get you right, the president of the bank and the majority of the board of directors will run this bank abso lutely, except as the espionage of the central board might prevent? Mr. W e x l e r . Or interfere; that is exactly it. Senator R e e d . So that if the banks elect three bankers directors and then elect three other directors, I suppose you would concede those three other directors of course would oe friendly to the banks and desirous to serve the banks as the directors in class B should be ready to serve the banks, or the same as in class A ? What you will do, as a matter of fact, will be to get three men that will act in har mony, three men in class B who will act in harmony with the three men in class A ? Mr. W e x l e r . That is a very distinct mistake, and it is an impres sion of which I would like to disabuse the minds of the gentlemen of this committee. When we select the board of the bank we do not consider whether this board is in accord with the president. We pick out a man who is an experienced wholesale groceryman, another man who is a retail dry-goods man, another man who is in the machin ery business, another a planter. Why ? Because when these propo sitions arise from persons engaged in these various lines of business it makes it possible for us to have men who are more or less expert in the particular line. Senator R e e d . I understand that, but all these men are members of the board. They are stockholders in the bank and they are inter ested in its welfare. Mr. W e x l e r . Yes, sir. Senator R e e d . Therefore when you pick men who are experts in these various lines of adventure, you, of course, know when they come to sit on the board they will use their best judgment? Mr. W e x l e r . Yes, sir. Senator R e e d . D o you mean to tell me that you or any other man, not more selfish than the average man, but just using the ordinary business sense, will not get three men that are going to side with the banks rather than with the Government in these matters ? Mr. W e x l e r . I certainly do not, unless the Government were endeavoring to impose something that we did not believe was right. E E BANKING AND CURRENCY. 53 Senator R e e d . I do not mean that they are going to be bad men, but I am talking about who is going to control in that board of direc tors. Who is going to control? Mr. W e x l e r . The people that have put the money in the bank, who have invested their money, are going to control, and they ought to control. Senator R e e d . The banks are going to control? Mr. W e x l e r . Yes, sir; there is no question about that. Senator R e e d . There is nothing in this bill, is there, that provides that those three men who are elected—that is, all of the directors of class B— may not own any amount of bank stock they want to own ? Mr. W e x l e r . No; there is nothing in there to prevent their owning bank stock. Senator R e e d . The only bar there is that they shall not actually do business with the banks, and shall not be interested as an officer of a bank? Mr. W e x l e r . Yes, sir. Senator R e e h . And as their election makes them officers they can not hold two offices very well, and as they can be stockholders to any amount, it might work out that the largest stockholders in the bank would qualify themselves for these positions by resigning their offices in the bank; so that, in fact, the six men might all be wealthy stockholders in the bank— these men constituting classes A and B ? Mr. W e x l e r . That would be a desirable situation. Senator R e e d . And that is what the banks would like to have ? Mr. W e x l e r . I think it would be desirable, because the more money you have invested-----Senator R e e d . And you would like to have the other three, of course ? Mr. W e x l e r . They would be selected by the President-----Senator R e e d . I say you would like to have the other three? Mr. W e x l e r . No; we would not care anything about that, so long as we had a majority. Senator R e e d . That is what I wanted to get at. So that these central reserve banks, under this scheme proposed in the bill, will be absolutely and entirely and completely in control of the banks except as the Government may exercise some power, whatever it may be, through the central reserve board ? Mr. W e x l e r . The Government would have a representative on the spot to report to it every infraction of the law, and it has the right to take away the charter of this Federal reserve bank at any time it sees fit. Senator R e e d . Y ou have no doubt that these banks would not deliberately violate the law. The question, of course, would be— though it is one we need not enter upon— how this control would go in practical operation ? Mr. W e x l e r . We cover that a little bit farther on. The C h a i r m a n . Mr. Wexler, you spoke of what would be your natural duty if you had charge of one of these reserve banks at New Orleans and a demand was made upon you by the Federal reserve board to lend a portion of your funds to one 01 the reserve banks of California. Do you think that any such an organization as the Federal reserve board would not accord you careful consideration to any communication you made ? 54 BANKING AND CUBEENCY. Mr W e x l e r . I think they would; I think they should; but suppose a very strong influence were brought to bear from California— and we know how influences work; we might as well be perfectly frank with each other. That might be a State that was antagonistic to the particular administration at that time, and California might be one favorable to it, and there might be a good deal of pressure brought to bear; but if I knew that loaning money to California might break the bank I had charge of, you can readily see the position I would be placed in. I can not conceive of a Federal reserve board that would endeavor to do that. The C h a i r m a n . D o you know of a Federal reserve board that would take an action that would cause the breaking of one of the banks ? Mr. W e x l e r . I do not think they would if they knew it. The C h a i r m a n . Your suggestions of political influence of improper character would indicate an indifference to the welfare that might be affected in a neighborhood that was not in complete harmony with the Federal reserve board. Mr. W e x l e r . Of course, such conditions might exist. I am very hopeful that we have not reached to that point. But the point I make is this, that it would be the natural disposition and to the interest of one Federal reserve bank to rediscount for another if it were able to do it, and that no compulsion is necessary. You can not imagine how distasteful compulsory acts of that kina must be to a bank or a banker. The C h a i r m a n . D o you not, then, recognize that there is some force in having the right to protest and point out to the Federal reserve board that it would be an injurious thing to such a bank to make this required loan? Mr. W e x l e r . Yes, sir; surely. The C h a irm a n . D o not think that it is advantageous, then, to that community to be allowed to protest? Mr. W exler. For the community called upon to make the loan? The C h a irm a n . For the bank of a certain district to have the right to protest ? Mr. W e x l e r . I certainly do think so. The C h a i r m a n . Would they have any protest whatever as to a central reserve bank ? Mr. W e x l e r . There would not be any necessity for a protest, Senator Owen. The C h a i r m a n . Nor would there be any organization by which they might protest. Mr. W e x l e r . But the occasion to protest would never arise. There would never be surplus money in any one place that was needed in another. The C h a i r m a n . The point to which I call your attention is that the protest which you might make as the manager in charge of a reserve bank you could not make after there was any such organiza tion because these funds would all be in the central reserve control directly, or no organization by which you could protest. Am I right ? Mr. W e x l e r . Y ou are right in the suggestion, if the condition existed. But if you had a Federal reserve bank it could not exist, BANKING AND CURRENCY. 55 because all the money would belong just as much to San Francisco as it would to New Orleans or New York, or any other place. The C h a i r m a n . And in that contingency the reserve which would be furnished by the banks in the country surrounding New Orleans would be capable of use by a Federal reserve board, the protest of the banks surrounding New Orleans to the contrary notwithstanding? Mr. W e x l e r . Absolutely. The C h a i r m a n . Do you think that is desirable ? Mr. W e x l e r . I think it is eminently desirable, presuming always that you bad a Federal reserve board that knew its business. The C h a i r m a n . Was that a part of your original proposal? Mr. W e x l e r . That goes without saying, that it should know its business. If it were made up of the various districts of the country, I think each one would see to it that its own particular section was not slighted. This country is so big and the crops are so diversified and the nature of its business is so different that the demand for money in different places differs at different seasons of the year. The federal reserve board, properly constituted, would see to it that when the surplus permitted at one place it might be sent out to Cali fornia when the fruit was being moved, or out to Minnesota when the grain was being moved. That is where the advantage of having the funds under one control exists as against having it under twelve different controls. Senator R e e d . H o w would it be if you just came down to the Gov ernment and did not have any central reserve banks ? How would it do to take the plan that now exists and enlarge it and make it so that it would be more flexible ? Mr. W e x l e r . I do not think the Government ought to be in the banking business. Senator R e e d . I am not speaking about it being in the banking business. I am speaking about letting the banks or groups of banks have some of its money. Mr. W e x l e r . You mean similarly to the method being pursued just now? Senator R e e d . Yes, of course; only enlarging it and perfecting it. Mr. W e x l e r . The method of doing it is quite cumbersome—■ —■ Senator R e e d . I am speaking about fixing that part of it, assuming that it can be fixed. Mr. W e x l e r . A number of experienced bankers might be able to set down a figure exactly by which some system could be evolved of that kind, but it is so contrary, in our opinion, to sound finance, that we never conceived the idea of having the Government in any way mixed up in the banking business. We have no other machinery for helping ourselves. I will state our case right now. We borrowed such money as the law allows us, and we are using it to move our cotton crops, our rice and our corn and the various business that comes through our port. I can not get any more; I have not the light. Senator R e e d . Suppose you were given the right. I do not want you, in answering my questions, to answer whether you think that the present system just as it stands would be adequate, but whether, since you gentlemen all, thus far, seem to want a central bank— one power— how would you like to have the Government of the United 56 BACKING AND CURRENCY. States, under a plan similar to the one now existing, simply to furnish money when it was needed to the groups of banks ? Mr. W e x l e r . I would be very much opposed to it, Senator, for this reason: The moment any section would make application to the Government for relief it immediately attracts attention to its condition, it creates fear in that particular section, and it causes a withdrawal of money from the bank and the hiding of it. Senator R e e d . You are speaking now of cases of emergency? Mr. W e x l e r . Yes, sir. Senator R e e d . I am speaking now about the right of the banks of New Orleans, through their clearing house, to come up here to the Treasury and say to the Secretary of the Treasury or to a branch of the Treasury— it might be in New Orleans— “ We need money to move crops, and here are our securities. We would like to have some Government money.” Mr. W e x l e r . It would not be practical, Senator. The Govern ment has no machinery for handling it in that way. It is a cum bersome method, at best. It has to surround its operations with a lot of red tape, and the Government does not always have the money. Senator R e e d . I am assuming that it has. Mr. W e x l e r . But, Senator, tnis is the one thing you ought to get into your mind, and that is the further you can separate the Govern ment from the banking system of the country the better it is. When the Prussian Army was encamped in the streets of Paris, in the Gar dens of the Tuileries, the banks of Paris paid 100 cents in gold against their bank notes just the same. Why ? Because the bank was sepa rate in its reserve against these notes from the Government. In the city of New Orleans, where we had the Citizens' Bank, with a gold reserve of 35 per cent against its outstanding notes, when the Federal Army occupied the city we went right on paying those notes—until Gen. Butler came in and took the gold. We paid right up to that date. Senator N e l s o n . I was there at the time. Senator R e e d . I want to say, in view of the confession of the Sena tor from Minnesota, that you probably know, Senator, that the stat ute of limitations has run ? Senator N e l s o n . I want to tell you one thing: You are not old enough to remember it, but their State bank currency was good, and they had no change. They would take a dollar bill, or a two-dollar bill, or a five-dollar bill and cut it into halves, crosswise, and each half would pass current, just as good as gold. That was in 1862 and 1863. The Ch a i r m a n . The Senator says he was there. He did not say he got any of it. [Laughter.] Mr. W e x l e r . Suppose we got into a general war with a big coun try, and we needed a lot of money, and we had to sell bonds. Do you not want this big banking system to be able to absorb these bonds so as to furnish the Government with the gold necessary to carry on an operation of that kind? If it— the Government— had loaned its money to the banks, and the banks had loaned it out to merchants and farmers and had to call it in, it would create a panic. Senator R e e d . Of course everybody understands that in the case of desperate war the fact that there was a gold reserve elsewhere than in the Government would be very desirable; yet you would BANKING AND CURRENCY. 57 hardly think that a banking system ought to be constructed so as to meet emergencies, disregarding payments-----Mr. W e x l e r . Oh, certainly not; exclusively with that idea. Senator R e e d . What I was trying to get at was just your idea. I do not want to argue, because we would not gain anything by doing that. Mr. W e x l e r . No; of course not. Senator R e e d . Suppose the Government of the United States was to simplify and enlarge the present Aldrich-Vreeland Act and make it so that banks or groups of banks could come here and get money to move crops in two ways, by the deposit of money in the nature of a loan or even in the issuance of money in case the Government found that necessary. Why would not that relieve the present situation to a large extent? Mr. W e x l e r . I will tell you why, briefly. It could be said in a very full manner, but I am only going to say a little on the subject. Every bank in a particular city does not necessarily need money at the same time. Suppose our bank desired to avail itself of the Aldrich Vreeland bill, as amended, in the manner that you are going to sug gest. It would have to go before the clearing house and expose its condition to all the other banks in the city. They would nave to come in and pass upon our securities, the clearing house would have to guarantee the repayment of the loans. Then you would have to send your securities up here to be passed upon. By the time you went through all of that it would not be worth a cent. Senator R e e d . You are talking consistently about the present condition not being simplified. I am assuming that there are methods for the simplification of it and giving the right relief. Now, as a parallel of what you say, suppose that these banks belong to the central reserve bank; that is, to one of these 12 banks; or if you have a central bank and want to get refief, would you have to expose your condition ? Mr. W e x l e r . They would go up to the central bank and say: “ Here is $1,000,000 of good notes. Can you discount them?” Senator R e e d . H o w do you know ? Mr. W e x l e r . Because they have men in charge of the bank that know the conditions and have investigated them. Senator R e e d . It is a local bank ? Mr. W e x l e r . Yes, sir. Senator R e e d . A local regional bank? Mr. W e x l e r . Yes, sir. Senator R e e d . Y ou would have a local regional ban k in every State ? Mr. W e x l e r . I would have a branch of a central bank in every city of any consequence. Senator R e e d . Then there would not be any use of going into the banking business unless you belong to this organization? Mr. W e x l e r . I think every bank would naturally become a member of that system. Senator R e e d . This would be very powerful-----Mr. W e x l e r . And very satisfactory. Senator R e e d . Power would cut some figure ? Mr. W e x l e r . That would be the least of it. Here is what we suffer from: A bank has all of its liabilities payable on demand. 58 BANKING AND CURRENCY. Anyone can come there and demand his money. It is loaned out to keep the wheels of commerce greased. Where can the banker go to get the money to satisfy that demand ? He has simply got to tnrow up his hands and shut his doors and fail. What I wanted to do is to provide a central bank where it can take its portfolio and go over to that central bank and get enough money to pay every single man, woman, and child who has got a dollar in there, upon demand. They would soon be redepositing it in the same bank. Senator R e e d . I agree with you that that is the principal trouble with the banking system. It is so arranged that every obligation of the bank is due on a moment’s notice, barring time deposits, and every credit of the bank, everything that is owing to it, is out for 30 or 60 or 90 days. If you can take those securities and go to a pri vately owned central bank and get your money and it can discount it safely, why can not the Government of the United States do the same thing ? Mr. W e x l e r . Because it can not get itself in shape to do it. Senator R e e d . Why not ? Mr. W e x l e r . Because I can not conceive of any machinery operated by the Government that could or should be used for this purpose. What is the use or advantage of mixing the Government up in it ? What is the use of using something worse when you have something better at hand? Senator R e e d . I can say to you frankly, in my humble judgment, if you agitated it for 25 years longer, the people would never vote for a central bank. I want to get your idea of a privately controlled central bank. I was trying to get your idea upon the thought of a Government-controlled central bank. Mr. W e x l e r . I am in favor of a Government-controlled central bank. Senator R e e d . Absolutely controlled by the Government? Mr. W e x l e r . Absolutely controlled by the Government, but with representation from different sections of the country; but the con trol should be in the hands of the Government. I am not afraid of that. We are in favor of that, but we do not want the Government to guarantee the notes or to be any part of the system except to control it and to see that it is operated for the good of everybody. Senator R e e d . Y ou w an t to issue the m o n e y ? Mr. W e x l e r . Surely. We want to issue the paper, the circulating medium; we do not want to issue money. Senator R e e d . Y ou want to issue paper. Commercially we call it money and it goes as money. Mr. W e x l e r . Certainly. It is highly advantageous. Senator R e e d . If I get your idea, it would be one great central bank with numerous branches running into every community of the country ? Mr. W e x l e r . Yes, sir. Senator R e e d . And the Government would control absolutely that central bank ? Mr. W e x l e r . Control it, yes; but there would be representation. Senator R e e d . H o w is it that you are willing to completely sur render the control if you have 1 bank, but unwilling to surrender the central control if you have 12 branches ? Mr. W e x l e r . We are. BANKING and currency. 59 Senator R e e d . I understand that the very thing that you contend for here is that the Government ought not to undertake to manage or control these 12 branches ? Mr. W e x l e r . N o ; we have only asked for a minority representa tion by the Federal reserve board. It is necessary because of their expert management. That is where the business is going to be done and that is where the local knowledge of conditions must be and where the people have their money in vested. The people have their own money in there and their friends’ money, and there is a local reputation to maintain. Senator R e e d . I think I understand you. You think that a lot of bankers— that is, all the bankers of the country, nearly—would put their money into an enterprise and trust to making one central bank a bank of issue and a bank of deposit, and they would trust that to officers appointed by the Federal Government ? Mr. W e x l e r . Yes, sir. Senator R e e d . And that that could be safely done? Mr. W e x l e r . That could be safely done. Senator R e e d . But that the moment you transfer those powers into the Federal authority having still the same control, it is dangerous ? Mr. W e x l e r . This Government should have control, the banks minority representation. The Government would not dare to do anything that would not be right. Public opinion is the great corrective influence in this country. Senator R e e d . That is what I think would be true if we had a Federal bank instead of a bankers’ central bank. I think public opinion would control. Mr. W e x l e r . Senator, what do you want with a Federal bank? If vou have a Federal bank the whole thing is as weak as its weakest link:. If anything happens the whole thing breaks down. If you mix them in together and anything happens the whole thing breaks down. Senator R e e d . What becomes of your stick argument? You say if you take two sticks separately they are stronger than the two sticks tied together ? Mr. W e x l e r . That is a different proposition altogether. They are not the same kind of sticks. One is a rope of sand, the other the stick. Senator R e e d . N o . Mr. W e x l e r . Absolutely. The Government has absolutely no money except what it takes away from the people; and under the principles of our party they ought not to take 1 cent more than they actually need. That is the principle of the Democratic Party, with which 1 am affiliated. Consequently the Government has no business with a lot of money to be scattered around. If it takes any more by taxation than is just and proper for running the Government, it is a wrong principle. But we have gone along many years without any trouble. You can have a war any time that will cost this country a thousand million dollars. Where will you get the money? You would have to go around and get the bankers to buy your bonds. Do you want to be behind another thousand million of notes, with the possibility of having to sell a thousand million of bonds ? Would 9328°— S. Doc. 232, 63-1— vol 60 BANKING and currency. you bring the whole structure down at one time ? the future. You must look to Senator R e e d . We are getting a little away from what we were talkingabout. Mr. W e x l e r . N o , we are not. Senator R e e d . We always get to talking about war. Mr. W e x l e r . I am talking about what could very well happen. It happened in 1776, and in 1812, and in 1845, and m 1860, and in 1898. We have had one about every 30 years since we have been a Republic, and we are about due for another one. Senator R e e d . But we have not had a war since 1860, of course-----Mr. W e x l e r . H o w about the War with Spain? Senator R e e d . That did not amount to as much of a war as some good strike on a railroad. Mr. W e x l e r . It cost us $300,000,000, I think. Senator R e e d . And it will cost us more when we get through pay ing pensions. Mr. W e x l e r . Yes, sir. Senator R e e d . But I think that is aside. If you had this great central bank and the Government was liable to go down, do you think that bank would stand ? Mr. W e x l e r . Absolutely, like a rock. Senator R e e d . But you think now, if the banks were to put this money into the hands of the Government, that both banks and the Government would go down together ? Mr. W e x l e r . I do, emphatically; just as certain as that the sun rises. Senator R e e d . What do you think about the creation of these enormous financial powers outside of the Government, in times of peace ? Mr. W e x l e r . That is all right. We should dominate the financial business of the world. Senator R e e d . Would not they fix the discount and the rates of interest for the entire country ? Mr. W e x l e r . Yes, sir. Senator R e e d . Would not that be a powerful factor? Mr. W e x l e r . Yes; to that extent. Senator R e e d . And you think that ought to be the case in the Republic ? Mr. W e x l e r . Yes, sir. Senator R e e d . If it put its power in behind a great railroad project-----Mr. W e x l e r (interrupting). If the business of the country was going too fast, and everybody was expending too much and buying too many automobiles, and every man wanted to buy his neighbor’s land and build houses there, they would raise the rediscount rate and cause a slowing up. On the other hand, if business became dormant and dull and needed stimulation, put the rate down and stimulate business. Senator R e e d . In other words, they would be the great regulator of all the commerce of the country ? Mr. W e x l e r . Absolutely. Senator R e e d . They could make business prosperous, or they could shut down on it ? Mr. W e x l e r . They could, yes, to some extent; they could do that. BANKING AND CURRENCY. 61 Senator R e e d . Under similar circumstances, what could the Czar of Russia do? He could not do any more, could he? Mr. W e x l e r . All they have to do, all that this central bank has to do, is to furnish credit for carrying on the business of the country. If more notes were demanded than in its judgment it was safe to put out, it would not do so. If you put in charge of that bank a board of directors of crooks and incompetents, why they could of course wreck for the time any business. They could create havoc; but it would not last long. You would have a certain minority member on that board representing the business interests of the country; he would soon arouse public opinion— and public opinion will check any abuse in this country; I do not care what it is or how bad. Senator H it c h c o c k . Do I understand whether this is a single bank or 12 regional reserve banks you favor a central board of control here in Washington, appointed by the President? Mr. W e x l e r . Yes, sir. Senator H it c h c o c k . Y ou are not at all afraid of placing the finan cial interests of the country under such a board of control ? Mr. W e x l e r . Not if we have a minority representation. Senator H it c h c o c k . Y ou are confident enough of being able to influence the actions of the central board ? Mr. W e x l e r . It is not that. We are confident enough. If we know what the majority is doing we can check it before the abuse goes too far without any idea of using any undue influence. Senator H it c h c o c k . Of course the financial interests of the coun try would have a tremendous interest in the control of that board— the actions of the board ? Mr. W e x l e r . I do not think so. My dear sir, the banking inter ests do not want anything but peace and quiet and safety. The banker wants to sleep at night. That is all he is asking. Senator H it c h c o c k . I think perhaps you misunderstood me. I have understood the whole tenor of your argument to be that you were vitally interested in the personnel of the board ? Mr. W e x l e r . Yes, sir. Senator H it c h c o c k . And of course you must be interested in the actions of the board ? Mr. W e x l e r . Unquestionably. Senator H it c h c o c k . And the 25,000 bankers of the United States, if they were all in the system, would be vitally interested in the organi zation and the selection of the board ? Mr. W e x l e r . Precisely. Senator H it c h c o c k . It would give them a tremendous interest in presidential elections ? Mr. W e x l e r . N o , I do not think so. I think any President who was honored by the nomination of the people of this country could pretty safely be trusted to put the right kind of men at the head of a bank of that sort. If I did not think so I would feel that the time had come to change our form of Government. Senator H it c h c o c k . Y ou have a perfect organization of bankers, have you not ? Mr. W e x l e r . Each one is a separate entity. We have no organi zation except for discussing our general affairs just as the merchants do and the hardware men and lawyers and doctors. 62 BANKING AND CURRENCY. Senator H it c h c o c k . Y ou came here to-day practically with the banking interests of the United States united, represented by a small body? Mr. W e x l e r . Precisely. Senator H it c h c o c k . It is possible you might be united in an election ? Mr. W e x l e r . I can not conceive of it. We are only about 24,000 bankers. If we all voted for one man it would not be more than a drop in the bucket. I do not think it would be all one way. (At this point the committee took a recess of 10 minutes, after which the following proceedings were had:) The C h a i r m a n . Mr. Wexler, the Senator from Ohio would like to ask you a question. Senator P o m e r e n e . Mr. Wexler, a moment ago, in stating your objections to the regional bank system, you used this illustration, as I recall it: That if California should want $1,000,000, the central board might say to the regional bank in New Orleans, “ You send $1,000,000 to California.” Mr. W e x l e r . Yes, sir. Senator P o m e r e n e . And you suggested that you might not be in condition to do this ? Mr. W e x l e r . Yes, sir. Senator P o m e r e n e . And that if you did do it, it would be an injustice to your own people? Mr. W e x l e r . Yes, sir. wSenator P o m e r e n e . Well, why do you assume under those cir cumstances that this central board would make an order of that kind that would work a hardship to the New Orleans regional bank? Mr. W e x l e r . I do not assume that they would. Senator P o m e r e n e . Well, you suggested that it was a proba bility— or, a possibility, at least. Mr. W e x l e r . Surely a possibility; but I did not assume that they would. Senator N e l s o n . They have the power? Mr. W e x l e r . They have the power to do it. Senator P o m e r e n e . I did not understand. Mr. W e x l e r . I say, they have the power to do it. Senator P o m e r e n e . But it seems to me that you are in error when you assume that they would do this thing which was wrong simply because they had the power to do it. Mr. W e x l e r . Well, my dear sir, you must admit that you would never as a man,* in any of your general affairs, give anybody else the power to ruin you, even though you have not the remotest idea he would ever exercise that power. Senator P o m e r e n e . Very well; let us go to your other illustration. In speaking of the central bank, you say that if New Orleans wanted to move her crops-----Mi*. W e x l e r (interposing). Yes, sir. Senator P o m e r e n e (continuing). All she would have to do would be to go to the central bank and get the money ? Mr. W e x l e r . Yes, sir. BANKING AND CURRENCY. 63 Senator P o m e r e n e . Is it not just as reasonable to suppose that the board of this central bank might refuse to give you your money when you needed it-----Mr. W e x l e r (interposing). Yes, sir. Senator P o m e r e n e (continuing). As it is to assume that the board which had control of the regional banks would order you to do a thing when you ought not to be required to do it ? Mr. W e x l e r . Yes, sir; and the central reserve board should have the right to refuse to give it to me. They should have that right, for this reason: If in our section of the country everybody nad a craze, for instance, for holding their cotton, and everybody was spreading out; and if we called for more money than we ought to have, and we were in an expanded condition— if that central bank was properly run, it should say: “ No, you can not get any money; you sell your cotton, and draw in your horns and go more con servatively.” Senator P o m e r e n e . I agree with you, Mr. Wexler, that they ought to have the power to do it. Mr. W e x l e r . Exactly. Senator P o m e r e n e . But they might as well misuse that power in the case of the central bank, as the central board might in the case of the regional bank; and it seems to me— this is my point— that the power is as liable to abuse in the one instance as it is in the other. Mr. W e x l e r . I do not think so. The situation is altogether different. For instance, the central reserve board would never use the power to say: “ Here, you are not lending enough money down there in your country; you go and put out more money; loan every body down there all they want.” They would never use that kind of power. And I would not give the power to demand of a bank that it must lend somebody else where it is contrary to its judg ment; but I certainly would give it the power to refuse to lend. There is the essential difference. Senator P o m e r e n e . And they might refuse it at the very time you needed it. Mr. W e x l e r . That is right; and it might be wisdom to refuse. I have had many a man come to me for a loan that needed it very much, and I have turned him down. And I have also had banks come to me for a loan that needed it, and I have turned them down; and they failed because I would not give it to them—because they were not entitled to it, and the loan, if made, would not be repaid. Senator P o m e r e n e . I simply called your attention to this fact, because I realize the possibility of power being abused in either instance. Mr. W e x l e r . Yes, sir. Senator P o m e r e n e . And I do not think that the one is more objectionable than the other, as I say. Mr. W e x l e r . I see your point. Senator S h a f r o t h . Mr. Wexler, relative to the matter that you first referred to, on arriving, that relationship of the Bank of England and the European banks-----Mr. W e x l e r . Yes, sir. Senator S h a f r o t h . We ultimately did not disagree very much as to that matter ? Mr. W e x l e r . No, sir. 64 BANKING AND CUBEENCY. Senator S h a f r o t h . But I want to read to you a little paragraph from Walter Bagehot’s book, Lombard Street, which probably clears the matter up more thoroughly than we did. He says: In London no banker has a chance of being a Bank of England director, or would ever think of attempting to be one. I am here speaking of bankers in an English sense—those who accept deposits subject to check. Not only no private banker is a director of the Bank of England, but no director of any joint-stock bank would be allowed to become such. The two situations would be taken to be incompatible. The mass of the Bank of England directors are merchants of experience and drawing a considerable capital in trade, in which they have been brought up and with which they are well acquainted. The direction of the Bank of England has for many gen erations been composed of such men. Mr. W e x l e r . Yes, sir. Senator S h a f r o t h . That is, I believe, the correct explanation. Mr. W e x l e r . I am very glad you brought that u p, because one point I overlooked with regard to the Bank of England is this: The stock of the Bank of England is not owned by the banks. Senator S h a f r o t h . No. Mr. W e x l e r . Banks are not required and compelled to subscribe to the stock of the Bank of England. Senator S h a fro th . N o. Mr. W e x l e r . The banks h av e no interest in the bank, except to borrow from it. Senator S h a f r o t h . They can not be subscribers. Mr. W e x l e r . They may be-----Senator S h a f r o t h . N o ; I think not. Mr. W e x l e r . They may not be, then; I am not sure of that. The case is not analogous at all. Senator S h a f r o t h . Yes; but the question is that that power of lowering or raising the discount rate on paper affects the market value of all securities, and the result is that it would be an improper thing or an incompatible position for a person to be in a banking business and dealing in securities, perhaps buying and selling stocks and bonds, and at the same time knowing in advance just what the action of the board would be. Mr. W e x l e r . We thoroughly agree that the controlling members of this board should be men more or less disinterested, so far as any bank is concerned. There is not any argument on that. Senator C r a w f o r d . Mr. Chairman, I would like to ask a question before this witness leaves the stand; I have been waiting for two hours. Senator R e e d . I thought there ‘ might be some delay in finishing with this witness, and I was about to submit a motion to adjourn. Senator C r a w f o r d . But this witness may be excused and may not be here to-morrow. It is a very small matter; but I want to get it in the record. Senator R e e d . I do not want to shut your question off. If you are not content to take it up in the morning, I will not make the motion, but if you are, I prefer making the motion. Senator C r a w f o r d . It is only a question to and relates to a matter I want to follow in this bill; and I want to get it in the record, be cause it affects very much a very large number of small banks. Senator W e e k s . Mr. Chairman, I desire to ask the witness some questions, and if there is a desire to adjourn, these various questions may delay the adjournment considerably. Will the witness be here to-morrow ? b a n k in g and currency. 65 The C h a i r m a n . He will be here to-morrow. We have a caucus to-night at 7 o’clock. Senator H it c h c o c k . Will the committee meet to-morrow morning ? The C h a i r m a n . Yes. Senator N e l s o n . I suggest that we adjourn until 10 o’clock to-morrow morning. Senator C r a w f o r d . I only want to ask two or three questions. Senator H it c h c o c k . I suggest that the Senator be allowed to ask the questions he desires. The C h a i r m a n . In the absence of objection that will be done. Senator Cr a w f o r d . The question I want to ask, which is largely on account of the fact that all of the banks in my State are in the situation I will suggest, is this: You stated that if you were called upon at New Orleans to discount paper in California, and you thought it was against the interest of your community, you would refuse to do it. I want to call attention to the fact that in one of the western agricultural States, which has not a city in it and whose largest town has not more than 1 5 ,0 0 0 people, there are 102 national banks, capitalized at from $ 2 5 ,0 0 0 to $ 1 0 0 ,0 0 0 each. By this bill, if it is enacted in its present form, Congress will go into that State with a big stick, and it will say to these little banks, “ You are required to take a million and a half dollars out of your loanable assets.” It would be reducing their loanable assets, would it not ? Mr. W e x l e r . Yes, sir; it would. Senator C r a w f o r d . Y o u are required to take $ 1 ,5 0 0 ,0 0 0 out o f your loanable assets that are now being employed in such little com munity, developing that new growing State, money that you are now loaning to the farmers and stockmen and retailers. Mr. W e x l e r . Yes, sir. Senator Cr a w f o r d . Y ou are required to lift that money out of your banks and away from your local customers. Under the penalty of dissolution, we compel you to invest it in stock in a regional reserve bank, 5 0 0 or 6 0 0 miles away, outside of your State entirely and beyond the reach of ordinary business transactions, for the purpose of capitalizing an institution of that kind. We are not going to allow you to have more than 5 per cent on your investment— you are now making 12, or 15, or 2 0 [laughter]—but on this money we are going to compel you, by a big stick, to lift out of your banks here and take away from your merchants, and your stock growers, and your farmers and put it over there; and we will only let you have 5 per cent on it, and we will not allow you to have any voice whatever in its final control-----Mr. W e x l e r (interposing). Control; yes, sir. Senator Cr a w f o r d (continuing). Control over it. And unless you have got a certain class of paper that we prescribe in this bank (of which you have none and will not have) you can not rediscount any thing that you have in the way of paper in this bank. Now, does that comport with your idea of what is just and fair to the little banker in this country ? Mr. W e x l e r . It does not, except-----Senator C r a w f o r d (interposing). Does it comport with what is fair and just to the small customers, and the farmers, and the mer chants, and the tradesmen in those small communities that are now getting that money ? Mr. W e x l e r . No. 66 BANKING AND CURRENCY. Senator C r a w f o r d . D o you know anything in the history of banking legislation, in this country or any other, where such a thing as that has been done or attempted ? Mr. W e x l e r . I do not know of any instance in any country where any man has been called upon and compelled to invest his money in something, whether he wanted to or not. Senator C r a w f o r d . That is what I mean. Mr. W e x l e r . But I think you have drawn your picture in rather a dark and gloomy manner. Senator C r a w f o r d . Well, if I have, I should like to know wherein it is defective. Senator N e l s o n . H o w about the deposits? Senator H it c h c o c k . Mr. Chairman, can not we adjourn at this time ? It is getting late, and the witness will be here to-morrow. Senator M cL e a n . Let him answer that. Mr. W e x l e r . I will answer it. I do not think there ought to be any compulsion about the subscribing to these banks. I think the proposition should be made sufficiently attractive—or, at least, not so disadvantageous— but that banks will want to come in; and I think that can be done without any sacrifice of any fundamental principle. Now, your banks that you refer to will have to contribute this $1,000,000 or $1,250,000 toward the capital. There is no hardship upon them in doing that at all. You have got a new State, a grow ing State; and anything which contributes to stable conditions in the United States helps your State and mine and every other State. Under our present banking system we have no stable conditions; we are on the mouth of a precipice all the time. We never know when things are going to blow up. Senator C r a w f o r d . Then, you think that the benefit we will get there is this public-welfare benefit ? Mr. W e x l e r . Not only public benefit, but your own benefit as well. Senator C r a w f o r d . Well, you big banking people in New Orleans, and Chicago, and New York, who have been working on this great banking scheme, have you really considered very much the interest of our little fellows ? Mr. W e x l e r . Yes, sir. Senator C r a w f o r d . With these small agricultural banks in country communities ? Mr. W e x l e r . Yes, sir; I assure you we have. We have some 500 or 600 correspondents among such banks, and we have considered them very carefully and many have offered the same argument that you have. Now, let us go on just a little further. You say they will not have any of the kind of paper that can be discounted. That is an exag geration; they have enough of that paper to rediscount every day to take care of their requirements. For instance, you have made the requirement in the bill that rediscounts must be of paper not running beyond 90 days. Suppose a bank wanted to borrow money on the 1st of March, for instance; and they went to their portfolio and found that they had $5,000 maturing in 90 days, out of a total of $100,000. They could use that much. They take that and discount it. Then in another 90 days, they would have that much more; it might have 67 BANKING AND CURRENCY. been originally a six months note; but three months has run on it, and it still has 90 days to run. They can rediscount all of that. And all through the three months’ period they will have other paper accumulating which they can rediscount. And then there is the sense of security the banker can feel, so that he can do his business with confidence and say to his customer, “ John, you can get the money you need”— and knowing that he can give it to him. That is worth a whole lot in the banking business. Senator Cr a w f o r d . Why not make it optional, so that if he feels that he can get any benefit out of it he can go into this; and if he can not get any benefit from it he can stay out ? Mr. W e x l e r . It must be optional. If it is not optional, it has to be made so good and advantageous that banks will come into it anyhow; and if it is made that good, it does not need to be compulsory. Senator C r a w f o r d . But this is made compulsory. Mr. W e x l e r . I know, and that must be changed. Senator Cr a w f o r d . Well, I will only say this, and I will not keep you any longer: I have talked with bankers in my State, and the best and most representative men, and they said, practically, that they would not have occasion to use this rediscount privilege of the regional reserve banks. Mr. W e x l e r . Well, I have heard a good many say that, and I thought so. When we first considered this bill I objected to the 60 and 90 day provision. I said, “ We objected to the 60 and 90 day provision.” I said, “ We have not enough paper of that kind; and I looked through our portfolio, and I found that we had twice as much as we needed. (Whereupon, at 5.30 o’clock p. m., the committee adjourned until to-morrow, Wednesday morning, September 3, at 10 o’clock.) W EDN ESDAY, SEPTEM BER 3, 1913. C o m m it t e e on B a n k in g a n d Cu r r e n c y , U n it e d S t a t e s S e n a t e , WasTiingtorij D. C. The committee assembled at 10.30 o’clock a. m. Present: Senators Owen (chairman), Hitchcock, Reed, Shafroth, Hollis, Nelson, Crawford, McLean, and Weeks. The C h a i r m a n . Mr. Forgan, who is your next representative ? Mr. F o r g a n . Mr. Wade. The C h a i r m a n . Mr. Festus J. Wade, of S t. Louis? Mr. F o r g a n . Yes, sir. Senator W e e k s . Mr. Chairman, I believe Mr. Wexler had not com pleted his testimony last evening at the time the committee adjourned. There are two or three Senators who desire to ask him questions. I should like to ask some myself. The C h a i r m a n . I will ask Mr. Wexler, then, to continue until the members of the committee have finished with their questions. Sena tor Hitchcock, may I ask you to preside while I attend a call to the Committee on Foreign Affairs ? Senator H it c h c o c k . Certainly, Mr. Chairman. I believe, Senator Weeks, that you desired to ask Mr. Wexler some questions ? 68 b a n k in g and currency. FURTHER STATEMENT OF SOI. WEXLER, OF NEW ORLEANS, LA. Senator W e e k s . Mr. Wexler, how many banks make your bank a reserve agent ? Mr. W e x l e r . Our particular bank ? Senator W e e k s . Yes. Mr. W e x l e r . Well, I could hardly answer that just offhand. We have about, I should say, 450 banks. Senator W e e k s . Well, are those generally located in Mississippi and Louisiana ? Mr. W e x l e r . Mississippi, Louisiana, southern Alabama, eastern Texas, southern Arkansas and western Tennessee. Senator W e e k s . Well, you are naturally in pretty close touch with those banks, are you not ? Mr. W e x l e r . Yes, sir; very close touch. Senator W e e k s . It is currently reported that country banks, generally speaking, are more favorable to the pending legislation in its present shape than large banks; and the intimation is made that there is some coercion to bring the country banks into line in favor of this legislation. Do you know of any such thing ? Mr. W e x l e r . N o , sir; I do not. I have rather observed the con trary. I found that the greatest objection to the bill has arisen from the smaller banks. I had occasion to go to the little city of Hatties burg, Miss., at the request of a group of bankers about 10 days ago, for the purpose of explaining the provisions of this bill, and the sentiment there was unanimous against coming into the system unless there were a great many amendments made to the bill. Senator W e e k s . Well, in the section of the country which you represent, there certainly would be a desire to cooperate with and further the wishes of the administration, would there not ? Mr. W e x l e r . Yes, there would. Senator W e e k s . Your answer to the last question leads me to another question: What proportion of the country banks doing business with you do you think would come in— national banks, I am speaking of now— under this bill, if it were not changed from the form in which it was presented to the House ? Mr. W e x l e r . I think a v ery few , if any. Senator W e e k s . Suppose the bill is changed to conform to the suggestions made by the Chicago conference, what do you think the result would be ? Mr. W e x l e r . I think, as I said in my previous remarks, that fully 80 per cent, and possibly even more than that, would come into the system. Senator W e e k s . H o w about the banks in New Orleans ? Mr. W e x l e r . I think the banks in New Orleans would all come into the system. After the meeting in Chicago our clearing house had a meeting, at which they expressed themselves unanimously in favor of the system provided these amendments were made. Senator W e e k s . Y ou made a suggestion in your testimony yes terday, in your argument against establishing (or authorizing) 12 reserve banks, that one bank should not be compelled to loan its resources to another, for sectional and other reasons. There was one argument which came to my mind, which you did not refer to, which seems to me to be especially pertinent, and that is the difference BANKING AND CURRENCY. 69 which will exist in the conservatism with which these reserve banks are managed— the far-seeing board of directors of a reserve bank, believ ing that they see trouble ahead, will make preparation for it. Now, they having made that preparation for it, would there be any justice, in your opmion, in compelling them to come to the assistance of a board of directors, or a bank, which had been managed in a different way— carelessly and unwisely ? Mr. W e x l e r . I think it would be extremely unjust and unfair if a bank which had conserved its resources in anticipation of a stringent condition were forced to impair that condition, which it had so laboriously built up, for the benefit of another section which had pursued a contrary course; and I can readily conceive that such a condition might arise. Senator W e e k s . 1) o you understand that these reserve banks would have any particular influence over local business? Would not all local business be conducted by banks as they are now organ ized? Mr. W e x l e r . They would entirely. Senator W e e k s . So that, in fixing a rate of discount, that would be simply a general guide, would it not, to the community, rather than a specific reflection on one bank or set of banks ? Mr. W e x l e r . It is my opinion that the rate of discount would really be fixed by the conditions existing in that section at that time. The function of the Federal bank would simply be to pro mulgate, in a sense, that rate; the rate would not really be made by the bank; the rate would be made practically by all of the other banks in that section, by the conditions prevailing and the demands for money, whether scattering or active; and the Federal reserve bank, if properly managed, seeing these conditions and taking notice of them and properly diagnosing them, would promulgate a rate that fitted that situation. Senator W e e k s . What have you to say about the reserve banks in different sections of the country establishing different rates? It has always seemed to me that one of the strongest arguments in favor of one reserve bank is that every section of the country, as far as the reserve banks of the United States are concerned, would be enabled to get rediscounts at the same rate; that a bank in Arizona, for instance, if it had the paper of the qualified class, would be able to get its accommodation at the same rate as a bank in New York. Mr. W e x l e r . Yes, sir. Senator W e e k s . And that it would put all sections of the country on the same basis. What do you think of the policy of allowing different rates to be made by the reserve banks in different sections of the country? Mr. W e x l e r . I do not think that different rates should be made by different reserve banks in different portions of the country. I think any such action would be extremely unpopular. I believe that if these banks are to enjoy the privileges which are to be granted them by the Government, the whole people should receive the same benefit, as far as rate is concerned. But one of the strong arguments, to my mind, against a number of regional banks is the difficulty which the Federal reserve board, iso lated from the various Federal reserve banks and not composed of 70 BANKING and currency. representatives of each section, are going to find in fixing a rate that will properly fit the conditions; whereas a central bank with representation from various sections of the country, even though controlled by the Government, having its fingers on the pulse of the whole commerce of the country, whose duty it is to oversee all of the»commerce and not that of any particular section, would be in a better position, in my opinion, to establish a rate, or, rather, to pro mulgate a rate, in accord with the prevailing conditions at that time throughout the country. Senator W e e k s . Well, would not fixing the different rates by different reserve banks militate directly against the section of the country which you represent, and the undeveloped sections of the West, and be favorable to the metropolitan centers ? Mr. W e x l e r . Undoubtedly. I have not understood that this bill contemplates, however, the Federal reserve board making a different rate for the different sections. Senator W e e k s . Oh, I think it does. Mr. W e x l e r . What was that ? Senator W e e k s . I think it does; distinctly so. Senator N e l s o n . It does not really contemplate it; but it is un doubtedly within the power of the board. Mr. W e x l e r . It is undoubtedly within the power of the board, yes. But I have not ever believed that public* opinion would ever stand for their making a lower rate in one section of the country than they do in another. I believe that would be immediately met with most serious resistance. Senator W e e k s . The original bill directly provided for that. Mr. W e x l e r . It gave them the right to fix rates. It would be very bad, if they established a different rate. Senator W e e k s . Well, fixing “ rates” is different from fixing “ a rate,” is it not ? Mr. W e x l e r . Undoubtedly. They have the power. But it would be very bad if they fixed a different rate in one section from that fixed in another section. Senator W e e k s . That would not necessarily mean, however, that the borrower in Mississippi would borrow at the same rate that the borrower in Illinois would of his own bank ? Mr. W e x l e r . N o . Senator W e e k s . But it would mean that the rediscount coming from the reserve bank would be “ on all fours” in all sections, would it not ? Mr. W e x l e r . That is it exactly. Senator W e e k s . That is all I wish to ask now. Senator N e l s o n . I would like to ask a few questions. Is not this, in its essence, under this bill, really a central bank with 12 headquarters; with 12 regional banks under one administration; is it not, after all, in its essence, equivalent to one central bank ? Mr. W e x l e r . It is in one sense; and it distinctly is not in another sense. The ownership of the stock of each of the Federal reserve banks, being entirely different from that of every other Federal reserve bank, makes it distinct and gives to each bank a certain local interest antagonistic in a sense to all the other 11 regional re serve banks. As far as the control and management is concerned, BANKING AND CURRENCY. 71 within certain limitations it would be under the Federal reserve board, as provided in this act; but-----Senator N e l s o n (interposing). Excuse me, there is one other question I want to ask just at this time. Mr. W e x l e r . Yes, certainly. Senator N e l s o n . I s not this currency which it is proposed to issue under this bill, aside from the fact that it purports to be the romise of the Government—is it not, in its essence, asset currency ased upon the assets discounted ? Is not that what the banks who obtain it do ? They obtain it on their commercial assets— on their commercial paper? Mr. W e x l e r . They obtain it upon commercial paper, which is presumed to be a good asset-----Senator N e l s o n (interposing). Yes; but I mean does not th a t amount in substance to an asset currency ? Mr. W e x l e r . It does, yes; except that in addition to the asset which it has, it maintains a gold reserve. Senator N e l s o n . Certainly. Mr. W e x l e r . Sufficient for the constant retirement of these notes-----Senator R e e d . How much reserve? Mr. W e x l e r . This bill provided 33 J per cent reserve. Senator R e e d . Pardon me for interrupting you now. I will ask my questions later. Senator N e l s o n . Certainly. Mr. Wexler, what is the radical defect of our present system of currency ? Mr. W e x l e r . The radical defect of our system of currency is that it is based upon a Government bond as security, and the volume of it has absolutely no relation to the requirements of the business of the country, but only a relation to the value of Government bonds. Senator N e l s o n . Yes. Well, you will admit this, Mr. Wexler, that that paper currency has been, so far as the public is concerned— the bill holders— a safe and sound currency ? Mr. W e x l e r . Absolutely. Senator N e l s o n . It could not be better? Mr. W e x l e r . Well, yes; it could be better. Senator N e l s o n . I mean as to quality; the quality of the money as money ? Mr. W e x l e r . Well, it could be better in that respect. That would bring on a long argument; but I will say it could be better. The evidence of it lies in the fact that when these Government bonds are selling at 98, the notes are secured by those Government bonds; so that the note you have is only worth 98 cents on a dollar, if you come down to the final analysis of it. Senator N e l s o n . N o w , we come down to this question: Why could not we build on the present system, and gradually allow the national banks to do what you propose to have these reserve banks do; in substance, issue notes, to some extent, if not altogether, on their assets— on their commercial assets ? Mr. W e x l e r . The objection to that is that we might come back to the old days of wildcat banks before the Civil War, when you would have to keep a little book in your pocket to see the value of the different notes that you might have. Senator N e l s o n . Yes. E 72 BANKING AND CURRENCY. Mr. W e x l e r . And in a country like this, as large as the United States and that has so many banks, I do not know that any sys tem permitting all of these banks to issue notes would be feasible. Of course" in Canada you have a condition where the banks are per mitted to issue their own notes; but you have a very small number of banks, with a great number of branches; and it has worked in Canada. Senator N e l s o n . Well, one part of your proposition is that these notes should be issued, not, as proposed in the bill, by the Federal Government to be the promise of the Government, but they should be issued by the respective reserve banks and be the promises of those banks ? That is a part of your proposition, is it not ? Mr. W e x l e r . Not exactly. The idea is that they should be issued from the Federal reserve board-----Senator N e l s o n . Yes. Mr. W e x l e r (continuing). To the respective Federal reserve banks, and should be designated by a number and the redemption charge able against the particular bank to which they were issued, and tnat all of the Federal reserve banks should be responsible for the whole system of notes. That is the suggestion that you will find that we had. Shall I explain that to you a little further ? Senator N e l s o n . I understand; but that is not in the bill? Mr. W e x l e r . That is in the bill. Senator N e l s o n . That it makes each bank liable for its own issue ? Is that not the plan of the bill ? Mr. W e x l e r . The plan of the bill makes each bank liable, and then makes the Government again liable behind the bank. Senator N e l s o n . Yes; but it does not make the whole group liable ? Mr. W e x l e r . I do not think it does, unless it has been changed in this bill of the 29th. Senator N e l s o n . I notice in the bill that provision is made for the redemption of these notes in gold or lawful money. That would mean, under our present system of currency, silver and greenbacks as well as gold, would it not ? Mr. W e x l e r . Yes. Senator N e l s o n . Do you think they ought to be redeemable in anything but gold ? Mr. W e x l e r . I do not. I think that we should maintain reli giously the gold standard that has been established in this country. Senator N e l s o n . And then you would have these reserve banks provide for a gold redemption ? Mr. W e x l e r . Gold reserve. Senator N e l s o n . Gold reserve. Well, do you think 33 per cent is sufficient ? Mr. W e x l e r . I think 33 per cent would be sufficient; yes. We have suggested that there should be 40 per cent. Senator N e l s o n . Yes. Mr. W e x l e r . We have raised it, because we believe that it would be better to make the notes so absolutely good and impregnable that we would rather err on the side of too much reserve than too little reserve. Senator N e l s o n . That is all for the present. Senator H i t c h c o c k . Senator Reed, ao you wish to ask any ques tions? BANKING AND CURRENCY. 73 Senator R e e d . I have a number of questions I would like to ask now, but I think perhaps some of the other members of the com mittee might desire to interrogate the witness farther now, and I can ask mine later. Senator W e e k s . I have some questions I should like to ask, if Senator Reed does not wish to go on now. Is there any unusual emergency existing in banking, financial, and business conditions in your section of the country at this time, Mr. Wexler? Mr. W e x l e r . Well, I can not say that conditions are unusual; no. We have at this period always a very stringent demand for money. We move four agricultural crops at one time, which requires a large amount of reserve money, which goes out to the cotton pickers and the sugar-cane and rice harvesters; and that, of course, attacks the reserve of the banks and diminishes their lending capacity; and our country is not wealthy enough, from its own resources, to take care of this seasonal demand at that time. Senator W e e k s . Well, is your condition at this time different from what it was a year ago or two years ago ? Mr. W e x l e r . It is somewhat different, due to the fact that our sugar section has suffered two quite serious reverses in the crop, and is now threatened with annihilation by the proposed removal of the sugar tax— which, of course, has had the effect of injuring sugar credits, causing a general feeling of unrest in that section; ana that has had somewhat of an effect upon our condition just at this time. Senator W e e k s . I am sorry I am not in a position to prevent that annihilation which you are anticipating. [Laughter.] Mr. W e x l e r . I am sure that 1 am soiry, too. Senator R e e d . Have you finished with your questions, Senator Weeks ? Senator W e e k s . I just wanted to ask one more question. Is the financial stringency coming over the country different, in your judg ment, from what it is at this season of the year all years ? Mr. W e x l e r . Do you mean to ask whether the condition is more stringent this year than other years ? Senator W e e k s . Yes; year m and year out. Mr. W e x l e r . Y e s ; it is just a little more so. We have the promise of very abundant crops; the larger the crops the more money it takes to handle them; and, as I say, we have passed through several years of devastation of cotton crops by the boll-weevil throughout our section; and then we have had one year of early frost in sugar, and a second year of disastrous overflow in the same section; and that has reduced the available funds of people engaged in these lines of business, and it has naturally required more credit to take care of them during this period. W e are in that condition just now. Senator W e e k s . Y ou are speaking of the section around New Orleans, are you ? Mr. W e x l e r . Yes; the section within a radius, I should say, of 200 miles around New Orleans. Senator W e e k s . Well, you do not anticipate any particular trouble, do you, in harvesting your crops ? Mr. W e x l e r . N o ; I do not. I think we will get through the sea son and take care of our crops very nicely, and I see nothing to cause us any anxiety or to cause financial distress other than to give us an Uncomfortable feeling during this period of greatest demand. 74 BANKING AND CURRENCY. Senator W e e k s . Which you always have ? Mr. W e x l e r . Yes; which we always haye to a greater or less degree. Senator R e e d . Mr. Chairman, I move that the witness be allowed to sit down during the examination. It is too long a strain upon a man. Senator H it c h c o c k . Without objection, the order will be made. Senator R e e d . There are a number of questions I desire to ask; and as it will perhaps take some time I thought perhaps the witness would prefer being seated. We frequently hear the statement, Mr. Wexler, that we haye the poorest banking system in the world. Do you agree with that statement ? Mr. W e x l e r . I do, em phatically. Senator R e e d . I want really to get your judgment about that. Mr. W e x l e r . I am going to give you my very best judgment. Senator R e e d . Do you mean by that that it is the most unsafe to the country, or the most unsatisfactory to the bankers ? Mr. W e x l e r . I mean that it is most unsafe to the country, and that it does not meet the requirements of the business of the country. I think the banker is least interested in the faults of the system, from a pecuniary standpoint, than any other class of people in the country. Senator R e e d . Will you tell the committee, in just as terse a way as you can, what are the present defects or faults of our system which make it thepoorest banking system in the world ? Mr. W e x l e r . Well, the greatest defect is that, in the first place, the requirements for currency vary at certain seasons of the year. That you can readily understand. It varies in one year from another year. In other words, during the crop-moving period a greater amount of circulating medium is necessary to pay labor than during the growing period. Then, again, in years when manufacturers are thoroughly em ployed, more money is paid out for pay roils than in years when labor is not thoroughly employed. Therefore there is a constant variation of the amount of circulating medium necessary for carrying on the business of the country. Now, the only circulating medium that we have is the reserve money, which is the basis of our credits; and when the greater demand for this circulating medium comes along it attacks our re serves; it takes the money which is the basis of our credits out of the banks; it circulates them for a longer period in the pockets of the people and in cash drawers, thus reducing the credit facilities of the banks. Then, again-----Senator R e e d . N o w , Mr. Wexler, permit me to interrupt you. Can you put that reason N o . 1 of yours into one short statement? You have added an explanation. Mr. W e x l e r . Yes. Sen ator R e e d . Y ou sa y the principal evil is w h a t— lack of flexi b ility ? Mr. W e x l e r . I think I can tell you. The principal evil is the lack of elasticity of our circulating medium. Second, the inability to rediscount, having no place to which a bank can go when it has exhausted its own credit facilities. Senator N e l s o n . Excuse me just here. In other w ords, you mean there is no general credit reservoir for the banks to resort to I BANKING and currency. 75 Mr. W e x l e r . Absolutely none. Now, the next is the fact that the entire reserves of the country are scattered in some 20,000 to 25,000 little piles, where they are ineffective, instead of being concentrated in one great reservoir where they would be effective. There are many other defects that would require explanation. All these should have explanations, but you have asked for it as tersely as possible. Senator R e e d . I have asked for it because I wanted to call for an explanation later, but I wanted first to get the heading. Mr. W e x l e r . Yes. Senator R e e d . Taking up the question of flexibility-----Senator N e l s o n (interposing). I think ‘ ‘ elasticity' ’ is a better term. Senator R e e d . Let me change that again. I want to get some light regardless of this bill. Mr. W e x l e r . Yes, sir. Senator R e e d . S o far as I am concerned, I am wedded to no bill. If we are going to legislate in regard to currency and banking gen erally, I would like to see it done in the best possible way. So the questions that I am asking I would like to have answered just the same as though this bill had never been proposed or dreamed of. You speak first of lack of flexibility or elasticity. Just what do you mean by that? Mr. W e x l e r . I mean by that that the present circulating medium does not expand and contract according to the requirements of business. Senator R e e d . N o w , why? Mr. W e x l e r . Because it is based upon Government bonds as security, and can only be issued against security of this character. Senator R e e d . Does not that apply now more to the general volume than to the matter of flexibility in distribution ? Mr. W e x l e r . No; it does not. If the supply of Government bonds is small, as has been the case several years ago, and the de mand was great and bonds went to a price of 107, or 108, or 109, it would be extremely unprofitable for any bank-----Senator R e e d . Yes. Mr. W e x l e r . T o take out circulation, even though that section of country required a greater amount of circulating medium. Senator R e e d . Pardon me; I do not want to cut your answer off so that you are not satisfied with it-----Mr. W e x l e r . N o , sir. Senator R e e d . But, having a sort of idea in my mind when the question is answered, I will take the liberty of cutting you off for a moment. Mr. W e x l e r . Yes. Senator R e e d . Y ou have answered now, so far as I need to have you answer my last question. My next question is, if there was a sufficient amount of securities— Government bonds—so that the banks could acquire them at par and then take those bonds to the Government and get money, would that relieve the particular evil we are now discussing ? Mr. W e x l e r . No, sir; it would not, because after that circulation was out and was no longer needed, there is no provision for the elimina tion of it, or the retirement of it; and a plethora is just as bad as too little. 9328°— S. Doc. 232, 63-1—vol 1------6 76 BANKING AND CURRENCY. Senator R e e d . Well, that would get you the money in the first instance, anyway, would it not ? Mr. W e x l e r . That w ould get it, yes. Senator R e e d . Then we come to the question of retirement as a separate proposition. Do I understand you, then, to mean this, that if, for instance, your bank was in need of money and Government bonds were easily obtained by your bank and other banks at par, if they could take those bonds to the Government and get money upon them that would relieve the difficulty, so far as giving you the money in the first instance was concerned ? Would that answer the objection ? Mr. W e x l e r . N o ; it would not. That would give you the circu lating medium necessary for moving the crops, and the pay roll requirement during that particular period. Senator W e e k s . Yes. Mr. W e x l e r . But would not give you 1 cent more money or currency facilities, because just as much money as you would get for the notes you would have to invest in the bonds. Senator R e e d . Yes; that is just the point I want to get to. You take $1,000,000 and buy $1,000,000 worth of Government bonds. Now, you have not got tnat $1,000,000 any more? Mr. W e x l e r . Not at all. Senator R e e d . But you have got an interest-bearing security, which if it was great enough, would pay you a return upon your $1,000,000 ? Mr. W e x l e r . Yes. Senator R e e d . Then, having invested in these bonds which bear you an interest, you go and get $1,000,000 of money, and you have that money; so that you have an interest-bearing security deposited with the Government, and you have $1,000,000 to use. Now, if the interest was high enough, I presume there would be a good deal of money invested in these bonas, would there not ? Mr. W e x l e r . I do not think there would. I do not believe that there is any rate of interest that any Government of the standing of this could afford to pay that would make it attractive for bankers to withdraw money from the channels of trade for the purpose of invest ing in Government bonds, except in periods of governmental stress, when the patriotic side would naturally appeal to citizens, and not as far as the investment is concerned. Now, as to the circulating mediums, banks might, if Government bonds were maintained constantly at par and the banker felt that he could go and redeem the bond at any time he saw fit at the Treasury Department for par, he might be willing to increase the circulating medium, when more currency was required for business, by purchas ing bonds and using that credit to issue a note against it— which is all it amounts to. The bank only makes a very small percentage on the transaction. But that would not furnish an increased credit which may be kept at certain times to prevent the whole banking and credit system of the country from breaking down. It has absolutely no relation, you understand, to that side of the question. Senator R e e d . Mr. Wexler, I was a little inclined to the opinion you now express; that is to say that when the Government permits a bank to buy $1,000,000 worth of bonds, it then locks up $1,000,000 of the bank’s money; and then by issuing another $1,000,000 it seemed to me that it had not very greatly expanded the currency. Yet I BANKING AND CURRENCY. 77 understood you to say that the reason we did not have a flexible currency was because there were not enough bonds which—you said something like that, I believe ? Mr. W e x l e r . N o . Senator R e e d . Well, at any rate, I am trying to get your views. Mr. W e x l e r . Let me get this very clear, because it is important. The statement is that the present circulating mediura does not bear any relation to the requirements of the country for circulation, and that there is no means m the possession of bankers at the present time to expand this circulation to meet an additional requirement, or to con tract it when it is no longer needed. Now, that is the proposition as far as the currency is concerned. Senator R e e d . And if you had more bonds, it would not help out much? Mr. W e x l e r . Absolutely not. Senator R e e d . And that brings us, then, to a second proposition. I take it now (and I will ask my question in this leading form in order to bring it out more clearly) that what you want is to be able.to take the assets of the bank, and upon those assets to get more money; that is, you want, directly or indirectly, to effect that result ? Mr. W e x l e r . I want to be able to convert the credit which I ex tend to an individual from one form to another form. Let me make it clear: If you come into the bank and borrow $1,000, we take your note for $1,000, and we give you in exchange for it our credit, which you can use. You could not use your own credit gen erally. And we give you our credit. How do we give it to you? We give you credit on our ledger for the net proceeds of that note of $1,000. Now, the result of that operation is that we owe you just as much as you owe us; that is correct, is it not? Senator R e e d . Yes. M r. W e x l e r . N o w , as long as y ou can p a y y ou r bills and carry on you r business w ith checks, y o u draw checks against th at $ 1 ,0 0 0 , and y ou gradually reduce this liability from us to y ou in th at w ay. Now, whenever you need cash— currency— and you come and draw that from the bank, we should be in a position to give you our obliga tion— a note, and to change the form of that credit from a book credit usable by check, to a note credit, usable by circulation— which privi lege we do not have to-day. Senator N e l s o n . In other words, exchange your note for his note? Mr. W e x l e r . That is the whole proposition. Senator R e e d . In other words, issue money ? Mr. W e x l e r . Issue, not money, but issue evidences of credit; issue obligations. Senator R e e d . Well, bills that circulate as money? Mr. W e x l e r . Yes. Senator R e e d . In other words— let us just abandon the text of it and go across lots—if you are running a bank and you have $1,000,000 of notes representing loans to your customers, and you have paid the last dollar out of your till that you can pay out in safety, you have to stop ? M r. W e x l e r . That is it. Senator R e e d . But if you took that $1,000,000 of notes and trans formed it into what I am going to insist on calling money— although there is a technical difference, as you put it----- 78 BANKING AND CURRENCY. Mr. W e x l e r . Yes. Senator R e e d . Transform it into bank bills, or bank money-----Mr. W e x l e r . Notes. Senator R e e d . By some process— then you have multiplied your ability to serve your customers, have you not ? Mr. W e x l e r . Precisely. Senator R e e d . N o w , I take it that what you want, then, m the way of f le x ib i lit y or elasticity of currency gets down to this: You want to be permitted, by some device or plan, to take the notes of your customers, and either against those notes or against your owner ship of those notes, issue bank paper; or you want to be able to put them up with the Government, or some agency of the Government, and have the Government issue the money on them ? Mr. W e x l e r . Well, not exactly. I want to be-----Senator R e e d (interposing). I am not speaking of what you want. Mr. W e x l e r . I understand. Senator R e e d . But this plan involves this idea of flexibility— involves one or the other of those propositions ? Mr. W e x l e r . Well, the flexibility is only a side issue of the propo sition you have just made. One is a question of circulating medium, and the other is a question of credit. Senator R e e d . N o ; I a m talking abou t ju st h ow y ou are goin g to m eet this kind of an additional dem an d at tim es ? Mr. W e x l e r . That is it. Here is the idea: If the condition existed in our bank that you have, referred to, we would want the privilege of taking $1,000,000 of good customer’s paper maturing in 30, 60, or 90 days, and not beyond 90 days, to a central reservoir of credit, which we mil call, for convenience, a central bank, which has the note-issuing privilege, and which could take these obligations of these various farmers, merchants, and manufacturers with our indorsements—which is not in a form of credit that we can use— and exchange for it their credit in the form of a bank note which we can use. Now, what happens? We have got this $1,000,000 of the bank notes of the central bank, and the central bank has $1,000,000 of the notes of various customers with our indorsement. Now, our cus tomers who have book credits draw their checks upon us, and we pay out the bank notes which we have received from the central bank. Now, this bank note does not count as reserve for any bank. You have drawn $50 in cash, we will say, and you have taken it over and paid it to your tailor, for instance. He has no use for it except to put it in bank. He deposits it in another bank. When that bank gets it, it does not count as reserve for that bank. It has answered its purpose, that note has. It has performed all the functions for which it was issued. It is deposited in some bank by your tailor, and that bank in turn deposits it in the central bank, probably; and that note will go out of existence. Now, in the course of 30 days, 60 days, or 90 days this paper which we have taken to the reservoir of credit and rediseounted has ma tured. Now, what happens? The man who owes the money, the maker of the note, has had to accumulate just as many of those notes which the central reserve bank originally issued as may be necessary to go and give to the central reserve bank to get his note back. So you have constantly this exchange of credit going on, and when the BANKING AND CURRENCY. 79 requirements of credit fall off and are no longer needed the notes go back into retirement, because they have necessarily been used to meet the original rediscounted obligation. So that a note issued in this manner, and it is the only manner possible, adjusts itself at all times to the requirements of tne country for credit. Do you under stand that ? Senator R e e d . Yes. I think I understand. I have no doubt your statement is illuminating; but I want to come down to the present. You have told me how it works out. Mr. W e x l e r . Yes. Senator R e e d . But I want to see if I am right on this proposition, that, at bottom, what you claim is necessary for flexibility or elas ticity means this, that there must be a plan devised by which the bank can take its assets—its commercial assets—I may be wrong in the use of some technical terms, but you know what I mean. M r. W exler. Y ou are correct. Senator R e e d . It must be able to take its commercial assets and convert them into what we ordinarily call money; that is, bank notes, or Government notes or some kind of notes, must be given to the bank in lieu of these securities which it puts up ? Mr. W e x l e r . Yes. Senator R e e d . N o w , that is the thing that is necessary for elas ticity. And it can not be reached, if I understand you correctly, by the plan of having the banks buy bonds, because that absorbs the money— an amount of money equal to the amount of money which they have issued. Am I correct, now, in that ? Mr. W e x l e r . Y ou are correct; yes. Senator R e e d . N o w , that is what I wanted to get at, and I was then ready to pass to another subject. Senator W e e k s . Before you do so, I wanted to ask one question or make one comment. I will ask Mr. Wexler if the volume of these notes which you have been discussing does not depend on the needs of the business community, and also on a sufficient reserve being maintained against them ? Mr. W e x l e r . Of course no bank is going to take out of its port folio notes of its customers and rediscount them unless there is a need for the additional credit facility in that particular section, because by so doing they are sacrificing a part of the interest which they would earn on the paper for the remaining length of time to maturity. In the second place, the central bank would not be permitted to redis count and issue its notes for such rediscounts unless it had a gold reserve of the amount which may be prescribed in the bill, anywhere from 30 to 50 per cent, for the redemption of these notes when they appear at their window, which may occur the next morning. Senator R e e d . Senator Nelson wanted to ask a question. Mr. W e x l e r . Yes, sir. Senator N e l s o n . Mr. Wexler, does not this, in its primitive form, amount to this. Senator Reed comes to your bank and says: I want to borrow $1,000, or $10,000, and will give you a note. You say to Senator Reed: How do you want this? Do you want it in the form of a credit on our books that you can check against, or do you want it in the form of notes? Mr. W exler. Yes. 80 Senator BANKING AND CURRENCY. N elson. And Senator Heed sa y s: At present I havte gpt a need for it in the form of little bilk. I do not want checks; I Want currency. Put it in little bills. And instead of giving him the credit for $10,000 on your books, you issue the promissory notes to Senator Reed and he uses them. Now, that is a transaction that arises from a commercial demand, is it not ? Mr. W e x l e r . Yes, sir. Senator N e l s o n . It arises from trading? Mr. W e x l e r . Yes, sir. Senator N e l s o n . And not by any artificial method of going and buying bonds ? Mr. W e x l e r . Absolutely not. It is the result of an absolutely commercial transaction. Senator N e l s o n . And it is for the benefit of Senator Reed ? Mr. W e x l e r . Yes; n o t for the benefit of the b an k. Senator N e l s o n . Whether he wants that in the form of a checking account or in the form of currency that will pass as money ? Mr. W e x l e r . Yes; that is it. Senator R e e d . N o w , I want to spend a minute more on this question. You say that this system responds to commercial de mands. By that I understand you to mean this: There are seasons of the year when the deposits pile up in your banks and you have so much money that you can not loan it out; that is, you have a large stirphis of deposits. Then there comes along a season of the year when nearly everybody wants to borrow money. Mr. W e x l e r . Yes. Senator R e e d . And you get down to a point where you have to begin to refuse your customers whom you would like to accom modate ? Mr. W e x l e r . Yes. Senator R e e d . And so you want to be in a position to stand those conditions ? Mr. W e x l e r . Yes, sir. Senator R e e d . And you say that this system— I grant you, now, that the plan which you outlined would meet that condition— I want to see whether there is another side, whether it is not possible, and entirely possible, for a bank (not a good bank, not a bank that is properly managed) to issue these notes for some other purpose than itierely to meet the legitimate demands of a community. Why is it that a bank having this power of multiplying its assets— for that is what it amounts to, loaning them and reloaning them—might not, if it saw fit, use this plan for a vast expansion of the currency, for an inflation ? Mr. W e x l e r . Well, there are two distinct checks upon it. One is that a bank is required to carry always on hand a certain gold reserve against its own demand liabilities. Senator R e e d . Well, that is 33 per cent, is it not? Mr. W e x l e r . No; that is, under the present law it varies from 15 to 25 per cent, according to whether they are country banks or reserve city banks. Senator JRe e d . That is what I am speaking of. * Mr. W e x l e r . And under the new law there is some reduction in that reserve requirement. BANKING AND CURRENCY. 81 Now, in the next place, where does this bank go to get the addi tional accommodation? It goes to the central bank. Now, the central bank is not permitted to discount paper, except such as arises from commercial transactions, and such as matures not beyond a certain stipulated period. Now, would you, as a safe banker, expand your credits upon a class of paper that you could not go to the central reservoir of credit and rediscount? You certainly would not if you were conservative. Senator R e e d . You have put in figures the qualification which takes away the danger-1----Mr. W e x l e r . That is in the bill. Senator R e e d (continuing). When you say “ the safe banker.” But all bankers are not safe; and the country once had an experience, years ago, I am glad to say, when the whole thing was very unsafe. I am talking now about how this plan might be abused. Mr. W e x l e r . Oh, I can not see-----Senator R e e d (interposing). I am not saying it might be; I am asking you what you think. Mr. W e x l e r . I understand. I do not think there is any way they could abuse it, because there would be a definite limit to the amount of paper of this kind that they could take, because after they had all they could reasonably take care of from their own resources, there would be no place they could go to rediscount the paper. They could not go to a cental bank and get any money on that class of paper. Senator R e e d . Well, as long as they wanted to borrow and had reasonably good credit-----Mr. W e x l e r . Yes. Senator R e e d . They could continue to come and borrow money, and the bank could continue to furnish it, because it would have an unlimited supply of money as long as it had an unlimited supply of security? Mr. W e x l e r . N o ; but the class of securities which it could redis count at the central reserve bank would be limited to that which was necessary for carrying on the commercial and agricultural and indus trial business of the country. Senator R e e d . Well, but who passes upon that? Mr. W e x l e r . Who passes upon the class of that paper? The directors of the Federal reserve bank, and the Federal reserve board, and the banker himself. Senator R e e d . We have a little different thought in mind, Mr. Wexler. Mr. W e x l e r . Yes, sir. Senator R e e d . Of course, if the central bank exercises the same kind of espionage— I do not use the term offensively-----Mr. W e x l e r . N o . Senator R e e d (continuing). Over the bank which comes to it for money— that you exercise over me if I come, namely, you know something about the business that I am embarked in; you know some thing about my capacity and ability; you know something about my personal integrity and honor; and, taking those matters into con sideration, you figure how much you can safely let me have. Now, of course, if that kind of policy was pursued by the central bank, and wisely pursued, then there would not be a great stretching 82 BANKING AND CURRENCY. of credits. But does it not get down after all to the question of whether there will be an extension, an inflation, and get down to the question of the management of this central bank, so that if it be con servative and wise and prudent there would be no great expansion, but if it should be otherwise, why there might turn out to be an expansion ? Mr. W e x l e r . N o ; I do not think there could, Senator Reed. There is another very strong check upon expansion, and that is the gold reserve required against the note, which the central reservoir of credit would issue. Senator R e e d . That is from 33 per cent to-----Mr. W e x l e r . From 33 to 40 per cent. Now, we have a bank which had reached the point where its notes which it had outstand ing— we will say that the reserve requirement of that bank was 40 per cent, and it was down to 41 or 42 per cent; why, its ability to continue to extend credit would stop; it could not go beyond that. It would not be permitted to do it, except in times of emergency or stress, when they might be permitted to waive the reserve require ment. But the management of the central bank would always nave in mind the necessity of paying the gold against those demand notes which were given out for credit and which might appear at the win dow for redemption the day after they were issued. And that will prevent any undue and extraordinary expansion of credit. Senator R e e d . H o w would this central bank put a limit or a brake upon the natural tendency to expansion? Would it be by raising rates of interest to the member banks ? Mr. W e x l e r . Yes; that would be one way to raise it. Senator R e e d . But after all do you not get down to the question— is not there a real, genuine danger of an inflation, provided you get a management of that central bank which is not absolutely wise and prudent ? Mr. W e x l e r . I think the danger is very, very slight, Senator. If that bank obeys the law (which it will have to do) and maintains the gold reserve required under the law, and observes the ordinary com mon sense that I can not conceive that it would not exercise, when the demand was getting too great or raising the rate where it would not be profitable for the borrower to take it— I can not see that under those circumstances there can be any great expansion arising from the organization of an institution of that kind. Senator R e e d . D o you think that this right to raise rates of interest then, ought to be vested in the management of the central bank ? Mr. W e x l e r . Yes; unquestionably. Senator R e e d . And the management of that central bank, after all, then becomes the arbiter of the whole financial scheme by raising and lowering the rates of interest— by raising rates of interest it stops undue expansion; by lowering rates of interest it invites-----Mr. W e x l e r (interposing). It encourages trade ? Senator R e e d (continuing). Trade and expansion. Mr. W e x l e r . Yes. Senator R e e d . N o w , I am asking you a great many questions that may seem to the bankers present to be unnecessary-----M r. W e x l e r . Not at all, Senator. Senator R e e d . But you all understand that I am just a farmer, trying to get some light. BANKING AND CURRENCY. 83 Mr. W e x l e r . Senator, let me make one appendix to my remarks: That is, that you remember that these notes must be redeemed whenever they are presented at a bank. Consequently, you can not have any very great expansion. The paper that the central bank rediscounts, maturing in 60 or 90 days, is coming due all the time for payment; and in order to pay its own obligations arising from the indorsement of the discounted paper-----Senator R e e d (interposing). Why can not they be renewed and the renewals be put in place of them ? Mr. W e x l e r . Well, but in the meantime it must be paid. The central bank would never renew an obligation; there would never be a single discounted note renewed by it. The bank originally dis counting might renew for the customer or individual, and in the course of time, if they wanted the money they might rediscount the n ew obligation; but in the meantime the note originally issued for which notes would have come from the central bank would have been paid and the bank notes retired. It may come out again if the bank requires it; but the bank notes issued against that rediscount would h ave performed its functions. It would have circulated, done its w ork, com e back, and gone out of business, or, which is the sam e, an equal a m ou n t of the bank notes would have taken this course. Sen ator R e e d . N o w , what would be the great possible expansion o f the currency under a plan with a central bank and a gold reserve o f 40 per cent? How much could that by any possibility expand the currency? And when I say “ currency” I mean money. Mr. W e x l e r . Well, that is something 1 do not believe any man could answer with sufficient accuracy to be of any value. I believe th a t in th e fall of the year we need an expansion. Senator R e e d . Well, I am asking the possibilities, not what you need, but the possibilities of expansion under this plan. Of course, if you gave a 40 per cent reserve of gold, that must mean that when the gold is exhausted you-----Mr. W e x l e r (interposing). Well, Senator, there have been some accurate calculations made on that particular subject by some of the gentlemen who are going to follow me, from which you may be astonished to see that there will not be any expansion at all; in fact, we are in considerable doubt, and we rather lean to the belief that it is going to bring about contraction if we do not have considerable amendment to this bill. In other words, we have not been able to find where we are going to get gold enough to carry the reserves that are necessary. Senator R e e d . I am not talking about the bill. I am talking about the plan of a central bank which has the right to issue money, and which must keep a 40 per cent gold reserve, and which can keep on issuing money, as far as the law goes, as long as it can maintain that 40 per cent of gold reserve. Now, what would be the possible ex pansion of our circulating medium under those circumstances ? Mr. W e x l e r . Well, I think the only way that that can be answered is to say that the possible expansion would be equal to the excess amount of gold which there might be in the country. In other words, if our crops here were very abundant, and foreign crops were very small, and the balance of trade was largely in our favor, and we drew from Europe two or three, or four, or five hundred millions of gold in payment of our crops, then that gold coming into this country 84 b a n k in g a n d c u r r e n c y . would form the basis of just that much more credit, and the ex pansion would be measured by the extent of that gold that might be available for credit purposes. I do not know any other way of Answering that question. Some of the other gentlemen might. Senator R e e d . Perhaps we can get at it in another way. Mr. W e x l e r . Yes, sir. Senator R e e d . At the present time, under the existing system, there is no gold reserve whatever required back of the national bank notes, or “ greenbacks,” is there? Mr. W e x l e r . The greenbacks have $150,000,000 of gold against an issue of about $350,000,000. Senator R e e d . But it is n o t a safety reserve; it is just here in the Treasury; is that not right? Mr. W e l l e r . Well, they have set it aside for that purpose; and I believe it is held that way. I do not know that there is any particular law that requires it. Senatof R e e d . Well, there is $150,000,000 of gold back of $350,000,000, you say? Senator S h a f r o t h . $346,000,000. Mr. W e 2£ler. Yes, $346,000,000. Senator R e e d . So that, in round numbers, you have what— cent ? Mr. W e x l e r . A little over, yes; about 43 per cent. 40 per Senator R e e d . N o w , we have Treasury notes? Mr. W e x l e r . The greenbacks are Treasury notes. Senator R e e d . I mean gold notes ? Mr. W e x l e r . Yes. Senator R e e d . Amounting to how much ? Mj\ W e x l e r . $1,150,000,000, about. Senator R e e d . $1,150,000,000. And we have got gold in the Treasury for each of those notes ? Mr. W e x l e r . Yes; they are nothing but warehouse receipts for the gold. Senator S h a f r o t h . There are $1,100,000,000 now. Mr. W e x l e r . Well, it fluctuates, just like warehouse receipts for a bate of cotton. Senator R e e d . Well, we have that much gold ? Mr. W e x l e r . Yes, sir. Senator R e e d . N o w , where else is there any gold piled up, except just as the banks individually may hold it ? Mr. W e x l e r . Well, there is no other in this country available that I know of. There may be a lot of it hidden around that is not de posited in the banks. But when you speak of available gold outside of that in the vault of the Treasury and that held by the banks, well, I do not know of any other. Senator S h a f r o t h . Senator Reed, I saw an account the other day stating that there were $552,000,000 of gold in circulation and in banks. Mr. W e x l e r . Yes, sir. Senator S h a f r o t h . Not gold certificates. Mr. W e x l e r . Yes, sir. Senator R e e d . N o w ,if there are $550,000,000 of gold, and you had paper issued against a reserve of 40 per cent amounting to that, how much would that give you ? BANKING AND CURRENCY. 85 Mr. W e x l e r . T w o and one-h alf tim es as m u c h ; abou t $1,380,0 0 0 ,0 0 0 o f motes. Senator R e e d . Well, that would make an absolute contraction in the currency, even if there were $550,000,000 of gold, Would it not? When I say “ currency” I mean the whole circulation. Mr. W e x l e r . But you have, in addition to that $550,000,000, the $1,100,000,000 of gold certificates which are outstanding, which are just the same as g<5d. Senator R e e d . But is that not included in that $1,400,000,000? Senator S h a f r o t h . No. Senator N e l s o n . N o ; that is outside of that. Mr. W e x l e r . Then you have got $150,000,000 back of the green backs, which gives you $1,750,000, which is a very respectable stock of gold. And if it were all in one place, all in one reservoir of credit, within a very few years the United States would be the commanding com mercial and financial nation in the whole world. The business we now send to London or to Paris or to Berlin or anywhere else would come to the United States. We would be invincible from every standpoint. And with the balance of trade in our favor every year, and with good crops, and with gold coming in, we would practically accumulate the gold of the world. They could not prevent it. There is the greatest opportunity for bettering the welfare of our people through the organization of a bank of that kind than anything I know of. Senator R e e d . Well, I do not just understand that. I want to understand it if I can. I know so little about money, and that is the reason I am asking you so many questions. How does that follow ? . Mr. W e x l e r . Well, gold, as you know, is the recognized ultimate standard of measurement of value for the civilized commercial coun tries of the world. It is the basis of all credit. Why? Because you can take a gold dollar in any country and purchase for it all that you require. Senator R e e d . Yes; I understand that. Mr. W e x l e r . Y ou could not take a silver note, for instance, and do it. Senator R e e d . I want to know how you can get that gold into the central bank; that is what I want to find out; how it gets there. Mr. W e x l e r . I will tell you how it gets there: The circulating medium that would be carried around in the pockets of the people, and so on, would be these bank notes; and the gold would gradually find its way into the vault of the central bank, becauso it woula never pay out any gold. Nobody would ever pay out a gold note. We would never pay out any, nor would any bank anywhere, nor would the Federal reserve bank ever pay it out, except in the cir cumstance where a note holder came and said, “ I want this note paid in gold.” He might have some particular reason for wanting gold in that case. Senator M c L e a n . Pardon me, you said “ gold note” ; you meant “ gold coin,” did you not? Mr. W e x l e r . Yes, sir; nobody would pay out a gold coin except in instances where the holder of th« note had some very particular reason for asking for it. 86 BANKING AND CURRENCY. Senator R e e d . What you mean is this: That whenever a $20 gold piece came into the bank the bank would inevitably drop that mto the bottom of its vault and never pay it out unless somebody came up and absolutely demanded payment in gold? Mr. W e x l e r . That is the idea exactly. Senator R e e d . Of course if there was any real financial fright or scare which came over the country-----Mr. W e x l e r . Yes. . Senator R e e d (continuing). You would have a good many people at the windows wanting the gold ? Mr. W e x l e r . Yes. S en ator R e e d . N o w , if the fa ith and credit of this big institution ever becam e seriously im paired, it m ig h t h a v e to g et up gold v ery qu ickly, m ig h t it n o t ? Mr. W e x l e r . Well, of course, if the people lost confidence in the note issue and everybody came to the window and demanded the amount in gold, it would require a general liquidation of credit of all the notes of everybody which the bank had, and the system would break down. But that has not been the experience of any other country. As I said yesterday, the Bank of France had no difficulty in paying gold when the Prussian Army was camping in the streets of Paris. Senator R e e d . N o w , just as to that matter of illustration—you want to settle this question right, you bankers, do you not ? Mr. W e x l e r . Yes. Senator R e e d . Y ou are more interested than anybody else, and I hope that we also want to settle it right. Do you think, now, that, fairly speaking, we are absolutely safe in assuming that European nations— that their experience can be taken as a safe and conclusive precedent for our country ? Mr. W e x l e r . I think with modifications it can. Senator R e e d . N o w , let me suggest to you, for instance, that the State of Missouri is two-thirds as large as Germany, and it is twothirds as large as France. You could take France and Great Britain and Germany— I have not figured it up, but I think you can— and drop them down in the State of Texas and still have some territory left. When I say “ England/7 of course I mean England, Scotland, and Wales. I merely mean by that to call your attention to the fact of the difference in territory. Then, I want to call your mind to the fact of the difference of the density of population, the great disparity there is between the population here and there; then I want to call your attention to the fact that the trade there is in settled channels, very much more so than are conditions here; that the country is not ex panding its energies and its industries as it is here; that you are not developing a new country; that the speculative feature which enters into our life is necessarily largely absent there, because the specula tive period has been long since past— I mean by that that speculation which is based upon new development. Taking all those things into consideration, is it safe to assume that because a plan works in Europe that it will necessarily work here ? Mr. W e x l e r . Senator, I am absolutely certain it will work here; and, as far as the speculation in Europe is concerned, while they have not the new development in which to speculate in their own country, they speculate in the development of every country on the face of tne BANKING AND CURRENCY. 87 earth. They speculate in our development; they speculate in the devel opment of Africa, Asia, and South America, and everywhere else. As far as expansion is concerned, trade in Germany has expanded in the last 20 years more rapidly than here, and yet the Imperial Bank of Germany meets that requirement there. There may have been a little tightening of the rates; and there is no doubt in the minds of anyone who has given this subject serious study but what the adaptation of the better systems of Europe, with some changes to meet our requirements, will work to perfection in this country. Senator R e e d . I want to pass to another matter. Of course, when you tell me that you bankers have figured out a plan, and that from your own judgment you think that that plan will work, that has a very great weight with me; but if you base it upon the experience of Europe, while 1 think that is valuable, I can not agree with you that it is conclusive, because they do not do things over there in the way that we do. They are not in the habit of going out on the bald prairie and building a city of 50,000 people in 10 years; they do hot do much of that, and I think that makes a difference. Mr. W e x l e r . We have only taken their experience as a guide to our judgment in the matter. Senator R e e d . Y ou said the second difficulty is that there is no place of rediscount to which a bank which has exhausted its own credit facilities can go. In a word, I take it you mean this: That every obligation the bank owes to its depositors is payable on demand, and it can not realize under the present system upon its assets quick enough to meet that demand. That is the idea ? Mr. W e x l e r . When that demand, of course, comes all at one time. Senator R e e d . That is the possible demand ? Mr. W e x l e r . The possible and extraordinary demand. Senator R e e d . I s it not true that if that one difficulty should be removed that we would never have another general panic ? I am not speaking about hard times now. I am distinguishmg between hard times, close times, tight times, and a panic. Mr. W e x l e r . Well, we would never have a panic, in my opinion, arising from the same condition as the last two panics, we have had. Senator R e e d . Could it arise from anything— a genuine panic ? Mr. W e x l e r . I can not conceive how a general panic could arise where the banks could not pay out to the people money that they could use to make their general purchases with, but I do not believe that there could ever be a perfect, complete panacea against the folly of mankind. I do not think it is possible to create anything of that kind, and you might, after a period of terrific expansion, wild and extravagant living, perhaps great speculation, where the saving classes, instead of being thrifty and saving, had plunged their money into mines and dozens of things of that kind, similar to the con ditions which existed when John Law operated in France in the last century. You might have from such causes a panic, but that has nothing to do with a case of this kind. To say that you could never have a panic, I would not care to make that bald statement. Senator R e e d . I was trying to get a starting point. Mr. W e x l e r . Yes. Senator R e e d . If your bank had $10,000,000 of deposits and you had been doing a sound, safe banking business, so that your 88 BANKING AND CURRENCY. $10,000,000 wag worth approximately $10,000,000, and in addition to that you have the stock of your bank, the double liability of your stockholders, the good wiU of your bank and all that—nobody could close your doors, if you could take those assets and go across the street and bring back $10,000,000 of money? Mr. W e x l e r . That is correct. Senator R e e d . And every* other bank situated as you are, if it had a place to go, and meet all demands, would not its doors close ? Mr. W e x l e r . That is correct. Senator R e e d . And it would not be 10 minutes after they began to get their money out until they would begin to put it back, and, if you could arrive at that condition, would it not mean the end of any real panic ? Mr. W e x l e r . Yes, it w ould. Senator R e e d . What are the things and conditions which would bring about this sort of situation: A large bank or two large banks in ifew York City close their doors. What makes that crash, so that the demands began to be made on banks all over the country, and then banks have to close their doors—what causes that ? Mr. W e x l e r . That is caused by the fact being advertised. The two banks were heretofore considered perhaps safe, but have been compelled to close their doors, and the individual here and there begins to feel afraid of the money he has in his own bank, and he be gins to talk to his neighbor: Did you hear about those two banks failing in. New York? such a Dank is all right. I wonder if such and And the whisper goes along, and you find these men presently appearing at your window with checlcs and they take the money home and put it in a stocking or rent a safety deposit box, and they are gradually taking your reserve money out. Then you look at your statements and you find that instead of having a 25 per cent reserve, which is the figure which the law requires to be carried, that you are down to 23 per cent, and maybe the next day down to 22 per cent, and the next 21 per cent, and that begins to be known and reflected in the weekly published bank statement, and then further fear takes place, and further withdrawals, and if everybody comes to get their money and you have no place to go to replenish it, why, of course, you have to close your doors. That is the way a panic works. Senator R e e d . Is there any difficulty that the bank suffers under in addition to that? I mean, I am directing your attention to just what I have in mind— to what extent does the fact that banks deposit with each other affect the ability of a bank to meet these extraordmary demands which may be made ? Mr. W e x l e r . Y ou understand that we have three classes o f banks— the banks in the central reserve cities. They carry all of their reserve in cash in their vaults. Senator N e l s o n . They are supposed to. Senator R e e d . They do. The law requires them to do it, and their published statement shows it. Oh, except that it may fluctuate a half point up or down. We nave only three reserve cities now. BANKING AND CURRENCY. 89 Mr. W e x l e r . New York, Chicago, and St. Louis are central reserve cities, and then we have reserve cities, of which class the city in which 1 live is one. Senator R e e d . Y ou have a large number of those? Mr. W e x l e r . A large number. Senator R e e d . Probably 20 or 30? Mr. W e x l e r . Forty-eight now, and we are only required to carry one-half of our reserve in cash, and the other half we may carry with these three reserve cities. In the operation of our business it is necessary for us to carry a certain amount of money in these cities, whether we wanted to or not, even if there was not this reserve re quirement. (At this point the committee took a recess of 10 minutes, after which the following proceedings were had:) Mr. W e x l e r . Might I be permitted to say a word? There are a number of gentlemen who have been designated to study and speak upon the points which Senator Reed and others are asking me about, and I feel that I am monopolizing the opportunity, and I feel very much as if I might be excused. There are others present who can answer these questions as well or better than I can, and who have written and studied a great deal upon the verv point vou are raising now. Senator H it c h c o c k . One trouble is that we do not know in advance what the subjects are— if they could be given to us we would know. Senator P o m e r e n e . Mr. Chairman, I want to suggest that it is possible there may be a difference of opinion among these gentlemen on the different subjects. Mr. W e x l e r . I am glad to say we are a unit. Senator P o m e r e n e . If there are a half a dozen men engaged in one kind of business who are a unit on everything, I have never come in contact with it, and I think it is very illuminating to get the views of all these men. Senator S h a f r o t h . If the gentleman is willing to return to the stand at any time— I want to ask some more questions, because he is answering some of them very clearly. Mr. W e x l e r . I will be perfectly willing and glad to remain on the stand. The C h a i r m a n . What is the pleasure of the committee? Senator H it c h c o c k . I move that Senator Reed conclude his examination, and that any others then desiring to ask Mr. Wexler questions have the opportunity. (The motion was carried.) Senator R e e d . I want to say bv way of explanation that I find it very difficult to follow any line oi thought out, as long as about the time we get to the point it has to shift to another gentleman. These men are all experts in their line, and I would like to have all their views, just as Senator Pomerene has suggested. Besides, each man states a thing in a different way, and sometimes that tends to eluci date matters. You had just concluded stating that the central reserve banks actually keep their reserve in cash on hand ? Mr. W e x l e r . Yes, sir. Senator R e e d . H o w much reserve do they keep ? Mr. W e x l e r . Twenty-five per cent of their demand liabilities. 90 BANKING AND CURRENCY. Senator R e e d . And they count nothing as a reserve which they have put into any other bank ? Mr. W e x l e r . frothing at all. Senator R e e d . S o that under the present scheme we start out with the fact that there are three central reserve banks— one in St. Louis, one in Chicago, and one in New York— which have a reserve of 25 per cent of their deposits ? Mr. W e x l e r . Yes, sir. Senator N e l s o n . It is not one bank in each place ? Mr. W e x l e r . All ban ks. Senator N e l s o n . It is the banks in these places ? Mr. W e x l e r . All national banks. Senator R e e d . All those national banks ? Mr. W e x l e r . In those cities. Senator R e e d . Can you tell me, without stopping to refer to any documents, about what the reserves of those three cities run on the average ? Mr. W e x l e r . I think it is about $400,000,000— $400,000,000 to . $450,000,000. Senator N e l s o n . Measured by their deposits ? M r. W exler. M easured b y their deposits. Senator R e e d . I know that. Say $400,000,000. Then that would mean that they had deposits of-----Mr. W e x l e r . $1,800,000,000; four times $400,000,000 would be $1,600,000,000. I said $400,000,000 to $450,000,000. The correct amount is $1,800,000,000 of deposits if they have $450,000,000 of reserves. Senator R e e d . Of course, if there was a run on banks, as soon as $400,000,000 was drawn out, when they had drawn down to the limit-----Senator S h a f r o t h . The reserves, according to the report of the Comptroller of the Currency, June 4, 1913, amounted in those reserve cities to $486,468,614.26. That is the total. Mr. W e x l e r . That is not correct. The figures I have here of the deposit in central cities is $1,800,000,000, which would require $450,000,000 of reserves. I think that is nearer correct Senator N e l s o n . Mr. Wexler, do they not get credit for the 5 per cent collection on future bills ? . Mr. W e x l e r . Yes. Senator N e l s o n . That is deducted from it? Mr. W e x l e r . From it. Senator R e e d . I did not get your question, Senator— on which they get credit of 5 per cent of the 25 per cent redemption fund deposit deposited for bills. Mr. W e x l e r . That is the only money they are allowed to keep outside of their vaults— the 5 per cent for redeeming notes, deposited in the United States Treasury. Senator R e e d . That is for redeeming notes ? Mr. W e x l e r . Yes, sir. Senator R e e d . So that you really have 20 per cent ? Senator N e l s o n . N o , no; that is 5 per cent on circulation, while the other is 25 per cent on the profits. Mr. W e x l e r . Five per cent for outstanding circulation at the time. BANKING AND CURRENCY. 91 Senator R e e d . The ordinary bank keeps how much cash in its vault ? Mr. W e x l e r . The reserve city banks, or the next class— have deposits aggregating $1,900,000,000. They are required to carry 25 per cent reserve, of which one-half must be in cash and the other hall they may keep in any one or in all of the three central reserve cities. Senator R e e d . S o that they can keep in Chicago and N e w York and St. Louis 12^ per cent of their deposits and count it as a reserve? Mr. W e x l e r . Y e s. Senator R e e d . Then there is another class of bankers ? Mr. W e x l e r . A class known as country banks. They carry deposits of $3,400,000,000, or nearly twice as much as the two others combined. They are required to carry 15 per cent. Senator P o m e r e n e . Not twice as much? Mr. W e x l e r . Nearly twice. Senator P o m e r e n e . As m u c h ? Mr. W e x l e r . A s much. The other two have $3,700,000,000, and the country banks have $3,400,000,000. Senator P o m e r e n e . Y o u stated twice as m uch. Mr. W e x l e r . Oh, no. I beg pardon— I should have said as much as the two others combined. Senator R e e d . The 15 per cent that they are required to keep, how much of that is kept in vaults ? Mr. W e x l e r . Six per cent of it must be kept in cash; the other 9 per cent of it may be carried either with the banks in the reserve cities or in the central reserve cities. Senator N e l s o n . And in each of those cases the 5 per cent on circulation is credit? Mr. W e x l e r . Is credit— a deduction from the total reserve requirement. Senator N e l s o n . Both as to the reserve cities and country banks ? Senator R e e d . That makes a system like this, as I understand it: If a bank in Oklahoma had $1,000,000 of deposits, it would have to have $150,000 of reserve, of which it would have in its own vaults-----Mr. W e x l e r (interposing). $60,000. Senator R e e d . $60,000; and it would have deposited either in Kansas City— it might deposit it all in Kansas City, but how much would it have to have there? M r. W e x l e r . It would h a v e to h a v e $ 9 0 ,0 0 0 . Senator R e e d . That becomes a deposit of the Kansas City bank? Mr. W e x l e r . Yes, sir. Senator R e e d . Then the Kansas City bank can keep of that $90,000 in its vaults-----M r. W exler. O n e -h a lf, o r $ 4 5 ,0 0 0 . Senator R e e d . $45,000; no. Mr. W e x l e r . One-half of the $90,000— no, no; I beg your pardon. Against the $90,000 it would have to carry a reserve of 25 per cent, which would be $22,500. It would carry one-half, or $11,250, in cash and $11,250 either in Chicago, New York, or St. Louis. Senator R e e d . H o w much does that leave us? You can figure quicker than I can. M r. W e x l e r . H o w m u ch w here? 9328°— S. Doc. 232, 63-1—vol 1------ 7 92 BANKING AND CURRENCY. Senator R e e d . Of this $90,000 sent up there by the bank in Oklahoma ? Mr. W e x l e r . $67,500, taking out $22,500 of reserve. Senator R e e d . I do not want to take it all out. I want to take out what they kept cash. Mr. W e x l e r . Yes. Well, we keep out $77,750. Senator R e e d . It sends that down to Mr. Wade’s bank. Mr. W e x l e r . It sends $11,250. Senator R e e d . It sends all that it has got down to Mr. Wade's bank. Mr. W e x l e r . H o w do you mean “ a ll,” Senator? Senator R e e d . We started out with $150,000 in the Oklahoma bank? Mr. W e x l e r . Yes. Senator R e e d . The Oklahoma bank had reserved in its own vault of that $150,000, $60,000? Mr. W e x l e r . Yes. Senator R e e d . And sends-----Mr. W e x l e r . $90,000 to Kansas City. Senator R e e d . And sends $90,000 to Kansas City. The Kansas City bank holds as a reserve against that-----Mr. W e x l e r . $22,500. Senator R e e d . Only half of that. Mr. W e x l e r . All right; $11,250. Senator R e e d . And that leaves us ? Mr. W e x l e r . That leaves us $77,750. Senator R e e d . Yes. That is put with Mr. Wade’s bank in St. Louis. Mr. Wade can take that and take his reserve out of that and send it to Chicago if he wants to, can he not, or send it to another bank in St. Louis ? Mr. W e x l e r . But it is not doing him any good to do it. His reserve only counts if he has it in his vaults. If he sends it to another bank he can not count it. He must have the reserve of 25 per cent, in addition to whatever he may have in another bank. Senator R e e d . When it gets to Mr. Wade the chain is broken? Mr. W e x l e r . It is broken; it stops; you have reached the ulti mate. Senator N e l s o n . Y ou understand, Senator Reed, that when the $90,000 of the Oklahoma bank comes to the Kansas City bank it swells the deposits of that bank to that extent ? Senator R e e d . Exactly. I have been accounting for that. When it gets to Mr. Wade’s bank he has to keep 25 per cent of it? Mr. W e x l e r . Yes. Senator R e e d . And then he can take the 75 per cent that is left and deposit it in Chicago ? Mr. W e x l e r . It will not do him any good if he does deposit it in Chicago. There is nothing to prevent him from depositing it where he pleases. Senator R e e d . If he wants to loan it to Chicago, he can do that $ Mr. W e x l e r . He must keep 25 per cent cash. Senator R e e d . The only difference is that the amount of reserve becomes greater when it gets to him. The Chicago bank in turu can take out the reserve and send the balance to New York? Mr. W e x l e r . If it chooses to. BANKING and cueeency. 93 Senator R e e d . A s a loan or in any other way it wants to ? Mr. W e x l e e . Senator, there is one mistake in your proposition. You have calculated that the Kansas City bank would send to Mr. Wade all of the money in excess of the 12J per cent that he is required to keep in cash in his own vaults. As a matter of fact, it would only send down there the 12J per cent of the $90,000. Senator R e e d . Why? Mr. W e x l e e . Because that is the amount of the reserve which it must carry against that deposit of that $90,000 from Oklahoma. The rest of the money it would loan out in Kansas City. Senator R e e d . I am talking about what it could do in loaning to other banks. I am not talking about the necessity of deposits, but what I am asking now is to what extent the banks do pass money from one to another in that way. Is it practiced large y ? Mr. W e x l e e . I will explain that to you. Let us take our own case. We have a reserve of about 2J millions cash in our vaults and 2\ million dollars with the reserve agents in Chicago, New York, or St. Louis. We carry that in those three cities, because they are our legal reserve centers and because we get demands from people who have bought goods in St. Louis for exchange on St. Louis, ex change on New York or Chicago. The bills of exchange we buy on foreign countries we sell in New York where the demand exists for such exchange. The money gradually comes to these centers, be cause they are the natural channels of trade through which the money of the country drifts. In addition to that, we will carry some money in Louisville, Cincinnati, Baltimore, Philadelphia, Kansas City, and various other cities, to which our funds drift in the natural course of business, and upon which we need exchange, and this is in addition to the reserve requirement, because what we have in those last-named cities we can not count as legal reserve. The lending on our part to banks is only to those banks in our immediate vicinity who carry accounts with us. If a bank, for instance, in the city of Vicksburg, Miss., does business with our bank and it needs accommo dation in the fall, we loan to that bank. The C h a i r m a n . The stenographer will please make a note that that $150,000 required on the deposit of $1,000,000 would take $60,000 in their own vaults as a minimum, $11,250 as a minimum in Kansas City, $2,812.50 in St. Louis, making a total of 7 ^ per cent minimum out of the 15 per cent required by statute. Senator R e e d . Could you tell me to what extent the banks do deposit their reserve with other banks ? Mr. W e x l e r . Do I think it is advisable ? Senator R e e d . N o ; I say, can you tell me to what extent that is done ? Mr. W e x l e e . T o what extent do the banks deposit their reserves with other banks ? Senator R e e d . Yes. Mr. W e x l e e . In the exact amount that the law requires, together with such additional reserve as particular banks may think it neces sary for them to carry for safety. Senator R e e d . I do not know whether you quite caught me or whether I quite catch you. A country bank is required to carry a certain per cent in its vaults, and it may carry the rest of its reserve in another bank? 94 M r. W BANKING AND CURRENCY. exler. Y es. Senator R e e d . I am not asking whether it complies with the law and keeps the 6 per cent in its own vaults. To wnat extent does it deposit that part of the reserve in other banks which it is permitted to so deposit ? Mr. W e x l e r . All of it. It may keep it in cash; The general rule is to carry the nine-fifteenths required to be carried by country banks in addition to the six-fifteenths in cash in other banks in reserve cities. Senator N e l s o n . But the country bank may keep the whole in its own vaults ? Mr. W e x l e r . It m a y . Senator R e e d . But I understand, as a matter of fact, it generally does not. Mr. W e x l e r . Generally it does not. Senator R e e d . And generally all banks avail themselves of the privilege of depositing that part of their surplus with other banks which the law allows them to so deposit. Senator H it c h c o c k . Senator Reed, it is time to put in the record the fact that the statement shows that the bank deposits of the national banks consist of $6,000,000,000 individual deposits and $2,000,000,000 bank deposits; about one-fourth of all their deposits are bank deposits. Senator R e e d . That, of course, includes, Senator Hitchcock, not only the reserves which they transfer from one to the other, but such other deposits as they see fit. Senator H it c h c o c k . National banks, their total individual de posits are $6,000,000,000 (about) and their total bank deposits from other banks are $2,000,000,000. Senator R e e d . In other words, the reserve and also other deposits. [To the witness.] I am now about to ask you this question— if Senator Hitchcock will let me have his figures I will be obliged: What degree of peril is added in the case of a panic, if any peril is added, by virtue of the fact that these reserves are in part deposited with other banks and other moneys, so that about one-fourth of the moneys in the banks are deposited with other banks ? Mr. W e x l e r . The question is to what extent that adds to a panicky condition in time of stress ? Senator R e e d . In case there is a panic started, to what extent does it accentuate the other ? Mr. W e x l e r . Well, when the entire system breaks down and banks throughout the country at large can not pay currency, as happened in 1907 when we had to resort to an illegal practice of issuing clearing house certificates, why, the fact that you have not that money in your own vault and have it in various banks throughout the country, naturally militates against your ability to pay out cash just to the extent of that portion which is not in your vaults, and which is in other banks. Senator R e e d . In other words, if there was $1,000,000 started in Oklahoma and part of it went to Kansas City and to St. Louis, and part of it went to Chicago and finally part of it went to New York, if you tied that money up in New York, you would tie up that chain of banks to the extent of the money so held ? BANKING AND CURRENCY. 95 Mr. W e x l e r . The percentage that finally finds its way, however, to central reserve cities, as you have observed in here, is a quite small part of the total. Senator R e e d . But, I say to the extent-----Mr. W e x l e r . T o whatever extent that may be. If you needed the actual currency and you had it in New York and could not get it, your ability to pay it out would be impaired just to that extent. Senator R e e d . In reference to the panic of 1907—just a word on this point, not to go into it generally—was not the fact that the banks were largely tied together by their business relations and their interdeposits— I presume I may use that term—responsible for the forcing of the suspension of payment by the banks generally through out the other portions of the country? Was not that largely re sponsible ? Mr. W e x l e r . Well, it is a good deal like a doctor diagnosing a case of sickness, Senator. When an attack comes on it is very hard to diagnose the original cause of the disease and its inception. There is a great deal of diversity of opinion about it. Of course, the first radical reduction in reserves exhibited itself in the New York bank statement, and that attracted the attention of the whole country to the condition in New York. The moment we all saw that condition, we had to draw our money out of New York in order to intrench ourselves, and in doing so we further weakened New York, so that we contributed in a sense to the acute condition that existed in New York. Our country bank correspondents, when they found that we were drawing our money out of New York with a view of strengthening ourselves, turned around and drew it out of us to strengthen them selves. So that the whole system broke down because of its inefficiency. Senator R e e d . And finally ended with the fellow with the stocking. Mr. W e x l e r . With what ? Senator R e e d . Ended with the gentleman with the stocking— the man that was going to get the money out and put it in his stocking. Mr. W e x l e r . It finally went to the individual who took it out of the bank and put it in his stocking. That was what created the panic. So that we all finally contributed to the acute condition that existed. Senator R e e d . So that it must be true that this practice of banks carrying large deposits with other banks is an element of danger in the present system ? Mr. W e x l e r . In the present system; yes. Senator R e e d . That is what I am trying to get at— the difficulties of the present system. Still keeping away from this bill. Mr. W e x l e r . For the reason that, Senator Reed, the New York bank has no place to go and get this money when called upon for it, having no privilege of rediscount. Senator R e e d . Suppose that the New York bank had a place it could go and get this money. That would pretty nearly solve the difficulty, would it not ? Mr. W e x l e r . Absolutely. Senator R e e d . But you do not think if he could go and get it down here out of the Treasury that that would do much good ? Mr. W e x l e r . N o , sir; it would not. It is too cumbersome. Senator R e e d . Why not ? Mr. W e x l e r . In the first place------ 96 BANKING AND CURRENCY, Senator R e e d . I'm talking about—following the present method— 1 a condition of affairs where he could walk right down to the Federal Treasury, promptly, and get the help. Would it not then be able to meet this condition ? Mr. W e x l e r . Yes; if the central Federal Treasury had the money and the Federal Treasury had the machinery for passing upon these loans, and was willing to make the loans at that time promptly— immediately upon the minute— why, of course, it would answer the purpose. Senator R e e d . Very well. I understand, of course, that you are talking about any plan that can be worked out. I am trying to get at the principle now. The whole difficulty, then, simply lies, as far as panics are concerned, in the inability of the great banks of the great centers to get money for their assets and get it quick ? Mr. W e x l e r . Yes. Senator R e e d . I thank you for that. You have already, I think, answered the third proposition, in which you said that the third difficulty was that the entire reserves were scat tered in the various banks, and you thought that they ought to be gathered into one common reservoir; and I do not care to press that further at this time. I am-taking too much time, anyway. Just one other matter, in regard to rates of interest: I believe you have stated that money goes to New York and to Chicago and to St. Louis and other large cities because it is following the demands of trade and commerce. Do you think, therefore, that the real laws of trade must be considered in that respect ? Mr. W e x l e r . Undoubtedly. Senator R e e d . I want to get your views as to whether or not a similar law does not apply to the question of interest charges— that is to say, we find that you can get a greater rate of interest on money in a new State. I have always found that it was not so much on account of the risk as on account of the fact that the man who borrowed the money had a better chance to make money probably than he did in older places. Is not that the situation? Mr. W e x l e r . I do not think it is, Senator. I think the higher rate paid in the newer State is due to the less liquid character of the security. It may be just as good. A man may have a vast tract of timber ; that is an excellent asset, yet it may not find a ready market. You will find that the higher rate is paid on account of two things: One the risk, and the other the liquid condition of the collat eral— how readily the money can be collected and converted back into cash. In new States— and largely in the Southern and Western States— our collateral is not as liquid as the collateral in the New England and Eastern States. Senator R e e d . I know. You have been so manifestly fair all through this interrogation, and I want to ask you a little further. A man out in a Western State perceives an opportunity to invest in something and make 100 per cent. Is not he more willing to pay a higher rate of interest, and do you not think that cuts some figure in the matter? Mr. W e x l e r . I think it does. He is more willing to pay a higher rate and he ought to pay a higher rate. What would just be the class of thing that you have in your mind upon which he sees an opportu nity of making 100 per cent ? Might it be the boring of an oil well, b a n k in g and currency. 97 might it be the buying of a piece of timber, or the erection of a saw mill or stave factory or an ice plant, or many things that new coun tries require, which is more or less fixed capital, not credit ? He puts the money in with the idea of making a big profit out of it or selling it to somebody else. He could not make 100 per cent by the opera tion of any one of those plants. Therefore it is more or less fixed capital that has to go in for a long time, and his judgment may be correct, and he should pay a higher rate, and that class of securi ties should never go into the central bank as a basis of a note circu lation. Senator R e e d . D o you think the same conditions that make it possible for this man to invest in the class of business ventures you have spoken of has its effect all along the line— the wages of men are higher, the profits on goods sold are higher, and do you not think that has something to do now with the building of the bank, and consequently the ability of the bank to ask more ? Mr. W e x l e r . Senator, I do. You are entirely correct that that employs labor and pays out wages and makes business better, but whenever the investment in enterprises of the character to which you refer is widespread and general and upon credit— that is, that the man who makes the investment has not his own money in the bank that he can use— that is what we class dangerous expansion, when he goes to borrow for such purposes, and that is what really brings about a panic, when we go too fast in investments of that kind. Senator R e e d . That is illuminating, but a little aside from the thought I have. I am directing your attention to this, whether it would not violate these— I will call them “ natural” conditions for the want of a better term— if we had one fixed rate of interest, the same for New York that you would have for Portland, Oreg., the same for Boston that you had for Seattle or San Francisco, are you not there trying to fix an iron rule and fastening upon conditions that are widely variable and where the unobstructed laws of trade have already met the varying conditions by varying rates of interest ? Mr. W e x l e r . N o , for this reason, that the central bank or a Fed eral reserve board controlling the regional banks would have no control over the rate of interest which the individual National and State bank would charge. It has nothing to do with it. It simply makes the rate at which it gives rediscount for the various banks. If John Smith should contemplate an enterprise of the nature that you refer to and wanted to borrow the money, he could not go to the regional bank, because he could not trade with it. He would go to the bank located in his town, and that bank would charge him a rate commensurate with the liquid character of his collateral and upon the risk. That rate he would have to pay, and that would have no regard to any rate -fixed by the Federal reserve board. After the bank got that collateral it would have to know that it had the money to take care of it for the full length of time that it had loaned, because it is not of the character that he could go and rediscount that paper, even with its own indorsement, in the Federal reserve bank. Senator R e e d . Why not ? Mr. W e x l e r . Because it would not be permitted. Senator R e e d . Suppose it is a merchant. I will take that. Mr. W e x l e r . All right, take that. 98 BANKING AND CURRENCY. Senator R e e d . We will say that the natural rate of interest in the East is 5 per cent. The present rate in the West, let us say, is 7 per cent. You establish this system, and your central bank says to its branches, or the Federal reserve board up here says to the Federal reserve banks, “ We loan you money at, say, 3 per cent.” Your bank out West would get its money at 5 per cent, and still continue, you think, to charge the same rate of interest to its customers ? Mr. W e x l e r . No, I think the rate of interest on this class of paper would decline. I believe the public would be served to better advantage and at lower rates on liquid commercial paper than it is being served at the present time; it would be an advantage to the whole country. Senator R e e d . If the rates came down on liquid commercial paper, that would necessarily, at least indirectly, affect the rates on all paper, would it not ? Mr. W e x l e r . I do not think it would. Senator R e e d . Y ou do not think it would at all? Mr. W e x l e r . No, sir. I have seen a condition where you could rediscount good commercial paper at 4 per cent in New York in banks and through commercial note brokers, when a railroad would have to pay 7, 8, or 9 per cent in order to get money— a good railroad corporation. Senator R e e d . Y ou say the bank would be able, although it got money at, say, 3 per cent, to nevertheless charge the customer in these western places 6 or 7 or 8 or 9 per cent, as the case might be; in other words^ charging whatever they saw fit, limited, of course, by his disposition to pay? Mr. W e x l e r . Yes, sir. Senator R e e d . If there was only one bank in his community he would have to pay what they fixed, would he not? Mr. W e x l e r . That is what he has to do now; but he could get in his buggy or automobile and go to the next town 10 miles away and get a little competition on his loan. Senator R e e d . He could do that now. Mr. W e x l e r . Yes. Senator R e e d . But if you had one central bank and it had its branches in every city and town, I believe you said every national bank would join it and practically every other bank would join it, and if this man left his town and went across the country 10 miles to the other town he would be dealing with the same gentlemen, in fact, that he was dealing with in his own town ? Mr. W e x l e r . Senator, he would not. You are confounding in your mind the Federal reserve bank or the branch of a central bank with the 23,000 to 25,000 State and national banks throughout the country who are merely subscribers. The competition amongst us as general bankers is extremely keen, and what makes the rates to-day? It is the competition that exists between bankers. If a man comes to me and wants to borrow, I do not ring up and ask every other banker, “ Has he been to you?” Senator R e e d . I understand that. As it appears to-day you bid for the borrower. Mr. W e x l e r . We give him the prevailing rate of interest upon loans of that character. b a n k in g and currency. 99 Senator R e e d . If he is jiot satisfied with you he comes to me ? Mr. W e x l e r . Exactly. Senator R e e d . The result is there is competition. Mr. W e x l e r . There is competition. Senator R e e d . If you have one central bank and that central bank has its branches, and all banks in order to avail themselves of its help must be members of it, then I want to know why there would not be one rate of interest fixed clear down to the customer. Mr. W e x l e r . Because------Senator R e e d . Inevitably. Mr. W e x l e r . Not at all. There would be absolutely no more relation between the individual banking institution then than there is to-day. They would simply be subscribers of one central reservoir of credit with which they could discount liquid commercial paper, but the remainder of the resources which they could not rediscount and their discounting privilege would be governed to some extent by the lending ability. Under the reserve bank system or the central bank with branches there would be the same competition that there is to-day. Senator R e e d . I understand you to say-----Senator N e l s o n . Let me interrupt you. I think that you have overlooked the fact that it is only banks that can be customers either to discount or to deposit with these national reserve banks, and they can not deal with individuals. Senator R e e d . I am not talking about the national reserve bank now at all. I am talking about this suggested plan with one central bank with numerous branches. Suppose that is established, and it has its numerous branches. I asked the question of Mr. Forgan, I think— I may be in error, if I am I apologize— whether or not that would not compel all banks ultimately to become members of the general system, and I understood him to say it would. Mr. W e x l e r . I think it would have the effect— the privileges should be so great that they would all want to join the general system. Senator R e e d . Suppose that is established, and it has its numerous branches; I asked the question, I think, of Mr. Forgan— I may be in error, if I am I apologize— whether or not that would compel all banks ultimately to become members of the general system. I understood him to say that it would. Mr. W e x l e r . I think it would have to be so. The advantages would be so great that we would all want to join the general system. Senator R e e d . Under that scheme which is suggested, what would be your relations to the great central bank with its numerous branches ? Mr. W e x l e r . What would be our relations with the central bank located in Washington in connection with the banks in New Orleans ? I would be a subscriber to the stock of the central bank and a depos itor in the branch in New Orleans. My general customers doing busi ness with me to-day would continue to do business just as heretofore and would not know of the existence of this branch. Senator R e e d . The New Orleans bank would rediscount at a rate of interest upon which to loan money to you and everybody else ? Mr. W e x l e r . T o m e and every other bank. Senator R e e d . That is what I mean. rate of interest at 4 per cent. We will say they fix that ioo BANKING AND CURRENCY. Senator C r a w f o r d . Senator Reed, pardon me, but would it include e v e ry other bank? Senator R e e d . If they all subscribed, and I think they all would have to. Mr. W e x l e r . All right, now, we have that condition. Senator R e e d . Your advantage in belonging to that system is that you can go and rediscount your customers’ paper ? Mr. W e x l e r . That is it. Senator R e e d . The first thing necessary, therefore, is that your paper shall be of such character that it will be passed by the central reserve bank ? Mr. W e x l e r . Yes. Senator R e e d . Therefore is it not only possible, but is it not inevitable that the central bank would prescribe the kind of banking you should do in order that you should be a safe bank ? Mr. W e x l e r . N o ;no more so than the comptroller’ s department at the present time prescribes the class of banking I can do. Senator R e e d . But the comptroller’s department at the present time does not have to let you have money. Mr. W e x l e r . N o ; but it prescribes the kind of business I can do. Senator R e e d . Let us see how it will work out. We might dis cover that it would be a bad thing for banking, and we might discover that it would be a bad thing for the country. I know the bankers do not want to hurt the country. Mr. W e x l e r . N o ,sir; we do n ot. Senator R e e d . Would not the central bank necessarily say in the end to you: We think you are paying too much interest on deposits; when we loan your bank money we do not want this kind of collateral; we want a good bank back of the col lateral. Would they not in that way, by suggestion, if not by command, influence the rate of interest paid upon deposits ? Mr. W e x l e r . I do not think so, sir. I think that the Federal reserve bank located in New Orleans would simply act in its relations with me in this capacity: We would be a subscriber to it, and the gen eral borrowing public would have no relations whatever with the Fed eral reserve bank. It would have its relations with me. A wholesale dry-goods man, for instance, would come to me. He is in good credit, and he can sell his paper on the markets of the coun try, and he carries a large average balance, and he onty borrows money for three or four months of the year, and he carries this balance all the rest of the year. I fix him as low a rate as my judgment might justify. It may be as low a rate as 4 per cent, as I can rediscount his paper with the Federal reserve bank in that district, or I may charge him 4J or 5 per cent, as the case may warrant. Now comes along a sugar planter who is perfectly good; he owns a magnificent plantation, he carries an account with us. He has his crop to bring m, and he wants $25,000 to finish his crop with. We will say that is a three or four months’ loan. His balance may not be as large, his paper is not quite as liquid, and he will pay me prob ably li or 2 per cent more. That is, I would exercise my business judgment of the value of the two accounts to the bank. I come along to the middle of September and I find that people want to borrow money on cotton, sugar, rice, and various other commodities. I find BANKING AND CURRENCY. 101 that we need more money in order to carry all these commodities, and I take the note of the dry-goods merchant or of the sugar planter, to the extent that I may need money, and take it over to the central bank and offer it at the prevailing rate on that day and they discount it. They do not discriminate with regard to the rate. The paper must be of that quality and standard required by the by-laws and rules of that bank or they will not take it at all. If it is of that character they discount it. They give me their rate on that date and the commercial transactions of the country are facilitated, and the commercial interests of the country are benefited. The rates of interest on that class of paper may decline, but it will have abso lutely no relation to the money borrowed. The money borrowed for the general development of the country will have to pay the rate which the risk of the loan and the character of the assets justify. Senator R e e d . That is a limitation ? Mr. W e x l e r . Yes, sir. Senator R e e d . After the establishment of this central bank and its numerous branches, how would it proceed to protect itself for loans or rediscounts that it made to your bank, for instance ? Mr. W e x l e r . Protect itself? Well, for instance, the board of that bank would be six members, as the bill proposes, selected from that immediate section, three probably bankers, and three merchants or agriculturists, who would be presumed to be familiar-----Senator R e e d . I am not speaking of the plan proposed in this bill. I am speaking about the central bank. Mr. W e x l e r . The branch central bank would have a governor at this central bank, and an advisory board there who would pass upon this paper. Its duty would be to be just as familiar with conditions as the board and officers of our bank are to-day. If they did not think well of the paper they would refuse it. Senator R e e d . That all relates to an examination in regard to the paper itself? Mr. W e x l e r . Yes. Senator R e e d . But in addition to the paper it would have to take into consideration the character of your bank and stability of your bank also. Do you think that would cut any figure? Mr. W e x l e r . Decidedly so. Senator R e e d . Then they would take that into consideration ? Mr. W e x l e r . Yes, sir; we would be the indorsers of the paper. Senator R e e d . Therefore, if you went there to get credit, they would consider, not only the credit of the man who signs the note which you presented, but also your credit ? Mr. W e x l e r . Yes, sir. Senator R e e d . Then do you think that if they made a suggestion to you that you were paying too much interest on deposits that you would not take heed to that suggestion ? Mr. W e x l e r . I think that if they made such a suggestion and the suggestion was wise I would certainly take heed of it. Senator R e e d . Don’t you think you would take heed of it a little on the line that this was the place you had to go to get your money in the time of rediscounts of these notes ? Mr. W^e x l e r . I can not conceive, Senator, of a suggestion being made that would not be in the direction of sound and conservative banking. 102 BANKING AND CURRENCY, Senator R e e d . Suppose they said: You must not pay interest on deposits at all. That would be in the interest of making the bank safe and it would be sound banking in that sense. Suppose that he said to you: You must not extend any more credit to A B; we don’t like his paper. It might be sound banking, but I am thinking a little about A B now just for a minute, about the customer, and the possible effect of one central body fixing this sound rate and one central body super vising in the way I have indicated all of the banking business of the country. I am thinking of the possible effect that might have upon the borrower. Mr. W e x l e r . I do not think, Senator, it could have anything but a salutary effect. Let us presume that the condition you have just mentioned arose, in which they should say: We do not believe it to be good policy for banks to pay interest on deposits subject to check. Let us presume that. I am not so certain but that such a recom mendation might be very good. Who pays the interest in the end ? Nobody but the borrower. If I am paying 3 per cent interest to all my depositors, I must get that much higher rate from the borrower. He has to pay the freight in every circumstance. Senator R e e d . That is true, but the man who has the money in your bank gets part of the freight. Mr. W e x l e r . If he has a lot of idle money, he has means of in vesting it. He can put it into savings banks where he can get interest, but I can not conceive of any branch of a Federal reserve bank or of a central bank inflicting upon the general banking interests of the country arbitrary rules that would be injurious to the people doing business with those banks. I am sure such a condition would not exist. Take Canada, where they have the branch-bank system. These branch banks do the local business. They have never inflicted upon their customers any arbitrary rules and regulations, I do not believe that we have anything at all to fear from that source. I think it will make for sounder and better banking. Senator R e e d . I do not want to have my questions misinterpreted. Mr. W e x l e r . I understand; you are trying to develop the fact. Senator R e e d . The bankers are high-class business men; I think a good deal of them; indeed, I borrow money from them. Mr. W e x l e r . They are very necessary. Senator R e e d . And as long as they continue to loan money I am going to have a soft spot in my heart for them; but the question now is whether or not it is not entirely possible for this central control to finally manifest itself in the conduct of the business of the individual banks in such manner that the business will be perhaps safer and sounder and for the best interest of the customers of the banks in the end ? Will he not find that there is practically only one place to get his accommodations and that competition has been largely wiped out ? Mr. W e x l e r . That is not the result in Europe. 1 am confident that this plan will make for sounder banking; that it will make for certainty of the banker being able to accommodate his customers. The great thing to be accomplished is to enable the man who needs BANKING and currency. 103 credit to conduct his business with confidence and with certainty that the credit he requires will be furnished him and that he need not be constantly under fear and hesitation as to whether or not he can get that credit. I believe that would be accomplished by the central banks or Federal reserve banks. Senator R e e d . That is all I wish to ask you at the present time; I thank you, Mr. Wexler. Senator H it c h c o c k . Mr. Wexler, you were just referring to this European practice, and if I understood you correctly, you spoke of the European system as being preferable. Which system do you refer to ? Mr. W e x l e r . The Bank of France appears to me to have an organization that is more nearly fulfilling all of its requirements as far as that country is concerned than the other systems that I know of. However, I have not made a study of the European systems lately and I am hardly in a position to make any definite statements in regard to them. Senator H it c h c o c k . Y ou objected when I said that the capital of these proposed new reserve banks might be owned outside 01 the banks, and yet the Bank of France is owned entirely outside of the banks, and they have no control over them. Mr. W e x l e r . I admit that. I think that is true of all the Euro pean banks. In fact, the capital is owned outside of the banks, but if you allow the capital here to be owned outside of the banks you will have to open the doors of the banks to the general public, and you will create a competition between ,your Federal reserve banks and the general banks which will ultimately result in this country in a monopoly of the banking business, in my opinion, and the dan gers to which Senator Reed has just referred might very well occur. Senator H it c h c o c k . I s it not a fact that the bank borrowing of every European country is much more concentrated than the bank borrowing of the United States ? Mr. W e x l e r . Yes, much more. Senator H it c h c o c k . And if we adopt one of those systems we are going to concentrate and centralize that bank borrowing ? Mr. W e x l e r . Not under the plan we propose here where each bank maintains its independent entity all the way through. I can not see how we can possibly have the condition of centralizing our banking systems. We will simply centralize our reserves and redis count facilities, and we will have just as many separate entities as we have to-day, and they will increase as the demand for additional banks occurs. Senator H it c h c o c k . The bank that desires to borrow currency under your plan, however, must ultimately seek relief of the central association ? Mr. W e x l e r . Undoubtedly. Senator H it c h c o c k . And seeking that relief, it is bound to present paper which is satisfactory to the central association? Mr. W e x l e r . Yes. Senator H it c h c o c k . And if the central association has the power of refusal it would result in giving the central body the power of sug gestion to all banks and the power to considerably control their methods ? 104 BANKING AND CURRENCY. Mr. W e x l e r . Well, it would to the extent where such methods are unsafe. The same condition exists to-day. When I go to our cor respondent in New York for a loan and he does not think conditions are as they ought to be, he does not hesitate to say: I do not think you are loaning your money at a proper rate of interest, or you are paying too much interest on your deposits. That is a perfectly proper suggestion. I make it to the banks which come to me. I nave no hesitancy in saying to them: You are not on the right track; you must mend your ways. Why should not the central reserve banks have that privilege ? Senator H it c h c o c k . But you take away from New York, St. Louis, and Chicago, and all these 48 other cities, this power of suggestion and give it into the hands of one bank. Mr. W e x l e r . Not at all. Take, for instance, our case. The banks doing business with us will probably have to use our facilities to a certain extent just as they have heretofore. They will not have enough liquid commercial paper of the proper character which this bank would accept. They will have to come to me with paper of a character which this bank will not take and I will have the same power of suggestion that I have had heretofore. Senator H it c h c o c k . This power of suggestion is now divided up in these three central reserve systems and as many banks in each system, and you propose to concentrate it all in one system ? Mr. W e x l e r . N o . They, as lenders of money, will have the power to suggest, which is an ordinary human right. The banker m the small town suggests to the individual. If one of his customers who borrows money from him is not running bis business properly he tells him so. That is just in the ordinary human course 01 affairs that the man who is doing business with another man and feels an interest in that man’s welfare suggests to him the proper course of business which he should pursue. Of course he may reject that suggestion. I have had men reject my suggestions to them, and the only thing they can say is— If you do hot like the way I am running my business I will take it to another bank. Senator H it c h c o c k . Y ou referred to the Bank of France. As a matter of fact your association of bankers proposes an entirely different currency plan from that in use in the Bank of France. Mr. W e x l e r . I nave said that we can not adopt any particular European or other system. We have to work out a system, taking the experience of foreign countries which is adaptable to our own particular conditions of affairs. Senator H it c h c o c k . Y ou are proposing a currency which is not a legal tender. The currency of the Bank of France is a legal tender. Mr. W e x l e r . Well, our currency would be legal tender-----Senator H it c h c o c k . I am speaking in the absolute sense. The currency that you propose is not a legal tender. Mr. W e x l e r . Well, I will simply reiterate that we have suggested a great many changes from any foreign system I know of, all of which we believe desirable. Senator H it c h c o c k . I s not the real trouble at the present time a lack of adequate legal tender— money— in the United States ? Mr. W e x l e r . I do not think so. BANKING and currency. 105 Senator H i t c h c o c k . The figures show only $900,000,000 deposits of balances in the reserves of banks of the United States for $8,000,000,000 of deposits. In other words, only about 10 per cent. Mr. W e x l e r . Yes; which is really more than we need. In this country the average reserve for the banks of deposit is 13 per cent, and in Europe the average is but 12 per cent. Senator H it c h c o c k . In Europe there is no duplication. Here we have duplications. Mr. W e x l e r . This to which I refer is all cash reserve, metallic reserves— legal money. Senator H it c h c o c k . The reserves shown in the national banks of this country are something like $900,000,000— that is, the cash re serve— against $8,000,000,000 of deposits. Mr, W e x l e r . But it is metallic cash, gold reserve. Senator H it c h c o c k . And the real trouble when it occurs is that the bankers are compelled to dip into this reserve if there is a run, and the banker has to make an excessive payment for loans. You propose no addition to this volume of reserve at all; what you pro pose to do is to increase the supply of credit money. Mr. W e x l e r . I am certain that the reason we have to dip into that metallic reserve is because we have not any paper money we can give the people. The people do not need the gold. If you had money in the bank you would not need to draw gold; you would have no use for it. You would only do that if you were frightened. A bank note would answer your purpose just the same. Senator H it c h c o c k . lias not every bank panic occurred where the reserves of the bank were at a very low ebb? Was not that the case in 1907 ? Mr. W e x l e r . Yes. Senator H it c h c o c k . And is it not true that at the present time bank reserves— I mean the cash reserve money in the banks of the United States— is almost at the same low ebb as in 1907? Mr. W e x l e r . No; I think the average reserve now is fully up to legal requirements. Senator H it c h c o c k . I am not speaking of the book reserves; I have no doubt that the books of the bank will show 25 per cent of their balance on hand, but, on account of this duplication of deposits, there is not actually in the banks of the United States more than $900,000,000 for the $8,000,000,000, and that is almost as low as it was in 1907. It is a little more than it was in 1907, but not much, and it is down to the point where bankers are actually restricting their credits at this time because they are so low. Is not that a fact ? Mr. W e x l e r . Yes. Senator H it c h c o c k . And your proposition does not go to that evil, but is only to inflate the credits. Mr. W e x l e r . Not at all. My proposition will bring into the banks the $300,000,000 or $400,000,000 of gold circulating in the pockets of the people to-day and add to the present reserve and give them in lieu of it a circulating note which will answer their purpose just as well and which they would rather have. We are paying out this reserve money whenever there is a demand for a circulating medium, when that money ought to be in our vaults. Senator H i t c h c o c k . Y o u propose using these bank notes which you want to issue for the purpose of withdrawing the gold from the people and getting that gold into the banks ? 106 BANKING AND CURRENCY. Mr. W e x l e r . Exactly. I think that with this system in vogue you would not see any more gold certificates and very few greenbacks. They would be the basis upon which the credit would rest. Senator H it c h c o c k . That gold when drawn into your banks would be the basis for conditional credit on which you would issue loans. Does not that mean inflation ? Mr. W e x l e r . Not at all; not if you have the proper proportions of reserve. Probably, if you look in your pockets you will find $40 or $50 of gold certificates there. Senator O ’ G o r m a n . No Senator from the West has that much money. Senator H it c h c o c k . I do not want to expose my financial con dition. Your idea, then, is that this power to issue conditional bank notes is desirable for the purpose of trading them to the people for the gold which you state is in circulation, thereby drawing the gold into the bank and increasing your reserve money, and for that reason increas ing the loans you can make? You think there is no danger of infla tion as a result of that process ? Mr. W e x l e r . N o , sir; because the amount of money you can issue in exchange for this gold must always be protected by gold reserves and liquid paper constantly maturing and constantly coming in for redemption. Senator H it c h c o c k . N o w , Mr. Wexler, you approve of the Euroean system. Will it not require practically a revolution of American anking to adopt rediscounting of bills by banks ? Mr. W e x l e r . The rediscounting of bills by the central banks or the . Federal reserve banks ? Senator H it c h c o c k . Would not that require a revolution in their methods of doing business ? Mr. W e x l e r . Not in the least. Senator H it c h c o c k . They carefully avoid rediscounting bills now, do 11 E Senator H it c h c o c k . It is regarded as bad banking ? Mr. W e x l e r . In some sections it is; in other sections it is re garded as good banking. Senator H it c h c o c k . But it would practically be a revolution of banking methods, would it not? Mr. W e x l e r . When the banker in the city gets hard up he does not want to borrow because he does not like to have it appear in his statements; it is simply a sentimental idea which prevails in his mind. As a matter of fact he would be a great deal better off if he did borrow and take care of the business of his section and of his cus tomers. In the section in which I live we do borrow. In 1907 the bank of which I am vice president borrowed twice as much as its capital to take care of the business. Many banks did not do it. We believe that the business should be carried on, that the crops should be shipped to Europe, and the gold brought back, and we did not hesitate to borrow and use the money in our business. It will cause no change whatsoever; instead of borrowing from New York as we do, we mil have the central reserve bank of credit to go to. Senator H it c h c o c k . Mr. Wexler, you admired the banking system of France. Is it not a fact that the Bank of France discounts notes BANKING AND CURRENCY. 107 for not more than 50 banks; that is, the total number of banks for which the Bank of France discounts notes? Mr. W e x l e r . lean not answer that question. It also discounts for the public. Senator H it c h c o c k . My judgment is that it is much less because there are only a few banks in France with several hundred banks con nected with each. Do you think that method can be made to apply to a country with 25,000 banks, if all want to discount notes ? Mr. W e x l e r . Not at all. I think the central bank here should have the right to discount for the 25,000 banks. Senator H it c h c o c k . Would you think the rediscounting of the banks is entirely different and a more serious proposition with so many individual banks than if there were a smaller number of great banks with which the business could be done ? Mr. W e x l e r . I do not think so; not at all. It is a question of principle. I venture to say that there are banks which discount for 3,000 or 4,000 now. There is no difficulty about it. Senator H it c h c o c k . A few moments ago, in answer to a question put by Senator Reed, you said that you thought that it would be entirely feasible for you to go to the representative of a central bank in New Orleans and present your paper and secure whatever cash currency you desired on that rediscount. Can you see any good rea son why you would go to that bank if, instead of representing the central bank, he represented the Treasury of the United States— the same expert represented the Treasury of the United States— to pass upon the paper which you offered and hand you out in place of it bank notes—notes of the Treasury of the United States ? Mr. W e x l e r . I can not see any reason for that. The Government has no money with which to do it. Senator H it c h c o c k . Suppose the Government provided the money ? Mr. W e x l e r . H o w would it provide it ? Senator H it c h c o c k . By issuing these notes and providing gold reserves for their payment. Mr. W e x l e r . Where are they going to get the gold? Senator H it c h c o c k . By selling more bonds; by providing an issue and requiring the bankers to pay enough interest for the loan of the currency to more than pay the interest on the bonds. Mr. W e x l e r . We have a fixed bond-secured circulation-----Senator H it c h c o c k . No; you misunderstand me. The bonds not to be secured; the bonds merely to be issued for the purpose of providing a gold reserve in the Treasury. You are to borrow those notes and pay interest on them during the time you have them. The Government is liable for their payment and has reserved their payment, but in the money you pay the Government for the loan of the currency you more than pay the interest on the bonds. By that method we add to the country a considerable amount of reserve money— legal-tender money, money that would be good for all purposes, public and private, and currency that could be used for banking reserve. Mr. W e x l e r . D o you want to make those notes legal tender ? If so, you would have to do it by act of Congress. Senator H it c h c o c k . All Government notes are legal tender now. Senator R e e d . We are dealing with an act of Congress. Mr. W e x l e r . I am sure, if you wanted to do so, you could work out a scheme by the which the United States Government could go* 9328°— S. Doc. 232, 63-1—vol 1------ 8 108 BANKING AND CURRENCY. into the banking business; but I do not believe that the Government of the United States ought to be in the banking business. Senator H it c h c o c k . The Government of the United States would simply be authorizing currency for the purpose of enabling banking interests to do business. Senator N e l s o n . Would not the banks have to deposit commercial paper with the United States ? Senator H it c h c o c k . Certainly; they would deposit it with the agents here. Senator N e l s o n . And the United States would be holding a lot of commercial paper ? Senator H it c h c o c k . Certainly. Mr. W e x l e r . Y ou practically have that in this plan. We have the Secretary of the Treasury as the ex officio head of this bank; we have everything you gain by having a Government bank without having the Government mixed up in it. Senator H it c h c o c k . The plan I am proposing does not involve the complicated machinery; it does not involve the deposits of the coun try; it does not involve detracting and taking away from the inade quate capital of the national banks; it does not take away the inde pendence of the country banks or the individuality of the bankers. Mr. W e x l e r . But here is what it does, which is infinitely worse. It is in the first place pledging the credit of the Government to secure the bonds. What advantage is there in selling a bond at 4 per cent which the Government would have to do now, and then requiring the people of the country to iix turn pay that interest back to the Govern ment, when you have the reserves now scattered all over in the 3,000 or 4,000 different piles, which simply needs to be concentrated into one pile to create the gold reserve necessary ? Senator H it c h c o c k . I am asking for enlightenment on a different line. You propose to inject perhaps $1,000,000,000 of credit currency into the money of the country. Is there any danger that the injection of that debased currency would tend to drive gold abroad ? Mr. W e x l e r . Just the contrary. Senator H it c h c o c k . That, it seems to me, would be the invariable result. You have a note which is not legal tender; you propose a note which is not legal tender. Mr. W e x l e r . But gold will not be near as available to be shipped out of the country as it is at the present time, because the gold will find its way into the vaults— into this central reservoir of credit—and the circulating note will be out among the people. Of course, these notes could be presented by a foreign Government if it had a balance against us at the central bank and the equivalent in gold taken away, and you will recall that I raised the point that the central reserve board ought to have enough power to Levy an export tax upon gold. That has been discussed in our committee. We have to-day the only free gold market in the world, and the balance of trade in our favor, and our enormous crops have been so great that we have been able to get our gold back on several occasions when it has been diverted abroad. But a condition might arise which would make an export tax on gold desirable. Mr. F o r g a n . I would like to suggest to the committee, if I may, that we are not at all surprised that the members of your committee when they get hold of a witness like Mr. Wexler should hold onto him. BANKING AND CURRENCY. 109 but Mr. Hill has been asked to prepare himself specially on behalf of this committee to answer all your questions in connection with the subject you have just been discussing. He is specially posted on the topics about which you have asked Mr. Wexler during the past 10 or 15 minutes; Mr. Wexler has only the general knowledge of the matter that he has acquired in his business. He is not as ready to answer as the gentleman who has prepared himself. Senator H it c h c o c k . Well, we will give Mr. Hill all the questions that are necessary to shed light upon the subject. Mr. F o r g a n . All I desired to do was to make the suggestion on behalf of ourselves that you ask the men who have prepared them selves to answer on these special topics, because we do not wish to give our own individual opinions. I want you to understand that we are here, appointed by the conference held in Chicago and under the resolutions adopted by that conference. Senator R e e d . But we may want your opinions. Mr. F o r g a n . Y ou are entitled to them, but if you will confine yourselves to the subject upon which we have prepared ourselves I am sure you will be much better posted. Mr. S h a f r o t h . Mr. Chairman, I move that the committee do now adjourn. The C h a i r m a n . It is moved that the committee adjourn, and we will therefore take a recess until 2.30 o’clock p. m. (Thereupon, at 1.10 p. m., the committee took a recess until 2.30 o’clock p. m.) after recess. The Ch a i r m a n . The committee will come to order. Gentlemen of the committee, Dr. Johnston was invited from Kansas City to address the committee. He is the president of the National Reserve Bank of Kansas City, Mo. He wishes to be heard, and I have requested him to appear before the committee, and I will ask the committee to hear him, and then we will proceed with and conclude the crossexamination of Mr. Wexler, if there be no objection. STATEMENT OF DR. JOHN T. M. JOHNSTON, PRESIDENT OF THE NATIONAL RESERVE BANK, KANSAS CITY, MO. Dr. J o h n s t o n . I am president of the National Reserve Bank of Kansas City, Mo. Mr. Chairman and gentlemen of the committee, I feel like apologizing for differing from these men who are here giving their views and opinions and arguments on the currency bill, and I should not be here to-day had it not been at the special request of Senator Owen, with whom I have been associated in a confidential and business way for many years. Let me say that I believe in these men who are here making their arguments before this committee. I believe in them collectively, and I believe in them personally. I believe each of these gentlemen possesses character, capacity, and conscientiousness. I believe that every move they have made up to this time and at this meeting of this committee has been done unselfishly and patriotically. 110 BANKING AND CURRENCY. Therefore it is the more embarrassing for me to differ with them, and especially two of this committee; it is especially embarrassing as a St. Louisan, for I have known Festus J. Wade for many years. 1 have seen him come up from a newsboy on the street and a driver of a mule car, and on up until he is to-day the financial head and leading spirit of what we count one of the greatest, if not the greatest, finan cial institutions in the central reserve city of St. Louis. 'I believe in him. This is evidenced by the fact that when he had a vision of a financial institution in St. Louis, and asked me to become a stock holder, I did so at once. And so I found myself having a quarter of a million of dollars invested in his plant. My faith has not been dis turbed, but has grown, as is evidenced by the fact that I am still a stockholder. Yet I have sold enough of the stock of his iastitution to clear me $50,000. So you know that I believe in Wade. Mr. Reynolds, over there, is another man in whom every banker has the utmost confidence. Only the other day I called him up bv phone from Kansas City and asked him if I should need half a million dol lars in a certain deal, temporarily, could 1 get it? He said: Johnston, you can get whatever you need. Go on. So you can see how embarrassing it has been for me to differ with these men, and I wish to say, gentlemen, that the only reason we could differ is because of the viewpoint at which we stand and from which we look. We are looking at this proposition from different viewpoints. You know, the bigger the proposition, whether it be a big subject or a big object, the comprehending of that object or subject, the grasping of it in toto, its greatness, depends upon the viewpoint from which you look at it. These gentlemen are looking at this question from the viewpoint of all our monarchical and oligarchical governments. Every monarchical or oligarchical government, whether it be pre sided over by a king, an emperor, a czar, or a mikado, believes in centralization of power. They stand for it. The reason that we can say truthfully “ London is England” is because all power is centralized in London. Political power is centralized there because of the House of Lords and the lower House. Religious power is centralized there because in London is the centralized power of the Church of England. Monetary power is centralized there because of the Bank of England. And the reason that London is England in a large sense is because of centralized power in London— religious, political, and financial. It is the same with Germany. I need not go into that in detail. It is the same with Italy. Religious, political, and financial power are all centered there. It is the same with France. It is the same with all monarchical or oligarchical governments. These old Governments are founded on the basal, fundamental idea of centralization of power. But when the Pilgrim Fathers came across they had this idea: They came as Pilgrims seeking a new land with new ideas and new ideals, and one of the ideas and ideals was to decentralize power. That is what they had in their minds. And when they came to this country the fundamental basis of the decentralization of power was controlling every movement. Conse quently when this Government was established by our Pilgrim Fathers New York was naturally the financial center, the center of BANKING AND CURRENCY. Ill monetary power. They knew it. They well knew it. But instead of following the old monarchical lines of centralization of power they placed the governmental power, the political power, as far from the financial power as it is possible for the two to be placed. When they came up here and established this place, Washington, as the place of political power, the place of governmental power, they went as far as they could from the center of finance. It was more then, gentlemen, than going from New York to San Francisco to-day. It took longer to come to New York by stagecoach than it would to-day to go to San Francisco. This Government, whether democracy or republicanism, has as its basal, its fundamental, idea decentralization of power, and that is the basis on which republics are founded. At least, that was the motive behind the foundation of this Government by our forefathers. Let us not for a moment consider, gentlemen of the committee, that decentralization of power stands for the same as “ scatteration.” Our forefathers never scattered. They shot straight. The men at Lexington and Bunker Hill shot straight to the point. Do not get mixed up. There is a vast differentiation between the word “ con centration” and the word “ centralization.” They believed in con centration versus scatteration, but they disbelieved in centralization of power— political, religious, financial, or monetary; and as all power had been centered by monarchical governments in one place, that is natural. You know why. Now, in order to make it short— because I must go this afternoon, if possible to get out of here; I have told Senator Owen I was sorry that I had to leave, but I have to do it— I think the best way for me to present the views as I see them is to take the ideas and recommenda tions of this committee here, and I take them from what I take to be one of the great newspapers of America. I clipped this from the New York l imes, which is distinctly a great paper. I think it is the best general financial paper; but, anyhow, it seems to be the repre sentative of the men who are arguing this question before you, and I simply clipped this from that paper. I was bluefishing, by the way, boys, day before yesterday, at 6 o’clock in the evening, and I got this message to come up here. I was away on the Sound with my family in a little cottage over at East Hampton, and I landed 27 bluefish day before yesterday after noon. They were cooked by the deft hands of the little woman I love, and I tell you they were fine. I came here under protest, and feel sorry for this committee, which has not had time to bluefish this summer. You have my sympathy. But, gentlemen, you are at the greatest task; you are facing the greatest problem that ever faced an American statesman. The tariff bill is important, and some of us are rejoicing that it is being worked out wisely and, we believe, satisfactorily to the country as a whole. But this problem is infinitely more important than the tariff question. Why ? Because it is basal. It has not only to do With the achievements and the advancement of progress in this country as it affects the men who are interested in the tariff question and are connected with it, but every industry in the United States is dependent upon the wise settlement of this problem. Not only that, but world wide conditions will be affected and influenced by the wise settlement of this question; and to-day, as this is the last word, the last say of 112 BANKING AND CURRENCY. any of the great Governments on a financial measure, upon a mone tary platform, of course it should be the most perfect bill and the wisest bill that has ever been wrought out by man, because it should be so wise and workable that all Governments of earth will be sending their experts here to see our method and how we have worked out this great problem. Let us get at it; and I will try to give you this in a very few min utes. From the Times I clipped the following suggestions, as I came up here yesterday afternoon., I did not land here until last night. I clipped this from the New York Times. If it is not a correct inter pretation of the ideas for which the committee stands, I should be pleased if they would speak and correct it. The more important changes in the currency bill proposed by the Chicago confer ence of bankers, in brief, were: First, 1 Federal reserve bank, or at most 5 instead of 12. Here again is that question of viewpoint. This is centralization of power. Democracy and republicanism stand for decentralization of power. The bigger the object or the subject that you look at, the more necessary it is for you to get the right viewpoint. I remember going to Alaska a few years ago to study the biggest things there— her glaciers and her gold fields. As I stood before one of the great glaciers there, 1,000 feet high and 3 or 4 miles wide, coming down between two great mountains like a frozen Niagara, there a great wall of ice, with all the colors of the rainbow in it, I could not get within a mile or two of it because every few moments great icebergs were breaking off of it, and it stood there 1,000 feet high, like a mighty frozen wall of power. There were icebergs bigger than the Washington Monument, bigger than this Capitol, bigger than the District of Columbia. They were coming off all the time— so big that they could float for 10 years and then strike a Titanic and smk it, with all the melting of a decade. It was a very great sight, but it was a very different one when I climbed with my alpenstock and got up on her peaks and pinnacles and there tried to see back to the pole that has just been discovered. It was a different point of view. It was a different comprehension of the whole thing, this viewpoint from the ocean and the one from the glacier’s peaks and pinnacles. These men look at this subject from the viewpoint of the centrali zation of power, as I see it. I think, of course, that their judgment is better than mine, and I ask you to give careful weight and con sideration to all they have said and all that they say, because I believe in them, gentlemen. They are men of honesty and probity and great capacity. But here it seems to me that 5 should be the minimum, 12 the maximum, and 7 the ideal number. Why? First, it is the decentralization of power. Let me say that. And, second, it is putting the Government close to the people, this Bank of America— we may call it that; I do not care what you call it— and it will be greater and more solid than the Bank of England or the Reichsbank of Germany or the Bank of France. Put one of these Federal reserve banks in five or seven regional districts. It is democracy. It takes the power close to the people and gets the people close to the Government. That is one reason; but aside from that, our banking system has been a system of decentralization. Why? Because we have had three central reserve cities—one in New York, one in Chicago, and one in St. Louis. BANKING AND CURRENCY. 113 Money, it is true, flows east like water flows down hill, and our money naturally flows east; but in the outworkings of our monetary system under which we have been working for fifty and one years, it is marvelously attributable to such men as Mr. Forgan and Mr. Reynolds, especially, those old bankers who have weathered all the storms, under the handicap of this war exigency bill enacted 51 years ago to meet the war debt. It is marvelously attributable to the achievement of men like Mr. Forgan, for they have weathered it through to this day and have made it workable. Money has been in the habit of flowing in these three central re serve cities, and not to take in these three central reserve cities as Federal reserve cities, it seems to me, would be in a sense a revolution that is not necessary and that is unwise. In addition to these three central reserve cities, which good gump tion would immediately be impressed with the fact that they should be each a Federal reserve city, there should be at least two more, one in San Francisco and one in New Orleans; and it seems to me that would make the bill wise and workable. But it seems to me it would be more perfect and more desirable to have seven Federal reserve cities. Wny? Because each of these Federal reserve cities might want to heavily dominate in capital or power the other Federal reserve cities. You should segregate them, like New York, for instance, which is a colossal institution by itself, and make that a reserve city, and the district which is near it, putting in the whole of New York State, for instance, and having another eastern reserve city, which it seems to me should be Boston, because it is the natural thing. Boston has a trade and commerce—you know that— and a clientele, a financial clientele, not onlv in the moneyed interests, but in population. All that New England dis trict is thickly populated. In these Federal districts you must look a little at population as well as territory. Therefore it seems to me that it would be wise to make Boston another, which would be six. Then one of three cities to make it seven— that is, either Kansas City, Denver, or Omaha. Senator N e l s o n . What about Minneapolis ? Dr. J o h n s t o n . All right, if you want to make it eight. I simply put down the cities on the map as I came up here yesterday. I picked them out as I saw where the trade channels run and where it would be the wisest to place them, and it seemed to me that seven were absolutely necessary and would be the perfect number. Let me go on, because I must get away. I want my friend Wade to have all the time he needs and I want you to listen to what he says. He has proven to me to be personified wisdom, up to this date. If you wish at any time after this to ask me further questions as to why five or seven instead of one, I should be pleased to answer them. I have only brought out the basal fundamental reason, that dem ocracy and republicanism stand for decentralization of power, and not centralization. Second. Membership in reserve banks should be voluntary instead of compulsory, for national banks, as now provided in case of State banks. I do not think that is wise, gentlemen. Why ? Because this law is not to be an experiment; it is to be a fundamental, actualized, abso 114 BANKING AND CURRENCY. lutely successful working law, and if you make the national banks Voluntary, of these 7,400 perhaps 3,000, or 4,000, or 5,000 have a banker who is conservative— and the best banker is always a con servative one— and he will kind of wait and feel his way and see, and you have got an institution started with you know not what capital; you know not where you are. I think that is a mistake from the standpoint of the assuring of the bill an unqualified success. You have got to know at least approximately what you are doing, and to namby-pamby this matter and go at it in this gingerly way, so that the national banks can come in if they want to, and if they do not they can stay out, I think that is a mistake from the standpoint of the dependableness of your capital; and that capital must be larger than any capital of any bank m America— and we have got one. I mean by that, the number all together, because we will make the concentration. We have got a bank of $25,000,000 capital. Third. Subscription to capital of reserve banks should be 10 per cent of member bank’s capizaliation, instead of 20 per cent. I have thought about that a great deal. There is something to that. I have discussed it with some of the men since I came up here. I asked if they wanted the full 10 per cent paid, and they said, “ Yes; that would be all right.” That is not good banking. A great banker, one who stands for aggressiveness as well as con servatism, must feel that confidence that comes from the reserve that he can pull on. It is a mistake, whatever you make it, not to have reserve power. The individual bank as well as the individual man who has not more reserve power left, holding back for emergency, is not as big a man as the man who keeps something back for a great emergency. I believe that 12 per cent would be wise and workable. Eight per cent to be paid in and 4 per cent left as a reserve. We must have a reserve. Suppose we utilize this in the case of some great stringency, some crop-moving period or other financial stringency. We want a reserve; we must have a reserve. That would make each bank contribute only one-eighth of its capital instead of one-fifth. It is quite a difference. I believe that in making it one-eighth, with 12 per cent, with 8 per cent to be paid in, with the 7,400 national banks, together with the other State banks that would come in, it would make the paid-up capital of these reserve banks at least $100,000,000 on the start. It should be. In other words, if there are seven reserve banks— I will take it for granted that you believe in perfec tion, and if you will study the Bible you will nnd that seven is the perfect number and the most oft-repeated— that would be practi cally an average of $15,000,000 a piece. Some would be more and some less, according to the district. If you want to ask me any questions, I must hasten. I would be glad to discuss this further were it not for the fact that I must leave shortly. I believe, gentlemen of the committee, that 12 per cent is sufficient. I do not believe 10 per cent is sufficient. I believe 8 per cent is suf ficient to pay in on the initiative. It will not be quite so revolu tionary as 10 per cent; and vet, remember this 4 per cent reserve, this 5 per cent reserve, which every weighty, poiseful banker must feel that he requires. BANKING AND CURRENCY. 115 To remove control of Federal reserve banks, Federal reserve board should be made up of the Secretary of the Treasury, three members named by the President, and three elected by the member banks, in place of the board being made up entirely of presi dential nominees. I know that is a very delicate subject. I hardly know how to express myself on it; but, gentlemen, control must be somewhere. If there is anybody we can trust, why not our own President— the man who has felt the throbbing of a soul expressed by the confidence of 100,000,000 people? If there is any dark streak in him, if there is any selfishness about the man, do you not think that the weight of his position, the honor of it, the confidence expressed, will steady the man and make him come up to the mark, if he has the graces and virtues of an American gentleman ? I will tell you, gentlemen, I believe that all our Presidents have been providentially nominated and elected— Washington, Jefferson, Lincoln, Cleveland., Wilson. It is hard for me to say that, because I was voting over at Baltimore for another man, a typical Missourian. But after a man does the best he can to achieve a thing, and then fails, I take it for granted that it is providential. That is my the ology. I believe it is providential that Woodrow Wilson is the President of the United States. We can trust him. Senator N e l s o n . I just want to say to you that my friend to the left here [Senator Reed] rather thinks Mr. Bryan, more than Provi dence, had something to do with that. Dr. J o h n s t o n . I thought about that when I was talking. While I believe in the wisdom of the original bill, I do not believe that it is an absolutely perfect bill, by long odds; in fact, I do not think it is any more perfect than the bill that you recommend here. Yes, I do. I think there are some absolute elements in it that you did not touch at all. It has solved with a center shot the most important thing in our monetary law for this great, vast country, with regard to this elastic feature. It solved that right on the start, so that our money automatically expands in crop-moving periods and stringency times, and automatically contracts when they do not need it. They solve that in that bill; and that feature, considering the world-wide conditions, is one of the most, if not the most, important feature in it. Do you gentlemen realize that for the past six months there has been— but this is not for publication. The C h a irm a n . Yes, it is, sir. Dr. J o h n s t o n . I will say it. We all know it; every banker knows it. There has been almost a quiet panic going on throughout the world; and that is the basal causal reason that the bankers of America are working for immediate action on this bill. Do you understand that this bill, which was established in 1863, this bill under which we are working, was established to meet a war exigency, and it was for the purpose of putting those 700,000,000 bonds out— those 2 per cent bonds— to raise this money for this war bill ? That was the main feature of the bill then; but, gentlemen, look at the elastic feature. And why has it worked all these 51 years? Mr. Forgan could answer this better than I could; but I will tell you one reason. It is because we have had a place for our expansion. We have had the wealth of 1,000 years accumulating in England and Germany and France and continental Europe; and when we have got hard up here, until seven or eight years ago, we got all we needed right 116 BANKING AND CURRENCY. over in London, until the war came up— that is, the African war— and they began to build great battleships to protect themselves against ossible war with Germany, and various other things came up, and, nally, four years ago, they quit taking our money. Four and a quarter was a big rate, and we could always get it there. Then they kind of stopped. Then, until two years ago, we got all we wanted in Ger many at 3i, or 3i, or 4J. Germany, with her industrial development, largely, and with her commercial enterprise, has spent a vast amount in building the second greatest navy, next to England, to compete with England. Then she shut up, and now Germany is wanting money from us and offering us 6J and 7 per cent; and money in Ham burg and Berlin is to-day selling for 7 and 8 pe~ cent. Then we had France, and even until a year ago she was the natural outlet. We could get it; we could always find it there; but a* year ago they took over $100,000,000 Frisco bonds at a rate of about 4.60 per cent; but now, since the war scare arose, these French citizens, women as well as men, are taking their money out of the bank; taking the gold, too, and to-day France is not only wanting securities, but she is really getting to the point where she wants money from us. Six hundred million of stocks and bonds have been cashed from Europe in the past nine months, and because of our commerce here in this country, our great development of this vast territory, so many things have gone on that we have, in the last decade, gone up. We have increased four billions in our debt outlet and have increased two hundred millions in real money, gold or its equivalent. So, now, every country on this earth—Japan, China, Russia, the Balkans, England, France, all the countries, are not only cashing on the stocks they have been taking from us, of which they have taken $5,000,000,000 worth in the last 20 years, four billions of that being railroad stocks and the other billion in various industries, but they are knocking at our doors for money. Therefore we need immediate action on this bill, because as perfect a bill as possible is needed on account of the world-wide conditions demanding it, and to put it off shows a lack of courage or brains to face the issue and work it out as wisely as possible. Now, listen: E This board to be appointed by the Government. There must be control lodged somewhere. I am willing to trust the Government. I am willing to trust Woodrow Wilson and his associates. As for the number, seven seems to be the perfect number, and that is all right as I see it; but I believe, gentlemen of this com mittee— and I suppose you want me to be frank. I know nothing else. A westerner, you know, is nothing else but frank and honest. That is the only way a banker knows how to be, if he is trained in the West— I believe it is a mistake to put the Secretary of Agri culture on this committee. Do you want to know why? Never in the history of America has there been such an initiative movement to develop the resources of American soil. American possibilities are right in the soil, and the movement was initiated by Secretary Wilson, a man whom I personally know and love. I remember once taking a long trip across the continent with him, and he told me about taking the initiative in training soil physicists. He called them physicists. I had never heard the word beiore he told me about it. He was send BANKING AND CURRENCY. 117 ing soil specialists all over the arid country of the West and down into the Southland to study every local condition of soil; and properly meeting that condition of climate and soil would prove the most resultful thing in dollars. And he told me how for 16 years he had been working on an awakening agricultural movement in America that we have been following up, but the surface of whose possibilities and resources have been but scratched. I thought when I talked to him: No wonder you were kept through both administrations of both Republicans and Democrats for 16 years. He impressed upon me the thought that the Secretary of Agricul ture is the most important place in the Cabinet. The other day I attended, at the Baltimore Hotel in Kansas City, Mo., a convention of agricultural bankers, they are called, representing nearly every State in the Union. A gentleman of the tribe of Israel, reminding me of my friend here, was there from Texas, and he was a steam engine in breeches. He is awakening the whole of the Lone Star State to the possibilities of that kingdom. And by the way, Senator Reed, your questions this morning in regard to area were wisely asked. Why? Because Texas alone is important. She is as large as Continental Europe, and one of our Territories, Alaska, for which we paid less than a postage stamp an acre, is larger by far than all Continental Europe and has more resources— when you study her coal, her timber, her fisheries, her gold— than any of the great Governments of Continental Europe. Mr. W a d e . Y ou do not give a reserve bank to Texas, though. Dr. J o h n s t o n . My friend, we are giving two southern cities banks, New Orleans and St. Louis. Your city is a southern city, my friend, and I think that the South, if she gets two, will do well. This is a southern city. She will do well, if she gets New Orleans and St. Louis. Senator N e l s o n . What about Atlanta ? Dr. J o h n s t o n . Atlanta is a great city, but you know the Panama Canal makes New Orleans an essential place, absolutely, and the Panama Canal makes San Francisco a necessary place, and the central reserve cities. These three are necessary places, because we want to disturb the usual flow of money as little as is necessary, and it has been going into those channels for fifty odd years and successfully so. And I would state that I believe in the men who are running the banks of Chicago and Kansas City. As far as that is concerned, I believe in New York also. Let me say, by the way, here, gentlemen, that I have no prejudice whatever against New York State or Wall Street in New York City. I have been banking for 28 years. I started a bank with the first $50 that I had, and I had a hard time getting it together, too, I tell you. I am still president of that bank down in central Missouri. I have never asked Wall Street for a dollar, under any conditions, but what I have received it right off the bat. And to-day, if I wanted $1,000,000, I would go right to Wall Street. So you see I have no prejudice. In fact, I think that her bankers there are distinctly great men. One reason I believe in New York so much is that they are mostly western fellows. Senator S h a f r o t h . If they would give me $1,000,000 I would think they were great, too. [Laughter.] 118 BANKING AND CURRENCY. Dr. J o h n s t o n . Listen. I have no prejudice against New York, but let me tell you, gentlemen, that New York should take her place. The centralization of power has made London, England; Paris, France; Rome, Italy; Berlin, Germany; but New York is not America. It is not the United States, because the political power has been decentralized, and there is none, and you all know that. New York State possesses one-tenth of our population and about onefifth of our wealth, and I honor her and reverence her for her great ness. But there are others. Do not think, gentlemen, that you would act wisely to take one tithe of time or divert one moment of the projectile personality of a great man away from his duties at this psychological moment in the development of the agriculture of our country. Why, in Missouri alone we have 36 per cent of our soil untouched yet. Think of it. A 1 jl ' • j1 ° ' \griculture;s business. What a vast These seven men that you appoint their hands and their brains full of work; and to take the agriculturist and scatter his potentiality, when we need another man to help him, or two or three, if we are to develop the vast possibilities of this country and make it one of the greatest on earth, is, I think, a mistake. I think it is a mistake about the comptroller. I think it is a mistake because he is right here working with these 7,400 national banks. He has got his hands full. There never was a man in America so full of work as our present comptroller or the one just retired. I do not believe there has been a greater comptroller since I have been a national banker. Gentlemen, I do not think that he should be in the bill. But that is a small matter. Those things are all small matters. It seems to me if you would appoint the Secretary of the Treasury, he, of course, should be on it. Then, it seems to me, the wisest thing is for the President to select these other men and leave the comptroller and the Secretary of Agriculture for the great work which they have in hand. But whether they are on it or not is not necessary to the achievement of the success of the bill. Authority of the Federal reserve board to compel one reserve bank to rediscount paper of another reserve bank should be made optional instead of mandatory. Here are six banks. Suppose there is a crop-moving period in the South, and a cattle-moving period in our country, and mules moving in another section, and corn in another, and wheat in another. You know how that is. I realize that these Federal reserve boards are owned by the banks of that district. They are controlled by them. Let me say to you that they are controlled locally by the men who furnish the capital much more than the Bank of Germany or Eng land or France control theirs. I will answer any question on that subject that you want me to, but it will take time. And so it seems to me, gentlemen, that we must trust somebody; and this board of control is just as much interested in keeping these banks on their feet and on absolutely secure grounds as this bank over there. The whole banking system is a matter of intrenched trust, and the question is whether you will intrench the trust in this Federal board here. Are they bigger spirits and greater men than BANKING AND CUBBENCY. 119 the men who look over the whole horizon, the whole field, absolutely unprejudiced? I ask that question. Member banks should be allowed cumulative dividends of 6 per cent instead of 5 per cent on their shares in the reserve banks. Gentlemen, I think that is only right and fair, and it is undemo cratic and discriminating against these stockholders in the 7,400 national banks to stop at 5 per cent. Six per cent should be the very limit. The Government report, as given in the last census, says that the National Bank of America made and declared dividends on an average of 9f cents for the decade which it was reporting. These 7,400 national banks, which you are compelling by this law to enter this Federal reserve are owned not by the officers and directors who are running them, but by 500,000 stockholders in America. These stockholders are composed of farmers and merchants and lawyers and doctors and widows and orphans. Mr. Wade, when he started his bank, came to me and I believed in him, because he had been an achieving man in other pursuits and not as a banker, and I took some of his stock, because I believed in him. I invested it with that point in view, and he beat 9f by long odds. He has paid 18 per cent and pays it to-day. One and a half per cent I get every month from your bank, and I always think of you with love. [Laughter.] Listen, gentlemen, because you are unwittingly doing an undemo cratic and a discriminating thing. These people invest their money in good faith. There are 500,000 of them. The officers and directors own only one-fortieth of these banks on an average. Thirty-nine fortieths are owned by all these widows and orphans and preachers and everybody else. They have got an average of 9f per cent, according to the Government reports. You see, you will force them to take 20 per cent on that investment and pay it over here. If it makes up to 5 per cent they can get it, but if it makes any more it goes to pay the Government debt. That is discrimination against these 500,000 men and women, forcing them into an investment which you limit at an unreasonable rate proportionate to what they have had. That is not right; it is not Democratic; it is not Republican; it is not anything but wrong, and 6 per cent ought to be the limit. Senator C r a w f o r d . Was such a thing ever undertaken, even in a monarchy or in oligarchical governments, to compel people to put money into an enterprise and then limit the return rate by law ? Dr. J o h n s t o n . That is a question of casuistry, which I have thought about very seriously. It would be very unreasonable to stop at less than 6 per cent, as they can loan their money out for that in the South and West. It should go to that. I think they could see that. There are very many blessings that accrue to the four-fifths of the investments here, making it a more dependable investment, more secure, and, I believe, finally more profitable, and I can see a reason why you could as a committee, in good conscience, limit it to 6, but certainly not less, because of the blessings that will accrue to the remainder by their investments, of course. That comes from your interpretation of whether it would be a blessing, which I believe we bankers think is the case. I must hasten, because I do not want to detain you here. You know the reason. I will say this while on this subject, that there is a dignity and a poisefulness and strength that the national 120 BANKING AND CURRENCY. banker has that the State banker has not. You can say what you please, I was very proud of the day when I became a national banker, instead of a State banker, which I have been for 28 years; and you feel that you have got the Government behind you, and to kill these national bankers with a State charter would be a most grievous error. Mr. F o r g a n . There is no intention of that. Dr. J o h n s t o n . I am very glad to hear that, because I did not know that at all. I had taken that all back. Ninth. That reserve banks be barred from rediscounting paper drawn to carry securities other than stocks and bonds. The C h a i r m a n . That is a mistake, Doctor. that. We need not discuss Dr. J o h n s t o n . I am very glad that it is, because if it is not a mis take it is certainly a big blunder. [Laughter.] Tenth. That the required reserve of country banks be reduced from 15 to 12 per cent, of reserve city banks from 20 per cent to 18 per cent, and central reserve city banks be fixed at 20 per cent—10 per cent in vault and 10 per cent in reserve bank. Let me say that I think that is absolutely wise. Mr. F o r g a n . It has been reduced. The C h a i r m a n . The House has made that reduction. Dr. J o h n s t o n . That is absolutely wise. I will tell you why. Now, listen; Mr. Forgan and Mr. Wade and Mr. Reynolds well know that the time may come, and I hope it will. [Turning to Mr. Reyn olds:] I want to see your face. I did not know you were here. If I say anything about Mr. Reynolds, I should like him to hear it. I hope the day will come when these reserves and these banks will not only be reduced, but the time may come when they can be practically wiped out. Let me tell you why. They can not be now, because of the many difficulties. So, I shall perhaps recognize bankers of the Southwest who are new men and not trained bankers, and we have held them in hand. But I do hope the time will come, and I believe it should come, when reserves would be gradually lessened, and the day may come when we get to be perfect bankers, when we won't have to limit that even to this much reserve. The C h a i r m a n . I would explain to you that the retirement of some of the members of the committee was because of a roll call. Dr. J o h n s t o n (reading): That limit on farm loans be raised from 9 to 12 months. That is all right. I do not think that is essential either way. It is not essential to ut it in or leave it out. I do not think it is basic or fundamental, know that we have one side of our bank where we have taken that on— savings deposits. It is only about half a million dollars, but oftentimes it has been taken out and built up on the other side. I think it has been some advantage; but there are disadvantages, where a great mob of people come into your bank— all sorts— and so I do not know but what, on the whole, that is a wise recommen dation. I believe it is, really. Mr. R e y n o l d s . We are glad you approve of it. f Dr. J o h n s t o n . I do not believe it is a wise thing, and my idea is that our officers would prefer that we did not have it; if it was not a builder up to the other institution we would rather not have it. I BANKING AND CUKEENCY. believe it ought to be left out. absolutely fundamental. 121 I will say that, although it is not That the section providing for savings department in national banks be stricken out. I agree with the committee that it should go out. That the proposed bank notes be issued by the banks under the control of the Comp troller of the Currency instead of having Treasury notes issued by the Government. Well, that is the biggest thing that we have struck yet. It would take me longer than 1 have, in order to allow Mr. Wade three hours for his speech this evening, for me to go over that. I think that either one of them will answer the purpose of this law. I believe with the issuing of the Treasury notes it would give a stability and prestige and dependableness world-wide, national and international, that this bank would not have without it. There are fundamental causes for arguing on both sides of this question. I believe these men are wiser than I am that are arguing this question and have put this in, and I think there must be some great reason which they have wrought out or they should not have put it here. However, I should not be afraid of tne Treasury notes, as I see it, but it may be because of my lack of perspicuity and grasp of some of the whole of it—summum bonum. I better not go into those arguments. I think there are some good arguments for it as well as against it, but I do not think that is fundamentally necessary to the success of the bill either one way or the other. They recommend that the 4 per cent be kept in the cen tral city bank or reserve city bank. I believe that is a good thing. I will tell you why, because this bill in a sense is revolutionary and it must be in order to be a success. There are conditions that wait and wait on, like the conditions in Mexico, and we have been waiting and waiting and waiting, until something absolutely must be done which is courageous, and our President is doing it, and I hope he will c o n t in u e to do it a lo n g th e lin e s h e is p u rs in g . If it b r in g s in t e r v e n tion, let it bring it. There are some things that require revolutions. We have been working along with this law, having this Aldrich-Vreeland makeshift as an expensive outlet, and that is out now in a few months. Some thing must be done. It is revolutionary in this sense: For instance, I figure it will take sixty millions out of one bank in New York, the City National, and if we continue to keep the 20 per cent it would cause them to have to put up $5,000,000 to their capital, or 20 per cent of $25,000,000— $62,500,000 at one time. That is only pro portionately to the other national banks. Of course it is more acute m central reserve cities, touching more heavily my friend Reynolds and my friend Wade in St. Louis and those banks than the reserve cities of which I am a member; but I have figured it would take out of St. Louis at one time from our national banks and what would it take out of Kansas City? It would take $22,500,000 out of Kansas City and put it in the Federal reserve bank. That is in a sense revolutionary, but they have got to prepare for it in order to do it, and in this preparation they have to collect money and all of that. I figure that in one bank in Kansas City, my own city it takes out $9,000,000. You figure they can go and get it the same day over here at this Federal reserve bank. I say, “ No; they could not.” They could do it, but any banker would 122 BANKING AND CURRENCY. lose his dignity and his prestige and sense of courage to not pre pare for this, if he has to go and get the same amount that is taken out the same day. And besides, gentlemen, a banker— a good banker— conservative though he may be and aggressive, as he should be— builds his bank with this thought— to get money in rediscounting, whether it be from a Federal reserve bank or any other bank only in emergencies and only for a short time, and the banker who does business with our bank or Mr. Wade’s bank or Mr. Reynolds’s bank who does not settle up at least once or twice a year, at most— and it ought to be much more than that— we begin to send the examiner down to see what is the matter. I want the dignity of the national bankers to be preserved, and I take it for granted that it would take about $2,000,000 out of our institution and put it over here in one day. What I will do, and I believe eveiy other banker will— what M r. Wade will do and Mr. Reynolds will do—is to go in and get ready so he will not be com pelled to borrow money from the Federal reserve bank in order to do this. The C h a i r m a n . We will have to suspend, as there is a roll call in the Senate. Dr. J o h n s t o n . All right. (At this point the committee took a short recess, after which the following proceedings were held:) Dr. J o h n s t o n . I did not realize that I had talked an hour until I looked at my watch. I will not go into this thing. Let me say this, that when you put this law into execution consider the timeliness in the matter, the time it should be done, and make it either the 1st of February or the 1st of March, because you want to make it as easy on the national banks, especially, as possible. It will not especially affect 7,350 of the national banks at all, but it will greatly affect the 47 or 48 reserve city banks or central reserve city banks, and to take this amount of capital that they have to supply and the amount of deposits which will come from these banks and put them in the Federal reserve banks you should select the most auspicious time, the time that would be most propitious for them, and that is the 1st of February or the 1st of March, not sooner than the 1st of February nor later than the 1st of March, because let me say that this committee will be intensely interested in making this law so wise and workable as to receive the enthusiastic support of all bankers of America, both Na tional and State, and anything that you could work in to please these men that does not antagonize some great basic, fundamental law, I believe should be done. I believe the bankers should be thought fully considered and everything given to them that can be done to make them happy in the bill and supporters of the bill. This is necessary for a triumphant success. One more word. The 4 per cent which they recommend to be optional with all the banks not in reserve or central reserve cities will help them greatly, and I do not believe it will hurt materially this bill. I have said, and I have figured on it from every standpoint, and I believe with that in the bill and limiting the number to five or seven, I believe that you will have the hearty support of this com mittee and every central reserve city. I believe that you ought to weigh that suggestion thoughtfully before you turn it down. I should like to see it placed in the bill. BANKING AND CURRENCY. 123 A closing sentence. I feel I should congratulate this committee and this country because all of us are patriotic enough to want a per fect law, a wise and workable law. It is to every American's dis credit if it is not so, and if it is so you will see this vast country go on by leaps and bounds in aggressive advance to prosperity and achievement. We are now 60 per cent richer than the richest coun try of Europe. France has more money per capita than we have, but she has only 43,000,000 population, but our 100,000,000 people have much more than France as a whole, and if we increase in wealth in the next decade as we have in the last, we will have passed in 10 years England, Germany, and France altogether. And, gentlemen, we have got to have a bill with vision and plan enough to meet this vast growth of our country. A centralized bank in the United States, it seems to me, would be similar to a European bank cover ing all the countries of Europe, because many of the 48 States have greater wealth and greater resources and greater territory than any of the continental European kingdoms, and we do not hear of European banks, which would be more sensible than a cen tralized bank here. Let me say I congratulate the people of America in having the present chairman of the Senate Committee on Banking and Currency. You will excuse me if I say to you that for many years I have been an associate in business with Senator Robert L. Owen. We are to-day directors in the same bank, and have been for many years. He founded that bank twenty and two years ago. The first charter was given to Robert L. Owen for a bank in the old Indian Territory, which now is the State of Oklahoma. The charter was renewed two years ag°* I count this Nation peculiarly fortunate in having a man as chair man of this committee who is not a novice in things financial. We count him one of the three great financiers of the State of Oklahoma, and he is far superior to the other two. We count Senator Owen for concentrated, systematic, orderly thinking on things financial and things monetary and things banking as an expert. I say this with out his knowledge and without his consent. I respect men like Mr. Wade and Mr. Reynolds on things financial, because I know them so intimately, but my respect for the building of a monetary law for this great Nation is greater for Robert L. Owen. The C h a i r m a n . Mr. Forgan, you had a program to suggest, and I think you had better do that now. Mr. F o r g a n . Mr. Chairman, the program that we have laid out is for Mr. Wade to follow Mr. Wexler. The C h a i r m a n . On what topic will he speak? Mr. F o r g a n . He will explain to you why there should be no com pulsion of American banking associations within one year to comply with the provisions of the act, and also why the banks should have minority representation in the formation of the Federal reserve board, so that the board would be formed, as suggested in our report, of the Secretary of the Treasury, ex officio, three members chosen by the President of the United States with the approval of the Senate, and three members elected by the directors of the Federal reserve bank. That will be followed by Joseph Chapman, of Minneapolis, who will explain why the Federal reserve board should not be given power 9328°— s. Doc. 232, 63-1—vol 1------ 9 124 BANKING AND CURRENCY. to require, but only to permit, Federal reserve banks to rediscount the rediscounted paper of Federal reserve banks. Then Mr. Wexler comes on again to explain why the Federal reserve board should not have the power to add to the number of cities clas sified as reserve and central reserve cities under existing law, or to reclassify existing reserve and central reserve cities, and to designate the banks situated therein as country banks at its discretion. That will be followed by Mr. E. J. Hill, who will take up two subjects, first, in regard to the 5 per cent redemption fund, which is now in the eneral fund, and why that fund should not be deposited in the ’ederal reserve banks as part of the Government funds in the bank. Also Mr. Hill will take up the entire question of note issue and give reasons why the circulating notes should be the obligations of the Federal reserve banks and not of the Government. Then, Mr. Maddox has been assigned the subject of why the Federal reserve banks should not be required to receive on deposit checks through the country at par, but snould only be required to receive at par checks on other Federal reserve banks. And Mr. Reynolds will be assigned the subject of why the require ments of bank reserves in the measure should be reduced to the per centages recommended in our report. Mr. Reynolds will be followed by Mr. Maddox again, who will take up the question of bank reserves, and our reasons for recommending a reduction from the amounts that were in the bill when we had it under consideration. I understand that has been since changed. Then Mr. Maddox will follow with the subject why the section relating to savings departments in national banks should be left out of the bill as recommended in our report. In rereading the bill as it has come out of the caucus, that para graph has been so altered that I think probably— I do not know— the resolution passed at the conference, but it would not have been necessary if it had been in its present condition, but we assigned this when it was under the condition that the investments they could make were classified and segregated, etc. That will complete our program. Senator S h a f r o t h . Mr. Chairman, I move you that inasmuch as these gentlemen are here and no doubt want to get through as soon as possible that this program be observed as reasonably consecutive as we can make it, and that we hear the first persons whom Mr. Forgan has named. Senator N e l s o n . In the order he has named them. I second the motion. Senator R e e d . Does that mean that we can not ask Mr. Wexler any further questions ? Mr. F o r g a n . Mr. Wexler will be on again, and I would just say that Mr. Wade is particularly anxious to be heard, as he has another important engagement with the department. Senator R e e d . I just wanted to ask Mr. Wexler two questions that I think of. The C h a i r m a n . After you conclude with those two questions to Mr. Wexler, then it is understood that we will follow this program? Senator R e e d . Yes. (The motion was carried.) f BANKING AND CURRENCY. 125 Mr. F o r g a n . I would say on behalf of Mr. Wexler that he had not had his lunch up to the time the committee reconvened. Mr. Wexler was busy while we were taking lunch correcting his proof sheets, and did not get the opportunity for lunch. The C h a i r m a n . The committee will now hear Mr. Wade, president of the Mercantile Trust Co., of St. Louis, Mo. STATEMENT OF FESTUS J. WADE, PRESIDENT OF THE MER CANTILE TRUST CO., ST. LOUIS, MO. Mr. W a d e . Gentlemen, the duty assigned to me is to try to explain to you why there should be no compulsion in requiring the national banks to join reserve associations in a year, and why we think we should have representation on the Federal board of control. Let us look at the facts as they exist. The writer of this bill assumed that the burden of creating Federal reserve banks should rest upon the banks of the country and not upon any other class of commerce of the Nation. We are asked to contribute more than $100,000,000 in capital, which does not belong to us, as bankers; we are asked to contribute one-half of the reserves that we now hold in our vaults, in order that this new institution may be a success. We make no objection to that onerous condition. But we can not con ceive that it can be right that we should be called upon to put up this vast sum of money without representation. Banking is composed primarily of, first, integrity; second, expe rience and judgment of credit; and, third, wisdom that is called upon to pass upon the credit commerce of the Nation in order that our funds might be loaned. In the minds of the public we are loaners of money, but, as a matter of fact, we are the greatest borrowers of money of any class of business men in this or any other nation. Every deposit we have is a loan, an obligation on the part of the institution that takes the deposit not only to pay that loan back as the ordinary borrower does, but be required at a moment’s notice to pay same to the clearing-house associations we are connected with to meet extraordinary demands at times when there is trouble, and also at times when everything is placid. The bankers ha^e not asked to buy the stock of the reserve banks. I have yet to find one banker who seeks to increase his proportion of stock, and I have yet to find one who would willingly subscribe for stock of such a bank if others could be found to take it. Why should not the commerce of a nation, the merchant and manufacturer and capitalist, invest in this stock and create this great bank, if it is essential to the development of this Government ? Still, we make no complaint. We are willing to accept the provisions of the bill if reduced 10 per cent; we are willing to hand over to you 10 per cent of the capital of each bank that many of us have labored for years to accumulate; we are per fectly willing to turn over to you one-half of our reserve money; we are willing now, as we have always been in the history of this country, to stand shoulder to shoulder in its development; but we believe, gentlemen, that your business as the administrators of this great Nation is no different than in the administration of an ordinary corporation, and we do not think any of you would have the temerity of going before the public with a prospectus to accumulate, by sub 126 BANKING AND CURRENCY. scription to the stock of a banking corporation, more than half a billion dollars and announce in the start to the people of this Nation who you expected to subscribe this vast sum should not have repre sentation on the board of directors. I have not the slightest fear that the President of the United States will not name men of integrity. I am absolutely confident of that fact, at least, in his judgment, and I believe when that board is named they will be men of such eminence and of such recognized integrity that every thinking banker will approve them; but the question, gentlemen, is whether each man so appointed will bring to that board the necessary banking experience, the necessary credit experience, the necessary wisdom for the inauguration of this great system at its inception. So I do not approach this proposition with any fear of political control or of its ever getting into the hands of men who are not entitled to the plaudits of the Nation. But I have great doubt about the administration of a board composed of three Cabinet officers, every hour of whose time is taken up from almost daylight to midnight with their respective duties as Cabinet officers, and four other men whom we do not know. We do not ask to name the men; we do not ask that they shall be bankers, but we do believe that on that board we should have men of experience in banking and in credits. The whole success of the proposition lies therein. Again, to many of us, and I admit I am one, this bill is repulsive. It is a forced measure, a forced bill, the like of which was never put upon the statute books of any nation, where you say to men in the national banking system at this late day: You must prescribe to this doctrine; take this stock; give up 10 per cen£ of your capital and 50 per cent of your reserve money or you must go out of business or out of the national banking system. Gentlemen, that does not appear to me to be the spirit of the American people; it does not appear to me to be in accord with Democratic prmciples. It appears to me to be entirely unnecessary. There ought to be, and I am sure there is, enough wisdom and ability in this committee and the committee of the House to draft a bill that will not compel us to come in, but, by the advantages and privileges you offer us, that will force us to Imock at the door to get in, and we believe if this bill should become a law it would be a reflection on the Congress of the United States to say to the national banking fraternity of the United States: You must subscribe to this doctrine or give up the business that you have accumu lated in a lifetime. I am not speaking as a national banker, although I happen to be one in an infinitesimal way. I am on this commission representing the State bankers and the trust companies, originally the only man on the commission in that capacity. I have urged for six j^ears that you never can have a homogeneous banking system in this Nation until you admit the State banks and trust companies into the general system. You come along with the proposition to our brother, the national banker, and you say: You must either do this or retire from business, liquidate your establishment, or go into the State system. I plead with you, gentlemen, as a State banker, as one that is extremely desirous of going into the national system, no matter BANKING AND CURRENCY. 127 what rules you put around it, provided it is not a forced bill; and I want to call your attention to the fact that as this bill is framed at >resent, in my judgment, if it were passed to-day it would be absoutely inoperative to-morrow. You have discouraged those gentle men who nave developed that national system up to its present state of perfection; you have them feeling as though they are no longer to be considered in the class of citizens who are worthy of represen tation. One hundred and thirty-seven years ago, gentlemen, the founda tion of this Government was based upon the fact that the older country would not give representation for taxation, or forced con tributions. This is distinctly a step backward. In no sense is it a step in the line of progress of the Nation. You have provided for not less than 12 reserve banks. I want to call your attention to a few statistics here, in which I believe I can point out to you a lurking danger in this whole move ment if you will allow the bill to stand as it is at present. In the six New England States, under your law, there could only be two regional reserve banks. In those six New England States there are 463 banks, and 10 per cent of those banks—just one-tenth of them— if they declined to come into this system, New England would be re duced to one, because your bill requires that no reserve bank can be established with less than $5,000,000 of capital. If you apply that doctrine to the 20 per cent proposition, then you could only have one bank in the six New England States, if they all came in. But I am relying on you to adopt the suggestion that 10 per cent is adequate, and 10 per cent is sufficient, and that in the last analysis 10 per cent will be introduced. In the Eastern States, New York, New Jersey, Pennsylvania, Dela ware, Maryland, and the District of Columbia, there are 1,650 banks. I could name one-tenth of the national banks that would not go into your system, and those great States would only have two reserve banks. In the Southern States you have 1,483 banks, and I could name 148 of the more important banks who if they did not go into the system you would have throughout the entire South only one reserve bank. In the Middle States there are 1,257 banks; and if 125 banks I could name, or one-tenth of them, were to withdraw or decline to come in and take out State charters, it would leave the Middle West without a reserve bank. Senator C r a w f o r d . Without any at all ? Mr. W a d e . Without any at all. Senator C r a w f o r d . One hundred and twenty-five banks ? Mr. W a d e . There are 1,257 banks, and if 125 banks of the larger banks I could name would not go into the system you would not have sufficient capital left to create a reserve bank of $5,000,000. I have the figures here, and I can demonstrate it. Senator P o m e r e n e . That is, you mean by that, so many of the larger banks ? Mr. W a d e . Yes, sir. On the Pacific slope, in the Pacific States, there are 490 banks, and if 49 of the larger banks should stay out it would leave that section of the country without a reserve bank. ! 128 BANKING AND CURRENCY. Senator P o m e r e n e . Would it interrupt you if I asked you a ques tion along there ? Mr. W a d e . N o , sir. Senator P o m e r e n e . What reason have you for believing that these banks might stay out of the organization? Mr. W a d e . The reason is that this is a forced bill, first; secondly, that it offers nothing to the banks in the way of an inducement to come in that they can not secure by becoming State banks, except the privilege of subscribing to your stock and contributing one-half of their reserve and reaping tHe benefits of the institution in the event that it should be successful. The reason I have picked out the larger banks, gentlemen, is this: There are in the national banking system, as you all know, over 7,300 banks. There are 2,004 with a capital of $25,000. Mr. W a d e . There are 2,704 with a capital of less than $100,000. There is no inducement that I can see now for smaller banks to come into this system. Senator R e e d . Why ? That 1#s what I would like to know. Mr. W a d e . The reason why, Senator, is this: That the banks in the smaller towns and hamlets of this Nation loan on a class of paper that this bill would not relieve them in times of distress. It is not what vou call or what the bill calls “ commercial paper.” It is generally loaned to a man because the banker knows his whole personality; knows his family— his wife and his children; knows that the farm over there is only mortgaged for $500; knows the little corner grocer who borrows $100 or the little country storekeeper who borrows $500 is just as good for his credit as the millionaire who borrows on his bonds. But if you tried to run a regional reserve bank and endeavored to take over that class of security for your reserve banking association you would have to know almost every man, woman, and child in tHose communities to be a judge of the credit. Senator N e l s o n . And then the time would enter into that. Mr. W a d e . And then again they do not loan money like we do. John Smith walks into his little country banker and he borrows $100 or $200 or $300, and they rarely charge him any interest. He wants to make a loan for 90 days of $100, and they do not charge him any interest. They just charge him about $5 for the loan, a mere incident and contract made between them, and it is perfectly satisfactory, and that class of paper, gentlemen, if you attempt to put it into a reserve bank would require a credit department that would almost take in the census. Senator C r a w f o r d . Mr. Wade, will you permit me right there-----Mr. W a d e . Yes, sir. Senator C r a w f o r d . I s it not a fact that with these little banks in small towns and in agricultural communities the loans even to the retail merchants and the very small business men always run until after the crop is sold anyvVay, whether farmers or not? Mr. W a d e . Yes; and then if the crop is not good it runs until the next crop comes in. Senator C r a w f o r d . And is renewed ? Mr. W a d e . Yes; and it is renewed and renewed again. The loans of a country bank are never cleaned up like those of a city bank or like those of a reserve city bank. Of course there are exceptions, but I am speaking of the general rule. Therefore in BANKING AND CtJftftiJNCY. 129 dealing with this subject you must perforce deal with the institutions that are in the larger centers relatively. I do not mean Chicago, New York, or St. Louis, but I mean with the general reserve cities, the cities of 25,000 or 50,000 or 100,000 people or more, not with the towns of 1,500 or 1,000 or 2,000 people or 500 people. Do not let me be misunderstood as in any sense decrying the country banker. I want it thoroughly understood that he fills his place and he fills it most admirably, and I also want it thoroughly understood that he does not require a reserve bank. Senator C r a w f o r d . That is right, too. Mr. W a d e . He has no use for a reserve bank such as those o f us in the larger communities; his correspondent takes care of him. That is what he keeps his money for with us, and great institutions, such as the First National and the Continental Commercial, of Chi cago, and the National City Bank, of New York, and great institu tions of that kind frequently make loans to these country banks of $1,000 and $2,000 and $5,000 and $50,000, and they will continue to do it. My appeal to you, gentlemen, is primarily for the purpose of aiding me in interesting the State banks and trust companies to come into this bill, because without their assistance you can not make it a success, in my judgment. Your note issue would be more or less a farce. It would be a rigid note issue unless you get the larger banks of the communities interested, State and National. Why? You issue this currency and the State bank can keep it as a reserve the same as they do for national bank currency, and that is one of the reasons why the national-bank note is not a liquid and rapidly redeemable currency. A national banker may have his son or his brother-in-law or his friend located in another city take out $100,000 national-bank cir culation and ship it over to him and it is just as good in the vaults of the State bank for reserve as gold, and it is accepted. Again, if a careful analysis is made of this bill in the States of this Nation which have good banking laws— and very nearly all of them have good State banking laws— it can be proven beyond a peradventure of doubt that the State bank and the National bank are doing business in competition, each on a corner across from the other, but each making about the same profit and each aiding in the development of the commerce and meeting the requirements of the Nation. Why is it, gentlemen, that with all the power of the United States Govern ment behind the national-bank system it does not progress like the State system ? The answer is simple. It is because the laws of the States, as a general proposition, meet the needs of the Nation, as a whole, more than the national-banking system does to-day. The banking power of the United States, aggregating as it does $22,000,000,000, is only represented in the national system by a little over 36 per cent, and here you bring along a bill at this hour and say to men who in good faith have taken out a national-bank charter and who have gone through panics and carried the Government debt through two wars and developed your country, that you must sub scribe to this stock and yon must separate with one-half of your reserve money, and you will not have representation on this board, failing in which you drive them out of the national monetary system. 130 BANKING AND CURRENCY. You hear a great deal of discussion about the banks Df the older countries, and I was rather amused to find the impression prevailing here that the Bank of England would not permit a banker to be on its board. That is not true; that is not the fact. There is no rule against it, absolutely none. It is only an expression of different terms between that country and our country that has misled the gentlemen who make such statements and who are, I have no doubt, just as sincere as I am, and I have no doubt that they believed everything they said. A banker over there is termed a banker if he is in a joint-stock bank, or what we would call ordinarily a corporation, and financial houses, which are the greatest bankers of the world, and are not only per mitted to have members on the board, but have them, and not only that, but there is a representative of a foreign bank to-day on the Bank of England boara. Where is there a greater banking house in this country, with the ossible exception of Morgan & Co. and Kuhn-Loeb & Co., than ►aring Bros. ? Lord Revelstoke is a member of the Bank of England. Senator N e l s o n . And a member of this firm? Mr. W a d e . Yes, sir; and a member of this firm. Morgan & Grinnell, another great banking house there, has a member of the board. They are not banking houses; they are financial houses. This is just a confusion of names. Senator S h a f r o t h . Is not the distinction simply that no person connected with an institution that cashes a check or receives der posits can become a member of the board ? Mr. W a d e . N o , sir; that is a theory, Senator, and not a fa ct. Senator S h a f r o t h . What do you think about this statement of Mr. Bagehot-----Mr. W a d e . Who is Mr. Bagehot ? Senator S h a f r o t h . He is author of the work entitled “ Lombard Street.” Mr. W a d e . I can not vouch for Mr. Bagehot, but I can vouch for the membership of the Bank of England, and I give as my authority, and you will find it in the volume published by the monetary com mission in the interviews with the government of the Bank of Eng land. That is my authority. Senator H it c h c o c k . It is also stated in these interviews, as I recall them, that there is no requirement at all as to the qualifica tions of the governor of the Bank of England, except that he must be a citizen of England. Mr. W a d e . Certainly not; there is no requirement of the President of the United States, except that he be a citizen and worthy of the office. Senator R e e d . Yes; he must have been born in the country. Senator S h a f r o t h . I was about to read the statement made by ' Mr. Bagehot, which is as follows: g In London no banker has a chance of being bank (of England) director, or would ever think of attempting to be one. I am here speaking of bankers in an English sense (if those who accept deposits subject to check). * * * Not only no private banker is a director of the Bank of England, but no director of any joint-stock bank would be allowed to become such. Tne two situations would be taken to be incom patible. * * * The mass of the bank directors are merchants of experience, employing a considerable capital in trade in which they have been brought up, and with which they are well acquainted. * * * The direction of the Bank of BANKING AND CURRENCY. 131 England has for many generations been composed of such men. (Lombard Street, pp. 214, 216; ed. 1910. Same effect Senate Doc. 405, p. 10, by National Monetary Commission.) Is not that true ? Mr. W a d e . I can not, of course, take better authority for my statements than the Congressional Record, and I give you my authority in the volume of interviews between the Monetary Com mission and the government of the Bank of England and the Bank of France and the Bank of Germany. Senator N e l s o n . That is published in the reports of the Monetary Commission ? Mr. W a d e . Yes, sir. Again, if you are going to apply the English doctrine, we accept it with open arms, because they do not foist the bank stock of the Bank of England upon the banker. The C h a i r m a n . Mr. Wade, may I ask you a question right there? Mr. W a d e . Certainly. ^ ^ 'ken suggest that this stock be thrown Mr. W a d e . Absolutely so. Why should it not be? The C h a i r m a n . I wish to have your point of view. Mr. W a d e . Absolutely so; we do not want it. Senator N e l s o n . What the chairman means is to the public outside ? Mr. W a d e . Why, certainly; let them take the chance and we will subscribe to the doctrine. Senator, you never have yet heard a banker worthy of the name of such demand that he and the bankers of this country should have the stock of this bank. We don’t want control; we don’t want this stock; we don’t want to put our money in it. We can get 5 per cent, anyway, or 6 per cent anywhere. Senator P o m e r e n e . Did not one of the witnesses yesterday say that they did object, because the moment the public was permitted to have stock in these regional banks that they would immediately want the privilege of doing their banking with the regional bank ? Mr. W a d e . He might have said so, and I will go further and say that whenever this Government wants to start an independent bank and go into competition with its national banking system we will not put anything in their way. Destroy, if you will, the thousand millions of capital, the eight thousand million of assets in this insti tution by bringing in this plan; that we could not very seriously protest, because it might be regarded as a selfish protest. There is not a man in this commission, gentlemen, that has ever approached this proposition from any other than one standpoint, and that is of patriotism and American citizenship. There is not a suggestion that we have made— I challenge any man to point out one recommendation that we have made that is selfish, and for the particular direct benefit of the banker as against any other class of citizens. The C h a i r m a n . Do you suggest that opening these stocks to the general public would destroy a thousand millions of capital and eight hundred millions of investment ? Mr. W a d e . I do not suggest any such thing; I suggest that we have not the slightest obj tion to your selling this stock to whomsoever may buy it, and if you are going to follow the management of the Bank 132 BANKING AND CURRENCY. of England control theory, why not follow the bank note capitalization theory. Anyone can buy a share of stock in the Bank of England if they have the money. They can buy a share of stock in the Bank of France or the Bank of Germany if they have the money. These banks were not organized by a forced bill or by compulsion, or bv telling a lot of business men that you must either subscribe to this doctrine or get out of business. They were built along the lines of the ordinary business proposition. There are so many ways, gentlemen, that you could open up this bill and make it so attractive in its features that we would be glad to come in. That is the kind of bill that I want to see, not this bill, discarding all the banking experience of nations that have lived 1,000 years; discarding all the power of the great Bank of England, whose whole assets amount to only about $350,000,000; discarding a system that absolutely controls the finances of that nation, but of every other nation upon the habitable globe. Every cup of coffee you drink is bought in pounds sterling; every rope you import from Manila is imported in sterling, franc, or mark. In our own possessions, the Philippines and Porto Rico, with all of our pretended power, our system is so weak that the pound sterling stands where our dollar is practically unknown. That, gentlemen, is our mission; that is our purpose; we have traveled here to tell you that if you attempt to put a force bill through and then attempt to organize not less than 12 reserve banks with a capital of not less than $5,000,000 each, and confine the subscriptions to national banks alone, it is our judgment that you will not be successful. The C h a ir m a n . You think the capital ought to be lower? Mr. W a d e . N o . The C h a ir m a n . Y ou think the principal must be lower? Mr. W a d e . I do not think, Senator, but I am absolutely convinced that the number of banks must be less than 12 rather than more than 12. I am not going to advocate a central bank idea, and yet I do not care to be misunderstood. It is a sound, economic principle of banking. It is a system that should be inaugurated, but I realize that it is politically unwise not only under a Democratic administra tion but equally so under a Republican administration. Senator W e e k s . Y ou do not mean unwise, but you mean impos sible. Mr. W a d e . I mean politically unwise or politically inexpedient. Senator R e e d . Politically impossible could be taken as synony mous with political unwisdom. Mr. W a d e . I think you will all agree that if you were to go out into the hustings it would be accepted as such. Now, gentlemen, our mission is to point out to you the weaknesses in this bill as we see them. Having discharged that duty, we leave the case in your hands, but we believe that the stockholders of this corporation should have exactly the same rights as the stockholders of the corporation known as the United States of America. We believe that the stockholders of the national bank should have the same right that you would convey to any other private corporation and that is representation. Again, we meet a political situation, and we do not ask you to give us control. We do not want it; but we do recommend to you, and recommend in all sincerity, to provide in this bill that the several BANKING AND CURRENCY. 133 reserve banks, as they may be later constituted, may recommend to the President of the United States a list of eligible men to be on that board and let him then appoint them. We do not want to name them, but if we have five reserve banks, or three, we suggest that we name men whom we know from our practical business experience of years are capable of presiding over tne destiny of a great institution such as this is and let the Pesident, from that list, whether it be 5 or 50 names, make his own selection. I would like, gentlemen, to have you leave this bill as now framed, all of it, for a while. I would like to have you forget the national banking system for a while, and I would like to have you divert your attention to the great strength of the State banks and trust com panies that handle part of the commerce of the country. The other institutions build your railways and your waterways and your build ings and till your soil and develop your agricultural and your manufac turing resources. The whole theory of this bill is built upon the national system. There is a provision that the State banks and trust companies may come in under the rules that will hereafter be pre scribed. What these rules will be will depend entirely upon the character of the men of the Federal board of control. I can state that to these national bankers around here, men who have grown gray in the service, and when I tell them that we loan on real estate over the United States, from Florida to Seattle, they hold their hands in horror, and when I tell them those notes are as liquid as their assets, well, they are busy, and they do not have time to investigate, but, nevertheless, it is a fact. Mr. N e l s o n . They are more liquid than call loans on stock col lateral in case of a panic ? Mr. W a d e . We are loaning to-day in Seattle, in Portland, Oreg., all through Kansas, in Oklahoma, and in Texas. We have never had a default on one loan on real estate, and we are making loans to the extent of about $500,000 per month. We are just as important a factor as they are, and you must reckon with the State banks and trust companies in framing this bill if you want to get a homogeneous law, but if after inspection of your draft of the bill you are going to turn the crank and force national men in the system, or retire them from the system, we will have to go into it, and we will say: Let them try it if they choose, and we will follow if it is a success. Senator S h a f r o t h . Mr. Wade, a few moments ago you made the statement that members of banking houses were in reality members of the governing board of the Bank of England. I had occasion to look at a book entitled “ The Meaning of Money,” by Mr. Hartley Withers. There he says: When we come to consider the bank’s organization, its most striking features are the constitution of its court of directors, and its system of government by rotation, and these are points on which the bank’s critics have fastened with the keenest energy and determination. The bank court is a committee recruited chiefly from the ranks of the accepting houses and merchant firms, and its members are nominated by itself, subject to the purely formal confirmation of the shareholders; and it is an unwritten law that no banker in the ordinary sense of the word—that is, no one connected with what we call the check-paying banks—can be a member of it. At first sight this is one of those anomalous absurdities so common in England, and so puzzling to the intelligent foreigner, who can not understand why we suffer them. A court of directors ruling the Bank of England, and so performing most important 134 BACKING AND CUKKENCY. banking functions, and yet disqualifying for membership any one with an expert knowledge of banking, is a tempting subject for an epigrammatically minded satirist. But in fact this anomaly, like many of our others, not only works excellently well in practice, but is, when calmly considered, clearly based on sound common sense. For in the first place it would obviously be undesirable that a member of one of the outer ring of banks should have the insight into the position of his rivals which membership of the Bank of England court could give him, unless all the others were similarly privileged. But if all the outer banks were represented on the bank court, it would become a committee of unwieldy dimensions, perhaps reproducing or reflecting in the bank parlor the rivalries and jealousies that stimulate the outer banks to work against one another, but are not conducive to their working together. And the question of proportionate representation would be difficult to settle. As it is, the bank court, being free from connection with the outer banks except by keeping their balances, is able to watch their proceedings with a wholly impartial eye, and, on occasion, to make suggestions with salutary effect. Mr. W a d e . Let me show you the fallacy of that and how utterly impracticable it is from a practical point of view. Take Baring Bros.-----Senator H it c h c o c k . Mr. Sterling Baring is a member of the Bank of England, but he is not a member of the Bank of England Court. Mr. W a d e . Lord Revelstoke is; he is a member of Baring Bros., and in the directory of the Bank of England. Senator C r a w f o r d . Do they not have what they call discounting houses ? Mr. W a d e . I will explain that in a minute. Let me show you how impracticable, improper, and unjust that statement is. I give you the authority of your own Congress as against a writer of a book. Let us deal with Baring Bros. They handle millions and millions, hundreds of millions a year. Do they go down in their vault every time they make a transaction and pick up a bag of gold and say, “ Bill, here it is” ? When they get that money do they carry the money in a bag? No. They must have a checking system. They are bound to have a checking system. There are three distinct bank ing houses in the city of London— distinctive classes in their nature. There is the joint-stock bank-----Senator N e l s o n . Incorporated? Mr. W a d e . Incorporated; then there is the discounting house; and then there are the financial houses; and then there is a fourth, the accepting houses. The joint-stock banks accept and so do the financial houses and so do the accepting houses, ana the joint-stock banks will take the acceptance of another joint-stock banK, and the Bank of England will take the acceptance of any other joint-stock bank and discount the paper, and it is a totally different system from what we have here. But it is very near the ideal. Again, let me show you the fallacy of the fear of having a banker upon a board that would regulate the discount rate for this Nation. Are you going to select seven men who will be so simon-pure in thought and mind and heart, and who wil] at all times be so discreet and by some operation of an unknown law not be able to tell his friend, the banker, that the rate is going to be raised to-morrow? Is the Bank of England rate ever raised without consulting the directors ? Certainly. It is done time and time again by the action of the gov ernor alone without consulting the directors. Senator S h a f r o t h . But it is often done with the consent of the directors ? Mr. W a d e . Frequently it is done with the consent of the directors, but the governor initiates it. Again, the Bank of England will BANKING AND CURRENCY. 135 not allow the governor of the Bank of England to succeed himself longer than two years. The deputy governor goes up, and it is a great position of honor. To be a member of the BanK of England board is a passport throughout the world. Senator P o m e r e n e . Did I understand you to say a moment ago that you feared that this board of control or reserve board, if appointed, would let some of the bankers know what the rate of interest was going to be? Mr. W a d e . N o . I said this: That a member of that board was just as apt to do it as a banker member. Let me tell you, Senator. We have in our institutions here in the larger centers what are known as clearing-house examination committees, where we examine a com petitor. Senator P o m e r e n e . I just wanted to call your attention to this fact: You have suggested here that if there was a board appointed under this bill that it might leak and let the bankers know what the rate of interest was going to be to-morrow ? Mr. W a d e . No; I suggested that they could leak just the same, whether members of a bank board or not. Senator P o m e r e n e . Would they not be less likely to leak than if they were bankers named by banks ? Mr. W a d e . N o ; and if they did, it would not make the slightest difference. Let me tell you why. Those of us who are active in the banking business, and who do an international business, as many of us do, watch the report of the Bank of England with just as much care and avidity as we do the weekly statements of the Bank of New York, and we know whenever there is going to be a raise in the Bank of England rate or when there is likely to be one. We do not know specifically when the rate will be raised, but there is a danger point in that statement just the same as the danger signals are known in New York, St. Louis, or any other town, and we can tell when the rate must go up. Senator S h a f r o t h . 1 hold in my hand the answer of the gov ernor of the Bank of England and the interrogations of the monetary commission. Let me show you what he says here: Q. Is it customary to reelect directors at the expiration of their terms?—A. It is customary for directors to be reelected. Q. Is there any custom restricting the class from which the directors may be selected?—A. There is no legal restriction as to the class from which directors may be selected, except that they must be “ natural-born subjects of England, or natu ralized,” but in actual practice the selection is confined to those who are, or have been, members of mercantile or financial houses. Mr. W a d e . That is right. Senator S h a f r o t h (reading): Excluding bankers, brokers, bill discounters, or directors of other banks operating in the United Kingdom. Mr. W a d e . That is the point I made. I said so, but notwithstand ing the custom, they still have on the board a member of a bank recently elected. [Reads:] But in actual practice the selection is confined to those who are, or have been, mem bers of mercantile or financial houses. Do you know what a mercantile house is over there ? Senator H it c h c o c k . Read the next line. 136 Mr. BANKING AND CURRENCY. W ade. Certainly. [Readmg:] Excluding bankers, brokers, bill discounters, or directors of other banks operating in the United Kingdom. That has been the practice, but that is not the law. Now, then, financial houses are exactly the same as Morgan & Co., of New York, or Kuhn, Loeb & Co., of New York, the greatest banking houses in America, but we do not call them financial houses. Senator H it c h c o c k . The law of 1844, under which the Bank of England is now" operating, does provide a qualification; a member of the board must oe a natural citizen. Senator S h a f r o t h . That is a general qualification, but we were talking of the actual practice of the Bank of England. Senator N e l s o n . However that may be, that is not really material to our inquiry. Mr. W a d e . The same principle applies in France and in Germany. The stock is held by the people of the nation. The Bank of France has 40,000 stockholders. The C h a ir m a n . Who appoints the directors there? Mr. W a d e . The directors are selected by the stockholders. In France the directors are named by the stockholder and the governor named by the Piesident of the Republic. There are 3 men out of 18 named, by the governor and 15 selected by the stockholders. The C h a i r m a n . Who appoints the managers of the various branches of the Bank of France ? Mr. W a d e . The governor. The C h a ir m a n . What power have the regents ? Mr. W a d e . Absolute power. We have it here in this report of the monetary commission. The C h a i r m a n . Y ou might read it into the record. Mr. W a d e . It is a long story and it would take some time for me to get it from the report. Senator H it c h c o c k . I have a memorandum of the matter here: In the Bank of France there are 15 regents and 3 censors, who are elected by the 200 largest stockholders. They have control of the management of the bank, including the fixing of the interest rate. The President appoints the governor and the subgovernor. Mr. W a d e . The Bank of France is a private corporation with 40,000 shareholders. The governor and two deputy governors are named by the President of the Republic* 18 directors are elected by the shareholders; a majority vote controls the operation. That is on page 190 in this book. Senator C r a w f o r d . In all these banks— England, France, and Germany— the stock represents voluntary subscriptions ? Mr. W a d e . Absolutely so. Senator C r a w f o r d . And in the first and second banks of the United States the subscription of stock was practically voluntary, was it not— in the old first and second banks here in our own country ? Mr. W ade . Well, I am not that old. Senator C r a w f o r d . That is true as a matter of fact ? Mr. W a d e . That is true. Senator C r a w f o r d . D o you know of a case where they have ever made it a matter of coercion to furnish capital for a bank ? BANKING AND CURRENCY. 137 Mr. W a d e . Gentlemen, I do not know where there is a law on the statute books of any enlightened nation—I do not know of any law in any State of this Nation where by the operation of law they say: Separate from your money or we will destroy your business. Senator P o m e r e n e . They require you to keep a certain amount of reserves now. Mr. W a d e . That is right; but that is voluntary. Senator P o m e r e n e . That is prescribed by law. Mr. W a d e . That is true; but I knew the law when I entered into that system. That does not take my money away; it conserves it in my safe. The C h a i r m a n . Mr. Forgan— pardon me, Senator Eeed, have you finished ? Senator R e e d . I am more interested in the conditions here than I am in Europe, and I was going to inquire about them; but I will defer my questions, Mr. Chairman. The C h a i r m a n . I merely wanted to call attention to page 190, to which Mr. Wade referred, with regard to the powers of the sharehold ers of the Bank of France. The statement is made that these share holders meet on a Thursday in January of each year, when they are told about the business of the bank during the year and are called upon to elect and reelect the regents and censors. The three censors must be chosen from the industrial and commercial classes and the three regents must be chosen from the general paying shareholders. The regents meet once a week, and they decide upon the changes in the rate of discount, which is their most important duty, and that practi cally ends their management. The actual management is done by the managers, who are appointed by the Government. And the same thing is true of the Bank of Germany. Mr. W a d e . But if you will read on further, Mr. Chairman, you will find that the majority of the directors control. I did not want to go into that; but if you will continue, you will find that the majority of the directorate of the Bank of France control its entire action except in the election of the two governors and the two deputy governors and the managers of the branches. The C h a i r m a n . But every one of the 188 branches has its manager, and every one of them is appointed by the Government. I do not see how the Government could go much further. Senator R e e d . I was interested in your statement, Mr. Wade, that the State banks are, notwithstanding the prestige accompanying the name “ National,” able to rival the national banks; and the reason you gave was that the State laws were more advantageous— that is not your language, but I am trying to give merely its substance. Mr. W a d e . That is the essence of it. Senator R e e d . N o w , in what respect are the State laws more advantageous? Could you give it to us in a short, terse statement? Mr. W a d e . Let me first give you the advantages of the National banks over the State banks. First, they can issue circulating bank notes, which formerly could be done at a profit, but latterly— particu larly in the year 1913—has been done at a very heavy loss, Decause of the depreciation of the 2 per cent, the 3 per cent, and the 4 per cent Government bonds. So, therefore, that is a privilege supposed to be m advantage which has developed into a detriment. 138 BANKING AND CUBBENCY. Second, it may act as reserve agent for other national banks for the reserve funds of other national banks. In a reserve city they can act as reserve agents for country banks, and in central reserve cities the banks can act as reserve agents for country banks and for reserve banks. Strange as it may appear, that is not regarded as a great advantage, because the reserves of the country bank and of the reserve city bank are always at the lowest ebb when money is close and at the highest when money is cheap. And secondly, because if a reserve bank or a country bank keeps its reserve in a reserve city or a central reserve city, it is almost an unwritten law that the reserve bank or the central reserve bank must loan it money whenever it needs it. Senator N e l s o n . You mean loan its money to the depositing bank? Mr. W a d e . Loan its money to the depositing bank. In other words, the bank that will keep a deposit of $10,000 will ordinarily be entitled to a credit of $35,000 or $40,000, and so on, in that ratio. The third supposed advantage the national bank has over the State bank is that it is the depositary for Government money. But again, in the year 1913, that has proven to be unprofitable, because for 50 years it was the custom of the Government to deposit money in the national banks without interest, but secured by the Government bonds. Many banks bought bonds and secured Government de posits. Many of them paid as high as 105, 106, and 107 for a 2 per cent bond, because it was profitable to do it— because they paid no interest on the deposits. But when the interest of 2 per cent was required and demanded of the national bank for the Government deposits the profit was eliminated; and when the bonds fell down below par the banks have charged, or should charge, to profit and loss account the amount of the depreciation. Senator R e e d . Those are the advantages of the national banks ? Mr. W a d e . Those are the advantages of the national banks. Aside from that, there is a certain imaginary glamour in being national banks. There is nothing in that except sentiment. Senator R e e d . A s I understand you, all these advantages have become disadvantages, except the glamour. Is that what you mean ? Mr. W a d e . Practically all; and the glamour has no value. Now, the advantages that the State banks have over national banks: They can do all the business that a national bank can do, except those three items recited. In addition to that, they can loan on real estate. In many States they can buy stocks and bonds. In many States they can act in a fiduciary capacity. Senator R e e d . Yes; act in a fiduciary capacity. Senator N e l s o n . And the reserve requirements are not as strin gent? Mr. W a d e . And in many of the best States of the Union they have no requirement about reserve at all, except that which is relied upon in the intelligence of the manager of the bank. The C h a i b m a n . And they do use national-bank notes as reserves, do they not, in some States ? Mr. W a d e . They can use national-bank notes in reserve, which a national bank can not do. They can use any kind of money in BANKING AND CUBEENCY. 139 reserve, while a national bank is restricted to carrying its reserve in what is called “ lawful money.” Senator N e l s o n . Gold, silver, and greenbacks. Senator R e e d . N o w , does that make up the advantages of the State banks ? Mr. W a d e . N o . In speaking about State banks, I never forget about the words “ trust company.” Senator R e e d . Yes. Mr. W a d e . I always put them under the same category. Senator R e e d . It is the same thing, only a different name ? Mr. W a d e . They can act as trustees under a will, or as trustees under a mortgage. Mr. W e x l e e . And as executors of estates. Senator H it c h c o c k . Administer estates? Mr. W a d e . Administer estates. Mr. J o h n s t o n . Mr. Wade, I would like to ask you is not the trust company in the banking world what the department store is in the mercantile world— they can do almost anything? Mr. W a d e . Well, you can not get married by them. Senator R e e d . Well, does what you have recited embrace all the advantages ? Mr. W a d e . I can illustrate this better by describing the institution which I preside over, and giving you the various departments. Senator R e e d . Well, that is hardly necessary. Senator N e l s o n . That would give us a better idea. Senator R e e d . Then I should like to have it. Mr. F o e g a n . Y ou can get an almost interminable Iranchise. I have one in the State of Illinois for 999 years. Mr. W a d e . We have a bond department, where we buy and sell all classes of bonds. We have a real estate department, wherein we buy and sell all kinds of real estate on commission—never speculated on it. We have a real estate loaning department, where we can loan on any piece of real estate anywhere in the habitable globe. Senator N e l s o n . For any length of time ? Mr. W a d e . For any length of time. Senator W e e k s . Mr. Wade, before you leave that subject let me ask this: You do not loan funds on real estate that are subject to check, do you? You only loan deposits that are time deposits, do you not ? Mr. W a d e . Why, we loan our money. We do not make any distinction whatever; not the slightest. We have a trust depart ment, where we handle all sorts of estates. We have a corporation department, where we keep the records of all kinds of corporations who desire records kept. We have a safe deposit department* And all of those departments are profitable. We have a foreignexchange department. In other words, we can do in the trust company—which I am so anxious to get under this system— anything that the discount house of London can do. We can do anything that the joint-stock bank of London can do; we can do anything that the national bank of the United States of America can do (except the three items I have mentioned), and anything that the accepting houses of L o n d o n can do. 9328°— S. Doc. 232, 63-1— yoI 1------10 140 BANKING AND CURRENCY. Senator M cL e a n . Y ou have a savings department, have you? Mr. W a d e . We have a savings department, with forty-odd thou sand depositors. And, lastly, we nave a charter that runs for 50 years. Mr. J o h n s t o n . The charter of a trust company in Missouri permits also, if the officers desire to take it up, that they should have an insurance department, fire and life. Senator S h a f r o t h . Mr. Forgan made a startling statement just now, that he has a corporation that has a legal existence of 999 years— according to the laws of Illinois. Mr. F o r g a n . And which is protected by a constitutional require ment; and there is not a word in the banking law under which it was organized that can be changed so as to terminate it. Senator R e e d *. Mr. Chairman, I suggest that we will not get very far if we go on these side issues. If there is any other member of the committee who desires to question Mr. Wade now I will waive the privilege for the present. The C h a i r m a n . The Senator from Missouri will proceed. Senator W e e k s . Mr. Chairman, it is half past 5; the committee has been in session all day, and I think it would be well to adjourn at this time, although there are some matters I wanted to get Mr. Wade’s views upon. The C h a i r m a n . When would you be able to appear before the committee again, Mr. Wade? Mr. W a d e . I can be back here on Saturday. The C h a i r m a n . Then the committee will be glad to have you explain further at that time about State banks and trust companies. (Thereupon, at 5.30 o’clock p. m., the committee adjourned until to-morrow (Thursday) morning, at 10 o’clock.) T H U R S D A Y , SEPTEM BER 4, 1913. C o m m it t e e o n B a n k in g a n d C u r r e n c y , U n it e d S t a t e s S e n a t e , Washington, Z). C. The committee assembled at 10 o’clock a. m. Present: Senators Owen (chairman), Hitchcock, Reed, Pomerene, Shafroth, Hollis, Nelson, Bristow, Crawford, McLean and Weeks. Senator W e e k s . Mr. Chairman, I think I ought to say to the committee that I am going, at 11 o’clock, when the Senate convenes, to introduce a resolution instructing this committee to report on the bill which we have under consideration, the 2d of December next, at the convening of the regular session of Congress, and to make banking and currency legislation the unfinished business at that time. I assume that the committee will want to take a recess, as I am going to introduce the resolution at 11 o’clock. Senator R e e d . I would like to ask the Senator if he could not let that go until to-morrow. I have made a positive engagement which compels me to leave here at 12 o’clock, and if this resolution comes up at 11 o’clock, I could not be there until the debate was over; because it will undoubtedly, if it is debated to-day, involve some delay. BANKING AND CURRENCY. 141 Senator H it c h c o c k . It could hardly be debated to-day. Senator W e e k s . Of course, if an objection is made, it can not be debated to-day. Senator H it c h c o c k . I think that will naturally be the result. Senator R e e d . I know it would; hence I ask the Senator for an extension of time. Senator W e e k s . I would like to accommodate Senator Reed. Senator R e e d . Well, the Senator can then just have it put in, and to-morrow we can take it up. The C h a i r m a n . Will you give notice, then, to-day that you will introduce the resolution to-morrow ? Senator W e e k s . I will introduce it to-day and give notice that, under the rules, I assume it would come up for debate to-morrow. Senator N e l s o n . It can not come up to-day unless you secure unanimous consent. Senator W e e k s . I am perfectly willing to ask unanimous consent that it come up to-morrow. Senator H it c h c o c k . Y ou do not need to ask for unanimous con sent. You can ask that it lie on the table and come up to-morrow. The C h a i r m a n . Mr. Forgan, who is your next witness ? Mr. F o r g a n . Mr. Wade is still here. Mr. W a d e . Yes; Mr. Chairman, I have concluded that I had better stay here than to come back on Saturday. Senator R e e d . We are waiting for Mr. Wade to answer our ques tions, and Senator Hitchcock, I believe, has some questions he desires to ask now. FURTHER STATEMENT OF FESTUS J. WADE, OF ST. LOUIS, MO. Senator H it c h c o c k . Mr. Wade, you differ from your associate, Mr. Wexler, in that you favor the idea of having outside stockholders rather than having stockholders confined to the banks ? Mr. W a d e . Yes and no. I think it would be all right to confine it to the banks if you did not make it a compulsory measure. As I said in my remarks yesterday, banks have not the slightest objection to taking the stock, provided they are not forced to do so. But if you are going to make it compulsory, then I would rather see it thrown open to the public. Senator H it c h c o c k . I s that not a mere sentiment, the difference between being compulsory and voluntary ? Mr. W a d e . No; it is anything but a sentiment. It is my deliberate judgment, Senator, and I have given this matter a great deal of consideration, that unless you change the provisions of that bill in that respect you will not get enough stock subscribed by the banks of this country to make the reserve banks a success. Senator H it c h c o c k . N ow you are not referring to the involuntary clause. Mr. W a d e . W h a t is th at, sir ? Senator H it c h c o c k . Y ou are not confining yourself, now, to the question whether-----Mr. W a d e (interposing). I am confining'myself to the involuntary clause, because it is so inequitable, so undemocratic, so unjust, to demand that a bank shall subscribe to a doctrine or be forced out of business if it does not take stock, and if it subscribe to it that J42 BANKING AND CURRENCY. it shall have nothing to say as to the control of the institution which it founds with its money. Senator H it c h c o c k . Does it really make any difference whether they are required to do so or whether they do so voluntarily ? Mr. W a d e . Why, I think it makes all the difference in the world. It is the difference of being forced to do anything in a country that is supposed to be free. It is repugnant to the manhood of the Nation. Senator H it c h c o c k . Mr. Wade, under this bill as it stands now there is not a dollar of capital added to the banking capital of the United States. Mr. W a d e . N o ; admitted. There is $100,0 0 0 ,0 0 0 to the credit capital of the banks of the United States. You require us to take 10 per cent of the capital of our institution and separate our institution from that and take in lieu thereof certificates of stock in this reserve bank. You will increase the capitalization of the banks of the United States $100,000,000 or more by the operation of this bill. Senator H it c h c o c k . But it is a duplication of capital ? Mr. W a d e . True, it is a duplication— admitted. Senator H it c h c o c k . D o you recognize that there has been a grow ing disparity between the capital of the banks of the United States and their liabilities represented by the deposits; that is, that the capital has been growing smaller and smaller, while the deposits and obligations to their depositors have been growing larger and larger ? Mr. W a d e . I think, Senator, that probably you make the com monly accepted mistake, and that is that you look entirely at the national system, and you fail to look at the general system. Senator H it c h c o c k . I think the disparity is still greater if you take in the State system. Mr. W a d e . I think not. Senator H it c h c o c k . But confining ourselves to the national system, as the banks under that system are the only ones that would be under compulsion-----Mr. W a d e . Yes, sir. Senator H it c h c o c k (continuing). It is the fact that the margin of safety to the depositors has been growing smaller and smaller ? Mr. W a d e . That depends upon what you mean by “ safety.” Senator H it c h c o c k . Because the deposits have been increasing relatively to capital. Mr. W a d e . Well, it all depends on what you would call the “ margin of safety.” What would you term the “ margin of safety ” ? Capital, money, assets, or what ? Senator H it c h c o c k . I should call the margin of safety the capital invested and the liability of the stockholders. Mr. W a d e . I can not clearly understand what you call the margin of safety. The margin of safety, in my judgment, in any bank, is in the wisdom and the judgment on which its money is loaned, so as to keep it liquid, and so that it can always be cashed. Senator H it c h c o c k . Well, that is a matter that can not be pro vided by law. It is a sentiment too vague. But the specific and material thing that I am considering is the amount of money that the stockholders put into the business as compared to the volume of busi ness tho.t they do. Mr. W a d e . Oh, that is what you call the margin of safety, is it ? Senator H it c h c o c k . That is the margin of safety, in my opinion. BANKING AND CURRENCY. 143 Mr. W a d e . Well, that might have very little to do with it. You might have a bank— and I know of one, and administered on its ob sequies— having a capital of $3,000,000 and a surplus of $1,000,000, and a deposit account of $6,500,000— and it was rotten. Senator H it c h c o c k . Yes, I know, of course, that is quite possible with any concern. Mr. W a d e . And then, on the other hand, I know of hundreds of banks with a capital of $100,000 and deposits of $1,000,000, that are just as clean as one with a capital of $1,000,000 and deposits of $ 2 ,000 , 000 . Senator N e l s o n . Senator Hitchcock, I do not want to interrupt you, but I want to suggest that, in connection with this question* you ought to take into account, not only the capital, but the surplus of the bank, which is a part of the fund just as much as the original capital. Senator H it c h c o c k . No, I do not. The purpose for which they are raising their surplus and keeping down their capital is to avoid the personal obligation of the stockholders. There is no personal obligation of the stockholders on account of the surplus. Senator N e l s o n . But that is a part of the funds-----Senator H it c h c o c k (interposing). But there is no individual liability attached to it. Senator R e e d . When you get the 20 per cent, there is no liability on the stock, is there? The C h a i r m a n . There is a double liability. Senator H it c h c o c k . For every share of stock there is a double liability behind the stock; but there is no individual liability behind the surplus; it is only a pile of money. Mr. W a d e . Senator, I think you have the wrong idea as to that; I am quite sure you have. Take the institution I preside over, which is a trust company. We have no double liability, but we have a capital of $3,000,000, and a surplus of $6,700,000. Certainly we do not have that surplus in order to avoid liability. The surplus of a bank is created primarily to give it strength, and to enable it to stand any tide that may come along. Senator H it c h c o c k . Will you please explain why a surplus of $1)000,000 is any stronger for a bank than $1,000,000 of capital? Mr. W a d e . O l course, it is very simple. If I have a bank with $2,000,000 of capital, and no surplus, whether it be State or national, or a trust company— $2,000,000 capital, and no surplus, and I happen to lose $100,000, I am prohibited by law from continuing to do busi ness until I make my capital good. Senator H it c h c o c k . And your stockholders are required to do that? Mr. W a d e . Yes, sir. But if I have a bank, or a trust company, with a capital of $1,000,000 and a surplus of $2,000,000, and lose the whole $2,000,000 surplus, I could still continue to do business. Senator H it c h c o c k , And your stockholders are not required to put up one cent ? Mr. W a d e . No; my stockholders are not required to put up one cent. Senator H it c h c o c k . That is exactly my idea. Mr. W a d e . But the stockholder has already put up that surplus* 144 BANKING AND CURRENCY. Senator H it c h c o c k . Well, you have exactly set forth the point I raised, that there is no personal responsibility behind the surplus, but there is behind the capital. Mr. W a d e . N o . The stockholders have no double liability in our State, whether it be a trust company or a bank. Senator H it c h c o c k . I am talking about national banks. Mr. W a d e . I know; but there is where you gentlemen have lost sight of the most important factor of this whole proposition. You have seen the hole and not the doughnut. You have taken 36 per cent of the banking power of this Nation; the banking power that moves what is commonly known as the merchandise of the country, and the crops of the country; but you have failed to deal with those institutions that have built up this Nation through the operation of its real estate department, real estate loans, bond departments, with its ability to handle agricultural plants of all kinds, and to develop the whole manufacturing industry by the erection of manufactories and office buildings, ana eelemosynary institutions—which national banks do not do. Senator H it c h c o c k . Well, that is hardly in the line of my questions. I was proceeding to develop a certain line of thought. I wanted to ask whether you recognized the fact, in the first place, that, compared to the volume of liabSities, the capital of the national banks has been diminishing ? Mr. W a d e . First let me say that I have not looked at the statistics in a way to carry that in my mind. But you must, if you take that into consideration, include the surplus. Senator H it c h c o c k . Well, I am leaving the surplus aside for the present. Mr. W a d e . Well, but you must not do that, for that is capital, and you have to include the undivided profits. Senator H it c h c o c k . Well, for the purposes of my question, I am leaving it aside, and I have to ask you whether you think, as a banker, there should be any relation between the capital and the amount of liabilities ? Mr. W a d e . Well, yes; there should be; but I would not be pre pared to lay down the rules for it. As a general proposition-----Senator H it c h c o c k (interposing). Now, I want to ask you-----Mr. W a d e (interposing). Well, wait a minute. As a general proposition, I think when a bank’s liabilities exceed its capital and surplus and undivided profits 10 to 1, it has about reached the limit. Senator H it c h c o c k . Ten to one, you say ? Mr. W a d e . Yes. That is a purely personal opinion, however, without very much consideration. Senator H it c h c o c k . N o w , the capital of the national banks is something like $800,000,000, is it not ? Mr. W a d e . N o ; it is over $ 1 ,0 0 0 ,0 0 0 ,0 0 0 capital and abou t $ 8 0 0 ,0 0 0 ,0 0 0 surplus and undivided profits. Senator H it c h c o c k . Over $ 1 ,0 0 0 ,0 0 0 ,0 0 0 ? Mr. W a d e . And you must add the surplus and undivided profits. Senator H it c h c o c k . Well, I am confining myself to the capital. Do you consider that the withdrawal of over $100,000,000 from that $1,000,000,000 would tend to weaken the national banks of the United States ? BANKING AND CUKKENCY. 145 Mr. W a d e . No, sir; you would only in effect loan or invest about 5£ per cent of your capital, surplus, and undivided profits. Senator H it c h c o c k . You think it would not? Mr. W a d e . No, sir. Senator H it c h c o c k . Could you withdraw $200,000,000 without doing that ? Mr. W a d e . Yes, sir; but I do not see the necessity of it. Senator H it c h c o c k . Y ou think it would not weaken them to withdraw that amount ? Mr. W a d e . No. Senator H it c h c o c k . Can you withdraw $300,000,000 without weakening the national banks ? Mr. W a d e . If you withdrew it and kept it where it could be bor rowed again, it would not. Senator H it c h c o c k . Then, do you think that the national banks could reduce their capital without weakening themselves, as would appear from your statement ? Mr. W a d e . N o . Senator H it c h c o c k . Well, where would you draw the line ? Mr. W a d e . I do not know just where I would draw the line on that. I do not understand the theory of your questions. Probably if I did I could answer them. Senator H it c h c o c k . My theory is that in so far as this bill provides for the withdrawal of a large per cent of the independent banks of the United States it weakens them and injures the system ? Mr. W a d e . N o , sir; it does not. Senator H it c h c o c k . Well, that is m y line of reasoning. Mr. W a d e . So I understand; but your line of reasoning is erroneous. Senator H it c h c o c k . Well, now I want to ask you this: Is it not a fact that the banking institutions of Europe proceed upon the theory that the liability of the stockholders is an important consideration for a depositor ? Mr. W a d e . No; I do not think that is a fact. Senator H it c h c o c k . I s it not a fact that all the large banks o f Europe have a capital on which the stockholders have omy paid in a per cent of cash, and that they have a large liability, much more than twice as much as they have paid in ? Mr. W a d e . In some instances that is the case, and sometimes it is not. Senator H it c h c o c k . I s it not the general rule as to a great many of the incorporated banks of Great Britain and France? Mr. W a d e . Sometimes that is the case; but I think you are in error. Senator H it c h c o c k . That a large majority of the capital paid in, with a large majority of the stockholders' dues to the bank are held for that purpose ? Mr. W a d e . Oh, yes; that is the theory. It is like your presentnational banking system. If I were a stockholder in a British bank, or a national bank in this country, and I had any reason to think that it would fail, I would sell the stock to-morrow, and my liability would cease. Senator H it c h c o c k . No, it would not. Mr. W ade. W hy ? 146 BANKING AND CURRENCY. Senator H it c h c o c k . Because there is a period of time-----Mr. W a d e . Well, what is the period of time? Senator H it c h c o c k . It varies in different countries. Mr. W a d e . I mean in this country now. Senator H it c h c o c k . Well, in this bill, I believe it is to be made six months. Mr. W a d e . Yes; but I am talking of the law, as it is to-day. It is one of those fictitious-----Senator P o m e r e n e (interposing). Let me understand you, please; do you mean that in this country, by transferring your stock to another person you can avo^d liability during the time you were a stockholder ? Mr. W a d e . Absolutely, if I sell it in good faith. Senator H o l l is . Oh, no. Senator W e e k s . Then, the man who bought the stock takes the liability ? Senator R e e d . The provision of the statute is that the man who purchases the stock— I am not giving the exact language, but the same substance— takes it with all of its liabilities. Senator P o m e r e n e . Primarily that is true. Senator R e e d . And there is no provision in the statutes that I have seen— I may have overlooked it— that provides any holder of bank stock shall be liable for the debts which were accrued at the time he held it; and which continues that liability after he has pur chased the stock. If there is such a provision in the statutes, I have not seen it. Senator P o m e r e n e . Primarily, he is liable for those debts if the purchaser should be exhausted without the creditors being able to enforce the full stock liability. You can then go back on the original purchaser. Mr. W a d e . I think you are in error there, Senator. Senator P o m e r e n e . I am not in error. I have gone over that proposition in Ohio, and I know whereof I speak on that subject. Senator R e e d . D o y o u mean, Senator Pomerene, that if I own bank stock to-day and the bank has debts, and I transfer that stock in good faith— I am not talking about a fraudulent transfer; but I transfer it in good faith— but after I transfer it, I can still be held to a double liability? I do not think that is the law. Now, I grant y o u ------- Senator P o m e r e n e (interposing). You can be held, Senator Reed, for those liabilities which were incurred during the time you were a stockholder, provided the amount of the stock can not be realized out of the man to whom you sell it. Senator R e e d . Y ou say that the decisions of the courts are to that effect ? I have not seen those decisions. Mr. W e x l e r . Senator, that is a mistake. Senator P o m e r e n e . Well, I have gone through that in Ohio, and I know what I am talking about. Mr. W e x l e r . It is purely a question of good faith. If you can show, upon examination, that the transfer of the stock was made by the party with knowledge of the failing condition of the bank, and it was a subterfuge to avoid liability, you are entirely correct; but if the transfer was made in good faith, for valuable consideration, in the BANKING AND CURRENCY. 147 ordinary course of business, you can not recover from the seller of the stock. Senator P o m e r e n e . If your position is correct, the double liability means nothing, and the man who has knowledge of the bank’s failing condition can get rid of his stock by selling it to a mere dummy, and thereby escape liability. Mr. W a d e . That is not what I contend. I say if he sells the stock in good faith, the buyer and not the seller assumes the liability. Senator R e e d . I have not examined the statutes, but I think the rule is this, that if a man owns stock in a bank and transfers it in good faith, his liability ends when the transfer is made, and the liability of the purchaser for all the debts of the bank, to the extent of the amount of his stock, immediately attaches. But, of course, if a man, in order to avoid that liability, is guilty of fraud— that is to say, if his transfer is a mere subterfuge—he would not them escape, because fraud vitiates every kind of transaction. Now, that is the line, I think, that obtains, although I have never examined it. If the Senator from Ohio has examined it, I should take his exposition until I found something to the contrary. Senator P o m e r e n e . I will say that that has been the holding of the Ohio courts right along. I do not now have in mind any Federal decisions on the subject. I do not have m mind now that there is any distinction between the two. The national banking law was framed after the free banking act of Ohio. It was originally drafted by Secretary of the Treasury Salmon P . Chase. Senator H it c h c o c k . Mr. Wade, can you conceive of a division of the functions provided for in this bill—possibly a division of the functions provided for in this bill ? This bill provides, in a way, for the mobilization of the reserves of the country, and for discounting paper. It also provides for the issuance of additional currency. Do you think that those are necessarily, or should be necessarily, united ? Mr. W a d e . Would you kindly repeat that question, Senator? Senator H it c h c o c k . The bill provides substantially for two pro ceedings, the issuance of additional currency, either by the banks or by the Treasury, and it also provides for the mobilization of the reserves of the banks and for transacting business. What would be your opinion of the advisability of dividing these functions, by having the Treasury issue the additional currency and allowing the banking business of the country to continue very much as it is at the present time? Mr. W a d e . They could be divided, and it could be operated; but it-----Senator H it c h c o c k (interposing). But what is the country most in need of at the present time, additional currency or mobilization of the reserves ? Mr. W a d e . Just a minute, sir; let me answer, please. It could be divided, but it would be a fatal economic mistake to let the Govern ment issue the currency as governmental currency. We can not get away from that and be truthful and honest men in appearing before this committee. We must tell you that that is our unalterable judgment on the proposition. Senator H it c h c o c k . Will you please state why it would be a fatal mistake for the Government to issue the currency? 148 BANKING AND CURRENCY. Mr. W a d e . Simply because it puts the Government in debt just that much more than is necessary. If these banks that you are going to organize, called reserve banks—whether there be 1 or 10 or 50— are going to be solid institutions, are going to be properly managed by the Government board of control; are going to be properly supervised by the Comptroller of the Currency; and if you are going to carry a proper gold reserve against them, you need no Government guaranty of its notes; and therefore we come to you, not as bankers but as citizens in that respect, and state: Do not assume an obligation for the Government, when there is absolutely no necessity of doing so. Senator H it c h c o c k . Well, is it concern for the welfare of the Gov ernment that influences you ? Mr. W a d e . Absolutely so. Why, Senator, if you would stop to consider for a moment, you must realize that every banker wants on every note all the collateral and all the indorsements and all the security he can get as a strictly selfish, narrow, proposition. And we come to you absolutely in a patriotic way, and say to you: Do not put the credit of the Government behind these notes, because, first, it is entirely unnecessary, and, secondly, it may hurt and injure the future of the Repub lic. Senator H it c h c o c k . Well, the larger part of the currency of the United States is already Government paper. Mr. W a d e . Oh, no; a good substantial sum of it is; yes. Senator H i t c h c o c k . Let me interrogate you here: We have $346,000,000 of notes? Mr. W a d e . Yes; but you have $150,000,000 gold as a reserve to protect them. Senator H it c h c o c k . And nearly $1,000,000,000 of gold certifi cates ? Mr. W a d e . Those are only warehouse receipts. Senator H it c h c o c k . Well, it is Government paper? Mr. W a d e . N o . Senator H it c h c o c k . It is not banking paper? Mr. W a d e . It is not bank notes; no. Senator H it c h c o c k . N o ; it is Government paper; it has the cer tificate of the United States that gold is on deposit in the Treasury ? Mr. W a d e . Well, my dear sir, ii you will put gold behind these notes, you do not need any Government behind them. Senator H it c h c o c k . Well, there is no question that a gold certificate is a statement of the United States that gold is deposited in the TreasUIT - Mr. W a d e . It is purely a warehouse receipt; but we will admit it for the sake of argument. Senator H it c h c o c k . We have already arrived at the point where the larger part of the currency of the United States is Government paper and not banking paper. We only have $700,000,000 of banking currency outstanding. So that we have already passed the point you have described of having the Government issue currency. We differ from all the countries of the world in that respect. Mr. W a d e . Yes. But if we have made a mistake— not a mistake— one of the most brilliant achievements of statesmanship, the creation of the national banking system and issuing of national banking notes BANKING AND CURRENCY. 149 to bolster up the credit of this Nation in its hour of distress. But when we have issued a fictitious currency, putting one note based on the credit of a Government bond bearing a fictitious rate of interest; and when the reason of its existence is no longer necessary and when the Nation has power to get along without it, why, when we tell you, with just as mucn patriotism as any man can have, that it is a mistake to do it, do you want to insist, and to persist in continuing to do it ? Senator H it c h c o c k . Let me ask you another question. Suppose the banks were given the power to issue these notes, what volume of them would be issued ? Mr. W a d e .. The volume that would be absolutely controlled by the needs of commerce. Senator H it c h c o c k . Will you please make an estimate of the amount ? Mr. W a d e . It is impossible to make an estimate. First, Senator, let me tell you that there is every dollar of currency in existence in this Nation to-day that is necessary for the conduct of its business. Senator H i t c h c o c k . You would not be in favor of having any limit at all ? Mr. W a d e . Absolutelyno limit. Senator H it c h c o c k . Well, suppose for the sake of argument, we place the limit at $750,000,000, that would be actually issued, tempo rarily issued, at different times. Suppose, instead of having the banfis issue that currency, the Government undertook to provide United States notes, similar in all respects to the notes now outstand ing? Mr. W a d e . Greenbacks? Senator H it c h c o c k . Greenbacks; legal tender for all debts, public and private, good for bank reserves, primary money of the country. Mr. W a d e . Yes, sir. Senator H it c h c o c k . Suppose, against that, it issued bonds that might be necessary to provide the reserve of 33, 40, or 50 per cent— the bonds only to be issued when necessary to provide the reserve. Suppose, then, those notes of the Government, from time to time, were loaned out to the banks upon the deposit of adequate security in, say, 50 subtreasuries of the United States all over the country. The banks paying interest on those notes would provide a fund far more than would be necessary to pay the interest on the bonds already outstanding. We would then add to the actual money of the country— legal tender money, bank reserve money— whatever was taken out by the banks from time to time. Instead of adding a volume of credit to the currency of the country, we would add primary money, equal to gold money. Mr. W a d e . Your question is too long. I could not answer it that way. I suggest you separate it, as younave several separate proposi tions in your question. Senator H it c h c o c k . I will take it up separately, if you prefer. Mr. W a d e . I think you confuse six or seven different propositions. Senator H it c h c o c k . Would it be as difficult for the Government of the United States to provide a certain reserve against note issues as it would for the banks to do it ? Mr. W a d e . A s safe for the holders of the notes ? Senator H it c h c o c k . Would the notes be just as good with the United States behind them, with a 40 per cent reserve behind them, 150 BANKING AND CURRENCY. as they would be with the banks behind them with a 40 per cent reserve ? Mr. W a d e . Unquestionably. Senator H it c h c o c k . So that if we had a possible issue of $700,000,000 of notes we would have a possible issue of $280,000,000 in bonds ? Mr. W a d e . Yes; but if you call bonds adequate security for those notes-----Senator H it c h c o c k (interposing). No; I am not talking about them as security at all. Mr. W a d e . Why are you talking about the bonds, then ? Senator H it c h c o c k . We sell the bonds to secure the gold, and the gold is in the Treasury as the reserve of the notes. Mr. W a d e . Well, of course, if you are going to put the Nation in debt and fictitiously create a reserve, then you and I* on that proposi tion must part company, because there is no necessity of selling the bonds. Senator H it c h c o c k . The Government would be paying interest on $280,000,000 of bonds and receiving interest on possibly $750,000,000. Mr. W a d e . I do not care if they were receiving an interest on $750,000,000 or $11,000,000. Why put the Nation in debt? Why create an obligation which is totally unnecessary upon the Govern ment ? Senator H it c h c o c k . Let me ask you another question: Would it be desirable to do this—is there any more to be gained by having money for redemption, legal-tender money, over merely credit money ? Mr. W a d e . I do not know how you differentiate ? Senator H it c h c o c k . Let me ask you this: You propose, and this bill proposes, for credit money ? Mr. W a d e . Yes, sir. Senator H it c h c o c k . Tt is not legal tender ? M r. W a d e . N o . Senator H it c h c o c k . M r. W a d e . N o . Senator H it c h c o c k . Mr. W a d e . No. Senator H it c h c o c k . Mr. W a d e . N o . Senator H it c h c o c k . It is not reserve ? It is a debased money ? It is not equal to gold certificates ? It is not equal to the present notes of the United vStates ? Mr. W a d e . It is not debased. Senator H it c h c o c k . Anything is debased which is inferior. Mr. W a d e . No. Senator H it c h c o c k . Banks can not take it in their reserves ? Mr. W a d e . N o . S e n a to r H it c h c o c k . Y ou c o u ld n o t ten d er it in p a y m e n t fo r a d e b t------Mr. W a d e (interposing). Just a minute, please. National banks can not take it in reserve. State banks can; but the national bank that gets those notes can go to the reserve banks and get real money for it, in the form of gold. Senator H it c h c o c k . Why have this distinction between money in circulation and money in value ? BANKING AND CURRENCY. 151 Mr. W a d e . W h a t is th a t, sir? Senator H it c h c o c k . Let me put it this way: Do you conceive that there is no limit to the amount of credit money which you can inject into the currency of the country without injury? Mr. W a d e . No; I do not conceive any such thing. v Senator H i t c h c o c k . Well, you have said that you desired to have no Umit made at all upon the volume of these notes which the banks shall be allowed to issue ? Mr. W a d e . Yes. But will you stop there and let me qualify that, or let me explain what I mean when I say that ? Senator H i t c h c o c k . Yes. Mr. W a d e . In the first place, we recommend that against every note issued there shall be at least 40 per cent of a gold reserve for every $100 issued. Secondly, as additional security, there will be 100 per cent of com mercial paper, indorsed by a solvent bank supervised by the Govern ment, behind each note issued, which commercial paper shall not run longer than 90 days. Thirdly, we recommend that there be provision made for the con stant redemption of those notes, so that the minute there is no longer any necessity for their existence, automatically they will retire. I think, Senator, that where you make a mistake is this, that you probably may be theorizing that the banker, after this bill would go into effect, could step across the street and say: “ Give me $100,000, or $1,000,000,” according to the size of his bank, and could get it and make money out of it. Let us see what the operation would be. He would first have to go over there and take his bills receivable out of his portfolio that would be bearing the substantial rate of interest, with 4 per cent as a minimum. If the manager of the reserve bank thought the paper was good, he would let him have it, and the reserve bank would get the interest instead of the individual bank, and the banker would get currency for it or bank notes for it in exchange. Therefore, until' he used those bank notes he would constantly lose money on them, and, consequently, he would not go and take his bills receivable and give them to the man across the street in the reserve bank unless there was a necessity for it. Now, the check against what you have in mind and what you fear is that the moment the manager of the reserve bank found his reserve was getting too low for the number of notes that were going out he would raise his rate of discount until he got it so high that it would make it impossible for the bank to borrow money, and in that way he would automatically shut it off. That is what is done in England. The bank rate that you all hear about and you fear so much going up is only a standard. The banks of the British Empire, or the British nation, do not follow the Bank of England. Frequently you can borrow money at less than the Bank of England rates, and fre quently you have to pay more for it. Senator H it c h c o c k . Let me stop you there. It is a pretty well known fact, however, that either in France, in Germany, or in Eng land, when the note-issuing bank fixes a rate the other banks, although they may be fully as large and having larger deposits, are very quick: to take a hint from the note-issuing bank when they are lending money at a lower rate. I think that is generally con 152 BANKING AND CURRENCY. ceded. The issuing bank always has that power over the other banks, that they will come up to the rate of the note-issuing bank, because at times they have to go to the note-issuing bank to rediscount. And that is one of the powers that Senator Reed and I think a little dangerous in this country. It tends to centralization and tends to destroy; but I think possibly I am encroaching upon the subjects of the other gentlemen of your committee. Mr. W a d e . I am glad to explain whatever I can, although I want to confine myself to the one subject. Senator H it c h c o c k . I will ask you one other question: You are not only a State banker, but a national banker ? Mr. W a d e . Yes, sir. Senator H it c h c o c k . Suppose you come down to your national banks and find that you have $500,000 to pay out on a certain date, and you have available for that purpose $500,000 of bank notes, and you also have available for the purpose $500,000 of gold certifi cates, which would you pay out ? Mr. W a d e . Bank notes. Senator H it c h c o c k . So that you do make a distinction between the value of the different kinds of paper ? Mr. W a d e . Surely. Senator H it c h c o c k . Y ou know that your gold certificates and your Treasury notes and United States notes are more valuable than the bank notes? Mr. W a d e . No; wait a minute. Not now, because they pass current. But there is only one kind of money that is good under all con ditions and of every kind, and that is gold. Senator H i t c h c o c k . Well, you know very well that the banks in this country— national banks—which carry $900,000,000 in their vaults now as reserve, only count gold and gold certificates and United States notes, and therefore there is a high value placed on that class of paper ? Mr. W a d e . By la w . Senator H it c h c o c k . And yet you want to inject into the currency $500,000,000 or $1,000,000,000 of inferior currency, that can not be used for the purposes required by the national banks as a basis of credit, and can only be put out upon the people of the country ? Mr. W a d e . That, Senator, is your theory and not mine. Already there is a law in existence that would permit the issuance of $500,000,000 of the currency which you describe. It has been in existence for four or five years, and not a dollar touched. Senator H it c h c o c k . Yes; but this bill provides for the use of currency -which has no higher value. These notes to be issued are not legal tender. They are not good for bank reserves. Mr. W a d e . Neither are the-----Senator H it c h c o c k (interposing). And the notes you propose are of the same character as this $500,000,000 which you have stored up ? Mr. W a d e . No; that is not so, Senator H it c h c o c k . And, in conclusion, you think, then, that no care should be taken to protect the banking capital of the United States ? You think it would be proper to encroach upon it by with drawing from the independent banks a large portion of-----Mr. W a d e (interposing). That is your theory, Senator. I do not think that way at all. BANKING AND CURRENCY. 153 Senator H it c h c o c k . My theory is that it is one of the dangerous features of this bill. One of the dangerous features of your proposition is that you propose to take away from the independent banks a large proportion of the capital they use in business, to take it away from their control, when already their capital is inadequate, and they should be required to enlarge it. Mr. W a d e . Well, it is just because I think that your mind has been devoted to the upbuilding of the country more than it has specifically to the upbuilding of banking. If your mind had been devoted, as mine has, along that channel, we might think alike. You will not admit surplus; you will not admit undivided profits. I must, from my experience. I may be wrong, but I do not think so. You take into consideration only the national system. I point out to you the other systems, and they, as a whole, take care of the situation pretty well. I have not the slightest fear of any inflation from this note issue. If I had, I would be violently opposed to it. I have not the slightest fear that it will hurt the banks or the Nation one iota. To put up 10 per cent of their capital to create a great bank or system of banks— not the slightest. I have .a fear that they will not make as much money out of the investment of stock as they would if they handled it in the ordinary avenues of business, by the limitation you put upon it. Otherwise I have no fear; and I am quite certain it will pay 5 or 6 per cent. Senator R e e d . Mr. Chairman-----The C h a i r m a n . Just one moment, Senator Reed. Mr. Wade, obviously the suggestion is made that the amounts invested or proposed, to be invested by the member banks in capital stock of the Federal reserve banks would diminish their present outstanding capital. Would you understand it so ? M r. W a d e . Well, it would not diminish the capital in the sense of the paper capital. It would diminish the loanable funds of each banking mstitution to that extent only. It would not diminish the capital. The C h a i r m a n . Would it not in reality transfer a certain amount of bills receivable into Federal bank stock ? Mr. W a d e . A certain proportion only. The C h a i r m a n . Substantially it would be a transfer of credits from one form to the other, would it not ? Mr. W a d e . Yes, sir; absolutely. Mr. H it c h c o c k . Let me ask a question, before you pass that. Where would the bank secure this money? Would it secure it by calling the notes ? Mr. W a d e . It could secure it in two ways: By taking money out of its vaults or drawing upon its extra reserve with other banks or by selling its paper to these reserve banks. The banks must deal with the reserve bank and sell to it a part of their portfolio. Mr. F o r g a n . Mr. Chairman, could I put a word in at this point? The C h a i r m a n . Certainly, Mr. Forgan. Mr. F o r g a n . I think I can clear this up in a word. The invest ment of the national banks in the stock of the Federal reserve banks would be small, an ordinary daily transaction of loaning 10 per cent of their money— of their resources, rather—not loaning, but invest 154 BANKING AND CURRENCY. ing 10 per cent of their available resources; 10 per cent of their capi tal which they are now permitted by law to do to any individual who comes in— and which they are doing all the time. Take, for instance, my own bank-----Senator R e e d (interposing). You mean an amount equal to 10 per cent ? Mr. F o r g a n . Yes; an amount equal to 10 per cent of the capital. Take my own bank; we have $ 1 0 ,000,000 of capital; our subscrip tion to the Federal reserve bank would be $ 1 ,0 0 0 ,0 0 0 . Well, it is not an unprecedented thing for a man to appear at my counter or at my desk and tell me he wants to borrow $1 ,0 0 0 ,0 0 0 , and it is not an unusual thing for me to say “ All right, make your note/’ and I lend him the $1,000,000. It is an ordinary transaction. It does not en croach on my capital. It does not interfere with my capital. It simply is an investment of $1,000,000 in a specific line of investment, and in this case it would be in the stock of the Federal reserve bank. Senator H o l l is . Mr. Forgan, may I ask you a question? What assets have you available from which you can loan that $1,000,000 or buy $1,000,000 of bonds or other securities ? You must have a great many millions. You are not confined to your capital or surplus. Tell us what your resources are. Mr. F o r g a n . D o you mean what they consist of ? Senator H o l l is . Not what they consist of, but how much they are. Mr. F o r g a n . Our total resources ? Senator H o l l is . Yes. Mr. F o r g a n . Somewhere about $125,000,000. Senator H o l l is . Then that $1,000,000, in the case that you spoke of, would be one one-hundred-and-twenty-fifth of your funds available ? Mr. F o r g a n . Of our resources; yes, sir. Senator R e e d . Mr. Chairman, I have to leave in a moment. Mr. Wade is from my own State, and I desire to ask him some questions. The C h a ir m a n . Y ou may proceed, Senator Reed. Senator R e e d . I want to lay aside this bill entirely, Mr. Wade. I want to lay aside the national banking act entirely, except that we have got a condition here of banks now, State and National. I wish you would tell the committee what, in your judgment, would be a proper scheme of banking for the Government to install. Mr. W a d e . I s that all you want me to tell you? [Laughter.] Senator R e e d . Well, I think that is not a very long or hard ques tion to put to a banker. If you would ask me as a lawyer what kind of a scheme of law, omitting the details, we ought to adopt, I could answer. Mr. W a d e . Well, I could do the same thing, Senator, if I had your ability. But for me I would not presume to do so. Senator R e e d . Well, I do not think we need to pay each other any compliments. Mr. W a d e . But I would not presume to attempt to tell this com mittee, or the people of the United States, what kind of a bill should be drafted to meet the needs of the country, because that would be very presumptuous for me to do so. Senator R e e d . Mr. Wade, that is just what we are trying to do at this time; and so far as I am concerned I do not care anything about this bill any more than if it never had been written. When I get through listening to what I can listen to I will do the best I can BANKING AND CURRENCY. 155 to make up my mind as to whether it is a good bill or a bad bill or whether it needs to be changed or not; and I think that is very much the attitude of this committee. That is, we have got a bill here, and it comes from the House of Representatives, and there is some presumption that it is a wise bill because it does so come. But I do not believe that the committee are limiting themselves to just what is in this bill, or even to this scheme. Now, you gen tlemen who have studied banking all your lives must have an idea as to what you would regard as an ideal banking system for the country, and if I could get your ideas on this whole question I should like to do so. Mr. W a d e . Let me express these views as my personal views, and in no sense as a member of this commission. Senator R e e d . Well, I would rather have your personal views than as a member of the commission, anyhow. Mr. W a d e . Then, the first thing I would do under those conditions would be to continue your work of creating this reserve bank. Per sonally, I would have a central reserve bank with branches. But, recognizing that is politically impossible-----Senator R e e d (interposing). No; let us just leave the political questions out of it. Mr. W a d e . I can not, because it is a fact. Senator R e e d . I want to get Mr. Wade's viewpoint, I want to state to the committee, as to what would be the proper thing to do; and then I think I can form some opinion as to his other views. Senator H it c h c o c k . Yes; just as if he were preparing a banking scheme himself. Senator N e l s o n . Without regard to politics. Senator H it c h c o c k . That is, from the standpoint of the public. Mr. W a d e . From the standpoint of a citizen of the country and not the banker. First. A central bank with branches in the principal centers of the country. Second. A note issue entirely issued by that bank-and under the absolute control of the Government by your Federal board of control, with representation of the bank upon that board of conti ol. These notes to be issued not to be the obligation of the Government, but the obligation of the bank. Senator N e l s o n . To be redeemable in gold? Mr. W a d e . T o be redeemable in gold and under a requirement that for every note issued a gold reserve of 50 per cent be maintained against it, with the power vested in the central reserve board to increase or diminish temporarily that reserve in times of great finan cial distress, and that no note ever be issued except upon prime commercial paper of the commercial establishments of the Nation for 100 cents for every dollar issued, in addition to the 50 per cent gold reserve of the bank. I would then provide that the national banks, the State banks, and the trust companies all be permitted to do business with such bank, provided they became members of the central organization and pro vided they went under stringent governmental examination, super vision, and control. I would require the State bank, and the trust company, and the national bank, when they secured a note from the central bank to put up the same general class of paper. 9328°— S. Doc. 232, 63-1— vol 1------ 11 156 BANKING AND CURRENCY. Senator R e e d . Will the stenographer read that last statement of Mr. Wade's? (Here the stenographer read the last preceding statement of Mr. Wade, as follows:) I would then provide that the national banks, the State banks, and the trust com panies all be permitted to do business in this bank, provided they became members of the central organization and provided they went under stringent governmental examination, supervision, and control. I would require the State bank, and the trust company, and the national bank when they secured a note from the central bank to put up the same general class of paper. Mr. W a d e . I would immediately proceed to refund the bondsecured currency of this Nation, by the retirement of all the bonds securing currency. Then, to relieve the commerce of the Nation of the great fixed charge upon it, I would require the central bank and its branches to collect what we call in the banking business “ transit” items or checks. Senator R e e d . Not checks? Mr. W a d e . Transit items are checks or drafts drawn on different banks throughout the United States, at cost to the central bank, without any cost to the member banks. I would not expect the country banks or the collecting banks that collected these items to do it for nothing. I would expect to compensate them the same as they are to-day. I would deposit all the money of the Nation— of the Government, except till money— in the central reserve bank, and I would require the central reserve bank to act as fiscal and financial agent of the Government under supervision and control of the Government, to finance it in times of distress and necessity. Senator R e e d . Had you concluded, Mr. Wade? Mr. W a d e . If these suggestions were adopted into law, I believe (and it is my personal opinion that I am always expressing) that you Would create a homogeneous banking system that would bring in, in my judgment, 15,000 or more banks into the general system, under general supervision, and controlled under the examination of a gen eral department, and then have the greatest banking system on the inhabitable globe. I would permit that bank to buy and sell foreign bills of exchange in order that its gold reserve might be at all times protected. I would authorize it to make a rate of interest— a general rate of interest, a standard rate of interest, for the whole country each time the rate was made, and to be published weekly and changed at the will of the Federal board of control. Confine absolutely the business of such bank in its dealings with the Government and the National and State banks and trust companies. Inasmuch as the central-bank idea can not, in my judgment, become a law under existing political conditions, then I would build a structure on the order of your reserve banks, but instead of attempt ing to try not less than 12, I would confine 't as a maximum to 5, and it is so much easier to accomplish the des'red results by attempt ing to create 5 reserve banks than it would be more than that. Then, after practical experience, if it was demonstrated that more than 5 was beneficial to the Nation, then I would recommend that the laws be changed and the system be extended. BANKING AND CURRENCY, 157 Senator H o l l is . Would it interrupt you if I asked you a question? Mr. W a d e . No, indeed. Senator H o l l is . Why do you select arbitrarily the number five ? Mr. W a d e . Because that is the greatest number that I hope y o u gentlemen will be induced to go to. Senator R e e d . You mean that you hope we will not establish more than five banks ? Mr. W a d e . That you will not establish more than five banks. Senator R e e d . And you would like to see us only establish one! Mr. W a d e . Yes, sir. S en a tor R e e d . N ow w e h a v e g o t it. Mr. W a d e . Then, the reason for that is this: If you had all of the surplus reserve money of this Nation under one general control, a3 it was aptly put yesterday, when a draft was made upon it, the reserve would be attacked only in one place, but as you divide your strength into parts, the greater the division the weaker the institu tion, because men are the same the world over, and the reserve bank of California is going to try to outdo the reserve bank of New York or of St. Louis or Chicago or New Orleans or wherever they may be located. Then I would not, under any circumstances, put in a clause giving a Federal reserve board the mandatory right to force the bank of California to discount for the bank of New York, or vice versa. I would leave that to the judgment and the experience and the ability of the men on the board of control of each of those different banks. There would be no object on the part of the bank of California in keeping money idle if it could loan it to New York, or vice versa. There never has been a time, gentlemen, when the legitimate bor rower could not get all the money he needed for his legitimate business in this Nation, if his borrowing were in accordance with the credit that he had to offer. Senator R e e d . Mr. Wade, you have answered my question and are now going beyond it. Your statements are very interesting. Hav ing asked that question, I wanted to ask you about one or two other things. You stated yesterday that the committee had overlooked or, at least, that the fact was being overlooked, that the notes and securities taken by your trust company and other similar institutions were, in fact, more liquid than the notes or securities taken by na tional banks, and, since you are here as the special representative of State banks and trust companies, I wish you would make that state ment a little more detailed. Mr. W a d e . Y ou , I think, Senator, misunderstood the purport o f my remarks. They were about as follows: I will try to repeat them. Senator R e e d . I do not care if you said it; if it did not express your opinion, I want to get your statement now. I am not trying to tangle the witness. I am trying to elucidate a fact. Mr. W a d e . I simply think you misunderstood me, and I believe I can explain why it would be natural that you would misunderstand. I said that in our institution, as we loaned money on real estate from Maine to California, and under our system, that our real estate notes were as liquid to us as the average commercial paper in the average national bank. Senator R e e d . N o w , why? 158 BANKING AND CURRENCY. . Mr. W a d e . Because we have a little different system from any other institution in the United States. 5 S e n a to r R e e d . H ow d o y o u m a k e th em liq u id ? is w h a t I w a n t to g e t a t. Mr. W a d e . I am going to explain that to you. When we make a loan on real estate, we make notes in units of $500 regardless of what the loan may be— $5,000 or $500,000. It is divided up into units of $500. Those notes, through a system that we have built tip, can be disposed of as readily as we can make the loans, not only in times of redundancy but even times of a panic. Senator R e e d . Will you tell me how? Mr. W a d e . I am going to. We take them, and we advertise those notes throughout the United States, and we deal with the masses of the people. The average sale of notes that we make would not exceed $1,000, and the great bulk of them are $500 notes, and the masses of the people buy those notes. We never sell anything to an insurance company; we never sell anything to Wall Street in New York or to Chicago banks or trust companies. We retail them di rectly to the people, and when money oecomes tight we then offer our higher interest rate of notes for sale, and when money is re dundant we offer the lower rate. Senator H it c h c o c k . D o you indorse them ? Mr. W a d e . N o , sir; we never indorse a guaranty note. Let me give you a practical illustration. Money was quite close all of the last six months. We found that our usual sales were not continuing. We had been advertising 5 per cent paper. We then advertised oiir 6 per cent paper, and we doubled and trebled our sales on a tight money market. During the panicky condition, a condition when fear runs throughout the land, the small depositor draws his money, and then his mind, if it is properly prepared by the usual advertisement, is directed into the purchase of these notes, and he buys them. Senator R e e d . In a word, Mr. Wade, the way you operate is this: I have $1,000 and I would like to invest in a note. You have estab lished the reputation and credit as a safe investment that the loans that you make on real estate are safe. I have got the faith credit of your institution, although you do not actually indorse, and the benefit of your examinations of titles and of values, and I simply go down to you and buy two of these $500 notes and put them in my pocket. I feel secure, because I have got real estate back of me. That is the situation ? Mr. W a d e . Yes. Senator R e e d . And you make these notes liquid by putting them upon the market and selling them to people, and you say that even in panicky times people will invest in that kind of security in pref erence to taking tneir money home and putting it in stockings or in bedtickings ? Mr. W a d e . Yes. Senator R e e d . That leads me to a question, because of this thought: Why is it that real estate securities, which are generally regarded as the most staple in the world, when properly made, can not be used by national banks, and what reason is there for any restriction upon the rights of the national bank to loan its money upon real estate security if it wants to ? BANKING AND CURRENCY. 159 Mr. W a d e . The national bank was primarily organized and is still recognized as being purely a commercial bank. Senator R e e d . 1 will now have to leave the room for iust a moment. Senator N e l s o n . During your absence I would like to ask a question. Senator R e e d . If you ask a question I would like to hear it. Senator N e l s o n . I will just state the question and Mr. Wade can be deliberating upon it until you return, and then he may answer it. Mr. Wade, you say national banks were primarily organized for com-* mercial purposes. Do you not think they have deviated from that course in investing a lot of their money on call loans or stock col-* laterals, and that is not commercial business, or stock exchange loans, I might call it ? (Senator Reed here left the room.) Senator H o l l i s . Would your banking laws permit you to indorse these notes that you sell to the mass of the people ? Mr. W a d e . Yes, sir. Senator H o l l is . Your laws permit you to do most anything you want. Is it left to your discretion ? Mr. W a d e . The national banks are permitted to indorse notes they sell. Senator H o l l i s . The notes that you sell ? Mr. W a d e . Yes—no; not rea1 estate notes. Mr. W e x l e r . I think that Mr. Wade’s institution stands in rather a peculiar position in regard to real estate loans and differs materially from the great number of trust companies throughout the country, in this fact, that a large portion of tne loans of Mr. Wade’s bank— and I do not say this in disparagement of his bank nor of the character of its loans— his institution loans largely to eleemosynary institu tions, largely Catholic institutions, throughout the United States, a particular branch of business to which he has given his personal attention, and which he has worked up very successfully. He, in turn, divides these loans into small amounts and sells them to mem bers of the Catholic church, of which he has a very large clientele, and to Catholic institutions which have reserve funds to invest in securities of that kind. I do not know of any other trust company throughout the United States— there may be one or two— which engage in a similar line of business on an extensive scale, but trust companies throughout the country otherwise accommodate a certain amount of real estate bor rowers by loans upon real estate, proportionate to the amount of fixed deposits not subject to check and deposits on time, which they feel it is safe for them to lend out on unliquid security such as a real estate loan. If that idea is thoroughly established in your minds as the general practice of trust companies without taking a particular case as an indication of a general practice, or what might be done by trust com panies, I think you will more clearly have in your mind the duties and functions that a trust company can perform with perfect safety in proportion to its deposits. I merely make that explanation, because 1 feel that Mr. Wade’s institution is loaning to a great extent in a particular branch of this business peculiar to itself. Mr. W a d e . I am very much obliged to you for explaining my line of business. 160 BANKING AND CURRENCY. Senator R e e d . I think we ought to proceed with Mr. Wade. I want to get the views of each of these men. When Mr. Wade gets through, if somebody else wants to take the other side of the ques tion, I would be glad to hear them then. Mr. W a d e . Senator, I would like to have the privilege of answering Mr. Wexler. Senator R e e d . I did not hear what he said. Mr. W a d e . I am very much obliged to Mr. Wexler for making an explanation of my business and advertising it so well, but if he would confine himself to facts, which I am sure he would if he understood, then it would be more interesting. The facts are that we have loans on a few Jewish synagogues. ^Laughter.] Mr. W e x l e r . That would not be a contradiction of what I said, You might sell them to your Jewish clientelle. Mr. W a d e . We have loans on the edifices of practically every de nomination extant. We have loans on Baptist churches and Meth odist churches and hospitals. Senator N e l s o n . Any on Lutheran churches ? Mr. W a d e . On Lutheran churches; yes, sir. We even take the Presbyterian in purely as a philanthropic idea. Mr. FdRGAN. It is the surest you have got. [Laughter.] Mr. W a d e . Then we have the business buildings scattered all over the United States, and our clientelle are the people of the United States and is not confined to any class or creed, color or nationality. Senator P o m e r e n e . But the class that have the money? Mr. W a d e . Yes, sir; Mr. Cash. I distinctly said, however, that it was the institution over which I presided that I was describing and not trust companies in general. Senator N e l s o n . That is general. Mr. W a d e . I do not think there is any deviation there. Senator N e l s o n . Y ou think that is commercially different? Mr. W a d e . I rather think so. I think if you loan on the collateral ©f stocks or bonds of a manufacturing industry, or an irrigation plant, or a railroad, or the stock of a commercial establishment itself, that is certainly aiding commerce in the country to be making such loans. I can not see the differentiation between the loaning to Marshall Field & Co. on its notes—if they borrowed, which they do not, I understand— and loaning to the Chicago & Northwestern Railway, which developed Marshall Field’s business. It is all the commerce 01 the country. Senator R e e d . Mr. Wade, you are getting away a little from what I had in mind. At the present time the law prohibits the national bank from loaning money upon real estate; that is to say, it can loan m^ individually $1,000 upon my note, back of which it has nothing but mv general credit and whatever honoi or ability I might possess; but ii I was to give it a mortgage on a piece of property worth $100,000, it can not take the loan. Now, I want to know, whether in your opinion, such a restriction as that is necessary ? Mr. W a d e . I thmk it is, Senator. If you are going to continue the operation of your national banking system, as it has been operated in the past 50 years. Senator R e e d . I am speaking about a proper national banking system. BANKING AND CURRENCY. 161 Mr. W a d e . Yes. If you are going to have different classes of banks— that is, the commercial bank and the trust company and the State banks and the savings-----Senator R e e d . D o you want them all brought in together, Mr, Wade? Mr. W a d e . Yes, but I will explain that. The national bank is what is primarily known as a commercial bank. The national bank is pri marily known as a commercial bank, as a general proposition. They loan on what is known as “ commercial” paper generally and on col lateral security, which moves the commerce of the country in one form or another, whether it be on railroad stock, or whether it be used in shipping cotton, wheat, or corn from the centers of growth to the centers of consumption; and to throw the door open to them to loan on real estate generally, without limitation, I thmk would be a mis take. Senator R e e d . Because of the class of security, Mr. Wade? Mr. W a d e . N o . Senator R e e d . But of because of the length of the loan ? Mr. W a d e . Because of the class of security, unless they had an avenue for the rapid disposition of it they would not have sufficient money to move tne commerce of the country, and therefore the wellregulated national bank endeavors in all accomodations to confine its loans to the length of time, as a maximum, to six months. Senator R e e d . That is a little different question. That goes to the question of the length of time of the loan. I attempted to go to the question of the amount of loans under certain conditions. I am talk ing about the principle, whether banks should be absolutely barred from taking real estate security. I understand you do this right along in national banks. I go down and I want to borrow some money. They say, “ Well, we need some collateral.” I say, “ I have a mort gage on John Smith’s home. I will put that up as collateral.” And then I get my money. Of course, that is a mere matter of circum locution. The result is exactly the same ? Mr. W a d e . Yes. Senator R e e d . And yet it is done every day in national banks, is it not ? Mr. W a d e . Yes. In the first place, there is nothing prohibitory in the national banking law that I could find against loaning on real estate. It is a practice and it is a ruling of the department against ifr; not a specific law. Senator R e e d . R u lin g of the department ? Mr. W a d e . A ruling of the department against it. Mr. F o r g a n . There are decisions of the courts against it. Mr. W a d e . There maybe decisions; I am talking about the statute. Senator P o m e r e n e . Regulations of the Comptroller of the Cur rency ? Mr. F o r g a n . Confirmed by decisions of the court. Senator P o m e r e n e . I knew that was the rule. Senator R e e d . The act itself excludes it, in this way, under the rule or expression of one power or the expressions of the number of powers to exclude powers, and here is the language: “ To exercise by its board of directors/’ etc. “ By loaning money on personal secur ity.” 162 BANKING AND CURRENCY. Mr. F o r g a n . The courts have decided in accordance with your ideas. Senator R e e d . I think so. I am very much in earnest about this matter, as a broad proposition, because the principle, if it is sound, might go into this bill, or it ought to go into some bill; if it is unsound it ought not; and, in view of your statement that you had so readily handled and made flexible these real-estate loans, and in view of the further statement that you thought this bill ought to be so drawn as to invite in and induce to come in the State banks and trust companies which do this kind of business we are talking about, namely, loans, largely upon real estate, I want to know now just what your views would, be about how that class of business should be handled by national banks, when under this bill or any other bill. Mr. W a d e . First, Senator, I do not believe that the bill as it is now framed, with a few amendments— by adding the words “ trust companies ” or “ member banks,” would interfere with my business one iota. I would still conduct my general business on the same lines that I am conducting it to-day, but if* I wanted to discount and if I wanted to acquire any of the notes of these reserve banks, then I ought to be required to put up the same class of security as the national banks, to wit, commercial paper. And again, I want you to thoroughly understand the statement made by me in your absence that our institution in handling loans in the way we do is an exception. It is not the rule of trust com panies. I was stating a personal experience rather than a general proposition; in fact, ours is the great, exception. Senator R e e d . But you find it is successful ? Mr. W a d e . Yes; but I would not advocate that the door be thrown open to national banks for the loaning on real estate without limita tion, but I would put this limitation on it, that a national bank might loan a certain percentage of its capital or its deposits-----Senator N e l s o n . Time deposits ? Mr. W a d e . N o ; deposits to a certain percentage of its capital, or its deposits might be invested in real estate owned or upon real estate loans. The reason for that is this, that under the national banking act, while it is against the ruling of the department, and Mr. Forgan says the decisions of the courts are against the loaning on real estate, they may own their own building and their own office. That has been carried to such an extent, I think the records of the comptroller’s office will show, that about 20 per cent of the capital of national banks is invested in real estate,* and I maintain there should be a limitation there, and I further maintain that if I am permitted to invest 20 per cent of my capital in a building—call it what you may— that my neighbor across the street in the national banking business should be permitted to invest the same percentage in good, clean, real estate loans. Mr. W e x l e r . Suppose you invest your surplus ? Mr. W a d e . I do not care what the percentage may be, whether it be surplus or capital, whatever you would call it, 1 maintain that $1,000,000 invested in 100 loans of $10,000 each are infinitely more liquid as an asset than $1,000,000 invested in a palatial office build ing. Therefore, I would permit the national banks to loan a per centage of their capital or their deposits or own real estate, but I BANKING AND CURRENCY. i6 a would not let it be both; in other words, when they get up to that percentage I would cut it out. Senator R e e d . Whenever they get to a ceitain percentage in real estate loans or in buildings, then they would have used up that privilege. Mr. W a d e . That privilege, yes. Senator P o m e r e n e . Did Mr. Wade indicate the per cent? Mr. W a d e . N o , Senator, I did not, because I have not given the matter consideration. I am answering these questions without any deliberation. Senator W e e k s . I want to ask Mr. Wade one or two questions upon this particular subject, but I think perhaps as long as you are questioning him I had better defer. Senator R e e d . I have to leave here in about 10 minutes, and would like to take up just one other matter. ‘Otherwise, I would yield in a moment. Mr. Wade, your proposition is that we should still have the national banks go on— I am taking up another subject now, and we will make this bill so that State banks and trust companies can come in by simply saying they may come in. Then, that would let the State bank go on and do business as it is now, and the trust company go on and do business as it is now, and the national bank would go on and do business substantially as it does now. Then we would have under one system three classes of banks, would we not? Mr. W a d e . Yes. Senator R e e d . And then we would have two of those banks, to wit, the State banks and trust companies— concerns with as many dif ferent powers as there are variations in State laws. So that you would have this sort of a system: First, the national banks, with cer tain prescribed and limited powers; second, a trust company in the State of Missouri with very broad powers; third, a trust company in the State of Illinois with larger ana different powers, and now I want to extend that— you can extend it to every State, as you might have 48 classes of trust companies, because they would be companies with 48 different sets of power, and they have 48 systems of State banks, with 48 different sets of power, and all these elements are to be con solidated into a bill, and all of them become a part of a system. I want to ask you if that is not liable to introduce a great deal of confusion. Mr. W a d e . Not the slightest, Senator. If you will follow the doc trine that I laid down, first, that the trust company and the State bank must put up the same amount of percentage on its capital that national banks do, as a contribution to the organization of the general bank or the reserve bank or five reserve banks that I have spoken of. They invest their money just the same as national banks, though they have no privilege of getting any of the benefits of the reserve banks over that that the national bank would have, namely, that if they require bank notes to meet the requirements of their business, they then have to be doing a commercial business, which woud be a branch of the trust company’s business and a branch of the business of the State bank, and they would have to bring up the same general class of commercial notes that the national banks would have ta bring up. Therefore, the national bank would be at no disadvantage under tnose conditions, because the national bank could not bring up 164 BANKING AND CURRENCY. its office building and say, “ Loan me $1,000,000 on this,” no more than the trust company could come up and say, “ Loan me a million dollars on my real estate notes.” Senator R e e d . I understand your point. I want to follow that central bank stock further. When the First National Bank of Kansas City comes to the central bank with its commercial note and wants to borrow $5,000,000, of course primarily the question is, Are these securities good ? Mr. W a d e . Yes. Senator R e e d . And to a large extent you depend, as the man ager now, of the central reserve bank or the regional reserve bank, upon that, but you require the First National Bank to indorse, do you not ? Mr. W a d e . Yes. Senator R e e d . And also to a large extent, knowing that bank to be a good, sound bank, you take that indorsement as of considerable value, would you not ? Mr. W a d e . Yes, sir* Senator R e e d . And that is because you know Mr. Sweeny; you know the kind of a banker he is; you know generally about his in stitution and because, too, it is examined and run under a certain system. I think we agree that far. Up comes the president of the trust company. He is loaning his money in an entirely different way. He is not subject to the same examination? Mr. W a d e . He would be under my recommendation. Senator R e e d . He might be subject to the same examination under your recommendation, but under the law of that State where he operates— it may be a very loose law—he may be perfectly within his legal rights and yet be doing a business not anything like as safe as the First National Bank of Kansas City. Mr. W a d e . Then the Comptroller of the Currency and the manager of the bank would decline to loan him the money. Senator R e e d . Even though his securities were good ? Mr. W a d e . Absolutely so. Senator R e e d . In other words, he would require that the State bank and the trust company, no matter what the laws were of their State, should conform to such regulations and be subjected to such examinations as to insure the stability of the institution as an indorser ? Mr. W a d e . Absolutely. Senator R e e d . Otherwise you would decline ? Mr. W a d e . To admit them to membership. Senator R e e d . That, put into effect, would mean this in its prac tical operation, would it not: That the State bank and the trust com pany would be practically wiped out as they now exist and would nave to transform themselves all into a system that would conform to the ruling of the Federal authorities and the managers of the regional banks ? Mr. W a d e . Not at all, Senator. You have got the wrong con struction of the whole proposition. Senator R e e d . Unfortunately, I probably have. You put me right. Mr. W a d e . It is not surprising, because you are not coming in con tact with this business as I am each day. BANKING AND CURRENCY. 165 Senator R e e d . I am trying to get at this: This is a matter of whether it would not compel them to come to one class ? Mr. W a d e . No. Let me give you a concrete illustration of how that can be operated in the most practical way. Chicago some years ago inaugurated what was known as a “ clearing-house examination/1 and they joined together at the expense of each other and yielded to private examinations of the members of the clearing house. In the clearing house of Chicago, as in St. Louis and New York, there are State banks and there are trust companies and there are national banks as active members. They also go under exactly the same examination. They are all subjected to exactly the same rules, and their assets must be clean or they are put out of the clearing house, because we do not want to be in partnership with the loose banker that we are afraid of. Senator O' G o r m a n . What happens to them when they are put out of the clearing house? Mr. W a d e . Well, I have never known, Senator, when one was put out of the clearing house since this system was inaugurated, because when a National bank and a State bank or a trust company can not stand the test of a rigid examination there is something radically wrong with it, and it is because of its inherent financial weakness that they will object to it; but I have never known of a case of where any of them were put out. It operates in this way: There are a com mittee of five usually that go over these examinations. If a bank is checked out by the clearing-house examiners as being clean O. K., that examination is filed away and the committee never sees it, and it has nothing to do with it; but if the examination finds bad banking practices, loose methods, or bad loans in the bank it is then reported to the committee, and that report is then taken up, analyzed, gone into, and detailed examinations of the criticisms made, and if they concur in the view of the examiner, he files his report as he originally wrote it. If they find he is in error, they correct the error and file the report, with such suggestions to the management as they, in their judgment, deem wise to clear up the defects in that institution. The result is that each of us is examining the other and is a check upon the integrity of the whole system. I know if they would pass my institutions with bad loans that the examination would be futile, and there would be no use of my paying the expense of it; but it has been found to be most beneficial in all of these centers where it has been tried, and the very best kind of an examination. We get the very best kind of results for the purification of the different financial institutions, whether State or National. Now, then, carrying that a little further, the same system could be incorporated that is contemplated in this bill. The Comptroller of the Currency would have the right— not only the right but the obligation— to come into our institution and every other State insti tution just as often as he went to the national banks, and we would have to agree to subscribe to all of the rules and regulations and examinations that are made of a national bank to ascertain whether our assets were clean and good, and if they were we would pass, and if not we would be turned out, which we ought to be. Senator R e e d . Nevertheless,-we have in the system three different classes of banks. Two of those classes of banks are doing a business which you say the national banks should not do, unless it was 166 BANKING AND CURRENCY. restricted. They are loaning money upon real estate. They are, in addition to that, doing various kinds of business that the national banks do not do. The effect of this is to bring you into one system, and you have the same right to go and get money that the national bank does. Mr. W a d e . On th e sa m e kind o f paper? vSenator R e e d . On the same kind of paper, but if carrying these other classes or securities would be dangerous to the national bank, why is not the fact that you could carry the same class of securities in your trust company and State banks— why does not that impair your ability to meet your obligations to the reserve bank just the same as it impairs the national bank’s ability to stand upon its feet and transact business generally with the country and meet its obliga tions ? Mr. W a d e . I do not lay down the doctrine, Senator, that I would restrict the national banks to any particular class of business. I did not say that. I said that if you were going to continue the national system as it has been continued, and most successfully for 50 years, that I would lift the embargo against their loaning on real estate and allow them to own real estate or loan a certain percentage on real estate. Senator R e e d . Would you now extend their line of activity as rather indicated in your last answer? Mr. W a d e . I think it would be ill advised. I think the national banks of the country themselves advise against it, but I personally would not have the slightest objection to it, nor do I believe the State banks would. Senator O ’G o r m a n . Why do you think the national banks would advise against it? Mr. W a d e . Because, through their operation and experience they are trained to handle the commercial business of the country on short-time paper, and they are not, as a general proposition, I take it, Equipped to handle long-loan business. Senator O ’ G o r m a n . Have not you heard national-bank men say from time to time there is no goodf reason why a State bank or trust company should enjoy banking privileges that are denied to national banks ? Mr. W a d e . Yes; and I would not deny it to them. I have not advocated that. Senator O ’ G o r m a n . Yet I gather from you that it is the judgment of the national-bank people that the present restricting limitations should be continued. Mr. W a d e . I make that statement, because I have heard the sub ject, Senator, discussed before some of the best national banking men m the country, and I do not pretend to talk for the national banks, but I get from that discussion that as a whole—particularly the na tional banks that are doing a commercial business—would not care to do this; but if they did care for and desired those privileges, I would not make the slightest objection to them. Senator R e e d . Mr. Wade, wnen you organized your trust com pany, with these manifold branches—I mean by that, branches you speak of—you took in those various’ branches of business because you thought they were lucrative, safe, and the proper thing for you to do ? BANKING AND CURRENCY. 167 Mr. W a d e . Yes. Senator R e e d . And they are greatly in excess of those privileges the national bank ordinarily assumes, or, indeed, has; that is true, is it not ? Mr. W a d e . Yes, sir. Senator R e e d . If your trust company came in under this system, had the same right to belong to the reserve bank, to put up securi ties and had money issued or paid to you on those securities, had the same kind of examination and the credit of the same kind of an examination that the national banks would have, why is it that your trust company would not then possess so many advantages that every nationaL feant would at once want to incorporate under the State law as a trust company and come in and take the field of business ? Mr. W a d e . There would be no reason why they would not, if they desired to; and there is no prohibition against them doing it to-day. Senator R e e d . Why would not they all necessarily do that same thing ? You have branched out beyond their sphere of the activity touched by the national bants, because it is an inviting field for rofit. Now, give to you every advantage that the national bank as in addition, it seems to me you then, as a matter of mathematics, have every advantage they have, and you have the additional advan tages, and it would seem to me that inevitably, assuming your class of business to be safe and sound— and I know you think it is and most everybody else thinks it is who do business with you— we all feel safe with you in Missouri— why would not they all want to be trust companies instead of national banks, and why should not they be ? Why should not every member of this system have the same rights as every other member ? Mr. W a d e . There is no reason in the world why they should not. Senator R e e d . Then you have answered my question as you might half an hour ago, where I asked you if national banks should not be allowed to loan upon real estate, because that is now the lesser em braced in the greater. Mr. W a d e . N o ; to answer your question more specifically, it would be this: That if it were now or even with the new law, or with the law as it is to-day, of any particular advantage to any national bank, there is nothing in the world to prohibit a national bank from chang ing into a State bank and having all the privileges we possjess now. Senator R e e d . But, Mr. Wade-----Mr. W a d e . Pardon me just a moment. Senator R e e d . Y ou would now have it to forfeit its rights as a national bank and the advantages of it. Mr. W a d e . But they have no advantages. You have taken all advantages away from them. Senator R e e d . Y ou keep saying, “ You have done this and that.” And I have not done anything, except occasionally to borrow some money from a bank, and when my banker cuts me off I am going to begin to draw. Mr. W e x l e r . I s that a threat or a promise ? Senator R e e d . Well, both. [Laughter.] Without joking about it, and I am very serious about it, the national bank has in the past had an advantage. You think that during the last year those advantages have been largely dissipated. Suppose we take whatever advantages they do have now and confer them upon the State E 168 BANKING AND CURRENCY. bank and upon the trust company. Why, then, would not every national bank want to become a trust company, coming into this system with the additional and enlarged powers ? I can not see why. Mr. W a d e . That can only be explained by the gentlemen who are primarily running national banks and in no way connected with trust companies. If they saw those privileges to be of such advan tage as you picture they would now go into the business, if they desired to. Senator N e l s o n . Let me interrupt both of you, if you will allow me. Is it not a matter of fact that a great many of these national banks have a loan and trust attachment, run by their officers ? Mr. W a d e . Many of them see those advantages and have organ ized a trust company, either directly under or indirectly owned by the banks. Senator N e l s o n . I think our big Chicago banks have that. Mr. W e x l e r . We have it. Senator N e l s o n . I think our friend at the head of the table has a loan and trust company as an appendix to his regular bank. M r. F o r g a n . I am the originator of the idea. Mr. W a d e . What I wanted to get into your mind was this: That to have the banking power of the United States developed to its greatest strength-----Senator R e e d . I see the advantage of that. Mr. W a d e . Permission should be given these State organizations to come under Federal control, supervision, and examination, and have an inducement to get them to do that; in order to conserve and bring up the strength of the whole system you should offer them some privileges. Senator R e e d . And your idea is— and I take it you intend to urge that upon the committee— that they should come in and be entitled to become members with full rights and privileges as members ? M r. W a d e . Our committee practically recommends that. Senator R e e d . I wish I might pursue this with you longer, Mr. Wade, because I am getting some light, but I shall have to go. Senator M cL e a n . On what percentage of the present value of your real estate do you issue your notes ? Mr. W a d e . Usually on a 50 per cent valuation. Senatqp S h a f r o t h . The papers in Washington gave an account of the proceedings of the convention at Chicago of the bankers, and I note that that paper stated that Mr. Forgan made the assertion that this bill would produce a great contraction of the currency. It was also stated by Mr. Dawes, formerly Comptroller of the Currency, that if this bill became operative, it would produce a great expan sion of the currency. Can you explain how, under the operations of the bill, it is going to affect the currency question, and which state ment, in your judgment, is correct? Mr. W a d e . Mr. Forgan is here to answer for himself, and I hardly think it would be proper for me to interpret his remarks for him. Mr. Dawes is not here, and I would also hesitate to go into the matter of his interview. Senator S h a f r o t h . We would like to have your view of it. Mr. W a d e . I would prefer, Senator, not to go into a discussion of the subject. BANKING AND CURRENCY. 169 Senator S h a f r o t h . Well, I wish to call to your attention this sit uation. Mr. W a d e . I think you will agree with me that it would be im proper for me to try to express Mr. Dawes’s contention in his absence. Senator S h a f r o t h . Y ou decline, therefore, to make any statement in the first place because the man who is quoted in the newspapers is here to-day and in the other case because the man is away ? Mr. W a d e . I will say this, speaking personally, as a member of this committee, that I believe they are both mistaken. Senator S h a f r o t h . I wish you would give us your view, because we want to get your view of this bill and what it is going to do when its provisions are placed in operation. Mr. W a d e . I think the effect of this bill will be-----Senator N e l s o n . A s it is, without any changes. Senator S h a f r o t h . Yes; as it is now, without any changes. Mr. W a d e . I think the effect of this bill, as it is now, will be absolutely impossible to create the 12 or more reserve banks provided for. Senator S h a f r o t h . Suppose there are only five. What would you think would be the effect of the passage of the bill on the con traction or expansion of the currency with only five reserve banks ? Mr. W a d e . I do not think it would have the slightest effect. Mr. W e x l e r . Senator, the other gentlemen here have made accurate calculations on that. Mr. R e y n o l d s . May I inject just a word here? I think it will answer the Senator’s question in so far at least as it was prompted by Mr. Dawes’s statement. In his absence he is of course unable to make any explanation for himself, but Mr. Dawes talked with me regarding this matter and he based the theory upon the fact that this bill, if enacted, would provide for an expansion of the currency upon the theory that in the open market for commercial paper it would be impossible to get credit from the Federal reserve banks through the use of this commercial paper and in that way would provide for expansion of the credit. That was the thought he had in mind, I am sure. Of course, I can not quote his exact words. Senator S h a f r o t h . Please explain that over again. I did not quite catch it. Mr. R e y n o l d s . His theory is that the establishment of an open market for commercial paper in the bill would provide for the over expansion. That is what he had in mind. It is a matter which can be calculated definitely. We have figures as to what the reserves are, and what the deposits are, on the ratio of loans and cash reserve, etc., and I will submit them later on, when I appear before the committee. Senator H it c h c o c k . Senator Weeks wished to ask some questions, and as Senator Reed has concluded the Senator may now proceed. Senator W e e k s . This question of commercial banks loaning on real estate is one of a great deal of importance. It has been before Congress in one way or another many times, and I presume it will be some time definitely determined by legislation which is pending or will be pending providing a class of banks for that purpose. I think the country and perhaps Congress has reached the point where farm-loan banks will be established, as is done in Europe, but Mr. 170 BANKING AND CURRENCY. Wade seems to have had a different experience from most com mercial institutions, and I want to ask him two or three questions about his experience. Twenty or twenty-five years ago there were organized a great many farm loan companies in this country. Their purpose was to loan money on farms in the West, pool the mortgages, making $100,000 of different denominations, we will say, and issuing de bentures against those mortgages. For a time they operated very successfully; the debentures were sold in $500 to $1,000 pieces to any purchaser who had the money for that kind of investment. The competition which developed as a result of this business led the com panies to loan more than they should on farms in many cases, so that they developed a large number of poor loans— bad loans— and the final result was that most of those farm-mortgage companies failed. They did, however, generally speaking, I think in all cases, generally guarantee the loans. Those loans were bought to a great extent by institutions in New England. I am not sure about the State, but I think Senator Hollis will recall that the State Bank of New Hampshire had many of those loans and made very large losses as a result. Senator N e l s o n . I want to call j^our attention, Mr. Reynolds, to the fact that that was not done by any regular bank, either National or State bank. They were sui generis and were established by speculators and promotors. Senator W e e k s . I am simply stating what actually occurred. Mr. Wade testifies that he maKes those loans and sells them in the same general way, and, much to my surprise, he seems to base his loans largely on the property of these institutions. One question I want to ask him is this: Are your entire loans based upon the prop erties of these institutions? Mr. W a d e . Oh, no; only a small proportion. Senator W e e k s . D o you loan on farms? Mr. W a d e . No; we do not make loans on farms. Senator W e e k s . D o you loan on city blocks? Mr. W a d e . Yes, sir. Senator W e e k s . Improved and unimproved? Mr. W a d e . Only on unimproved property in St. Louis. Senator W e e k s . On unimproved property only in St. Louis? Mr. W a d e . That is all. Senator W e e k s . And on improved property in other cities ? Mr. W a d e . Yes, sir. Senator W e e k s . D o y o u make these loans in every State? Mr. W a d e . Yes, sir; where we get an application for them without qualifications. Senator W e e k s . What kind of machinery do you have to deter mine the values which shall be placed on them ? Mr. W a d e . We never make a loan, Senator, without a personal, examination by an officer of our company; and frequently, if the loan is large, by two or three officers; and frequently by two or three visits to check up one another; and then we never make a loan with out a percentage of the loan paid off annually. For instance, if we make a 10-year loan we exact a 10 per cent annual payment, and then we make the notes mature annually. As a tenth of the loan is paid off the security remains the same, and as 30 per cent is paid off BANKING AND CURRENCY. 171 the security still remains the same and the loan is getting better. The purpose of that is to avoid changing of values in any locality. We never make on outside loans— we did in St. Louis— but we never make, on what we call our serial plan, a loan without annual maturities and sometimes semiannual maturities. Senator W e e k s . Mr. Wade, would you recommend banks generally engaging in that kind of business ? Mr. W a d e . I would have no objection to it, Senator; not the slightest, provided they have the necessary experience in handling that class of loans and the machinery to conduct it. Senator W e e k s . Of course, that is true. It must be operated with great caution and with great judgment or it would be a pretty bad piece of business, would it not ? Mr. W a d e . So it would be with any other line of banking. Senator W e e k s . But there are a great number of men who have good judgment as to commercial credit who have not the machinery and probably would not have the capacity to pass upon real estate values in all sections of the country. Mr. W a d e . And that is why I have heard the national banker object to that plan. As I have stated, however, I have had some business experience along that line. Senator N e l s o n . Senator Weeks, as I understand this system it is something similar to a railroad mortgage. They have one blanket, mortgage and issue a lot of bonds. They have one bond of one de nomination, another of another, and those bonds are scattered all around, but the security is one instrument. Mr. W a d e . Except that we have annual payments and the rail road mortgage matures all at one time. Senator rTe l s o n . You have one mortgage, but the notes will be in different hands. It is in principle the same as a railroad bond and mortgage. Senator W e e k s . You would not advocate banks doing this unless they were going to resell the mortgages in some form, except in a limited way, would you ? Mr. W a d e . I would not have any objection to that, Senator, if they do not put all their money into that line of loans. Senator W e e k s . Where would you draw the line? Mr. W a d e . By judgment and experience—let me qualify that statement ? Mr. F o r g a n . Would you not draw the line on the difference be tween time deposits and check deposits ? Mr. W a d e . Not necessarily so. We have about 25 per cent of our loans in what we call our bond account, a real estate loan account— 25 per cent of our deposits I should say. I have never yet heard of a national bank or a, State bank or a trust company failing if their mortgages were sound. If their mortgages were absolutely good, clean paper, and were made with care, I never heard of a failure of any kind of a bank from that cause. Mr. W e x l e r . Mr. Chairman, will you allow me to make a state ment? I do not want to interfere with Mr. Wade's statement at this time, but I want to make this statement: Upon the fundamental principles of this bill and the suggestions which this committee have made there is no difference among the members of the committee, 9328°— S. Doc. 232, 63-1— fo! 1------ 12 172 BANKING AND CURRENCY. but with regard to certain details of the bill there is some little difference of opinion, which is created to some extent by the training of one banker which may be different in a State bank or trust com pany and another banker who might have been trained in a national oank. There is a great difference with regard to what is a trust company. The original idea of a trust company was that it should perform trusts, should act as trustee for mortgages and bond issues, administrator of estates, administer property of absentees, and various quasi-financial duties of that character. Out of the inception of that business has grown a general banking business on the part of the trust companies which they should never have been permitted to do, but which the trust company of the type of Mr. Wade’s com pany is now doing. These companies do all of the business that a national bank does; they handle commercial accounts, buy and sell exchange, foreign and domestic, and they are engaged in every branch of the business that a national bank does, and in addition to that they do all the business of a trust company. The business of a State bank of deposit is no different from the business of a national bank except that they loan a certain reasonable proportion of their deposits upon real estate. Senator Reed asked some very pertinent questions with regard to the organization of these banks and with regard to lending of money on real estate, and my ideas are so different from what Mr. Wade has stated that I feel that in justice to myself I should set them forth at this time. I think that the State banks, accepting the deposits of the public, and subject to check, should be permitted to come into this organization provided they comply with all the rules governing the management of the national banks, because the business which they do is identical. Senator N e l s o n . Would you have them do that in every locality? Mr. W e x l e r . No; I will come to that. I think that the banks located out of central reserve cities and reserve cities should be per mitted to make a proportion of their total loans upon real estate, but not more than 50 or 60 per cent of the value; but the banks located in reserve cities, central reserve cities, do not need it, because that business can be taken care of by savings banks and by banks carrying deposits not subject to check. Further than that the central reserve cities and the reserve cities are the great avenues of credit for the commercial life of the country and their funds should be left there for that purpose. Senator W e e k s . What percentage of their loans would you say should be devoted to that purpose ? Mr. W e x l e r . I should say a percentage of 25 or a maximum of 30 per cent of their total loans. I think it has no relation to the capital and no relation to the surplus of the banks. That question of course must be determined by the character of the loans and the business policy of the banking house. Senator S h a f r o t h . What limit of time would you suggest; or would you limit the time ? Mr. W e x l e r . Yes, sir; I would limit the time to the seasonal period for borrowing for making crops. Senator N e l s o n . That hits your country but not ours. Mr. W e x l e r . I am going to come to that in a moment. We are .going to have in this country—we are bound to have in this country— BANKING AND CURRENCY. 173 a farm-lending credit bank which will loan on farms for 5, 10, 15, or 20 years just as they have in foreign countries, and such loans should be taken care of in a bank of that character, and not out of the liquid funds of the country with which we carry on the commerce of the country. Such loans should not be made out of any money left on deposit and subject to check. If such loans are made upon money subject to check sooner or later you are bound to involve yourself in trouble and for two reasons: First, You can not always find a market for those notes. There is a very limited market for mortgage notes in certain sections of the country. In Minnesota and Wisconsin I understand there is a good market for them, but in our section there is not any market. Again, if you foreclose on your mortgage and want to sell the property there is not always a buyer for it. My con ception of the organization of this bank is that the State banks should be permitted to come into the organization, provided they do exactly the same character of business as the national banks. They should be permitted to loan a certain percentage, say not more than 30 per cent on real estate, and I think on loans maturing in not more than one year; but I would be willing to concede that. I think the trust company, performing the functions of a trust company, should be left entirely out of this system, because trusts are administered under the particular law of the particular State in which the trust company is located. If our trust company is appointed executor of a will or administrator of an estate we are governed entirely by the laws of the State of Louisiana, and whatever law should be made by the Federal bank act for the government of the trust company would not apply. Mr. F o r g a n . What would you do in the case of Illinois, where all the trust companies and all the State banks are organized and the same law governs them all ? Mr. W e x l e r . I think that ought to be corrected, Mr. Forgan. I think the State banks and trust companies are as separate in their functions as one class of commercial dealers is separate from another. Senator N e l s o n . Y ou overlook this fact, however: It is all very good to say that that should be done in a large city and that you should have a separate bank doing one kind of business and a loan and trust company doing another kind of business and a commercial bank doing another kind of business. But you can not have those three kinds of institutions in a little country town of 2,000 or 3,000 people. You can not organize three separate institutions. One bank must do all kinds of business. M r. W a d e . A s y o u k n o w , I s ta y e d o v e r to b e here t o -d a y a n d to b e in terrog a ted , an d I w o u ld like to g e t th rou g h . Senator H it c h c o c k . Senator Bristow is here and would like to ask ,a few questions. Mr. W a d e . Certainly. Senator B r i s t o w . I was interested in one remark which Mr. Wade made, and that was in connection with issuing one note on credit of another note. I think Senator Hitchcock was asking questions and you objected to the present national-bank note because it was a currency based on credit. Mr. W a d e . Based on a fixed obligation. Senator B r i s t o w . I understood that you objected to that kind of currency and I could not see why the currency recommended in 174 BANKING AND CURRENCY. this bill and why the plan which you suggest is not a currency based on credit. It is, is it not ? Mr. W a d e . Yes; but there is quite a difference there, Senator. We recommend as a committee that notes be based on what is known as commercial paper; that is to say, paper that is issued for the purchase of the products of the earth, of the farm, of the factory, of the mine, of the commercial establishment. That represents the commerce that is gradually consumed within a year or within a six-month period, as against the fixed obligation such as your Gov ernment bond. Under the present law the 2 per cent bond never becomes due and is based on a fictitious credit. The market value of those bonds is fictitious. This country is not and never has been on a 2 per cent basis, but by the operation of law and the assistance of the national banks we have sold six hundred or more million dollars of 2 per cent bonds, and they are apt at any time to depreciate in value to an extent that might affect the value of the notes, or at least greatly injure the national banks. Senator B r i s t o w . I realize that; but I understood your objection to be against a currency based on credit. Mr. W a d e . N o , Senator; just the reverse. It must be based, first, on a 40 or 50 per cent gold reserve, at least 100 per cent of commercial short-time paper that matures within 90 days at the very outside, also secured by all the assets of the reserve banks. Senator B r i s t o w . I understand you now; you object to the national-bank note being based upon Government bonds which has a secured circulation, as I understand it— of course you understand that I am not an expert at all on these matters. The distinction you make is that one is a fixed obligation and the other is a rapidly maturing obligation? Mr. W a d e . Yes, sir. Every bale of cotton that is ginned is con sumed within a short period of time. Every bushel of wheat is con sumed within a short period of time, every bolt of calico on an active merchant's shelf gradually goes into consumption, and they issue, ha order to move that commerce, what is known as commercial paper, which matures within a short time, and it consumes itself, and there fore brings back from the Nation all over the money to meet the obligation of these short-time notes. Senator B r i s t o w . That is theoretically true, but as a matter of fact does not a very large part of the notes of a bank practically con stitute a continuous loan ? They are renewed every 90 days over and over again ? Mr. W a d e . Not the commercial paper. The well-regulated com mercial house never renews its paper. Senator B r i s t o w . But are you not speaking of the practice in a very limited part of the country ? Mr. W a d e . No; it is universal. Mr. F o r g a n . It constitutes the great majority of the paper handled by the banks in the cities of the country. Senator B r i s t o w . I know; but that is one of the things I think this bill is being framed for—for the banks in the cities. Mr. W a d e . We went over that very thoroughly yesterday. Unfortunately you were not here. Senator B r i s t o w . I was engaged in the Senate Chamber. I know that the bank in the small communities— the national bank— necessarily carries a great deal of paper that is renewed— BANKING AND CURRENCY. 175 Mr. W a d e . We admit that. Senator B r i s t o w (continuing). From time to time. It is not merely a temporary loan, but it is in fact part of the capital of the business. Mr. W a d e . We admit that. On yesterday it was explained to your committee that that class of banking is always taken care of by the reserve bank, the individual bank in the individual locality where they carry their reserve account, and they carry their reserve account for that purpose. Senator B r i s t o w . It strikes me that that is the theory; that that class of banking—meaning the country banks—is taken care of. Senator N e l s o n . It is not taken care of. Senator B r i s t o w . It may or it may not be, depending upon the will of the fellow that has to take care of that bank, and Senator Hitchcock has brought out that feature in his questioning far better than I can in the questions I am asking— as to the independence of the small banks of the larger bank— and I wiill not pursue that. Mr. W a d e . The answer to that, Senator, is this: That no country bank that I ever heard of has ever failed, if it was sound, for want of accommodations from the reserve cities of the Unites States. They never fail for that reason. They fail usually from shiftless manage ment or from dishonest management, and one is just as bad as the other. Senator B r i s t o w . I am sure that is true. Mr. W a d e . The country bank, so called, gets all of the accommo dation that it is entitled to by reason of its stability, and its require ments are necessarily small. Many banks, Mr. Forgan will tell you, he loaned from $1,000 to $100,000 and $500,000 to meet the require ments of the commerce of the country in that locality. Senator H i t c h c o c k . At the present time the country bank has the privilege of selecting any bank in a reserve city near by to do business w ith . Mr. W a d e . Yes, sir. Senator H it c h c o c k . And if it is not accommodated at one bank it will transfer its loan to another ? Mr. W a d e . Absolutely. S e n a to r H i t c h c o c k . U nder this sy ste m p ro p o s e d it w o u ld b e d e p en d en t on on e single b a n k and on e single m a n a g e m e n t ? Mr. W a d e . No. Senator H it c h c o c k . It would very largely. Mr. W a d e . No. S en a tor H i t c h c o c k . Y ou th in k th e ba n k s in th e reserv e cities w ou ld con tin u e to ta k e care o f th e c o u n t r y ba n k s ? Mr. W a d e . Absolutely. Senator H it c h c o c k . When they are compelled themselves to discount paper in the central bank ? Mr. W a d e . A b s o lu te ly so. Senator H it c h c o c k . I doubt it. Mr. W a d e . Senator, the answer to it is that they are doing it now and why should they not do it when they have the greater facilities? The trouble experienced by the country banks in times of stress is the inability of reserve banks to provide the sinews of war to take care of the country banks, and we are trying to get you to provide those sinews of war so that we can take care of them. If I were to 176 BANKING AND CURRENCY. tell you that the national banks in reserve cities— central and reserve cities— spend thousands and hundreds of thousands of dollars a year to develop customeis from country banks you might not doubt my statement. But almost all of these large institutions have three, five, and some of them seven or eight men traveling 365 days in the year. For what ? To solicit country bank accounts. Senator H it c h c o c k . Is it your opinion that country bank accounts will fall off under this bill ? Mr. W a d e . No; only those classes of country banks that will go into a reserve bank in its particular locality. There may be some diminution of deposits in the large centers, but it will not be to any appreciable extent and it will not be to any serious injury, if you put the reserve in a proper way where you do not require them to carry too much cash in their vaults. Senator B r i s t o w . When Senator Hitchcock was interrogating you, you spoke aboutsthe inflation of the currency and you said it would not be inflated, and that only so much currency would be had as the needs of the commerce would require. How would you ascer tain what commerce required ? Mr. W a d e . By the demand for loans. If I had a deposit account, the only way I can find out what the commerce of that community requires is the demand made from my customers for loans. Senator B r i s t o w . There is no limit to the demand for loans, is there ? Mr. W a d e . Oh, yes. One of the greatest hardships that the banker has to go through at times is to find safe loans. After the panic of 1907 money went begging; 12 or 14 months ago money was selling very low, so low that it required a great deal of effort by many of the banks to make loans, and there was a decided contrac tion of loans, and this is particularly true when there is a redundancy of credit and money in the United States. Senator B r i s t o w . Then when there is no demand for loans or a slight demand for loans you would retire the money— the circulating currency ? Mr. W a d e . Absolutely. Senator B r i s t o w . What would be the effect of that ? Mr. W a d e . The effect would be to bring things down to a normal condition. Senator B r i s t o w . What do you mean by a normal condition? Mr. W a d e . A condition by which a bank could loan its money and live. Senator B r i s t o w . Not an increased rate ? Mr. W a d e . Not to any unreasonable extent— only to an appre ciable extent. You understand, Senator, under any bill you inaugu rate here you can not get money like you would take coal out of a coal cellar. When you get bank bills you have to give something for it, and that something has to pay interest, and therefore you are not going to part with tne bills receivable bearing a rate of interest unless you can use the money and use the currency. Currency is of no more value than a bale oi hay if you can not make it earn some thing. Therefore you are not going to pick out things just for the privilege of doing it and separate with your profitable business and pile it up in your vaults. There would be no object in that. BANKING AND CURRENCY. 177 Senator B r i s t o w . Of course you understand that I am not a financial expert, and do not pretend to be. Mr. W a d e . Neither do I. Senator B r i s t o w . What harm is there in having plenty of money and low interest ? Mr. W a d e . By creating an inflation if you had too much of it. Sens:' r B r i s t o w . N o w , we have quite a stable amount in circu lation now. We will say that some times it is hard to find loans and other times very hard to find money to make the loans. When money is plentiful and interest rates are low, is that any detriment to the country in any way ? Mr. W a d e . Usually when money is in action or loaned it is because of the inactivity of the commerce of the country, and stringencies are not brought about in the United States by conditions usually arising in the United States but chiefly by conditions abroad, and through our unfortunate financial system as it now exists when such times arise as the panic of 1907 and 1893 Europe contracts its credit to protect its gold reserves, and it is in the contraction of that credit from the United States either through the sale abroad of securities which come back to us or checking off the export goods that we send to them, that we as bankers must contract our loans, and what we want is not more currency to conduct the business of to-day, but we want a currency that when fear and panic goes over the land we can go and put up our securities in the form of commercial paper and get the necessary currency to do business on it. Senator B r i s t o w . Have you not got it now ? Mr. W a d e . No; we have not, and if fear and panic should strike this country to-day you would go through the same disgraceful experience as you did in 1907. Senator B r i s t o w . Why ? Mr. W a d e . Because of the contraction of currency and credits. In the first place, Senator, 95 per cent fully of the money loaned in this country and in all other countries is loaned on credit and not on money. Credit is the great thing; not the currency or money. Senator B r i s t o w . Y ou spoke of the panic of 1907, and said we would have the same thing over again. Why not use the $500,000,000 provided in the Aldrich-Vreeland bill ? Mr. W a d e . The answer to that would be, Why have not we used it during the past year when money was close and the interest rate high ? Senator B r i s t o w . I supposed the interest rate had not been high. Mr. W a d e . Yes; they were high. That law is so impracticable, so cumbersome in its operation that if a bank in St. Louis were to make application to exercise the privileges of that law it would be sub jected to severe criticism. First it must go to its competitors and tell them “ my condition is so-and-so, and I want you to join with me as a member of the reserve association to make an application to Washington to get money.” Senator B r i s t o w . Well, I have heard that criticism. It gives too much publicity. But could not that be changed ? Mr. W a d e . All laws can be changed, yes. But you have not changed that law in five years and we opposed the enaction of such law. 178 BANKING AND CURRENCY. Senator B r i s t o w . If agreeable to the chairman I would like for you, if you will, to submit a statement to be incorporated in your hearing before the committee which you are now making, as to what changes should be made in that law to make it useful in the event of a panic or tight money market such as you say we have had in the past six months. Mr. W a d e . I would not presume to do that, Senator. I would not want to arrogate to myself the wisdom of the banking fraternity. I am here as a member of a committee and if the chairman of the commission should direct us to work along those lines I have no doubt we would be glad to do so. Senator B r i s t o w . That is too much like the Democratic policy. I think we are entitled to your judgment as well as the collective judgment of all the gentlemen who are associated with you. Senator H it c h c o c k . The committee will take a recess until 2.30 p. m. (Thereupon, at 12.55 p. m., the committee took a recess until 2.30 p. m.) AFTER RECESS. The C h a i r m a n . The committee will come to order. I think that the Senator from Kansas desires to ask some further questions of Mr. Wade. Mr. W a d e . May our chairman make a statement first ? The C h a i r m a n . Certainly. Mr. F o r g a n . Mr. Chairman and gentlemen, I wish to assure the committee that we gentlemen who have come from different parts of the country are putting our time entirely at your service, and we wish to meet you just as you wish to have us meet you. We are going to presume, however, to make a suggestion. There are seven of us, and we each have one or more branches of this subject to place before you. We feel that if we had been allowed to do so, 50 per cent of the questions that have been asked would have been answered by us in the regular course, as we came to them. We are charged with the responsibility of representing to you here the reasons why the conference held in Chicago made these suggested changes in the bill. We are perfectly willing that each of us should be crossexamined as to his individual views on the whole subject, and we will be very glad to be called for that purpose; but we feel that if we are allowed to get our views before you gentlemen you will get answers to your questions. So that it will save your time and save ours by obviating the necessity of asking questions which we will answer in the course of our taking up the subjects as we come to them. For instance, the next question that comes up, after we are through with Mr. Wade— and of course we do not want to interfere with Mr. Wade's cross-examination at all—is to be taken up by Mr. Chapman, and he is prepared to address you in regard to the next important change which occurs in section 12 , paragraph B, on page 16, and he will explain to you why, in the opinion of our conference, the Federal reserve board should not be given power to require but only to permit Federal reserve banks to rediscount the paper of other Federal reserve banks. Every one of us has already answered that question BANKING AND CUBEENCY. m individually, and he, having come prepared, we want to have him heard, and he would answer it, just as we have all answered it, and the time of the committee would be saved. There is this further reason why I ask your consideration in this matter: Some of us who are here are employees of institutions, and our time is not our own. Some of us have duties to perform at home, and some of us left home having made arrangements to return by about this time. Mr. Chapman, for instance, would like very much to leave this afternoon. He has made his arrangements, he has got his reservations made, and he would probably not take more than 10 or 15 minutes to place the subject before you. Mr. Maddox comes from Atlanta. He is going to take up two questions that have been materially changed in the proposed measure since he prepared his address. He will have to adapt his address to* the changed conditions; but they are all subjects that you are ques tioning every one of us on. If you will let us finish and then call us before you individually to get our individual views on the subjects that we have not addressed you on we will be very glad. The C h a i b m a n . The substance of your suggestion is that you wish to suggest to the committee that the cross-examination should be confined to the topic upon which the witness is speaking ? Mr. F o e g a n . Either that, or else finish that subject before you cross-examine us generally. Get our opinion on each specific subject before you cross-examine us. Then we will stay here and be ex amined individually on the general questions. If the reason given by our specially delegated member is not a satisfactory explanation of our reason, then you can hear the rest of us afterwards. The C i i a i e m a n . If there is no objection by any member of the committee to that policy, I think it would be very valuable to us. Senator B r i s t o w . Of course, I realize the desire of a methodical business man to proceed with a thing like this as he would with a business matter; but when a party appears before the committee and makes a statement it naturally is fruitful of suggestions, and when questions are asked it leads from one thing to another, and the result is that you have a diversity of views which, to me, is very much more useful than a carefully prepared paper may be; and while, as far as I am concerned, I would be very glad indeed to accommodate myself to the convenience of these gentlemen, I think they could be of much more use to us members of the committee if they would allow us to pursue the usual method in eliciting opinions on hearings of this kind. Senator P o m e r e n e . I agree with Senator Bristow. We are here to get at the truth, and that is what we need— cross-examination. While I do not mean to criticize any of these gentlemen— I tliink they are going to tell us the truth as they see it and as they understand it—when it comes down to these details it is very apparent that they differ, as honest men do differ, on these subjects, and that is the most illuminating part of this cross-examination, to me, I want to know the truth about this, and I do not care how long it takes. It is a pretty serious problem, both for bankers and the public; I understand that very thoroughly; but you can not elicit information by having each man come in and testify in chief and then recall each one for cross-examination. 180 BANKING AND CURRENCY. The C h a i r m a n . The committee must exercise its discretion with regard to the matter of cross-examination. Mr. R e y n o l d s . I feel, Mr. Chairman, that we are here by the courtesy of this committee, and while Mr. Forgan has expressed what would be most convenient to us, yet we are entirely subject to your call, and we hope you will proceed in whatever manner as will best satisfy your purpose, to solve this problem, as you believe, correctly. Mr. W a d e . Provided you will let me go, sir. Mr. F o r g a n . I only made the suggestion thinking it would save the time of the committee. Senator R e e d . There is this to be said about it, Mr. Forgan; You make some remarks, and at the time you are making them the very thing a man wants to know occurs to his mind, and if he puts it aside and lets it get cold, a chain of ideas is broken and may not come back again, partly because of the limitations of the members of the committee. I know it is, as far as I am concerned. But I think we can well take into consideration the statement of Mr. Forgan, that others are to follow, and therefore perhaps we may abbreviate some what the examination. Senator P o m e r e n e . If some of the other witnesses here present want specially to get away we will try to accommodate them. Mr. F o r g a n . There are at least two that have only one subject each. The C h a i r m a n . The committee will try to accommodate those gentlemen. Mr. Wade, the Senator from Kansas desires to ask you a question or two. Mr. W a d e . Very well, sir. Senator B r i s t o w . Just before the lunch hour I asked you if you would submit, as a part of your statement, your judgment as to what changes ought to be made in the Aldrich-Vreeland bill in order to make it respond to the demands of the country during panics or hard times, and I thought you rather hesitated to do that. I think it is entirely pertinent, because it had been suggested by a number of Members of the Senate, and of the House as well, that a temporary change might be made in the Aldrich-Vreeland bill which would answer any immediate purpose without taking up the more elaborate provision of the currency legislation, and it was with a view of having your views, and views of the gentlemen who are here, upon that question that I asked that it be incorporated in the record. I think that anything that relates to the present law and proposed changes would be useful to us, and I would like very much, if you could, to have you submit your criticism of the bill as to its impracticability so that I might have it for consideration. Mr. W a d e . Senator, in the first place it has been six months or more since I have read that bill. I know in a general way it is impracticable, but to attempt to tell you offhand, or to try to criticize it m a meeting such as this, I would not care to attempt it, because I do not believe I could do the subject justice; and then again, I would not like to be singled out as one of the committee of seven who were invited here to prepare in concrete way a criticism of such a bill. I would rather take counsel and have the benefit of the counsel of my associates. Senator P o m e r e n e . That is what this committee is trying to do now. BANKING AND CURRENCY. 181 Mr. W a d e . If that were the judgment of our committee I think no doubt the chairman of our committee would be glad to call us together for the purpose of taking up that subject and giving you the general opinion on that subject after it is discussed by us. Senator B r i s t o w . When I made this request, I was inquiring as to how you would ascertain when more money was needed, when the need of commerce, as you expressed it, would demand a larger circu lation, and you said it would depend upon the demand for loans. Now, do I understand by that that whenever a bank had more demands for money than it had the money to supply such demands, it would then take a part of its assets to the central bank in one instance and the board of control in the other and secure additional currency for the purpose of meeting such demands ? Mr. W a d e . Yes, sir; your understanding of that is correct. Senator B r i s t o w . And that additional currency which this bank secures is issued according to your plan by the central bank, and according to the plan of the bill by the Federal board, through the regional bank ? Mr. W a d e . Yes, sir. Senator B r i s t o w . And your suggestion is that the regional bank have 40 per cent of gold as a guaranty fund, a reserve fund, against this, as well as its credit ? Mr. W a d e . Yes; 40 per cent gold reserve against all notes issued and 100 per cent commercial paper plus the total capitalization of the bank. Senator B r i s t o w . This 100 per cent commercial paper comes from the bank seeking the additional money ? Mr. W a d e . Currency, bank notes; yes, sir. Senator B r i s t o w . The interest on that, of course, goes to the regional bank ? Mr. W a d e . Yes, sir. Senator B r i s t o w . And the bank puts out the money and forfeits that? Mr. W a d e . Not necessarily the interest on those particular notes. You take your paper to the reserve bank and discount it. Your notes might bear 4 per cent. They might bear no interest, because they might have been discounted themselves, or they might bear 6 per cent, and you have to pay the rate for the use oi that currency that was fixed by the Federal reserve bank in the district in which you were located. The rate might be higher or it might be lower. Senator B r i s t o w . Suppose the notes, the majority of those notes, draw 6 per cent. Mr. W a d e . I think not. Senator B r i s t o w . I am just supposing that. In some parts of the country they would and in other parts of the country they would not ? Mr. W a d e . Yes. Senator B r i s t o w . Suppose they do draw 6 per cent. What would the regional bank charge this local bank for the use of the money ? Mr. W a d e . Depending entirely upon the demand that was made on the Federal reserve bank, if it was properly managed. Senator B r i s t o w . Suppose it said 4 per cent. What becomes of the margin of 2 per cent ? 182 BANKING AND CURRENCY. Mr. W a d e . Just exactly the same condition would exist as now, without this bill being in force. We would take $ 100,000 worth of paper;and I would go to Mr. Forgan and say, “ I would like to sell you $400,000 worth of paper.” If I discounted the note at 4 of'# per oe&i and sold it to him on a 6 per cent basis, I would make 2 per cent a»d, on the other hand, if I discounted it at 4 per cent, I would lose 2 per cent in the transaction. Senator N e l s o n . If you sold it to him at 6 ? .Mr. W a d e . Sold it to h im a t 6. Senator B r i s t o w . I understand; and the bank discounts that paper and uses it as it would any fund ? Mr. W a d e . Yes, sir; the only way now we could discount a note at the banks is by dealing with the fellow we discount with just to that extent We take from him the amount that we discount. Senator N e l s o n . Take the interest in advance? Mr. W a d e . Yes, sir. Senator B r i s t o w . You spoke, when Senator Hitchcock, I think, was interrogating you, of the fictitious reserve. What do you mean by “ fictitious reserve” in referring to the plan suggested by Senator Hitchcock ? Mr. W a d e . I do not remember making that statement. Senator B r i s t o w . Y ou used the term “ fictitious reserve.” I wondered at the time just what you meant by it. Mr. W a d e . If you would tell me the whole interrogation, I think I could answer your question. Senator H it c h c o c k . Was it on the occasion of my questions rela tive to currency that might be furnished by the Government of the United States ? Senator B r i s t o w . Secured by bonds. Senator H it c h c o c k . N o . I suggested for your consideration a plan that the Treasury of the United States might furnish currency to the banks or to currency associations, and it might protect those notes by selling bonds and then procuring a gold reserve. I think you termed it fictitious reserve. I am not sure as to the language. Mr. W a d e . N o . In that connection I said the 2 per cent Govern ment bonds were maintained on a fictitious credit and not on a real credit as to the market value of those bonds-----Senator N e l s o n . That is the way I understood it. He meant the 2 per cent bonds at a fictitious credit, because they were available for banking, and without that they would not be worth their par, drawing only 2 per cent interest. Senator B r i s t o w . I do not know just what Mr. Wade had in his mind, but Senator Hitchcock was speaking of the Federal Govern ment issuing to the bank that money and the Federal Government placing behind that currency 50 per cent gold reserve, similar to the system which we now have in regard to greenbacks, and it was in con nection with that discussion that the term1‘ fictitious reserve ” was used. I did not understand just what you had in your mind, and that is what I wanted to bring out, what you meant by the fictitious reserve, because it seemed to me that it was a better reserve than had been suggested up to that time. Mr. W a d e . I think you probably must have misunderstood my answer, or I must have answered not understanding the question asked. BANKING AND CURRENCY. 183 Senator B r i s t o w . Possibly you used some other word than “ re serve.” It might have been a “ fictitious value” as to bonds. Mr. W a d e . The market value of the bonds. Senator N e l s o n . I understood it as referring to the 2 per cent bonds. Senator B r i s t o w . Another remark which struck me as very inter esting, which has not a direct bearing and still has an indirect bearing on the subject, was when you spoke of Marshall Field borrowing money of a railroad which had made the business of Marshall Field. Mr. W a d e . Contributed to the development of Marshall Fields business. Senator B r i s t o w . The way you used the terms at the time indicated that you believed that the railroad had been responsible for Marshall Field’s success, and I wondered just what you meant by that. Mr. W a d e . I was trying to illustrate, in answer to a question of Senator Nelson, I believe, that it was perfectly legitimate for a national bank in New York or in San Francisco or anywhere else to loan on call the money of its depositors secured by bonds and stock. Senator N e l s o n . Collateral. Mr. W a d e . Collateral. And while it was perfectly legitimate for them to loan on call or on time its money on collateral notes, secured by stocks and bonds not only of railroads and manufacturing industries, it would not be the class of security that should be put behind Federal reserve notes. That is what I was trying to illustrate and what I meant by the railroad contributing to the development of Marshall Field’s business. The building of any railroad into any community contributes to the commerce of that community. Senator B r i s t o w . Gives it commercial facilities ? Mr. W a d e . Yes. It permits the transportation of all the products of the land, and it sends back the articles that are purchased irom the sale of those products. Senator B r i s t o w . Y ou would not say that the railroad made that community, any more than you would say that the community made the railroad ? Mr. W a d e . Oh, no; the one contributes to the development of the other. Senator B r i s t o w . The two work together. Mr. W a d e . And therefore to attempt—-which the question rather led me to believe was in that direction—to say that you should only loan or should make any discrimination in loaning on the railroad stocks and bonds, or the manufacturing corporation stocks and bonds, or the securities of a commercial establishment, or improvements built upon land for the purpose of creating factories, would be a mistake. But that was not the kind of security that we are advocating to put behind Federal reserve bank notes. Senator N e l s o n . I would be very glad if the committee would hear Mr. Chapman. There are some questions that I should like to ask Mr. Wade here, but Mr. Chapman, from Minneapolis, president of the Northwestern Bank, is here, and is a member of this committee, and I should be very glad if you would give him a hearing, in order that he may go home this evening. Senator P o m e r e n e . I also would like to ask Mr. Wade a few ques tions. 184 BANKING AND CURRENCY. The C h a i r m a n . If there is no objection, Mr. Chapman will be heard by the committee. Senator N e l s o n . Mr. Wade wants to go home, too. Mr. W a d e . I wrote a man in New Hampshire and one in New York to meet me in New York to-day. I telegraphed that I would be there to-day. Mr. C h a p m a n . Finish with my friend, Mr. Wade. I do not go until 6.45. Mr. W ade. Y ou could finish w ith m e in a few m o m en ts. Senator N e l s o n . I will waive my questions to Mr. Wade. Senator S h a f r o t h . I intended to ask him one or two questions, but I will waive mine. Senator P o m e r e n e . In view of one matter to which he addressed himself, I have one question, and for that question it will only take a few minutes, if you have no objection. The C h a i r m a n . Proceed. Senator P o m e r e n e . I assume that it goes without saying that the success of the plan embodied in this subject depends largely upon the extent to wnich the banks of the country avail themselves of its privileges ? Mr. W a d e . Naturally. Senator P o m e r e n e . And the same may be said of the plan as amended by the committee of the American Bankers’ Association? Mr. W a d e . Naturally. Senator P o m e r e n e . Y ou called attention yesterday to the fact that in certain of these regions which it is proposed to lay out that if 10 per cent of the banks, and perhaps more accurately speaking, 10 per cent of the capital in that region should fail to avail itself of the privileges contained in this measure, they could defeat the pur- of the bill or the legislation. fose not? I understood you that way, did Mr. W a d e . Yes, sir. Senator P o m e r e n e . If the proposed plan became a law; that is, if the proposed plan as amended by the bankers became a law, and 10 per cent of these bankers with banking capital should refuse to avail themselves of the piivileges of the bill, it would very seriously embarrass the scheme. Is not that true? Mr. W a d e . No. In the first place, I said one-tenth of the banks that could be selected in any district or division of States, if they did not go in, would make it impossible to organize 12 reserve banks, because the remainder of them would not have sufficient capital to create a capitalization of $5,000,000 multiplied by 12 or more. If you adopted the suggestions that we have made here you would re duce the number of reserve banks to three or five, and therefore reduce the capita] to be gathered together, just as 3 or 5 is to 12 , and you ought not, in my judgment, in the initial stages of banking and currency reform, to attempt to create so many reserve banks at one time. If five proved to be successful, there is nothing to prevent you from extending it later if it is found to be practicable. Senator P o m e r e n e . The general purpose— I am speaking now of the amended scheme of the American Bankers’ Association— is prac tically the same as the purpose of the orginal bill ? Mr. W a d e . Our general purpose, gentlemen, is to help the Govern ment of the United States to create a sound banking plan that can be workable and that can be put through in a practicable way. BANKING AND CURRENCY. 185 Senator P o m e r e n e . Suppose that either the orginal plan or the the amended plan should be adopted, and 10 per cent of the national banks would fail to go in, would not that materially hamper the success of the system ? Mr. W a d e . N o ; I think not. Senator N e l s o n . Let me suggest to you if you will allow me: It might, if amended, be so practicable that many State banks would go in to make up the deficiency. Mr. W a d e . I will tell you why it would not, in my judgment. Take, for instance, the New England States. If I remember it cor rectly, the total capitalization of all of the national banks in the six New England States is $105,000,000. If they did come in you could have two reserve banks in the six New England States. In the Eastern States, roughly speaking, there are $337,000,000 of capital. If they all come in you could have six reserve banks; because you would have $300,000,000 capital to draw from. But if half of the banks in New England did not come in, and half of the banks in the Eastern States did not come in, there would be nothing left than to try one reserve bank in each of these different districts; and the reason 1 said one-tenth of the banks would be that if one-tenth of the national banks I could name would not join, then you would only have capital enough remaining to have one reserve bank. The smaller institutions I do not believe are going to flock into this reserve association, because I do not think they will get the benefit from it that would justify them in doing so. Senator P o m e r e n e . If the Congress should decide to provide for 12 regional banks, in your judgment it would be necessary to have the national banks go in in order to make it a success ? Mr. W a d e . Yes; I think so. Senator P o m e r e n e . That being so, I wish you would point out why, in your judgment, Congress ought not to say to these banks, if it is going to adopt this scheme, “ You shall go in” ? I am speaking of national banks now. Mr. W a d e . You mean compulsory, without representation? Senator P o m e r e n e . Yes. Mr. W a d e . I thought I covered that very fully yesterday, Senator. I would only be repeating myself. Senator P o m e r e n e . The point I am trying to bring out is this: That if it were decided to make 12 regional banks, and you did not compel them to go in, then, necessarily, it would fail, according to your theory? Mr. W a d e . Yes, sir; if they did not come in. Senator P o m e r e n e . If they did not come in. Now, you have stated that you came here-----Mr. W a d e . Let me answer you further, Senator, before you ask me that further question ? On the other hand, if you keep this bill in its present form, with the clause compelling the national banks to go in or go out of business or out of the national banking system, I then do not think you would accomplish your purpose; but I do believe that you will drive some of the very best national banks out of the national system by sending them into State systems, where they can get all of the benefit they can now get by doing a banking business. 186 BANKING AND CURRENCY. Senator P o m e r e n e . Your answer is dealing with prophecies rather than with facts. Mr. W a d e . Absolutely so. I do not pretend to say who will come in or who will go out. I am giving my opinion. Senator P o m e r e n e . I saw a statement the other day that if this bill should become a law they would surrender their franchise or char ter and incorporate under the State banking laws. Mr. W a d e . Yes, sir. Senator P o m e r e n e . I s it your belief that that would be done to any material extent ? Mr. W a d e . I think it would, Senator, I am sorry to say, But I be lieve that the banks would have to look to their own interests and to the protection ol their own stockholders, and not turn over 10 per cent of their capital and 50 per cent of their reserve money to become stockholders in a corporation the stockholders of whom would have no voice in its management or direction. Senator P o m e r e n e . That is discussing another branch that I do not care to develop just now, although I have no objection to your answer at all, of course. The statement was made here yesterday that there were something over 25,000 banks, I believe, in the country, and about 7,000 of them— I am not giving the exact number-----Mr. W a d e . That is approximately correct. Senator P o m e r e n e . About 7,000 of them were national banks; so that you have this bill as presented to the Congress making it obli gatory on 7,000 of the banks to go into this scheme, leaving it op tional with the other 18,000, and you here largely represent the 18,000. Mr. W a d e . No, no; I represent myself. I can not do that. Senator P o m e r e n e . Well, you are speaking in behalf of the State institution. Mr. W a d e . Speaking as an officer of a State institution—put it that way. Senator P o m e r e n e . Yes. So that, so far as you are concerned and your bank is concerned, you have no objection to this bill-----Mr. W a d e . I am also a national banker, you know, too. Senator P o m e r e n e . I am speaking of you as a State banker, now. Mr. W a d e . N o . Speaking as a State banker, it would not make any difference to us, because you could not force us to do anything. Senator P o m e r e n e . And you still have the opportunity to avail yourself of the provision ? Mr. W a d e . Yes, sir. But, speaking as an American citizen, I think it is improvident; I think it is a mistake; I think it is un-American; I think it is unjust to pass a law compelling these banks to subscribe to this stock or go out of a system that they have helped to build up. Senator P o m e r e n e . Well, if the success of a system is to depend npon whether we shall compel them to do a thing or to leave it to their discretion to do it, would you not have a good deal of misgiving about the success of it if you had to depend entirely upon the volun tary duty of certain institutions ? Mr. W a d e . N o . But if Congress can not draw a bill that will be sq attractive in its operation, so practicable in its working, without forcing the banks to come in, then I think Congress would make a mistake. BANKING AND CURRENCY. 187 Senator P o m e r e n e . Speaking for myself, I want this bill to be so attractive that they will all want to come in; but at the same time it is my present judgment, and I state this with an open mind, that after we make it as attractive as it can be made they ought to be compelled to go in. Senator O 'G o r m a n . The national banks alone? Senator P o m e r e n e . The national banks alone. I think it ought to be made so attractive, however, that they would all want to come in. If there are any changes to be made in that respect I would liko to hear what they are. Senator R e e d . There would not be a bit of difficulty in getting them in if you make it attractive enough. There might be some question about how the people of the country would receive it. Senator P o m e r e n e . I mean by that I doubt the wisdom of pro viding for a system and then letting individuals say whether they will abide by it or not. Senator S h a f r o t h . Y ou had better let the witness go, or somebody else will get to asking him questions and he will not get away at all. Mr. W a d e . I am very much obliged to you, gentlemen. STATEMENT OF JOSEPH CHAPMAN, VICE PRESIDENT OF THE NORTHWESTERN NATIONAL BANK, MINNEAPOLIS, MINN. Mr. C h a p m a n . Mr. Chairman and gentlemen of the committee, I have a very small thing to call to your attention, and I will do it just as briefly as possible. It is in the section of the bill which says “ at the present time to permit or in times of emergency require Fed eral reserve banks to rediscount the discounted prime paper of other Federal reserve banks.” At a meeting of these bankers in Kansas City some time ago, where they were discussing agricultural matters, Mr. Jordan, of Pettis County, Mo., one of the real assets of that county in Missouri, made this statement. He said he was talking to a farmer and he said: John, do you test your seed corn? The farmer replied: Certainly not. I don’t believe in any of these new-fangled ideas. Mr. Jordan said: I want to tell you something. box or in the field. Every farmer tests his seed corn, either in the seed I take it that the object of this meeting is that we want to test out this bill and see that when we get it planted out in the field whether it is really going to germinate and grow into something useful to the American people. I want to call your attention to that clause, “ or in times of emer gency require,” which we ask to have stricken out. I would like to be mformed, for one, if there is in any civilized country in the world or ever has been any means devised by law to compel any man to loan money to another. In the medieval times history says that they used to boil the Jews alive in oil and torture them to try to force hose men to loan them money. Senator R e e d . Did they get it ? [Laughter ] 9328°— S. Doc. 232, 63-1—vol 1------ 13 188 BANKING AND CURRENCY. Mr. C h a p m a n . But it was impossible. They could confiscate their property, but they could not get a loan unless the Jews were willing to loan the money. Now, gentlemen, times have been changed very much in free America along that line. We have never considered it possible to force a man to loan money to another. That clause in the bill, whether it is constitutional or not I am not lawyer enough to say, but that it is un-American and uncivilized is absolutely correct. It harks back to the stone age, when a man went out with a club and took what he wanted. Senator O ’ G o r m a n . What are the objections to that proposed system ? Mr. C h a p m a n . We want that eliminated, and have the clause, Senator, to read: to permit Federal reserve banks to loan. I will show you the reason why that will accomplish exactly what this reading at the present time will, with the objectionable matter left out. In Minnesota Senator Nelson has a farm. It would be just as proper for the State Legislature of Minnesota to pass a law appointing a committee of seven citizens of Minnesota whose duty it should be to require or to compel Senator Nelson to loan his teams and his harvest ing machinery to his neighbor when his neighbor was taking in his crop. It is just as reasonable to compel Senator Nelson to loan his teams and his harvesting machinery as it is to require or to compel one bank to give credit to another against its free will. I take it that none of you gentlemen considers the necessity of putting that in— that is, from a legal standpoint. It would appear to us that it is absolutely illegal and un-American, as I said before. What will the objection be to that bill without that clause in it? That is what interests us. In the bank with which I am connected we have over 9,000 checking accounts. Of those, over 50 per cent are accounts of $100 or less. We loan those people $100 or less. We look them up just as carefully and are glad to extend the credit to those people just as much as we are to loan a corporation or a firm $100,000 or $500,000, which is the most we can loan. There is no law that requires us or compels us to loan that money. That is what we are a bank for. That is what our business is, to loan that money. Senator Hitchcock, I think, yesterday or the day before spoke about the continental banks in Europe and compared them to these 12 regional banks. There certainly is no law requiring those con tinental banks of Europe to discount the paper one for the other. Yet they do it. They do it because of the law of supply and demand. They do it because there is money in it for them to do it, and that is what the success of these regional banks is‘ going to depend on— not on any force which will compel them to do it, but for the same reason that prompted Robert Morris to loan money to the Continental Army to carry on the war. Nobody forced him to loan that money; nobody forced the national banks to come into existence and buy those bonds. These gentlemen do it willingly and gladly. And, gentlemen, if you will leave that phrase out of that bill you will accomplish more in getting a friendly attitude toward all of the b a n k in g and currency. 189 banks of the United States and toward your purpose in establishing this bill than you will by including in it something that is absolutely unnecessary to the working success of your plan and something that may be so unconstitutional as to absolutely make your whole law invalid and void. That is about all I care to say on that subject. I am willing to answer any questions you gentlemen may have to ask me. Senator N e l s o n . I would like to ask a few questions. You have one of the largest banks in Minneapolis, and I would like to have you tell this committee what you know about farm loans, real-estate loans on improved farms, and how you look upon that kind of loans and that kind of security. I know you are familiar with the subject, and I know the committee will be glad to hear you. Mr. C h a p m a n . Well, sir, as a national banker, I am not familiar with the loans, because our national bank can not, by law, make them; but for years I have been an officer of the Minnesota Bankers7 Asso ciation, an association of about 1,000 banks. The national banks in that State, outside of the reserve cities, have talked this matter over, and they are anxious to have the privilege of loaning part of their resources on first farm mortgages loaned on a conservative valuation. Senator N e l s o n . Of how much, 50 per cent? Mr. C h a p m a n . Forty to fifty per cent; not over that. Senator N e l s o n . H ow do they regard that kind of paper— farm mortgages ? Mr. C h a p m a n . That paper is regarded as the best in the world, of its class. There is no better paper made than first farm mortgage properly made. Senator N e l s o n . If a man came to your bank to borrow money on his note, you would rather have as security a good farm mortgage of that kind than the ordinary class of stocks and bonds— outside of Government and State bonds, I mean ? Mr. C h a p m a n . Outside of Government and State bonds, if I knew that loan was safely made., I would just as soon have it as any rail road bond ever made. But not in a reserve city, Senator. Senator N e l s o n . N o . Your idea, then, is, Mr. Chapman, that the privilege of loaning on farm lands or, rather, the privilege of loaning on real estate, should be limited to farm land ? Mr. C h a p m a n . That is right. Senator N e l s o n . On improved farms, and should be limited to what are classed as country banks ? Mr. C h a p m a n . Yes, sir. Senator N e l s o n . Not banks in reserve cities, central reserve cities I Mr. C h a p m a n . No, sir; I would not give them the privilege. Senator P o m e r e n e . Why not ? Mr. C h a p m a n . Because we act as reserve agents for 1,000 banks. We must keep our assets in such shape that we can take care of k sudden call. A farm mortgage is not necessarily a liquid asset. Senator N e l s o n . I s it not very nearly the unanimous feeling among national banks, outside of the Twin Cities, that they are in favor of amending the law so that they can loan on real estate farm mortgages ? Mr. C h a p m a n . Yes, sir; I should say so. Mr. N e l s o n . It is the universal sentiment. Senator R e e d . In Minnesota ? 190 BANKING AND CURRENCY. Senator N e l s o n . In Minnesota. Senator R e e d . There has been mentioned several times the ques tion of whether the Government could compel one of these Federal reserve banks to transfer money to another, and the question of the constitutional rights that was raised has entered into it, and you likened it in your illustration to Senator Nelson’s farm, whe3*e the Government would provide that a board of directors should compel him to loan his farm tools and machinery. Let me call yotir atten tion to this: No bank exists as a matter of right. There is not a single bank in this country but what exists because the law provided the plan for its existence. If the Government were to provide a sys tem of banking, and in the law creating the system it was to provide that every bank coming into the system should have certain privi leges, they would have those privileges, would they not ? Mr. C h a p m a n . Yes, sir. Senator R e e d . And if it provided that it should also assume certain duties and obligations, they would have those duties and obligations, would they not ? Mr. C h a p m a n . Yes, sir. Senator R e e d . And if they failed to respond to the duties and obli gations, the Government would close their doors, would it not ? Mr. C h a p m a n . Yes, sir. Senator R e e d . D o you n ot th in k th a t disposes of the con stitu tion al question ? Mr. C h a p m a n . Absolutely not—not unless you want to go back to the times when they boiled the Jews. Senator R e e d . I am talking about constitutional questions. I am not talking about boiling Jews; I have always been opposed to that. [Laughter.] You have already answered about the farm mortgages, which is illuminating; and I want to ask you this: In the large banks, even in these big cities, do they not have an organization that is pretty closely affiliated with them to take care of farm loans? Mr. C h a p m a n . Yes, sir; we have a trust company. Senator R e e d . Right in the same building ? Mr. C h a p m a n . N o , sir; adjoining the building— but there is a connecting door. [Laughter.] Senator R e e d . Does it have the same officers ? Mr. C h a p m a n . No, sir. Senator R e e d . It has some of the same officers ? Mr. C h a p m a n . None of the same active officers. No officer of the national bank is connected in any way with the making of those farm mortgages. Senator O’ G o r m a n . The same interest controls them both? Mr. C h a p m a n . Yes, sir. Senator R e e d . Somebody controls them. Mr. C h a p m a n . Yes, sir. Senator R e e d . There is one man there, I take it, and he is probably the president of the bank ? Mr. C h a p m a n . Yes, sir. Senator R e e d . S o th at even the large bank in reserve cities does n ot w an t to let go of th a t class o f business, b u t he w ants to keep it in a separate till ? Mr. C h a p m a n . He wants to keep it separate from his demand obligations, from where they do not belong. BANKING and curbency. 191 Senator R e e d . What do you think about the proposition, or the plan, that was suggested by M r. Wade this morning of these mortgages taken by a reputable firm being a pretty easily convertible thing when we want to convert them ? Mr. C h a p m a n . I should say that that would depend absolutely on the integrity and the ability and the experience of the company mak ing those loans. Senator R e e d . That is pretty nearly true of every bank; your bank depends on that. Mr. C h a p m a n . Yes, sir; but every bank does not sell paper and does not sell mortgage notes to individuals of that kind. Senator R e e d . But I think the proposition that the business must be properly conducted goes with every bank? Mr. C h a p m a n . Yes, sir. Senator R e e d . I want to ask you this, whether you agree with the statement that was made here by Dr. Johnston, that the money is flowing out of the Bank of France now because of the war conditions, that the people are drawing the money out of the Bank of France and putting it into hiding, thus reducing its assets. Do you know whether that is the situation ? Mr. C h a p m a n . I only know what I read, and that is to the effect that— of course we must take into consideration that the average peasant of France is a wealthier man than the average citizen of this country; that is, the average business man of America. They have more money in the banks. The Frenchman is naturally thrifty. The reason for that is that when this Balkan War was closed and there were securities offered at a high rate, Mr. Thrifty Frenchman wants to be ready to get it; he wants to have his money where he can get it and sell it and make more money on it. Senator R e e d . Could he not draw a check on the bank for it ? Mr. C h a p m a n . He m ight. Senator R e e d . D o you agree with Dr. Johnston that this war con dition having obtained, the money is being drawn from the Bank of France ? Mr. C h a p m a n . Yes, sir; it is due to the war condition; certainly. Senator R e e d . D o you think that that comes because of the fact that he is hiding his money or investing his money ? Mr. C h a p m a n . I think both. Senator R e e d . Both ? Mr. C h a p m a n . Yes, sir; he is getting ready to invest his money. Senator R e e d . So that the theory that has been advanced here, that if the bank is entirely separate and distinct from the Government, the bank stands alone, like a Rock of Gibraltar in time of war, does not seem to be quite borne out ? Mr. C h a p m a n . Absolutely; there is no question of the integrity of the Bank of France to-day. Senator R e e d . I am not talking about the ability to break it, but the question of inspiring this implicit confidence that remains through all the terrors of the long war and leave the bank absolutely standing out in the sunlight untarnished and unharmed. Mr. C h a p m a n . I do not think that. In Europe the banks are coming out of this stronger than ever-----Senator R e e d . D o y ou think the Frenchman is drawing out all his money from the Bank of France to-day any slower than he would be 192 BANKING AND CURRENCY. drawing it out under the same circumstances if that bank was actually owned by the French Government ? France is not in any danger. Mr. C h a p m a n . That is a pretty hard question to answer. I do not know about the diplomatic conditions in Europe; I do not know whether France is in danger or not. Senator N e l s o n . I have understood that it is not as common for the peasantry of France to deposit their money in the bank as it is in this country. They like to keep it at home. That is the custom of the country. Senator S h a f r o t h . That is the reason it takes a larger circulating medium for that country. Mr. F o r g a n . All of the peasants of France that have money in the bank also have a little pile besides, generally. Senator S h a f r o t h . France also has a limitation as to the quantity that can be deposited there by one individual. STATEMENT OF ROBERT F. MADDOX, VICE PRESIDENT OF THE AMERICAN NATIONAL BANK, ATLANTA, GA. Mr. M a d d o x . Mr. Chairman and gentlemen, I have been requested to bring to your attention the recommendation of the convention of bankers in Chicago in connection with the last paragraph of section 17 of the bill in regard to par points of checks. For your information I will read it. Senator S h a f r o t h . Section 1 7 ? M r. M a d d o x . Yes, sir; that is, in our printed form. It was adopted at the meeting in Chicago. Tne C h a i r m a n . Page 32. Mr. M a d d o x (reading): It shall be the duty of every Federal reserve bank to receive on deposit, at par and without charge for exchange or collection, checks and drafts drawn upon any of its depositors or by any of its depositors upon any other depositor and checks and drafts drawn by any depositor in any other Federal reserve bank upon funds to the credit of said depositor in said reserve bank last mentioned.. The Federal reserve board shall make and promulgate from time to time regulations governing the transfer of funds at par among Federal reserve banks, and may at its discretion exercise the func tions of a clearing house for such Federal reserve banks, and may also require each such bank to exercise the functions of a clearing house for its shareholding banks. The convention discussed that paragraph at length, and finally adopted as a recommendation, respectfully, that the paragraph be changed to read as follows: It shall be the duty of every Federal reserve bank to receive on deposit t par checks and drafts drawn upon any other Federal reserve bank. From the last annual report of the Comptroller of the Curren v we find that of the 7,397 national banks in operation in the United States more than 2,000 were banks in small cities operating with only $25,000 capital and 4,706, or 63 per cent, had capital less than $100,000. It was largely the consideration of this great number of small national banks and the small State banks throughout the United States that undoubtedly prompted those in attendance at the recent convention to respectfully recommend the change in that paragraph of section 17. The small banks of the country have performed and are performing a great service to the Nation. They encourage thrift in their com BANKING AND CURRENCY. 193 munities and facilitate trade; they are the kindergartens of commerce. Especially in the South and West these small banks have been of great benefit. In the spring they have made advances to the farmer which enabled him to pay cash for his supplies, and they are gradually emancipating him from the burdensome system of trading on long time, with its accompanying high prices. In the operation of the smaller banks of the country the exchange received is a considerable portion of their annual profits. To make the regional reserve bank receive at par all checks drawn upon any member would, it is believed, in time force all banks in that district to cash at par all checks drawn in that district. The check deposited in the regional bank, drawn upon any member, would immediately be charged against the reserve deposit of such member, and thereby enforce its collection at par and eliminate from the member bank any possibility of collecting a reasonable rate of exchange. As the member bank would never know what amount of checks drawn upon it would be deposited in the regional reserve bank nor when they would be deposited it would force the bank to carry a large amount to its credit with the regional bank above the reserve required, for which the bank would receive no interest, and frequently require the member bank to ship by express at considerable expense currency to meet these checks which are drawn payable at the counter of the member bank. As there are more than 25,000 banks in this country, ot which only 7,372 are national, and the success of the new banking and currency bill must depend upon the cooperation of a laige number of banks of all kinds, the importance of the proposed revolution in collecting checks and the enormous labor, expense, and risk imposed upon the regional reserve banks, together with the loss of revenue to a large percentage of the other banks, should not be underestimated. As is generally known, the clearing houses in certain cities have, through mutual cooperation of banks in other cities, been able to work up a system by which checks upon certain banks and cities are now received at par. This has proven successful in a measure in the thickly settled sections of the country, especially New England. In other cities banks have cooperated in having their out-of-town items collected jointly through their clearing houses, thereby reducing some what the cost to the city banks. In New York City the clearing house has been working on a plan of cooperation for a par basis with outside cities for some time, but not withstanding the large number of banks which carry accounts in New York City, they have been able to get only the banks in the following number of cities in five States to remit at par: In New York, 43; in New Jersey, 34; in Connecticut, 14; in Rhode Island, 9; in Massa chusetts, 74; while in 15 States the banks will not remit at less than one-tenth of 1 per cent, and in 30 States the banks find it necessaiy to charge one-fourth of 1 per cent. It is therefore clearly shown that the question of exchange charges is one to be regulated by local con ditions, and not one which warrants at present national control. The development of the above-mentioned systems of collecting checks is progressing satisfactorily to both the city and the country banks, and as its operation is based upon voluntary cooperation it is likely to continue. We believe that after the regional banks are organized they can reach some agreement with the member banks in 194 BANKING AND CURRENCY. regard to a uniform rate of exchange which will be mutually satis factory. While the collection feature of the proposed bill may be considered favorably by some of the large cities, we do not believe the country is ready for a national enforcement of free collection of checks, as proposed in the present bill. At a recent group meeting of bankers in a prominent southern State resolutions were adopted, from which I quote the following: Resolved, That if paragraph 6 of section 17 of the proposed bill is intended to cause universal parring of all checks and drafts and thereby destroy the present source of income country banks derive by making reasonable charges for collecting and remit ting to cover checks and drafts, that the said provision is pernicious and will result disastrously to the earnings of country banks. Resolvedfurther, That this question of exchange is a local question, involving different considerations in the several communities of the United States, and should not be regulated by national legislation. Resolvedfurther, That the forfeiture of exchange earnings would so penalize the State banks o f ---------as to prohibit their becoming members, and that it would force country national banks to retire from the system, and thereby cause the financial power of the country to remain in the centers without relief to the conntry districts. As the checks upon the small country banks are usually drawn by country merchants, who trade largely with their nearby wholesale merchants, a large majority of their checks circulate within a radius likely to be included in the Federal regional reserve district. In con sideration of the trade of these country merchants, we have not heard of the city merchant seriously objecting to paying the small exchange charged by the city bank and never exceeding one-fourth of 1 per cent to reimburse it for the charge made by remitting by the country bank. I say reimburse it, but the city bank does not, as a rule, charge an amount which does reimburse it. The city bank allows its depositors to “ bunch” their out-of-town items, and they are of course collected individually. The rate for remitting by the country bank being more on small amounts than on large. In the city of Atlanta, for instance, the clearing-house banks collect through their clearing house a large amount of their miscellaneous country checks payable in Georgia, Alabama, and Florida. The average cost to the Atlanta banks to collect these items is $2.07 per thousand, while they only charge their customers $1.25 per thousand, showing a net loss of 82 cents a thousand. Tha operation of the par feature, of the proposed bill would virtually mean that in order to collect every check in the United States at par a member bank would only have to open a reciprocal account with one other member bank in each of the Federal reserve districts. We believe that there is now existing a most encouraging spirit of cooperation between the banks of the various cities and towns of the country, each willing to accord to the other every due consideration, and they are all working for the benefit of their communities and to the prosperity of the Nation. Tne banks are now satisfied with the existing arrangement, and their patrons are pleased. Under such conditions, we believe the amendment we propose would be to the best interests of the regional reserve banks and satisfactory to the people. It virtually makes 12 par points, representing every section of the country, which would be all that is needed and furnish a sufficient basis of exchange at bar. It would leave the Federal reserve banks, at least for the present, BANKING AND CURRENCY. 195 free to perform the function for which th§y are most needed; that is, to control the reserves of the Nation and furnish to our people a wisely secured circulating currency receivable in gold. Senator S h a f r o t h . What does this cost that you refer to con sist of ? M r. M a d d o x . I do n ot believe I quite understand you , Senator. Senator S h a f r o t h . I mean exchanges. Mr. M a d d o x . In dollars and cents ? Senator S h a f r o t h . Yes. Mr. M a d d o x . You mean to the country at large? Senator S h a f r o t h . No; I do not mean the country at large. I mean what does each item amount to ? Suppose I brmg a check to you, and charge you me one-fourth of 1 per cent. You say that it costs the bank that much or perhaps a little more. M r. M a d d o x . The city bank ? Senator S h a f r o t h . The city bank. What does that cost consist of? M r. M a d d o x . We take the check that we receive over the counter to-day at Atlanta. I will use Atlanta for illustration. It receives the check deposited by one of its customers on Valdosta, Ga. We send that check to Valdosta, and the bank in Valdosta will remit us an Atlanta exchange for $1,000, if that were the amount of the check, less one-fourth of 1 per cent. We have the use of that money for probably two or three days. But the city banks, as a rule, only charge their customers exactly what the country banks charge them for remitting the checks back to the counter from which they were taken and deposited. Senator R e e d . Why should that bank make that charge? Mr. M a d d o x . I t is ju st a source of revenue for them . T h ey h ave to keep their m o n ey in A tla n ta and fre q u e n c y h ave to send it b y express to the different parts of the country The C h a i r m a n . There is postage and clerk hire also. Senator R e e d . I am trying to get at the reason. You are a banker in Atlanta ? M r. M a d d o x . Y e s , sir. Senator R e e d . I live in Kansas City. I go dow;n to Atlanta and I give you my check for $1,000 upon my bank in Kansas City, and you give me $1,000. M r. M a d d o x . Y e s , sir. Senator R e e d . I readily understand you have got to lose the use of that money until you can get it from Kansas City. You lose that much of your funds. When that check gets back to Kansas City, to my bank, my bank pays the face of it. Mr. M a d d o x . Certain cities of the country are recognized as par points. The city of Atlanta is one. The city of New York will take any number of checks at par. Take Kansas City and New Orleans and Louisville and Cincinnati and Baltimore and Chicago at par. If my bank can collect that check at par in any way it would charge you for it. Senator R e e d . Why, in all instances, does the check not go back to the bank upon which it is drawn ? M r. M a d d o x . It does. Senator R e e d That bank proceeds to discount the checks ? 196 BANKING AND CURRENCY. Mr. M a d d o x . N o , sir. It is willing to pay out the currency at par value for the check over the counter, and it does it every hour of the day; but when I receive that check and see that it was drawn in Kansas City, that it was not a check on New York or Atlanta, it costs the bank m Kansas City something to maintain that balance in Atlanta, and therefore the bank in Kansas City charges a certain rate of exchange for furnishing me that piece of exchange instead of the currency. Senator R e e d . Going back to the transaction between yourself iind myself, you sent the check to my bank in Kansas City where I have an account now, and they send a draft to you upon New York. It is justified in making a charge to you for that draft, because it has to keep a large sum of money in New York and it is out that much interest; and that is the reason it keeps that account in New York. Does it not get anything on this account there ? Mr. M a d d o x . Usually the New York banks pay 2 per cent interest on balances. Senator R e e d . But that does not compensate it for money that it might get. It might get 5 or 6 per cent. I see. Then there is occa sionally money actually shipped all over the country ? Mr. M a d d o x . We do it. From Atlanta we have to ship it at large expense. Senator S h a f r o t h . Where you do not charge between points it is because they have correspondent accounts ? M r. M a d d o x . Yes, sir. The city banks never attempt to collect the exchange out of a check, but they can collect the par. All the banks throughout the country try to collect them from their cus tomers as reasonably as possible, and we voluntarily make par points; <and under the present theory, for instance, if New Orleans would be our regional reserve, we would have to keep money going to New Orleans all the time, and we would have to keep an excess there to meet the demand, and I would have to send currency there to meet it unless it was payable on the counter of my bank in Atlanta. Senator S h a f r o t h . D o you know how many par points there are in the United States! Mr. M a d d o x . I have no idea; but 1 think New York is in a better position to create par points, because of the large number of recip rocal accounts kept there, and the banks find it absolutely necessary to make these charges or they would not do it. It would be a serious handicap to the success of this measure, in my opinion, when you realize that 4,700, 63 per cent, of the national banks are operating with less than $ 100,000 capital— and that is an important part of a small bank’s profit. In my State there are 600 more State banks than National banks, and they are mostly smaller banks. I suppose there are over 200 State banks, with $15,000 capital, which could not possibly come into this system. Senator N e l s o n . What proportion of the $25,000 national banks have you ? M r. M a d d o x . There are only 13 in the State of Georgia, whereas there are 1,700 banks altogether. In some States there are banks operating with $ 10,000 capital. Under this proposed law no bank -can come into the system with less than $25,000 capital. Senator B r i s t o w . Y ou s a y it costs more in some regions of the country than in others ? BANKING AND CURRENCY. 197 M r. M a d d o x . Yes, sir. Senator B r i s t o w . Why should it cost more ? Mr. M a d d o x . Because exchange on the leading cities is less avail able, and it is more necessary to express. Senator B r i s t o w . In what sections of the country is the expense heavy ? M r. M a d d o x . In certain parts of the South, when cotton bales are moving, and the cotton merchants are trading on Europe and in New England. It is necessary, in order for us to buy New York exchange, to pay a very large premium for it; and that applies in the different sections of the country. New York is the par point that America remits upon for all checks. Senator B r i s t o w . In some sections of the country the banks in one town charge more for the collection of checks than in other towns, do they not? M r. M a d d o x . That is due to local conditions. Senator B r i s t o w . The cost is just the same? M r. M a d d o x . It is just the same. It is for the same reason that one merchant in a town will sell goods at a much less price than another one will. Senator B r i s t o w . A s far as m y know ledge goes, the banks h ave th e sam e rule governing these charges. M r. M a d d o x . They usually have some agreement about it that will meet the conditions of the town itself. Senator B r i s t o w . But if in one town they make a charge and in another town they do not, that would indicate that it was not very important factor in the revenues of the bank, would it not ? M r. M a d d o x . There may be some special reason why that bank particularly wants to encourage a certain means of collection from a certain section, and do it somewhat as an advertising feature; but it does it at a loss, I think. The country banks are really entitled to some exchange, in my opinion, after these regional reserve banks are organized, and the country banks come m. If the regional reserve banks will make some equitable arrangement with the mem ber banks for a uniform rate, I believe it will be less than the prevail ing rate. I believe it is one-tenth of 1 per cent. It would be uniform throughout the regional reserve. Here in our bank, say, it would cost a man $6,000 to $ 10,000 a year if his checks were forced to be cleared at par. A small country bank-----Senator S h a f r o t h . In the illustration of Senator Reed giving you a check at Atlanta on Kansas City for $1 ,000, you would send that check to New York, would you not? Mr. Maddox . N o, sir. Of course there is a different system by which different banks collect their out of town checks, but I think any such amount as that, the banks would send it there. All the larger banks would. Senator S h a f r o t h . Y ou having a balance in New York and the Kansas City bank having a balance in New York, they would offset each other ? M r. M a d d o x . That might be, if Kansas City was collecting at par. If that is the case, I would not charge the customer who came in with the check and wanted $ 1,000 clearance. The banks are all anxious to protect their par points as much and as liberally as possible for the accommodation of their customers. The other matter------ 198 BANKING AND CURRENCY. Senator H i t c h c o c k . Before you leave that, Mr. Maddox, I want to ask you a question along th&t line. Suppose this provision should stand in the bill as it is, it would, be easier for e$*eh ba*nk to make these collections if there were a large number of reserve banks than if there were a small number, would it not % Mr. M a d d o x . I think not; for the reason that while a small number of regional reserve banks would necessarily include a little larger terrifcory if there'were 5 instead of 12, yet the bill says each bank shall receive on deposit at par the checks of any member of that distiict; in other words, one bank in the entire South must receive at par ch^ks of every other member in the entire South. Senator H i t c h c o c k . These checks do not have to go through a remote center if there are a large number of regional reserve banks. Mr. M a d d o x . That is true. Senator H it c h c o c k . If they had to go through a remote center would not that complicate the matter of collection somewhat rather than having more centers ? M r. M a d d o x . I t w ould be a little longer distance from the rem ote center. Mr. W e x l e r . Instead of a reserve bank they would have branches, M r. M a d d o x . I believe it is contemplated that the reserve bank would have branches. Of course, we do not know how largely that branch feature would be developed. Senator H it c h c o c k . Have you any of showing what per cent of profit come back, we will say, to a bank of $75,000 capital, from charges upon the collection of checks. Mr. M a d d o x . I am not prepared to answer that. I should say, roughly speaking, 20 per cent. Mr. Wexler, would that be out of the way? Mr. W e x l e r . That would depend upon deposits of the banks. I should think more than that. I should think: nearer 35 to 50 per cent. Mr. R e y n o l d s . I might say that there is a vast difference in charges made for the collection of these checks in the different sections of the country. You take the northern and western banks in the small towns, and the exchange feature, the selling of exchange checks over the counter has dwindled down to almost nothing, whereas in the South, where Mr. Maddox is. I think you still maintain a fair rate of exchange on those items; so that while the South will get a very large revenue and income from this, in some other sections of the country it is very materially reduced. M r. M a d d o x . I t is p u re ly a local m atter. Senator N e l s o n . Has not the practice grown up among banks to issue drafts in such cases without charge for their customers who are depositors in the banks— those who do business with the banks as depositors—without exchange ? Mr. R e y n o l d s . A very large percentage of the. banks in the North and Northwest do that, but not many in the South. Mr. F o r g a n . Before Mr. Maddox proceeds to the next subject, I would like to say that this subject— the exchange charges on checks—was more hotly debated than any other feature of the bill in our meeting at Chicago. It was brought up especially by the representatives of the small banks in the South, who protested most vigorously against that provision of the bill. I want to draw your BANKING AND CURRENCY. 199 attention to that, because if you want to make the bill popular with tte smaller banks of the South, you will find that that is the prominent sticking point that they are objecting to. Mr. K e y n o l d s . I think, if I may, I can give you a little idea as to what this means in dollars and cents, as one Senator here suggested. By quoting from an average of perhaps a dozen letters th a t! have received from southern correspondents bearing upon this subject, as I recall these letters, and I should say offhand, without having gone over the figures to justify it, that the banks from which I heard would have a capital averaging perhaps $150,000 apiece; and in their letters protesting against this clause being inserted in the bill, the amounts of the loss that each of these bankers claimed their banks would incur in event of its passing ranged all the way from $7,000 to $20,000. Senator S h a f r o t h . A year ? M r. M a d d o x . A y ea r. The C h a i r m a n . The volume of these exchanges as shown by circu lar 34, an abstract of the condition of the national banks, July 3, 1913, is that these checks and cash items run from $250,000,000 to $296,000,000, during the year, on daily account current. M r. M a d d o x . Outstanding all the time. The C h a i r m a n . Outstanding all the time, and it, of course, makes a very large business. Mr. F o r g a n . Right there I would like to give you a little bit o f statistics to show you that this is no small matter that we are talking about. It might seem a small matter when the individual check is considered, but when I inform you that we have a department in our bank in which we keep more than 60 men doing nothing else but handling these checks, and that we handle 25,000 a day, and send them to their destinations from Chicago alone, and that Mr. Reynolds here must have at least 30 per cent more than that, you will realize the volume of business that is done along that line. The C h a i r m a n . I would like to ask you, Mr. Forgan, in that case whether a large part of those are not checks passing through your bank for collection ? M r. F o r g a n . Oh, yes. The C h a i r m a n . And would not those checks if they were on deosit on a Federal reserve bank be canceled at the Federal reserve ank, and therefore make unnecessary the sending of that check down to the correspondent and back again to be simply charged against him ? Mr. F o r g a n . That could be done, but it would be very bad, as the banks would have absolutely no control of their balances, and that is what we are running across every day now. There is not a bank correspondent on our books that will permit us to charge $1 to their account until we have got their signature to a check or order telling us, “ You are authorized to charge it,” so we have to send every check on every correspondent to that correspondent and wait until we get back an order to charge. The C h a i r m a n . It would, however, be an economic advantage, if it could be done ? Mr. F o r g a n . If it could be done; but by doing it you complicate the management of each individual's business to such an extent that, for instance, he has no knowledge of what checks his customers are E 200 BANKING AND CURRENCY. drawing on him, and if his balance with his reserve agent is impaired by charging to him checks which are not honored, and sending them back to liim before he has provided for them, he has to keep a very much larger balance in order to protect his reserves against such charges, of which he knows nothing until after they have been made. The C h a ir m a n . But the premises upon which you proceed in the case of a Federal reserve bank which dealt along with banks of a qualified class as members of a Federal reserve bank would be a dif ferent premise from that which now forms a just basis upon which an objection would be made by a correspondent bank and yourself. Mr. F o r g a n . I think not, because the reserves would be kept by the Federal reserve banks. Mr. R e y n o l d s . By way of completing the record with reference to this and giving you a little better idea, perhaps, as to the magni tude of this business, and which I hope to touch upon a little later, I will only say that in our institution we handled last year 19,000,000 checks and items of this kind, checks and items on points outside of Chicago and New York City. We have in one department 200 men doing this business alone. We have in transit in process of collection an average of about $13,000,000 the entire time. When you undertake, Mr. Chairman, to have those go through the Federal reserve bank and cancel them as you suggest, you overlook one of the most important things necessary in the handling of checks of that kind, and that is that you do not know the genuineness of the signature of the maker of the check, nor do you know that he has the balance in the bank upon which it is drawn. If those things could all be put in the hands of the Federal reserve banks, if they could know that every check that comes through their office is signed by a genuine maker, and that the balance which that man would have in that particular bank upon which he would draw the check was sufficient, your theory would be a good one; otherwise it would be fraught with much danger. The C h a i r m a n . I would like to have it appear in the record in this connection that if there were established 10 reserve banks, involving 27,000 banks, there would be 2,700 banks on an average in each of these 10 Federal reserve districts. Each one of these 2,700 banks would have its signature of record at its Federal reserve bank, and I take it also, if necessary, at the other Federal reserve banks. I am not talking about private checks— I am talking about checks sent by the members of the banks; and therefore when any one of these member banks draws a draft upon any other member bank or any member bank of another Federal reserve bank, the process would be that such checks going into the reserve bank No. 1 would be there canceled and sent as vouchers to member banks, who would be carrying deposits with such bank, and in like manner such bank would be itself credited with checks drawn on other member banks belonging to that particular Federal reserve bank. If, how ever, the checks were drawn upon a member bank of another Federal reserve bank it would be transmitted by the Federal reserve bank No. 1 to Federal reserve bank No. 2 , and a like process of cancellation obtained, and therefore there would be an obvious economic advan tage. I would be glad to have the record show in that particular that process is wrong. BANKING AND CURRENCY. 201 Mr. M a d d o x . There is just one thing I would like to add, referring to your comment of a moment ago: The convention recommendea a substitute for that paragraph, to be that— It shall be the duty of every Federal reserve bank to receive on deposit at par checks and drafts drawn upon any other Federal reserve bank. In other words, any member in any district could draw a check on the Federal reserve bank in that district and that check would be collectible at par at any other Federal reserve bank, which would merely make, as I said before, as many par sections of the country as there were Federal reserve banks. I could draw a check on the reserve bank in which my city was located, lor illustration, and it would be taken at par, and also all over the United States in any other Federal reserve banks. Senator R e e d . Let me ask you if that would work out this way: The customer of a country bank desiring to pay a bill, say in Atlanta, and that country bank was a member of the reserve association or the reserve bank, and could go to that bank and draw his check to the bank and get a check from his bank drawn upon the Federal reserve bank, and use that check to pay his bills. Mr. M a d d o x . All over the United States. Senator R e e d . And then that would avoid the payment of any exchange. M r. M a d d o x . Y e s , sir. Senator R e e d . And if he drew his own check directly you want it so he would still have to pay no exchange? M r. M a d d o x . T h a t was th e o b je c t o f this p rov ision . Mr. F o r g a n . That is the milk of the coconut. You have brought it all out right there; that is what the country banker objects to. I do not want to reflect on the country merchant, but the not infrequent practice of some country merchant is to issue his check on his own bank, knowing that it is going to be three days going and three days coming back, and he does not make his deposit until he figures it has had time to get back. Senator P o m e r e n e . Perhaps you ought to modify that and say “ some country merchants.” Mr. F o r g a n . I say “ some” ; I did not say all. That is the feature that the country bank objects to. Mr. W e x l e r . The customer of the country bank in paying a bill in St. Louis, instead of going to the counter of his local bank and buying a piece of exchange on St. Louis, as he ought to do, and remitting that to the merchant in St. Louis in current funds of St. Louis, he will draw his check on the local bank and send it to the merchant in St. Louis, and it takes that check probably three days to go and a day in St. Louis, and three days to come back, so that he need not have the money in bank to protect that check for sev eral days while it is in transit; and further than that he is generally interested in the local bank, and he thereby enables the local bank to make a collection charge upon the St. Louis hank that received it from its customer, so that he is benefiting again by it. I do not think you are going to get the small country bank into this system unless you eliminate this clause to which they object, as Mr. Maddox has said; and I think it is a proper subject to leave for adjustment and working out after your bank has been established* 202 BANKING AND CURRENCY, I think it w ould be m o st wise and politic to do th at, because, as I h eard one banker sa y : Even though the country perish, we must keep our collection charges. Senator S h a f r o t h . Is there not this advantage in drawing a check of that kind; that is, you get the receipt direct of the man to whom you are going to pay the money? He can do it by going to the bank, but it is a round-about way. That is the reason I pay my bills by check, because I write on each check what the bill is for and it answers for the receipt; and that is of great value to me, because I do not have a very big account. M r. M a d d o x . There is one other thing, w hich I do n ot think is h ard ly necessary to dwell upon, b u t I can see the effect if ev ery regional reserve ban k were com pelled to tak e at par the check on ev ery m em ber bank th a t it m igh t encourage w h at we call “ k itin g .” I t w ould facilitate th a t v ery bad feature th a t som e custom ers of ban ks practice. I will n ot go into th at, because I do n ot think it is necessary at this tim e. Senator W e e k s . Mr. Maddox, do you not think it would be well to explain just what you mean ? M r. M a d d o x . I f a concern had a branch office in another part of th e section of a regional reserve district and th e y b o th h ad accounts in the different tow ns where those branches were located , those checks w ould have to circulate at par, do y o u n o t understand, in any art of that district, and one branch could draw the check on his Kome bank and they could draw a draft on that member and they both would be taken at par, which is just keeping it in circulation until it came back and then the regional reserve bank would nob know whether the check was good upon the issuing bank until it came back. There would be no way of the regional reserve bank knowing if those checks were good. In every bank in the larger cities—certainly in Atlanta, although I do not call Atlanta a large city—every day there are probably 25 or 30 checks thrown out of the bank that come through the clearing house that are not good. Those checks would have been cashed by the regional reserve Dank and charged to our account, and in some instances those checks aggregate a large amount and it would have reduced our reserve by that amount, although we did not know that the man who drew the check did not have the money sufficient to his credit to pay it. Senator R e e d . Would you object to this clause if it was amended so that it was the duty of a Federal reserve bank to cash without charge the check of any member bank ? M r. M a d d o x . I f I get y ou r question, it is w h at the p rovision is w e are n ow com plaining abou t ? Senator R e e d . D o you think that would be identical with the present provision ? Mr. M a d d o x . Practically the same. Senator R e e d . This reaas: And without charge for exchange or collection, checks and drafts drawn upon any of its depositors or by any of its depositors upon any other depositor. Mr. M a d d o x . That word “ depositors” means members, because no depositor can be a depositor without being a member. Senator R e e d . I see, we get back to the same place. BANKING AND CURRENCY. 203 Senator B r i s t o w . A moment ago there was an indirect criticism made on drawing a check for bills, and figuring on the time incident to .the return of the checks, in order to prevent overdraft on the local bank, and when that check comes back, the man who drew it makes a deposit and not when it was drawn; instead of that, if he had to buy a draft and deposit that with the local bank, would not the local bank have the use of the customer's money before its obligation was met; but as it is now the country merchant has the use of the bank's money ? Mr. W e x l e r . That is correct. Senator B r i s t o w . Why should not the merchant have the use of it as well as the banker ? Mr. W e x l e r . We do not say that he should not, we are just sim ply stating the cr„se. Mr. M a d d o x . The point is simply this, to boil it down, that the present system of collecting checks, while a little bit onerous upon the city banks—and they would benefit more than any other class by this bill—we believe, and our committee that considered this feature were nearly all city banks, but they sincerely and conscien tiously believe in the interest of this bill that it would be unwise to put this burden upon country banks, or, rather, to withdraw from the country banks the profit that for years they have been accustomed to earn through exchange. Senator W e e k s . Mr. Maddox, you have just said that this bill would be more beneficial to the city banks than to the country banks ? M r. M a d d o x . I said this p ro v isio n . Senator W e e k s . Y ou said “ bill.” M r. M a d d o x . I beg your pardon. Senator W e e k s . Y ou meant “ provision” ? M r. M a d d o x . I m ea n t “ p ro v is io n .” Senator R e e d . You think this provision has got to be limited, practically, to simple transactions between the reserve banks ? M r. M a d d o x . Yes. Senator R e e d . That takes away one of the advantages claimed for the bill. It occurs to me, as we proceed, that the bill is some thing like I heard a young lady say about her good looks. She said she would be good looking herself if it wasn't for her nose, her eyes, her mouth, and her complexion. [Laughter.] Mr. M a d d o x . Gentlemen, our committee has conscientiously— and I happen to be a member of the committee that revised this bill, or rather suggested some of the resolutions in the committee, and worked harmoniously with the committeee—and I believe that we should work in the interest of the whole country in suggesting these amendments, and if there are any features of the bill that ap pear to favor one class of citizens, it was not the intention of the committee. Senator H it c h c o c k . Mr. Maddox, you make no distinction in your objection between a check drawn by a country merchant drawn on one bank and a draft drawn by one bank on another bank, they both being members of the reserve association ? Mr. M a d d o x . Yes. The provision is that any check of any mem ber drawn upon any regional reserve bank shall be taken at par by all the regional reserve banks. 9328°— S. Doc. 232, 63-1—vol 1------14 204 BANKING and currency. Senator H it c h c o c k . But a check drawn by one member bank upon another member bank shall not be taken at par ? Mr. M a d d o x . No. A check drawn by one member bank upon another member bank may not be good, and the regional bank might cash the check for $ 10,000 when one member bank might not have it in another bank. Senator H it c h c o c k . Are there any cases like that ? M r. M a d d o x . Frequently banks draw upon Atlanta a check where they have not sufficient funds. They probably expect to get them there, and maybe the train will be late, and sometimes they do it without any expectation of having it there, just to obtain circulation. Senator H it c h c o c k . I supposed that individuals did that, but I did not suppose that banks ever did. M r. M a d d o x . I have heard of it having been done, have you not, gentlemen ? Mr. W e x l e r . Yes. Mr. M a d d o x . The next feature, gentlemen, if you have finished with that, to which I would like to call your attention, is the feature of savings banks in the national banks or the national banks doing a savings-bank business. When the convention met in Chicago, the bill stood as it appears in the printed report-----Senator B r i s t o w . Before entering upon that, there is another feature I would like to inquire about. If a merchant, we will say, here in the city of Washington is making a remittance to New York, and he sends his check on his local bank here to New York, the party to whom the check is drawn in New York deposits that check in his bank. Is that check cleared there in New York and charged to the account of the bank correspondent, or does it always come back to the city from which it was drawn ? Mr. M a d d o x . If I catch your question, I will repeat it so that I may be sure that I did: A merchant in Washington will send to a mer chant in New York a check on a Washington bank, the merchant in New York deposits it at his New York correspondent, and that New York correspondent will forward that check to his correspondent in Washington, the same as a check drawn to a merchant in Washington, and charged to that bank’s account in Washington; but if it happens not to be a check on the Washington bank it might or might not charge it— as far as Washington and New York are concerned. I have no doubt that all Washington checks are taken at par in New York, and the exchange feature does not enter into that transaction at all. Senator B r i s t o w . That is what I wanted to know, whether the bank simply charged it in New York to the account of the bank here and then the bank was out nothing. Mr. W e x l e r . I would like to say that that practice does not gen erally prevail. For instance, we have a large number of correspon dents and receive a great many accounts on those banks that keep accounts with us, and none of them permit us to charge those checks to their account. We assemble all checks on a particular point during the day and at night they are put into a letter and listed, and they are sent to the particular point, to our banking correspondent in that*town. He collects them from the various banks in the town and sends us the check to cover; that is the usual procedure. BANKING and currency. 205 All banks endeavor to get their bank correspondents to permit them to charge these items up to them, and in former years there was considerable of it done, but nowadays the banks will not let us do it; they insist that we send the item to them and let them challenge the signature and ascertain if the check is good, and then send us their exchange, usually on ourselves, if it is our correspondents, or some times on New York, Chicago, St. Louis, or Kansas City, or wherever it might suit their purpose. Senator H it c h c o c k . Mr. Wexler, is that true, of a draft drawn upon one bank by another bank ? Mr. W e x l e r . Yes; if, for instance, a bank in the city of Shreve port sends us a check on the bank in Monroe for the credit— that is, for the Shreveport bank—we have got to take that check just the same and send it up to Monroe and collect it. Senator H it c h c o c k . An individual check, you are speaking of ? Mr. W e x l e r . I am speaking about a bank check. For instance, the bank at Shreveport, La., has a credit in Monroe which it desires to get out of there and get into a reserve city, like New Orleans. I am its correspondent— that is, of the Shreveport bank— and it draws a check on Monroe and sends that check to me at New Orleans. I in turn send it to my correspondent at Monroe, and he mails me New Orleans exchange, or Chicago exchange, or St. Louis exchange, or New York exchange, which we call current funds, and then the Shreveport bank has the money to its credit with me in a reserve city. The Monroe bank charges us at the rate of $1.50 for collect ing that item, and we in turn charge the Shreveport bank the same— $1.50— that we have been charged by Monroe for collecting it. Senator H it c h c o c k . Suppose both of those banks have accounts with you, why could not you credit one and charge it to the other? Mr. W e x l e r . Because they won’t let me; in the first place, because they do not know how many checks are out, and they do not want to impair their reserve; and another thing is that they want the checks to come back to their counter so as to ascertain whether it was good or not; it may not be good. The C h a i r m a n . Suppose the Shreveport bank sent you at New Orleans a check on the Monroe bank and it went to the Federal bank; you would take it and put it right in the Federal reserve and take credit, and the Federal reserve bank having an account with the banks in that region, would then charge the Monroe bank and credit you, and you would credit the Shreveport bank, and the transaction would be economically completed there, without this sending back and forth; and therefore it would be an economic saving in the matter of time and postage and clerk hire and use of the money ? Mr. W e x l e r . Absolutely, and it would be extremely desirable. Of course the next step would be that the regional bank would send the item to Monroe, which it would have to do for verification of the signature and to ascertain whether it was good, and the credit it would give you would be subject to being charged back if it was not good. The C h a i r m a n . That would be the result in any event. Mr. W e x l e r . That would be a step in the right direction. It would be economy if that could be done, but that would not affect the various collections of the small country bank. 206 b a n k in g and currency. M r. M a d d o x . T h e question of exchange is m ore or less local, and it is v ery difficult to pass one rule th a t w ould a pply all over the cou n try. The C h a i r m a n . The present system would go on in any contin gency, I take it ? M r. M a d d o x . Y e s. The C h a i r m a n . Because all of these banks have at present and will continue to have large accounts with other banks where they keep their reserves ? M r. M a d d o x . Y e s , sir. The C h a i r m a n . At present the country banks keep 10 per cent more than the legal reserve now ? M r. M a d d o x . Y e s , sir. The C h a i r m a n . I believe you will concede that to be the case ? M r. M a d d o x . Y e s , sir. The C h a i r m a n . And that that system would still go on; they would not be obliged to send their remittance through the Federal reserve bank; they would still have the opportunity of using the present system, which is possible in the way of exchange. M r. M a d d o x . B u t if the am endm ent stands as at present, a n y check of a n y m em ber, y o u understand, will com e into the reserve ba n k at par som e tim e, very likely. Mr. R e y n o l d s . Mr. Chairman, I think I can clarify that just a bit for the members of the committee by making this statement: In its practical application the parring of checks, as the chairman has indi cated, would be decidedly to the advantage of the city banks; it would at the cost of present income of the country bank; that is exactly what it would mean when put into force. It would, however, as the chairman has stated, make available for reserve purposes very much more quickly a very large amount of money, and it would be an enormous economic saving m the collection of the funds. The C h a i r m a n . It would relieve approximately a part of the pres ent volume of $250,000,000 to $298,000,000 which are daily current in these exchanges. Mr. R e y n o l d s . If the national banks would all join the association, I should estimate it would relieve 70 per cent of it. Mr. W e x l e r . I would advise you to leave it out of the bill, because these country banks will not come in. The C h a i r m a n . I think they will. Mr. W e x l e r . I have talked to 100 of them, because I advocated that it should remain in the bill— that it was in the direction of eco nomics. I tell you they will not come in, and I would advise leaving that for adjustment after you get the banks started. Senator P o m e r e n e . I think they would come under your persua sive argument. Mr. W e x l e r . That was when they said they would rather see the Nation perish than to lose their collection charges. Mr. R e y n o l d s . I agree with Mr. Wexler as to its practical applica tion, though I want to be frank enough to have you understand that from my viewpoint it would be a decided advantage to my institution to have that remain in the bill, although for the very reason Mr. Wexler has stated there is a prejudiced opinion against it by the small country banks. BACKING AND CURRENCY. 207 Senator B r i s t o w . Mr. Chairman, you spoke of $200,000,000 or $300,000,000 being carried here as though it were a loss— as though losing the money. Who is losing the money ? The C h a i r m a n . The c o u n try . Senator B r i s t o w . Who, in the country? The C h a i r m a n . The in d iv id u a ls. Senator B r i s t o w . What individuals are losing this money? The C h a i r m a n . Those who are entitled to the active use of the money and who are compelled to carry it. Senator B r i s t o w . Who are they ? The C h a i r m a n . I leave that for my friend Maddox to answer. I could answer it. Senator B r i s t o w . It is the banks ? M r. M a d d o x . I do not know. Senator B r i s t o w . I s it not taking from the public a facility which it now has, which is a convenience to it, because it costs the bankers something to carry this ? Mr. R e y n o l d s . There is, however, a very large exchange charge made by the banks against this very practice which ultimately must be charged back to the people. Senator R e e d . Senator Bristow, you are not laying the pleasing unction to your soul that these bankers really lose this money themselves ? Senator B r i s t o w . If they are charging the people and get the advantage of a higher rate than they would have to pay otherwise, of course they are making profit by it. Senator R e e d . That is just it; they are charging these customers ultimately at one end of the line or the other. Either the man who draws the check or the man to whom it goes in payment has to pay these exchange rates. The C h a i r m a n . The economic loss must rest on the commerce of the country, and that is where it belongs. You can not charge it up to any other source. Senator H it c h c o c k . I would like to ask you whether this practice that country banks have of charging for the collection of these checks has not actually been promoted by the banks in the large cities them selves as a means of securing country depositors ? M r. M a d d o x . No; I do not think so. Senator H it c h c o c k . And has it not been offered as an inducement to these country banks ? Mr. Maddox . I do not think so. That is one of the features the banks recognized when the bank was chartered and organized and de veloped; it was existing then and is existing now. Senator H it c h c o c k . A s far as crediting at par the checks of one bank against another bank, they both being members of the reserve bank, while a bank would Lose in one case, would it not gain in another case, and would not the offsets be reasonably equal ? Mr. Maddox . Well, I do not think so, sir. The difficulty about having the regional reserve bank cash any check except the check the signature of which it has on file and a knowledge that the funds are available if that check is bad------- Senator H it c h c o c k . I am speaking now of the check of the one bank against another bank, they both being members of that reserve association or another reserve association. 208 BANKING AND CURRENCY. M r. M a d d o x . T h e reg ion a l reserve b a n k c o u ld h a v e n o w a y o f k n o w in g w h eth er o r n o t th e ch e c k w as d ra w n b y an a u th o riz e d officer, m th e first p la ce , o r w h eth er th e c h e c k o f o n e m em b e r w as g o o d u p o n an oth er b a n k , b u t im m e d ia te ly w o u ld ch a rg e it again st th e m e m b e r’ s reserve a c c o u n t w h en it ca m e in to th e reserve b a n k , an d I d o n o t see th e n ece ssity fo r it. Senator R e e d . I did not understand that. Mr. W e x l e r . Let me explain that. Senator R e e d . I do not understand why the central reserve bank could not have the signature of the cashier of each member bank. M r. M a d d o x . It could. Senator R e e d . Then it could tell when it got the check. M r. M a d d o x . I t w o u ld n o t k n o w w h eth er it w as g o o d o r n o t. Senator R e e d . The check of the bank which is a member bank ? M r. M a d d o x . Yes. Senator R e e d . N o w , it has some ot the funds of that member bank on hand, and that member bank has some investment in the central bank, and it draws its checks in serial numbers. I do not see why you can not verify the signatures. M r. M a d d o x . If, for instance, one member bank in Atlanta draws a check upon a bank in Savannah, your idea is to have the regional reserve bank in New Orleans cash tnat at par? Senator R e e d . N o ; I was talking about the bank in Savannah drawing its check payable to me—its own check— and my taking that, I putting the money in my own bank, and my bank transmitting it to the regional reserve bank. When it gets there, you have got books in which you have the signatures of the 600 or 700 cashiers of these banks. You would have, of course, to verify the signature. You would not have any difficulty about that, would you ? M r. M a d d o x . c a tc h y o u r id ea, Mr. W e x l e r . Mr. M a d d o x . T h a t is a fe a tu re th a t m ig h t b e in c o r p o r a te d — as I it is su ch as w e ca ll “ ca sh ier’ s c h e c k s .” For the transfer of funds. Drawn by any member bank upon any other mem ber bank would be redeemable at the regional reserve bank at its face value at once. Senator R e e d . Yes; that is wnat x mean. M r. M a d d o x . I do not see any objection to that. Senator R e e d . What 1 have in mind is just this sort of a transac tion: A merchant in Atlanta, Ga., wants to pay a bill to a wholesale house in Chicago, say $ 10 ,000. He comes to your bank and draws ^ hereupon issue him a check of reserve bank in Chicago. It y ta k e it a n d d e p o s it it in th eir b a n k , an d th eir b a n k is a m e m b e r banK. Mr. W e x l e r . That is just what they recommend, Senator Reed. Senator R e e d . And the member bank thereupon-----Mr. W e x l e r . I s charged up with it. Senator R e e d . Thereupon collects it through the central reserve bank. Mr. M a d d o x . That is exactly what we recommended. Senator R e e d . That is all right, is it ? Mr. M a d d o x . We recommend that with this distinction. As I get your question, Senator, it was the check of the bank upon itself— a BANKING AND CURRENCY. 209 cashier's check, you said. You said a merchant would go to a bank in Atlanta and get a cashier’s check. Mr. W e x l e r . He said a check upon a regional bank in Chicago. M r. M a d d o x . I d id n o t u n d ersta n d h im to sa y th a t. Senator R e e d . Why not a check upon itself if it had all the time money to its credit in the regional reserve bank ? M r. M a d d o x . T h a t is en tire ly sa tis fa c to ry , an d th is p r o v is io n co v e rs th a t fea tu re, or it w o u ld b e v e r y easily in co rp o ra te d . Senator R e e d . Then, if a merchant did not want to “ kite” a check— I guess that is a correct term— that is, send the check in, as was described here by Mr. Wexler, who seems to be something of an expert on that-----Mr. W e x l e r . On stopping them. [Laughter.] Senator R e e d . On stopping them; yes. If he did not want to send the check when he really did not have any money, and thus gets the benefit of three, four, or five days' time; but I mean if he really had the money and was willing to use it at once he could, under this suggestion we are now talking about, draw his check to his own bank and could save the exchange, and he would not be out anything. You do not object to that sort of thing? Mr. R e y n o l d s . That would be a common practice. Mr. W e x l e r . That is exactly what it should be, but what the country bank wants is to add: Nothing in this clause shall be construed to compel the country banker to collect items drawn upon him free. That has no relation to items drawn upon the regional banks, but items drawn upon the country banks, free. I think that should be put in in order to encourage the country bank to come into this system. Senator B r i s t o w . Mr. Maddox, on that point, if I am in business, we will say, at Bradford, Nebr., and I remit by check to pay a bill in Chicago, and the check makes its rounds and comes back to my bank, and it is charged to my account. I get a check from some one in some other town in my favor, and I take it and deposit it. At Bradford the bank may charge me for collecting that check. Mr. W e x l e r . Yes, sir. Senator B r i s t o w . If there is any bank in that community which will not make the charge, that bank will get a great deal of business which it would not otherwise get ? Mr. W e x l e r . Yes. S en a tor B r i s t o w . S o th e b a n k s m a k e an a greem en t th at th e y all w ill ch a rg e or n on e w ill ch a rge. Mr. W e x l e r . That is right. Senator B r i s t o w . If some bank in the town wants to go in and not charge, they will get the business, and all the rest will go in and be each tumbling over the other to do it. So you do not have to give them the guaranteed right to charge, because if one goes in they will all go in. They want to guard against our forcing them to come in and forcing them to handle these items for nothing; that is, they do not want to give up this line of profit because another community has already given it up. Mr. W e x l e r . Senator, there are a great many small banks that really could not exist without the collection charge, they could not 210 BANKING AND CURRENCY. earn a dividend. Take a bank with $25,000 and $50,000 deposits, of which there are thousands throughout the South I know. They ca^n not earn enough upon their smaS deposits to pay their dividends if they did not make this large collection charge. The collection charge collected by the State of Mississippi, as shown by a very respectatne and trustworthy representative of that State, is that it amounts to $650,000 a year, collected by all the banks in the State of Mississippi for the collection of checks held by banks or individuals outside of the State of Mississippi on banks located in the State of Mississippi. They realize that the establishment of this system of banks will reduce that charge very materially, and should do so; but they do not want any provision in here under which the entire charge can be eliminated, and I tell you that it is a good policy to put nothing in the bill that will indicate that that entire charge is going to be eliminated, because they will fight you, and their representation is enormous, and you will have a great deal of difficulty in putting the bill through if you antagonize that very large class of banks throughout the country. Senator B r i s t o w . If we are making a bill wholly for the benefit of the banks, your argument is very good, but I do not understand that the purpose of this currency legislation is wholly and simply in the interest of the banks; I think the whole country is interested. Mr. W e x l e r . I agree with you, and banks located such as mine and Mr. Reynolds's and Mr. Forgan's, and the banks in all the large cities will benefit tremendously by having any such charge elimi nated entirely. Therefore, we are talking against our own personal interest in the suggestion to you not to interfere with this as far as concerns the country banks. You will have to work out a great many other things m connection with this currency and banking scheme after it is once in operation, and you recognize that policy must govern you to some extent. You want to pass the bill, and you do not want the antagonism of this vast number of small banks scattered all over the United States which are to-day earning money from this source, and you can therefore just as well let a subject alone that will be too hot for you to hold, if you attempt to solve it at this time. [Laughter.] vSenator R e e d . There is one trouble about your logic, and that is that it does not follow that we want to pass this bill. Mr. W e x l e r . I am presuming that you do. Senator R e e d . And if you keep on raising objections to it, I am going to think it is about the worst bill I ever heard of. Mr. W e x l e r . The objections that we have raised are only to a small part of the bill. There are a great many excellent features which we have not referred to. Senator R e e d . I am getting interested in knowing what some of them are. Mr. W e x l e r . We will get to that subsequently. It is merely a matter of policy that I am referring to in regard to getting these banks with you m this proposition. Senator H it c h c o c k . Y ou answered Senator Reed's question, but there is still another question I would like to have cleared up. Is this merchant in Atlanta buying a draft for the payment of his bill ? As I understand it, he buys a draft on the St. Louis bank and it is sent to the wholesale house in St. Louis, and the wholesale house in St. Louis takes that $ 10,000 draft and deposits it, say, with Mr. BANKING AND CURRENCY. 211 Forgan’s bank in Chicago, and Mr. Forgan’s bank deposits it with the reserve bank located in Chicago. Now, he has deposited a draft drawn by an Atlanta bank upon a St. Louis bank. Mr. W e x l e r . Yes, sir. Senator H it c h c o c k . Are you willing to have that received at par? Mr. M a d d o x . The provision we recommended did not contemplate that. Senator H it c h c o c k . That is what I want to get clear. M r. M a d d o x . The transaction that you refer to could be very much simplified under our provision. The gentleman doing business in St. Louis could come to a bank in Atlanta in order to pay the merchant in St. Louis for a bill of goods. There would be no reason under our provision for him buying a draft on St. Louis. He would simply buy the bank’s draft on the regional reserve bank in our district, which would go at par in St. Louis. Senator H it c h c o c k . You are the bank in Atlanta. His bank in Atlanta is privileged to keep a part of its reserve not only in a reserve bank but in a private national bank, and it may prefer to draw its draft on that bank. So that is bound to occur. What I want to clear up is whether your association objects to having the draft of one bank upon another bank received at par by the regional bank. M r. M a d d o x . I do not think that that would be wise. I think the regional banks of those districts— there could be no reason why a bank in Atlanta would draw a check on a bank in St. Louis if it could draw a check on the regional bank and have it cashed at par in St. Louis to accommodate its merchant. Senator H it c h c o c k . It might be either. It might be that the bank in Atlanta had $20,000 in one of the national banks in St. Louis, and it might have a small amount-----M r. M a d d o x . It would still draw its draft on the St. Louis bank and ask the St. Louis bank to send its check on the St. Louis regional bank, which would immediately go at par in the Atlanta district. That is exactly what you say. Senator H it c h c o c k . Your answer is that your association objects to having the draft of one bank on another bank received at par by the reserve bank? Mr. F o r g a n . We do not object to any check being received at par. Senator H it c h c o c k . Y ou advise against it ? Mr. F o r g a n . N o ; we do not advise against it. What we object to is the removing of the charges made by these small country banks at the present time, and that is all. These transactions that you are giving as an illustration would all go at par now. Mr. R e y n o l d s . We are perfectly willing to have that. M r. M a d d o x . T h e r e m o v in g o f th e charges m a d e b y th e sm all c o u n t r y b a n k is th e o b je c tio n . S en a tor H it c h c o c k . I s th e c h e c k o f th e in d iv id u a l o n th e c o u n tr y bank? M r. M a d d o x . T h a t is th e in terest o f th e c o u n tr y b a n k in it, and th a t is th e o b je c t io n ; and as th e y n u m b er 63 per cen t o f all th e n a tion a l ban ks, y o u ca n see at o n ce if th e y d o o b je c t it w o u ld be v e r y serious. Senator H it c h c o c k . I understood 3^011 to object to a draft by one bank on another bank because you could not tell if it was good. And one bank might not have a balance. 212 BANKING AND CURRENCY. Mr. M a d d o x . All objections along that line are not insurmountable. The C h a i r m a n . Mr. Maddox, do you interpret the language of the bill with reference to individual checks and not bank checks ? Mr. M a d d o x . What was your question ? The C h a i r m a n . I asked whether or not you construed the language of the act as found in the last paragraph of section 17, to which you have been referring, as intended to par private checks on individual banks, or whether it related alone to checks of member banks? Mr. M a d d o x . The paragraph reads: It shall be the duty of every Federal reserve bank to receive on deposit, at par and without charge for exchange collection, checks and drafts drawn upon any of its de positors, or by any of its depositors upon any other depositor. That is, any bank. The C h a i r m a n . They are exclusively banks, are they not ? M r. M a d d o x . Y e s. The C h a i r m a n . Therefore this section relates alone to checks on banks and on member banks ? M r. M a d d o x . N o , ch e ck s u p o n a n y membfer. The C h a i r m a n . Upon any of its depositors ? M r. M a d d o x . D e p o sito rs, w h en m e m b e rs; n o d e p o s ito r ca n b e a d e p o s ito r w ith o u t b e in g a m em b er. The C h a i r m a n . Therefore it only relates to member banks ? Mr. M a d d o x . Absolutely— on checks on members, Mr. Chairman. The C h a i r m a n . I see the point you are making. Mr. W e x l e r . If our bank gets a whole lot of items from its cus tomers, drawn on little country banks, and we take-----The C h a i r m a n . Y ou do not object to checks of member banks being taken at par upon another member bank or upon any regional bank ? Mr. W e x l e r . Not at all. Mr. M a d d o x . Mr. Chairman, the other subject is the question of the savings feature of the national banks. You will see from the printed report that there is a long provision controlling the savings departments of national banks. Senator H it c h c o c k . What section is that ? M r. M a d d o x . Section No. 27. The C h a i r m a n . Page No. 29. M r. M a d d o x . T h e p r o v is io n seeks to c o n tr o l the sa v in g s d e p o sits o f n a tio n a l b a n k s, an d after a v e r y fu ll d iscu ssion o f th a t fe a tu re , it w as u n a n im o u sly su g g ested th a t the p r o v is io n b e strick en e n tire ly o u t, an d n o fu rth er r e c o m m e n d a tio n in rega rd to sa v in g s b a n k s th a n at p resen t; in oth er w o rd s, to p e rm it th e n a tio n a l b a n k s to co n tin u e to op era te th eir sa v in g s d e p a rtm e n t a t p resen t u n d e r th e ru lin g o f th e co m p tro lle r. At the recent convention of bankers in Chicago a resolution was unanimously adopted urging Congress not to incorporate in their new banking and currency bill section 27, covering savings depart ments of national banks, but recommended that the national banks be permitted to continue to operate this feature of their business as at present. The last annual report of the Comptroller of the Currency showed that of the 7,397 national banks, 3,268 had savings departments, and that 2,709,048 depositors had to their credit $748,247,183, or an average deposit of $276.20. The savings deposits in the national BANKING AND CURRENCY. 213 banks is less than 12 per cent of the total deposits in all national banks. In the 25,195 banks in the United States in 1912 there was de posited $17,024,067,000, exclusive of bank deposits. Of this amount there were $6,496,192,000 in savings deposits, showing that of the total deposits in all the banks in the country 38 per cent consisted of savings. Out of the 25,195 banks in the country the 7,374 national banks held practically one-half of all the individual deposits, while only 630 mutual savings banks held 55 per cent of all the savings deposited in the Republic. The amount of savings deposits per capita in the United States in 1912 was $67.77, and for each geographical section was as follows: New England States........................................................................ $237. 00 Eastern States................................................................................ . 129. 23 Pacific States................................................................................... 82. 43 Middle Western States.................................................................... 46.13 Southern States............................................................................... 9. 89 Western States................................................................................. 8. 56 The average dividend of the national banks upon their capital and surplus last year was less than 7 per cent. Senator H it c h c o c k . I s that for savings banks strictly ? M r. M a d d o x . All savings accounts. Senator H it c h c o c k . It is not for building and loan associations, is it? M r. M a d d o x . I to o k th at fr o m the co m p tr o lle r ’s figures. I pre su m e he figured it in th a t w a y . State institutions doing a savings business in some o f the States o f the country are required to segregate savings deposits, and the law specifies into what investments they shall be placed. The wisdom o i this method of handling savings accounts has been discussed by the officers of State banks, trust companies, and national banks at their various State and national conventions for several years, but owing to the rigid rules and regulations controlling national banks, it has not been thought necessary to apply this system of segrega tion of deposits and further regulation of investments for the savings deposits of national banks. While the mutual savings banks have by far the larger part of the savings of this country, they operate principally in the larger cities, and the State banks and the national banks in other sections have opened savings departments in order to encourage saving and ac commodate their customers, and they have attracted many deposits which otherwise might have been hoarded. The operation of a savings department provides an incentive to thrift and brings to the community an increased supply of capital and therefore benefits the banks and the people by furnishing increased deposits available for loan. The opening of the United States postal savings banks has brought out $25,000,000 from persons who were too timid to let their funds run through existing banks into the channels of trade, and has proven to be a wise movement on the part of the Government. It has been generally believed that about the best asset a bank can have is a good short-time paper made by a solvent individual or corporation. It is upon this class of paper we are about to base the 214 BANKING AND CURRENCY. new circulating notes of the Nation. It is into this class of paper that the national banks have largely invested their savings deposits and against which they have earned the reserve required for demand deposits. While in New England, New York, and Pennsylvania the local securities may be attractive for investment of savings funds, their low rates of interest are not so attractive in other sections. In Massachusetts, with its $800,000,000 in mutual savings banks, it is said that 90 per cent are invested within that State. In Michigan 51 per cent of the savings must be invested in mort gages and bonds, 15 per cent held as reserve and the remaining 34 per cent may be invested as the directors see fit. In Massachusetts one-third may be invested in commercial loans and the remainder held in cash or mortgage loans. While there are but few reasons for national banks segregating their savings deposits, we believe there are none why they should be forced to purchase bonds and mortgages. The investment question is purely a local one and what might be practicable in one section would be wholly impracticable in the other. We believe the requirement to set aside 20 per cent or one-fifth of the national banks’ capital for their savings department and to require that such an amount shall be invested in bonds and mortgages is especially burdensome, as the banks now pay full taxes on this amount to the State, city, and county. We believe that the restriction as to the purchase of bonds of cities with a minimum population of 25,000, and also limiting the list of bonds of cities to those having bonds outstanding of only 5 per cent of their assessed valuation, will force the banks to purchase bonds of a very few cities. The interest on bonds of the United States and the different States is so low that there would be but little margin, if any, between the rate of interest paid savings depositors and the available income from such investments. While this section of the bill does not so specifically state, it is presumed that the savings depositors will rely upon the segregated assets of that department, or will have a first claim on those assets, and if there is a deficiency they will have a further pro rata claim upon the other assets of the bank. We have seen in the recent past a great decline in the market price of bonds of all kinds and especially those which are available for use in savings banks, while commercial paper is still worth its full value. If to meet a heavy demand on the savings department of the national banks in times of distress, the banks are forced to sell these bonds on a declining market, it would seem that this would likely produce a deficit in the savings department, but if the short-time commercial paper was held it would liquidate the savings accounts at par. The preference of the savings depositors and the danger above re ferred to might seriously affect the confidence of the depositors in the commercial departments of the national banks, while all depositors are now mutually sharing responsibility in the solvency of the insti tution. The bill proposes that about $750,000,000 now on deposit in national banks and doing their full duty to facilitate trade by being turned over three or four times a year in the currents of commerce shall be withdrawn from that service and locked up in long-time BANKING AND CUBEENCY. 215 bonds and mortgages. Business would be shaken as credits were withdrawn. Loans would be called and the borrowers would be forced to make loans elsewhere. There would be a hardening of rates, and many sections of the country would be seriously affected. The demand for money in the United States has grown in propor tion to its commercial development, which has been astonishing in the past two decades. The growth of the South and West has been wonderful, and these two splendid sections of our country are now throbbing with new life. The banks in those sections, aided by banks in the North and East, are doing much to promote this condi tion of agricultural and commercial activity, and their efforts have added to the credit and glory of the Nation. To force the national banks to withdraw the amounts of their savings deposits from their present investment and convert them into bonds at this time would be hurtful, and we believe it is unnecessary. It would reduce the earnings of the banks, curtail credit, and the wage earners, who are the principal savings depositors, would cer tainly suffer. It would mean that large amounts would be with drawn from the communities where they have been earned and taken to the large cities of the East or Middle West to find the character of securities prescribed in the new law. It would mean that the rate these investments now earn in the channels of commerce would be materially reduced if they are converted into low-rate bonds and mortgages. The banks would be compelled to reduce the rate they are now able to pay in their savings departments, or it would mean that the profits in the commercial side of the bank would have to go to make up the loss in the savings side. The withdrawal of the loans from the customers of the national banks to meet the new law would force many of their patrons to other State banks and trust companies, which are now permitted to invest their savings deposits in commercial paper. In certain sections it would be impossible for the great mass of merchants and business men to obtain sufficient accommodation for their business in their own State. At present, by encouraging the wage earner to save a portion of his earnings and deposit it in the home bank, the bank is enabled to again put it back, through loans to the merchant and manufacturer, into the business from whence it came and enable them to continue to pay the wage earner and by this process keep the wage earner busy and thrifty and keep the wheels of commerce moving. To take the wages of the workingman out of the community where it was earned and where it is needed for commercial purposes and purchrse bonds and mortgages in other parts of the country is a direct restraint of local development. So far as we know, there is no demand from the savings depositors in the national banks to have their deposits segregated and the in vestment of their funds restricted to bonds and mortgages. The present splendid law regulating the operation of national banks and the rigid governmental supervision of their action has given to the country a safe system of banking, protecting the depositor and benefiting the people. We believe that the officers and directors in control of the national banks of the country can be trusted to continue to carefully safeguard 216 BANKING AND CURRENCY. the interests of all their depositors; for their interests are mutual and inseparable. The national bankers of this country have played an important part in the upbuilding of our Republic and are a credit to the Nation. They are as patriotic as can be found in any other profession, and as few have been found unfaithful to their trust as have been found in the other walks of life. The continued prosperity of our country is of vital interest to the bankers, not alone because they are bankers and have other large outside investments, but because they are Ameri cans. Their interest in this bill and theirpresence here to-day is but an evidence of their patriotic and unselfish desire to assist as best they can, through their practical experience, in framing a banking and currency bill which will meet the needs of the Nation and pro mote the prosperity and happiness of all our people. Senator R e e d . Mr. Maddox, that is a very beautiful and inspiring peroration, and I congratulate you, but I would like to know how you make it jibe with the remark of the gentleman quoted by Mr. Wexler, who said— Let us have our exchanges though the Government fall. Mr. M a d d o x . He probably was not included in the class I referred to. There are some patriotic bankers, I believe, in this country. The C h a i r m a n . Mr. Maddox, what is the present actual cash re serve against the savings deposits of the savings banks of the country ? Mr. M a d d o x . Well, I think that varies in different sections, Senator. The C h a i r m a n . Take it as an aggregate. M r. M a d d o x . I am n o t p re p a re d to answ er th a t— th e to ta l re se rv e req u ired . The C h a i r m a n . I think it can properly be said to be 1 per cent cash. M r. M a d d o x . I know in some States that it is very small. The C h a i r m a n . Can you give the average of the distinctively savings banks of the country ? I say that it is 1 per cent cash, while the reserves of the national banks at present is 25 per cent cash in the central reserve cities, 12 ^ per cent cash net in the reserve cities, with 12 J per cent as open accounts with reserve stations in the central reserve cities, and 15 per cent for the country banks, although the country banks carry 25 per cent of actual deposits. Mr. M a d d o x . Yes, sir; they carry the same reserve now. The C h a i r m a n . I was going to ask you this question: If it would not be feasible as to the savings deposits of the national bank system to require against the savings deposits a small amount of cash reserves, since the savings deposits are peculiarly stable in character ? M r. M a d d o x . I think it would. The objection the banks make at the present time— and I mean the savings deposits of national banks. There are a large number of them in the large cities, but they are mostly in the smaller cities. I am not prepared to give the figures as to the section, but I do know that in some of the southern cities they have developed good savings banks and the amount brought back into the channels of commerce. The C h a i r m a n . If they were required to have a smaller cash reserve most of these savings departments would release a portion of the capital for the service of the country. BANKING AND CURRENCY. 217 M r. M a d d o x . I th in k th e y w ou ld . I th in k if th e n a tio n a l ba n k s w ere a llow ed to ca rry a sm aller reserve in th eir sa v in g s d e p a rtm e n t it w o u ld b e a d istin ct im p ro v e m e n t. The C h a i r m a n . Would you think it advantageous to the national banks to carry these savings accounts now, to permit them to use a part or a considerable part of these savings deposits for loans upon farm mortgages ? Mr. M a d d o x . Well, I think that the national banks, some of them, would like to invest their money prooably on real estate loans, but they would not like to be told to do that. The C h a i r m a n . I mean, of course, if they are given permission to do that, which now they do not have. You think it would be well to give them that permission? Mr. R e y n o l d s . I think if you reduce the commercial deposits and then allow them the privilege that it would be a good thing. Senator R e e d . D o you restrict that answer of yours that you just made to the savings bank departments; that is, the savings depart ments where they receive money for a stipulated period of time ? Mr. M a d d o x . Yes, sir. Senator R e e d . And you think that department could properly engage in loaning money upon farms or other real estate ? Mr. M a d d o x . Well, in some sections it might; in others they might prefer to continue to loan on commercial paper. Senator R e e d . D o you think it would be proper for them to have that authority ? Mr. M a d d o x . I think they ought to. I think national banks should be permitted to make loans on real estate if they so desire. S en a tor R e e d . H ow a b o u t a b a n k th a t d id n o t h a v e a savin gs d e p a rtm e n t ? M r. M a d d o x . Well, that is a very much mooted question. Some national bankers think it ought to be confined to commercial paper and others think they ought to be permitted to loan on real estate. In my own State I do not think that if that permission were granted the national banks would make any loans on real estate. Senator P o m e r e n e . That, of course, depends on financial condi tions in the particular community. Mr. R e y n o l d s . Mr. Chairman, may I have just one word ? In this connection the employment of savings deposits must be looked at from two different standpoints; first, the standpoint of the benefit to the local community which has just been outlined by Mr. Maddox. But there is the other theory, which prompted, no doubt, the writing of the original bill, was for the protection of the savings bank de positors on account of the business of loaning money in the banking business generally, because of the inability to discriminate between good and bad banks. I think those are the two points and I think they ought to be both borne in mind in the formation of this bill. Senator M cL e a n . These savings bank departments generally exer cise the privilege of notice—require notice ? v Mr. M a d d o x . Nearly all of the savings bank departments, I think, have that provision in their savings book. But of course you can understand that it is very seldom that that is ever taken advantage of. Mr. R e y n o l d s . They could not do it under the law. The C h a i r m a n . Are there any other questions, gentlemen ? 218 BANKING AND CURRENCY. Senator W e e k s . Speaking of reserves on savings bank deposits, do you think it of any great importance whether there is any material reserve or not in a community where there are banks where they can obtain the cash for their daily transactions ? Mr. M a d d o x . I think it would be an advantage to the banks if the savings department could carry a little less reserve. In some States this reserve constitutes a large proportion of the total receipts. At present under the national banking law they are required to carry 16 per cent reserve. Senator W e e k s . Savings banks in Massachusetts do not have to carry any reserve whatever. They simply have to have a daily balance on hand to take care of the current business. Mr. W e x l e r . Under the law of Louisiana we are required to carry 5 per cent. Senator W e e k s . I move, Mr. Chairman, that we adjourn to meet at 11 o’clock to-morrow morning. The C h a ir m a n (after putting the motion). The motion is carried, and the committee will now adjourn to meet to-morrow morning at 11 o'clock. (Thereupon, at 5.20p. m., the committee adjourned to meet to-morow (Friday) morning at 11 o'clock a. m.) F R ID A Y , SEPTEM BER 5, 1913. C o m m it t e e o n B a n k i n g a n d C u r r e n c y , U n it e d S t a t e s S e n a t e , Washington, D. C. Present: Senators Owen (chairman), Hitchcock, Shafroth, Nelson, Bristow, Crawford, McLean, and Weeks. The C h a i r m a n . I wish to say to the members of the committee, and to those whom we have expected to hear this morning, that there is a conference going on now of the members of the Democratic Party in the Senate, which may take some little time; but I think that the committee may proceed with the hearing, with the understanding that when the full membership of the committee is present— or when we certainly have a quorum present— those gentlemen who are making statements before the committee will be available for crossexamination. If that is agreeable to the committee we will proceed. Senator B r i s t o w . I suppose that is the best we can do, Mr. Chair man— unless we postpone the hearing. Senator W e e k s . I think that will be all right, Mr. Chairman. The C h a i r m a n . Then we will proceed. Mr. Wexler, Senator McLean would like to ask you a question. Senator M cL e a n . Yes; 1 would like to ask just one question. Mr. W e x l e r . Yes; certainly. Senator M cL e a n . I think one of the members of your committee the other day said that, no matter what bill might be finally passed by Congress, he thought that, owing to the condition of credits in February and March, it would be a better time to adjust the banking and currency system of the country by the proposed currency legis lation than at any previous time. 219 BANKING AND CURRENCY. And I want to ask you, if you could get this bill amended as is suggested by your committee, would you prefer to have it become a law immediately (or as soon as possible), or do you agree with the gentleman who testified the other day that there is a time in the spring of the year when this revolution in the system could be better adapted to conditions than at present ? FURTHER STATEMENT OF SOL. WEXLER, ORLEANS, LA. OF NEW Mr. W e x l e r . My answer to that question would be this: That even if the bill were adopted at the present time with these sugges tions embodied in it it would probably take several months before the organization would be sufficiently complete to have the bank in proper operation to do business, and we have been striving for bank ing and currency reform for so many years, and we feel that we are probably nearer to it now than we have ever been, if the amendments that we have suggested should be adopted by your committee and passed upon favorably by the Senate and become enacted into law, that we think it would be better not to take the chance of anything happening to prevent the legislation by deferring it until some months after date. It is a fact, of course, that money is easier, under ordinary circum stances, in the spring than it is in the fall; but, after carefully work ing over the figures to see just how this will work out if these amend ments are adopted and the bill passes with the suggested changes we have made, we do not think it will give us any trouble whatever in paying over to the Federal reserve bank the necessary capital and the necessary reserve. Senator M c L e a n . Well, would the enactment of the law by the 1 st of January next be as satisfactory as it would to have it enacted the 1 st of November1 ? Mr. W e x l e r . If we are certain to have it enacted, I do not think the matter of two or three months makes any difference at all. Senator M cL e a n . Well, in the event that these amendments are approved by the committee? But you must anticipate the enact ment of this bill as reported to the House. What would you have to say as to the wisdom of immediate action ? Mr. W e x l e r . Well, I should think that it would be very advisable for the Senate to defer action upon a bill as imperfect as that bill is; because if they should decline to accept our suggestions and should pass the House bill as reported by the House committee, you would simply have a shell; you would have a bill that would never come into operation, because the banks would not go into the system. Senator M cL e a n . But suppose you have got to go into it? Mr. W e x l e r . Do you mean assuming that the bill will pass in its present form ? Senator M cL e a n . Yes; we are assuming that this bill, as reported by the House committee, should become a law ? Mr. W e x l e r . Yes. Senator M cL e a n . What would you say as to your preference in the time of its beginning to operate ? Mr. W e x l e r . Well, I can not conceive of the bill ever coming into operation in that form, even if you pass it. You can not make the 9328°— S. Doc. 232, 63-1—vol 1------15 220 BANKING AND CURRENCY. 18,000 State banks come into it, and you can not make the national banks come into it; consequently, you will not have any banks in it. You can pass all the bills you like; but if you do not have a sound bill, you have nothing but a bill; you have not got a bank. And I can not answer that, because I know that if you pass the House bill without these changes which we have suggested, you will not have any bank. I am willing to stake my reputation on that proposition, that you will not have any Federal reserve bank, because you will not get any contributions to its capital. Therefore we need not argue on that point. Now, going back to the other questions, as to passing the bill with the suggested amendments, if you are absolutely certain, or reasonably certain that you can pass a sound currency bill in January, and if you are not taking any risk of not being able to handle Democratic Repre sentatives as well in January as you could now upon a measure of this kind, why there is no objection to its going over to January. But if there is any danger on that score, I womd rather see a sound bill passed now. Senator M cL e a n . Well, M r. Wexler, I think it is a supposable thing that you may have to accommodate yourselves to the bill as reported to the House. I think that is supposable. If you will try to assume that such a thing is possible, I would like to have your views as to your preference as to the time it should go into effect. Mr. W e x l e r . Well, admitting then, that we will be compelled to enter under any system that may be devised in such bill as you might j>ass, then I think the longer you could put it off, the better it would Senator M cL e a n . That is all. The C h a i r m a n . Are there any other questions the members of the committee desire to ask? Senator B r i s t o w . Just let me ask Mr. Wexler a question, Mr. Chairman. The C h a i r m a n . Certainly, Senator Bristow. Senator B r i s t o w . Would you prefer that the bill which has been reported to the House should pass rather than to have no legislation at aH? Mr. W e x l e r . I would prefer no legislation at all. Senator B r i s t o w . Y ou would ? Mr. W e x l e r . Yes, sir; simply because I do not think the banks would come into it, and it would be a wasted effort, and an oppor tunity lost of getting what the country really needs. S e n a to r M c L e a n . Y ou base y o u r o p in io n u p o n c o n d itio n s in th e S o u th , la rg e ly ? Mr. W e x l e r . Upon conditions in the South and upon the conversa tions I have had with bankers all over the country. I have been identified with banking reform for about eight years very actively. Senator M c L e a n . But you are exceptionally well informed as to conditions in the South ? Mr. W e x l e r . I am. I do not think the bill as reported out of the House is a workable bill. There are a number of features con nected with it that are not workable. S e n a to r H it c h c o c k . I s so m e m e m b e r o f y o u r c o m m itte e o f b a n k e rs g o in g to ex p la in w h y th e b ill is n o t w o r k a b le ? BANKING AND CURRENCY. 221 Mr. W e x l e r . Why, all the objections we have raised and the changes we have recommended have been in the direction of making the bill a workable bill; they are based upon that idea largely. And if I might ask a question, the point was raised that we might be compelled to enter into any system, irrespective of the merits of the bill which might be adopted. Have you ever considered whether you could compel the banks to enter such a system1 ? Senator M cL e a n . Well, no; I do not think that is necessary to reply to the question I asked. Mr. W e x l e r . N o ; but it just raised my curiosity. I thought you might have in mind some way by which this could be made operative, whether the banks wanted it or not. S en a tor M cL e a n . N o . Senator H it c h c o c k . Suppose the subscriptions to the bank were thrown open to the public; and the subscriptions of the banks were not absolutely necessary to the success of the measure; what would be your judgment as to the establishment of the bank ? Mr. W e x l e r . Well, of course, the Government would have the power to go into the banking business in competition with the 24,000 or 25,000 banks that are now doing business; and there would be nothing to prevent their doing so. But we are perfectly willing to stand that competition. We believe we can hold our own against it, and we believe that we could survive a bank of that character, and that its competition for such a length of time as it was in operation would not injure our business to such an extent that we could not recover. In other words, we are willing to take our chances. Senator H it c h c o c k . But that bank would not be in the general banking business, but would only be a bank of banks; that is, re ceiving banks’ deposits and granting credit to other banks. Mr. W e x l e r . But, suppose the banks would not do business with it? You could not compel us to do so. You could drive us to the trough, but you could not make us drink. Senator H it c h c o c k . Well, is it your opinion that the banks would not rediscount your paper with such an institution if they wanted additional funds? Mr. W e x l e r . Well, if the proper facilities were offered, they might do so— if the bank was properly managed and in proper shape to do business. Senator H it c h c o c k . I s it not a fact that all the central banks of Europe are entirely independent of the commercial banking system ? Mr. W e x l e r . They are independent o f it; yes. Senator N e l s o n . Still, they do a commercial business; the Bank of England does a commercial business. Senator H it c h c o c k . Yes; they do a commercial business, but it is not as large as that of the commercial banks. In fact, I understand that the Credit Lyonnaise is larger than the Bank of France, so far as the deposits are concerned, and commercial business. Mr. W e x l e r . Yes; very much larger. Senator W e e k s . Going back to that subject which you discussed of the directors of reserve banks. There are three characters— class A, class B, and class C— appointed by the Federal reserve board, one class of three elected by the banks in that district, and the other class of three elected from the business element ? Mr. W e x l e r . Yes. 222 BANKING AND CURRENCY. Senator W e e k s . N o w , it is the last three over which there is a contention. You bankers desire to have those men so elected that they will be familiar with banking matters and in a sense represent the banking community. The idea of the bill as it now stands would seem to imply that they should be entirely independent. Now, could not those three directors be elected so as to answer both objections in this way: Have three directors appointed by the reserve board, three elected by the banks, and those six select three men from the business community who are not in any way connected with banks, or banking, or owners of stock in banks, or having any other affiliations than any business man would have in any commu nity? Mr. W e x l e r . I don't think there would be the slightest objection to that. The objection that we raised was as to the right of the Federal reserve board to remove, at their pleasure, these three men whom we have elected to represent the agricultural and commercial interests. We did not object to their personnel; we did not object to the class of business which they represented. We merely objected to the right of the Federal reserve board to remove them. Now, the method which you suggest for electing them, would suit the banks throughout the country just as well as the method pro vided in the bill. Senator W e e k s . Well, you think that would give a fair and impar tial board do you ? Mr. W e x l e r . I d o . The C h a i r m a n . Are there any other questions, gentlemen ? The Senator from Kansas. Senator B r i s t o w . I have got an impression from the hearings—it may be erroneous, but it is my impression— that your principal objec tion to the bill is that it does not give the banks a representation on the Federal reserve board of their own selection ? Mr. W e x l e r . Yes, sir. Senator B r i s t o w . And you ask that you be permitted to name three of the seven. And you also maintain that there are too many regional banks— that there should be 5 instead of 12; and I got the impression that these two were the major objections that you had; that the others were matters of detail and of less consequence ? Mr. F o r g a n . N o , sir; there are two gentlemen who are going to address you now on two other serious objections, or rather, as soon as they get the opportunity. They are here for that purpose. Senator B r i s t o w . Well, we will hear them upon the subject. Senator N e l s o n . There are two other serious objections. One is compelling the banks to become members of the regional reserve banks, and the other is compelling one regional bank to discount for another, whether it wants to or not. Mr. F o r g a n . Then there are two other objections still to come that have not been brought out. Senator B r i s t o w . Well, your objections to compelling banks to become members whether they want to or not is dependent, is it not, upon your ability to have these three representatives on the central board? If you have three representatives on that board you would not object to that, would you? Mr. W e x l e r . Yes; we would. BANKING AND CURRENCY, 223 Senator B r i s t o w . Would your objection be just as serious? Mr. W e x l e r . Yes, sir. Senator B r i s t o w . Even if you had representation on the board? Mr. W e x l e r . Yes. Senator B r i s t o w . I had not gained that impression. The C h a i r m a n . Mr. Wexler, the committee has been carefully attending the objections that have been raised to the bill. I will ask you, before you leave, if you observed anything in the bill that was meritorious ? Mr. W e x l e r . Yes, sir. I observed a good deal in the bill that is meritorious. The C h a i r m a n . I should be glad to have you enumerate the points which you think are meritorious. Mr. W e x l e r . Mr. Chairman, do you want that now, or would you not rather wait until these two other gentlemen—Mr. Reynolds and Mr. Hill— of our committee have finished their discussion. I have had a great deal to say upon the subject that has been allotted to me; but if you desire me to go into this question after they have finished I will be v e r y glad to do so. The C h a i r m a n . Will you be still available for that purpose at that time ? Mr. W e x l e r . Yes, sir; and very glad to do it. Mr. F o r g a n . Mr. Wexler is to appear before you again. Senator N e l s o n . Before you start in I just want to call the attention of all of you to this: Do you not think it is a good feature in the bill that no interest is paid on deposits by regional banks ? Mr. W e x l e r . Excellent. Senator N e l s o n . And do you not think that it will be a good plan to carry it further and provide that the other banks should not pay any interest on bankers’ deposits ? Mr. W e x l e r . Well, if the law passes as drawn, we would not have any deposits from banks to pay interest on. Senator N e l s o n . I mean why would it not be a good thing to pro vide that banks in reserve cities or central reserve cities should not pay any interest on deposits of other reserve banks ? Mr. R e y n o l d s . For the simple reason that the reserves are fixed-----Senator N e l s o n (interposing). I do not mean just the reserves, I mean all bankers’ deposits, whether they were reserves or not. Mr. W e x l e r . If you would reduce the requirement as to the reserve, I would subscribe to that theory; otherwise I would not. Senator N e l s o n . Are you aware of the fact that after the panic of 1873, resulting in the Cook failure, the clearing house of New York had an investigation thoroughly made into that panic, and one of the chief reforms that they recommended after that investigation was that there should be no payment of interest on deposits, and that the majority of the banks coincided in that report; but there was a small fragment that would not agree to it, and hence it could not be carried out? Mr. F o r g a n . I think we are about in the same position. Senator N e l s o n . N o w , as you gentlemen here are public-spirited enough to want to assist the public, why not apply the same principle of payment of interest to your banks that you would apply to reserve banks ? 224 BANKING AND CURRENCY. Mr. W e x l e r . Senator, we are in the position of paying interest, and not receiving interest, and it is the small country banker who carries his account with us who gets his interest. Mr. R e y n o l d s . We are not the men who receive interest on deposits, but the men who pay interest on them. Senator N e l s o n . I will, by and by, call your attention to some other things in connection with this. I want you to discuss the good things, and I want you to be a little unselfish and say what you think we ought to do in the way of reform, not merely what you want to do. Mr. F o r g a n . If we could get the deposits-----Senator N e l s o n (interposing). And was it not from bad banking, rather than from bad currency legislation, that we had the financial panic of 1907 ? Mr. R e y n o l d s . It was from both. Mr. W e x l e r . Yes; from both. We had not the machinery to check the panic when it occurred. That made the panic. If we had had the proper machinery, we would not have had the panic. STATEMENT OF GEORGE M. REYNOLDS, PRESIDENT CONTINEN TAL AND COMMERCIAL NATIONAL BANK OF CHICAGO, ILL. Mr. R e y n o l d s . The question of good or of bad banking can not alter or be applied to public opinion, and public opinion, in times of depression, is the difficult thing with which the banks have to contend. Senator N e l s o n . D o you not think that that panic of 1907, which leaves a bad taste in our mouths, because the country was prosperous, and it came like lightning in the midst of a sunshiny day; it came upon the country right there from New York, and the money interests were to blame for it, and not the law ? Senator H i t c h c o c k . Mr. Reynolds, do I understand you to say that the Chicago National Bank receives no interest upon the bal ances of their deposits in New York? Mr. R e y n o l d s . I did not say that; but the balance upon which we get interest is very small, compared with the balance upon which we pay interest. Senator H it c h c o c k . Oh, yes, I see your meaning. Mr. F o r g a n . If the suggestions should be carried out that there should be no interest paid upon any bank balances, the First National Bank of Chicago would be saved an expense of $ 1 ,200,000 a year. Mr. R e y n o l d s . It would save us an expense of over $2 ,000,000 a year; and you can readily see that we would not object if it could be put into operation and operate fairly with us as compared with everybody else. The C h a i r m a n . Mr. Reynolds, would the passage of an act of that character, providing that banks should not pay interest on deposits, would that interfere, do you think, with the deposits which you have, in any material way ? Mr. R e y n o l d s . I could not say that it would interfere so much with deposits in centers like New York, or Chicago, or St. Louis, as it would elsewhere. But there is one thing which must be borne in mind in connection with this problem, as well as every other problem; BANKING AND CURRENCY. 225 and that is, that any system which is economically expensive, the expense must be borne by the public. Now, if you take away from the banks of the country the right to draw $ 10 ,000,000 interest on their balances with their reserve corre spondents— as they are doing to-day— and give them nothing to compensate them for that, either in the way of reduction of reserve requirements, or something else which would bring them some profit, then the rates of interest will have to be increased proportion ately to give them a moderate return upon the investment in the capital stock of various banks, which will result in higher rates of interest, which in turn will increase the cost of living that we hear so much about. All principles must go back to the people, and it makes no differ ence whether it is beneficial to the banks or otherwise in its effect it must work back to the masses. Senator N e l s o n . N o w , let us go back to the practical ideas. Is it not a fact that when money is plentiful in the interior of the country the country banks and the banks in the reserve cities send the money to New York, to the banks in New York, for the sake of getting their 2 per cent interest on the deposits? The banks in New York, at that season of the year, in order to utilize that money and make that interest, instead of investing it in what I call commercial loans or commercial strictly they invest it in call loans on stock collateral on the stock exchange, in those gambling contracts; and there is where the money comes from to do that. And then, in the fall of the year when there is a demand for the money in order to move crops and so on, their money is tied up in those stock collaterals. Now, would it not be safer to keep that money at home instead of getting that 2 per cent interest on it— would it not be better for the whole country ? Mr. R e y n o l d s . I do not think, Senator, there is any question about that at all. That does not, however, change the force of my state ment to the effect that it would reduce the income of the banks from their present status of a little over $10 ,000,000 a year, which must be borne at some place by somebody else. Now, if you want to ask whether, as a principle of economy, if it would be better to take that $ 10 ,000,000 and spread it in higher interest rates which the people would have to pay, that is another proposition. Senator N e l s o n . Well, would it not be better, so far as the ques tion of safety is concerned ? Mr. R e y n o l d s . I do not think there is any question about that. Now, let me in the same connection make a statement as to how I regard this thing of the investment in the so-called stock exchange loans. If that money would be kept at home, Senator, and be invested ‘by the local bankers in such loans as they can get over their counter, the liquidity of the assets of banks to that extent would be reduced, because I think you will agree that if the farmers of the country borrow this money and are called upon to pay it back before their crops have matured or before their live stock has been fattened for the market, it could only be done at a sacrifice. Now, the whole tendency of sending money to New York for loans upon stock-exchange collateral is not because the banks of the West want to do it, but because, under existing conditions, it is the only 226 BANKING AND CURRENCY. place to which they can go and invest their money in a class of paper that can be collected immediately upon call. Senator N e l s o n . Now, let me read you here from Mr. Sprague’s report from the monetary commission upon the panic of 1907: Among the many lessons which may be drawn from the study of the experience of the national banks during the crisis— And then he goes over the crises of 1873 and 1893, and then comes to this crisis— The entire absence of liquidness and call loans, so far as the New York banks are concerned, is the most certain, and by no means the least important. And out of a total loan of $63,000,000, the call loan account was $54,000,000, and, furthermore, the time loans with collateral securities were stock exchange loans, to the extent of $4,000,000. The only kind of loan which was reduced at all was the ones of the variety of commercial loans, a time loan on paper with a single individual. Now, during the panic the call loans were not reduced; it was the commercial loan which was reduced. Mr. R e y n o l d s . I agree with that as to the commercial loans. And in order that I may be understood clearly, let me state that it is a fact that the institution with which I am connected makes no loans in New York upon stock exchange collateral, either on call or on time, with the exception of very minor loans occasionally, where it is done for some particular purpose. I might say that during the past six or seven years we have never had more than $ 1 ,000,000 or $2 ,000,000 loaned m New York at any one time against stock-exchange collaterals, very largely for the rea son, first, that we can not afford to; the rates are low. And secondly, for the reason that commercial banks in my city, almost uniformly, try to employ their money in commercial enterprises in an effort to develop the commercial and industrial enterprises of the com munities from which we draw our money. Senator N e l s o n . Mr. Reynolds, do not understand me as charging your Chicago banks with the responsibility for that condition. I think you are immune. The guilt is at the door of the New York banks. Mr. R e y n o l d s . But I want to put what I say as forcefully as I can, because I am not interested in it, personally, one way or the other. Applied to normal times, the statement you have made is literally true, because the man who borrows money on stock-exchange collaterals in New York, and who wants to realize on them quickly, must depend on the ability of the borrower to reborrow that money immediately else where or upon the sale of same. Now, if the condition is so bad that the banks of New York City are unable to extend the accommoda tion, the result is that there is a very violent break in the values of securities, and we are in the midst of a panic. Senator N e l s o n . Yes. Mr. R e y n o l d s . N o w , that is what actually happened in the panic of 1907; and the illustration you have made is literally true; and that is the reason that in all the discussions I have had on the subject of currency legislation I have insisted that the security for bank notes should be in a character of paper which naturally liquidates itself, and thereby forces to that extent notes which are issued against it. Senator N e l s o n . You are undoubtedly right. N o w , you remem ber that in the panic of 1907— excuse me for interrupting you. BANKING AND CURRENCY. 227 Mr. R e y n o l d s . Y ou are perfectly free to do so. That is what w e are here for. Senator N e l s o n . In the panic of 1907 we imported nearly $100,000,000 of gold. I think it was some ninety-odd million dollars of gold, between ninety and one hundred million. How did we get that gold? We did not get it on financial bills; we got it on com mercial bills; we got it on commercial bills accompanied with bills of lading, and it was American wheat, American flour, American cotton, and the commodities of our country which brought this ninety-odd million dollars worth of gold into the country. Mr. R e y n o l d s . Yes, sir; that is true. Senator N e l s o n . And in addition to that our banks during that time— there was a suspension of 2 months and 10 days— increased their circulation some fifty-odd million dollars, and the Treasury deposited fifty-seven-odd million dollars in the banks. Four million dollars went to New York and was used for the stock-exchange loans, and two banks got most of that money. Ought we not to provide for an emergency like that ? Ought we not to legislate for panicy times and meet that situation when it arises ? In easy, good times we do not need any law. Mr. R e y n o l d s . I think that is what you contemplate in your bill here. As bankers we do not contemplate that there is going to be a great necessity for a very large expansion of credit, but we regard this as the means to the end you suggest. Let me take the matter you have just referred to, Senator. What would have been the result in the importation of the gold we have referred to had that panic occurred at a time when our crops were not ripening and had not been harvested ? We would have had none of those commodities the exportation of which brought us gold. What would we have done in that contingency ? Senator N e l s o n . We would have had a hard time to get the gold. Mr. R e y n o l d s . That is the point exactly; and that is what I submit we should keep in mind in the matter of carrying the reserves in the banks at home. I agree with you fully in the principle, but in the adoption of that principle you must take into consideration the question of credit or exchange and the effect upon business; and you must try to modify the requirements of reserves within the limits of safety always, so that you will not lock up more money than is actually needed. Senator N e l s o n . D o not misunderstand me as limiting my ques tion simply to reserves. Most of the banks in the larger cities for exchange * AT v 1 St. Louis, and Chicago—have the carry under the law. I would reserves have this nonpayment of interest apply to deposits of the country banks. These reserve banks are paying interest. Ought we not to legislate in these piping times of peace and not let this matter drift along until another situation similar to that in 1907 arises? Mr. R e y n o l d s . What is the cause of the panic? Is not the panic and the hoarding of money always subsequent to an inability of solvent and responsible firms to borrow money ? What leads to the hoarding of money and the lack of confidence in times of panic ? It is the knowledge of the fact that the best men of the community, 228 BANKING AND CUBEENCY. who are known to be financially responsible, are unable to get the credit necessary for the proper conduct of their business. If you provide a proper system of banking and currency, forming the organi zation through which credit can be extended to any reasonable re quirements of business you are going to take away from the banks the liability of that fear which prompts the public to want to take their money out of the hands of the banks and hoard it. Let me illustrate just a little how that works from the stand point of the man in the city who carries these reserves. I can do it perhaps better by taking an example from my own business and my own experience during the panic days of 1907. At that time one of my junior officers came to me and said, “ One of our customers is here, and he is very boisterous and he is very excited and he says he wants to get what he put into our bank.” I said, “ Well, there is no trouble about that.” He said, “ Well, this man is very much exer cised, and I think you would better see him,” and so they showed the gentleman in. I said to him, “ What can I do for you?” He said, “ What is the matter with this bank; what is the reason I can not get out of this bank what I put into it?” I said, “ Why there is no trouble about that. I am sure your idea must be entirely erroneous.” “ Well,’’ he said, “ this is the first intimation that I have had of any encourage ment at all along that line.” I said, “ Sit down, and let us see what the trouble is.” I investigated the matter and found that his bank had $67,000 on deposit with us, and then I said to him, “ Very well, we will give you back what you gave us.” I found that in the make-up of that $67,000 there was $13,000 of sundry items payable all over the country in his cash letter just received. Then I said, “ By way of doing what I said we will do, here is your letter and your $13,000 of sundry items. Now we owe you $54,000. Now we will prepare a bundle of checks, indiscrimi nately, because that is the sort of checks you gave us, aggregating $54,000, and we will give them back to you, and we will then have given you what you deposited with us.” He said, “ I don’t want that; I want the money.” I said, “ I beg your pardon; your statement was that you wanted what you put into this bank.” “ Well,” he said, “ what I want is the money.” I said “ What you want me to do is to let you and your community accumulate these checks, no matter what they may be, and you want to send them to us, and in times of emergency you want me to be a magician and turn these checks into bank notes, because every avenue through which we could hope to realize on them in cash is absolutely closed through public fear and distrust of the banks.” Now, gentlemen, let me first briefly as I can illustrate what I believe is necessary in considering this legislation. I believe the prime necessity is the passage of a law that will enable me as a banker to exchange these forms of credit sent to me in this way in the natural course of business, and of which we are getting millions every year, into some other form of credit to meet the requirements of tne man who makes the deposit. In the first place, a man in the country sells a horse for $100, and I am taking this merely as an illustration. He takes a note of the man who purchases the horse upon the theory that he is not going to need the money; yet a little later on he finds BANKING AND CURRENCY. 229 that he wants to use a part of that money and he goes to the bank and discounts it. He has converted the individual credit into a bank credit for the note upon the books of the bank. Another process in the exchange of credit of that note into some other form of credit is when he issues his check upon the bank. He is known to be solvent in his community and his check is acceptable there, but suppose he has business transactions away from home. He is not known there and he fears perhaps his check will not pass current because they would not know it would be good. Conse quently he goes to the bank and says, “ I want to draw my check for your bank draft.” He sends that bank draft to you in Minneapolis or any other city and it is deposited in your bank without any dis cussion whatever. You in turn have deposited that credit in the bank in Minneapolis or in some other place and you wish to go abroad, and you say, “ Your bank draft will not be known there; I want currency for it.” And what do you do? Through these processes you have converted or exchanged that credit through the various forms of credit which it represents into bank notes, which after all are only another form of credit. If in this legislation you will provide an ability on the part of the bank to make these exchanges of the forms of credit from the nature in which they are deposited at the bank counters into such other forms of credit as the various customers of their banks may require in the daily transactions of their business, you will have solved the whole problem. Senator N e l s o n . Excuse me for interrupting you so much. I did not want to break into your statement. Mr. R e y n o l d s . Y ou do not interrupt me in the slightest. Senator N e l s o n . I was merely going to say that you might go on with your statement. The C h a i r m a n . I would like to ask you a question with regard to the panic of 1907. Do you remember whether or not in the months preceding the panic, beginning in January, February, April, May, there was any constriction of credit by the banks of New York City? Mr. R e y n o l d s . I do not think there was, Senator, except as it was required by their declining deposits. The C h a i r m a n . Would not the constricting of credits and the declining of assets necessarily go hand in hand ? Mr. R e y n o l d s . They must necessarily go hand in hand, but if the ability is not present to extend credit to the community when the community needs it because our reserves are insufficient we must decline to grant that credit or take the chance of having our charters revoked. At this point I want to impress upon the committee the fact that the bankers of this country are not shirking their duty. As a matter of fact they are taking more responsibility than they have any right to do under the law in undertaking to maintain a free exchange of credit throughout the country, but as bankers we are deeply inter ested in this and we are very frequently forced either to decline to extend the credit desired or we are forced to make temporary impair ment of our reserves. The average banker in a commerical city goes as far as he feels it is possible for him to go consistent with safety to provide the credit necessary, and I think my friend Mr. Forgan will bear me out in the statement that the most worrying thing we 230 BANKING AND CURRENCY. have in the conduct of our respective banks is the floor walking nec essary for us to do in our effort to accommodate the public, as we fre quently do. We must impair our reserves below the legal require ments, and we are never certain that we are going to be able to meet the full requirements of the community even then. The C h a i r m a n . Was there any voluntary contraction of credit preceding the panic of 1907, as far as you recall? Mr. R e y n o l d s . N o, sir. I am frank to say that in our city the demand for money was not very severe before the 1 st of July. In our own institution we had been quite full handed due to the fact that there was a lack of demand for money earlier in the year which had enabled us to make very large investment in commercial paper, so that on the 1 st of July, 1907, even though our deposits were only $75,000,000 we had a maximum of $20,000,000 of outside commercial paper. The result of that was that in practical operation during the iali we were able to extend credit to our correspondents almost without censoring the amount. I mean by that without asking them to take a smaller amount than they asked for, so that if the balance they had carried with us was sufficient to justify the loan to the full amount of their application we gave them that amount of money. That was not true with banks generally where they had a larger percentage of borrowing customers, and during the months— I should say the four months preceding the panic of 1907, banks generally were obliged to restrict the granting of credit they extended to their correspond ents because of the impairment of their reserves. The C h a i r m a n . Was there not a tendency, beginning in January and February, of the banks of the country to enlarge their reserves as far as possible, and did not the country banks particularly under take to enlarge their reserves ? Mr. R e y n o l d s . I do not think so, Senator, not as early as that. I should say perhaps beginning in August or the middle of September. You will remember that the clearing-house certificate basis was not declared until the 26th day of October. Senator N e l s o n . I think: you are right. Mr. R e y n o l d s . And my remembrance is that the tendency of the banks in the country to increase their holdings of legal money as reserves did not manifest itself, not to any extent, until September. Mr. F o r g a n . There was, if you will remember, 10 days’ suspension. Senator N e l s o n . I was under the impression that the Chicago banks would never have been obliged to suspend if you had not been tied up by New York. Mr. R e y n o l d s . I do not think I would be fair to my friends in New York if I did not make this statement and let it go into the record, and I make it in all candor and frankness. I know that in 1907, through pride, perhaps, many of the bankers of the country gave as a reason for their failure to pay cash their inability to get their money out of New York. Primarily that was true, but when I tell you that so far as our own institution was concerned after the first four or five days of the panic we had extreme difficulty in securing New York exchange enough to meet the wants of our customers, it probably will present a different aspect to you. In fact, during the panic of 1907 I can recall very dis tinctly that there were four or five days when we were unable to remit balances to New York when our friends requested us to do so, BANKING AND CURRENCY. 231 for the express reason that we were unable to buy in the city of Chi cago exchange on New York, even though in some instances it sold as high as $5 or $6 a thousand premium. Senator H it c h c o c k . What do you argue from that? Mr. R e y n o l d s . I argue from that that they did not have the money there. Senator H it c h c o c k . Where ? Mr. R e y n o l d s . In New York. If our correspondents were asking us to send balances to New York the inference naturally would be that they had not sufficient New York exchange, and if we in turn had not sufficient exchange to sell to remit there and could not buy it in the market the inference naturally would be that there would be a shortage of New York exchange in all the banks. Senator H it c h c o c k . At that time were the deposits of the country banks not about $300,000,000 ? Mr. R e y n o l d s . They were; scattered, of course. Senator H it c h c o c k . That would seem to be a large balance. Mr. R e y n o l d s . When you scatter that amongst 25,000 banks it does not mean so much as you would think. Then, too, you must bear in mind that the figures given by the comptroller show balances due from reserve cities representing $250,000,000, I think Senator Owen said yesterday, of what we call the floating or transit. It was not in New York, although charged on the books of outside banks as being in New York. The moment a bank in Omaha enters upon its books a check and charges it to our account the books immediately show a credit with the Continental Commercial National Bank of Chicago of that amount. Senator H it c h c o c k . But the figures given by the Treasury De partment give the showing of the books in the banks of New York, and when I say $300,000,000 I mean that the books of the New York banks showed that they held that amount. Mr. R e y n o l d s . That might be true. I would not undertake to discuss it, as I am not familiar with that particular matter. I have no doubt that your statement is correct. But I would answer it this way, then— the small banks of the country do not require much New York exchange. If a bank in Colo rado or California carried $10,000 with us and we needed New York exchange we could not ask them to sell us New York exchange, although they may have had $25,000 of this amount to which you refer. I am "trying to illustrate the difference between their demand and the demand in the commercial centers, because that is the only knowledge we have. Senator H it c h c o c k . What, in your opinion, was the effect of with drawals by local depositors; was the market really depressed by reason of the fact that country banks were taking out their balances ? Mr. R e y n o l d s . I should say both. In Chicago, I think, that we must have shipped to the country in the 10 days preceding the date upon which we went upon the clearing house certificate basis— $15,000,000 altogether. During that time we could not get money in New York of any kind, due to the fact that public confidence had been disturbed in New York and both banks and local depositors were trying to withdraw their money. Senator H it c h c o c k . The local demand on the New York banks only related to a few concerns. The great clearing house banks were 232 BANKING AND CURRENCY. not suffering from the local withdrawal but were suffering from legi timate withdrawals which came from banks from other parts of the country. Mr. R e y n o l d s . You will bear in mind, of course, that the season when this occurred was the season of greatest activity in the move ment of crops and fall business generally. Naturally I should sup pose that the greater majority of their withdrawals were to the West. Senator H it c h c o c k . Mr. Reynolds, let me ask you your opinion on this question: Suppose the New York banks— the national banks— were prohibited from allowing interest on balances of banks from other parts of the country. Do you think the banks of the rest of the country would keep on depositing there $300,000,000 constantly? Mr. R e y n o l d s . Well, not that amount probably, but they would be obliged to keep on deposit fairly large amounts, because when you take into consideration that the exchange transactions of this country amount to about $ 1 ,000,000,000 a day you will readily see that banks must have fairly large working balances in all the centers, and inasmuch as New York is without question the financial center of this country everybody nearly must do some business with that city. The tendency, however, in the West is for the banks to carry their chief reserve balances with the nearest by-reserve city correspondents. For example, at Fullerton, Nebr., a bank would carry its largest balance at Omaha. Omaha in turn carries their largest balance with Chicago. It works that way all the way through. Senator N e l s o n . Mr. Reynolds, I want to call your attention to the fact that from the 22d of August to December 3, 1907, the New York banks increased their-loans to the extent of $63,000,000 and out of this $63,000,000 over $54,000,000 was stock-exchange call loans. Mr. R e y n o l d s . Yes. Senator N e l s o n . And there is where the money went ? Mr. R e y n o l d s . Yes, sir; but I maintain that that did a world of good, because it helped to create a serene public confidence when con fidence had been seriously disturbed. Do not misunderstand me; I do not mean to say that under normal conditions that would do so much good, but whenever public con fidence is disturbed and whenever solvent people are unable to borrow money anywhere in the country, anything which shows that there is money for investment has a wonderfully quieting effect upon public opinion. That is what I mean, and in that way it helps public opin ion materially. Senator N e l s o n . What right have those banks to cry out every fall and say “ We need money for moving crops,” when they put such an enormous quantity into these stock-exchange loans, instead of holding it for the purpose of moving the crops ? Mr. R e y n o l d s . I cfo not know what they do. Senator N e l s o n . That is what they did on that occasion. Mr. R e y n o l d s . I have heard a great deal of that sort of talk. I think there is a wrong impression in the minds of the people with reference to that. Senator C r a w f o r d . Mr. Reynolds, you spoke about the impair ment of reserves, particularly when these stringencies occur such as the one in 1907. Of what good is a reserve if we do not impair it ? BANKING AND CURRENCY. 233 Mr. R e y n o l d s . I quite agree with you, Senator; but the trouble is that the law does not give us that right. Senator C r a w f o r d . But should not the law give you the right ? Mr. R e y n o l d s . In the bill which you have under consideration you provide, as it now stands, for an impounding of $520,000,000 of reserves, and you say the minimum must be so and so. Is that a reserve when you do that ? If we are unable to use it in case of an emergency is not that an absolute impounding of money and is not that in reality capital rather than reserve ? Senator C r a w f o r d . It seems to me that it is a mistake to do that, to provide for these reserves and then when the crisis comes and the full power of the banks should be used to ease the situation, to have an ironclad bar there to prevent the use of those reserves. It is like refusing to use water to put out a fire because you are afraid you will use up the water. Senator N e l s o n . Senator Crawford, will you allow me to say one thing there— excuse me for breaking in. Mr. R e y n o l d s . I hope you will break in whenever you desire. That is what we are here for. Senator N e l s o n . If you abolish the payment of interest on bankers’ deposits I would be quite willing, speaking for myself, to leave this question of reserves to the banks, to their own judgment. Mr. R e y n o l d s . Y ou have taken the words out of my own mouth. I want to discuss with you the question of reserves. I am going to conform to the recommendations made by our committee; but in the meantime I am here to express my individual opinion on that point. So far as I know America is the only place in the world where there is any requirement by law for reserves. I believe that the basic prin ciple of reserves is that we should have a proper reserve and it should be gold. I believe the quantity to be kept should be left to the ex perience, judgment, and the skillful management of the bankers themselves, and if you are going to allow me to arrange that in what I regard the most scientific way I would let the banker carry what he thinks he ought to to protect himself. If you were a merchant or manufacturer or jobber you would of course carry money on hand. Is there any law to tell you how much you must carry? Are not the requirements of your business and the precedents under which you work in that business the tiling that should be taken into consideration ? One of the objections to this bill, which I wish to take up later on and which I will briefly touch upon at this point, is that we believe that they are asking for too much money to be put into the Federal reserve banks at the beginning, for the express reason, as we believe, that the minimum amount required there ceases to be a reserve if it can not be withdrawn in time of emergency. It is a good deal like a hospital bed in a city hospital endowed but with the understanding that it is always to be held in reserve. Senator N e l s o n . Or like a spare bed in the founder’s house. Senator C r a w f o r d . Mr. Reynolds, is it not also a mistake to begin to curtail loans and refuse to extend credit when these trying times come? Is not that the time when, so far as possibly can be done, accommodations should be increased ? Mr. R e y n o l d s . If you will allow me to be somewhat personal in answering these questions and take incidents in my own experience 234 BANKING AND CURRENCY. and business as the basis of my replies I think they will mean more than if I entered upon a strictly theoretical discussion. Senator C r a w f o r d . Yes; I think that is the best plan. Mr. R e y n o l d s . I will answer your question by saying that I believe the only way in the world to allay panics once started is to do all you can to feed out credit, because, as I said a moment ago, the desire to hoard money is only because of disturbed public con fidence and distrust in the banks, and that occurs only when there is an inability on their part to extend credit. . Senator C r a w f o r d , is it not a fact that in New York those peo ple have done great injury in these periods of stringency by holding on to these reserves and contracting credit when they ought to have used the reserves and extended credit ? Mr. R e y n o l d s . I think, if you will study the records themselves, you will find that they have used it very frequently. On the other hand, I might answer you by saying that they can only conform to the requirements of the law in that respect. In 1907, during the 60 days of the panic, our own institution made $16,800,000 new loans. During that time we used our credit more freely with the clearing house in Chicago than some of our friends did, but that was what I conceived the purpose of going on a clearing-house basis, and I exercised the functions as I regarded them proper to ex ercise and extended credit to my customers to the fullest extent to which I felt justified. I borrowed freely from the clearing house, using the clearing-house certificates as the basis for settlement of our transactions between the banks. The result was that the man who felt that he would need credit later on and had the assurance that he could get it did what he could to cooperate with us to allay the panic. The result was, too, that our deposits increased. If a banker carrying a reserve balance in three different cities writes to all of them that he may need some accommodation and two of them say to him: These are peculiar times; we can not let you depend upon us for anything, and you must stand upon your own bottom, because we have nothing with which to meet this emergency; and the third one to whom he writes says: If you are consistent and careful and do not loan money for speculative purposes and do not borrow money to build up a balance against which we must carry a reserve, certainly we will do what we can for you, and we think we can take care of your needs— the result would be that he would transfer as much of his balance as he could to the bank which promised most certainly to give him assistance, and naturally he would reciprocate by cooperating to the best of his ability. Senator H it c h c o c k . Y ou think that if the law prohibited banks in reserve cities and central reserve cities from accepting deposits of country reserve banks it would result in keeping the money nearer home. Mr. R e y n o l d s . Well, I think it would to some extent, but that money would be invested at home. Then the question of whether it would be invested in liquid assets and could be readily gotten at when needed is a question that would have to be considered. Of course, the exchange requirements would make it necessary to carry balances in large centers. The actual working of that situation in 1907, for the first 10 days of the panic we city bankers were besieged by personal visits from BANKING AND CURRENCY. 235 our correspondents in the country, many of whom came with their carpet bags, and some of them with clubs. They were going to have the money they had on deposit with us. They would send us checks from all over Christendom, and they wanted us by the stretch of our imagination to turn them into money or currency, which we were un able to do. There was a good deal of criticism the first 10 days, and bankers were abused pretty severely, but two weeks later those same men wrote back to us and said that by the application of the same principle of conserving their resources that we had applied they were running into more money than they needed, but they said “ Please, will you not lend us some money to make exchange?” That is the way it worked out with the man who in the first instance was worried about his balance with us, who in the second instance plead with us to give him some credit, in order that he might keep the channels of commerce open through the selling of exchange. Senator H it c h c o c k . If these balances were kept nearer home and if they did not drift into New York and other great centers, where they become scources of danger in times of stringency, would it not be better for the country as a whole? Mr. R e y n o l d s . I do not know that I caught the full meaning of that point. Senator H it c h c o c k . Would you think we would have had any panic in 1907 if there had not been those great balances of country banks which were being withdrawn, to the embarrassment of the city bank? Mr. R e y n o l d s . Absolutely the same. It was a disturbed public confidence, and if you can pass some legislation that is sure to keep men from becoming frightened and disturbed and suspicious of each other, then you will prevent any disturbance of that kind. In this connection I want to say that I do not believe you could pass any law the strict adherence to which would take care abso lutely, under all conditions, of business. This disturbing of the public confidence would go too far. If a disturbed public confidence would have been noted only in the vicinity of New York, I would answer your question “ Yes” ; but how was it created? It was created because men like Mr. Wexler and brother bankers of his in the South, who had been promised lines of discount in New York City at the cotton-moving season, went there to get their lines of credit, and the New York banks, by reason of reduced deposits and reserves, had to say to them, “ Gentlemen, we are sorry, but we can not keep our promises.” What was the result? The result was that those men went back home thoroughly imbued with the idea that we were going into a very serious time financially; and with our present expeditious way of transmitting information it went all over the country in 24 hours, and it had almost as instantaneous an effect as the exploding of a dynamite bomb. It affected the whole country everywhere, and that is the reason we had to ship to our correspondents $10 ,000,000 or $12 ,000,000 in a week. Senator H i t c h c o c k . Let me ask you, would it not have been quite possible that Mr. Wexler might have procured the money which he needed for the cotton-moving if it had not been for the fact that 10,000 or 15,000 western banks were drawing balances out of New York at that time ? 9328°- -S. Doc. 232, 63-1—vol 1------ 16 236 BANKING AND CURRENCY. Mr. R e y n o l d s . I do not think they were, Mr. Hitchcock. I think if you would study the records of that closely you would find that they only drew their balances after the condition in New York had reached a point where they were unable to do it. I know the first notice we had of it was from the South, from the people to whom we had loaned money. We had extended their usual lines, and had loaned money, in many instances, in amounts as large as $500,000 and $750,000, and many of those people came back to us and said: We must ask you for additional credit, because we can not get it in New York. They have shut down on us. Senator H it c h c o c k . Let me draw your attention to times in New York. Mr. R e y n o l d s . Yes. Senator H it c h c o c k . Liquidation had been going on there since spring. Mr. R e y n o l d s . Yes. Senator H it c h c o c k . There had been a run on three or four differ ent banks ? Mr. R e y n o l d s . Yes. Senator H it c h c o c k . There had been meetings of the clearing houses and conferences. The result of those meetings had been tele graphed all over the country. Do you not think that these 5,000 or 6,000 or 15,000 or 20,000 banks over the country which had bal ances in New York were reading the papers, and do you not think that they were withdrawing their balances because they realized that New York was in difficulty? Mr. R e y n o l d s . They did, to an extent, but to what extent the best record would be to take the report of the comptroller. Of course, that all had a tendency to help increase that state of distrust which was gradually growing, and which a little later burst forth in a storm so fierce that everybody wanted their money. Senator H it c h c o c k . le t me ask you another question. Is it a fact that your own bank is much more apt to be embarrassed by withdrawals of country bank deposits than by local deposits in Chicago ? Mr. R e y n o l d s . Yes, sir; if there was a fluctuation, very much more so, sir. Senator H it c h c o c k . The demand comes much more suddenly, however, because of stringency and attempt to readjust credit? Mr. R e y n o l d s . There is no argument on that. On the other hand, the serious question in all this discussion is as to how efficient you want your money to be. You could with more propriety say that you are very much safer in making the trip from here down to your hotel on foot than you would be to take an automobile. There are a great many ramifications that must necessarily affect a discussion of a question of this kind. If you have your reserves at home and have only the idea of their utmost safety in mind, you will necessarily impair their efficiency as reserves. By which I mean that it will be necessary for you to reduce the amount of credit that you can extend against those reserves. They are all factors in this proposition. But what I hope to accomplish most by the little I can say is to impress upon this committee that this is the most important problem of legislation in this country since the Civil War. The ramifications BANKING AND CURRENCY. 237 of the passage of currency legislation are so many and so great that it is only by discussions of this land and the free interchange of opinions that is going to bring put the facts that will give everybody a proper viewpoint of the whole situation. Senator M cL ean . Mr. Reynolds, in that connection, what are the resources of your bank ? Mr. R e y n o l d s . About $225,000,000 in the national bank. Senator M cL ean . Y ou probably have correspondents in a great many States ? Mr. R e y n o l d s . In every State in the Union. Senator M cL ean . N ow take, for instance, the Dakotas. Mr. R e y n o l d s . Well-----Senator M cL ean . In the time of stress, have you any tendency to discriminate against the small banks, say, in the country—in an agri cultural community like the Dakotas ? Mr. R e y n o l d s . Absolutely not. The contrary is the case, because, as practical and experienced business men, we know that their require ments are such that $1,000 or $2,000 may mean life or death to them, and so they are considered first. Senator N e l s o n . We people of the West, Senator, have never felt that our banks were discriminated against. Mr. R e y n o l d s . We have about 5,000 correspondents, located in every State in the Union, and at the present time we are carrying a little over $100,000,000 in balances of those banks. Senator C r a w f o r d . Those people out there know you, and they know Mr. Forgan, and they simply enioy your confidence completely. Now, I want to ask you-----Mr. R e y n o l d s . Thank you for the compliment. Senator C r a w f o r d . I want to ask you, knowing that banking busi ness out in that country, what there is in this system for rediscounting that really justifies compelling them to furnish capital for these big reserve banks— those little banks out there, as you know them ? Mr. R e y n o l d s . If I may be frank with you-----Senator C r a w f o r d . If you will just permit me to finish this ques tion. Have they that class of paper which to any large extent would be recognized in the rediscounting done in these reserve banks ? Mr. R e y n o l d s . Well, I think, Senator, answering the last part of your question first, that they are all somewhat mistaken as to that. They say they loan their money for six months. That means that even though the majority of their loans may be for six months or longer, that in the ordinary course of business they make one loan to-day, another loan to-morrow, and another the next day, and so on, so that in the last analysis they have a certain amount of paper maturing every day. In the natural practices they send to their correspondents in the centers everywhere such checks as come in and accumulate every day. If they would apply the same principle to their notes, sending in to the Federal reserve bank for discount every day the notes that would mature in 45 days, they could find a great deal of paper that would be eligible for discount. Senator C r a w f o r d . That is the point I wanted to be informed on Mr. R e y n o l d s . Answering the rest of your question, I do not see any reason in the world how they can be benefited more than they are. I do not believe that with the exception of a few days early in the panic of 1907 there was a single case where our bank declined to 238 BANKING AND CURRENCY. extend credit to any correspondent who has asked for credit, provided their balances with us were of a character that we were warranted in doing so, and provided also we felt that the character of the bank and the collateral which they offered justified a loan. In other words, we have never declined to loan our correspondents, except during a few days in the panic of 1907, and even then such loans as we declined the first four or five days were recalled by telegraph and discounted. That being the case, the banker in your State, Senator Crawford, who has his account with Mr. Forgan's bank or with mine, knows full well that if he is in good standing ne can get what discount accommo dations he requires. Therefore, he says: Why should I go into this? Why should I be asked, in the first place, to put up a part of my capital, and why should I be obtiged to lose the interest on my reserve? They think they are getting all they want. I believe if a canvass were made among the corresponding banks of all of the reserve centers in the West— and that does not limit it to Chicago— I believe if the bankers throughout the country could be written to and asked where they keep their accounts, and how many disappointments they have had, and now many times they have been badly treated, that you would be amazingly surprised at how few criticisms you would get, because, so far as I know, they have no occasion for complaint. We have something like 375 bank correspondents in South Dakota, and I can not recall ever having declined to loan to any of them if we felt they were good for it. Sometimes we are asked for loans by banks that are not in good repute, where we think their collateral is sufficiently liquid, or where they would be unsafe people to loan to, but even those instances are very rare. Senator N e l s o n . We must not lose sight of the fact that in spite of these regional reserve banks that probably the bulk of the business of the small country banks would be with the banks in reserve cities after all. Mr. R e y n o l d s . Yes; there is no doubt about that. Let me illus trate another point. Senator C r a w f o r d . Just there, before you go to another point— I do not know that you have made it very clear— they are getting all the accommodation they need ? Mr. R e y n o l d s . Yes. Senator C r a w f o r d . They are not making any complaint; they can rediscount the paper they have with your bant and Mr. Forgan’s bank? Mr. R e y n o l d s . Yes, sir. Senator C r a w f o r d . They are not only asked to but they are simply required to-----Mr. R e y n o l d s . They resent it; that is all. Senator C r a w f o r d (continuing). To give up this capital to a reserve city bank which they do not need ? Mr. R e y n o l d s . They resent it; they say they won't go into it. Senator C r a w f o r d . I s it really a fair proposition ? Mr. R e y n o l d s . I do not think it is. I do not think the proposition of compulsory entrance into the system is fair from any viewpoint, and I do not think that the establishment of Federal reserve banks under this bill can be accomplished in anything near the time by the adoption of that as would be the case if left free to do as they please. BANKING AND CURRENCY. 239 Senator N e l s o n . I s it not necessary to get this new system com plete and effective and in working order that State banks should be taken in ? Mr.R e y n o l d s . I think so; indeed I do; because there are two to one. Senator N e l s o n . And why should the national bank be treated in different manner than we treat the State banks ? Why should we make it compulsory in one class of banks and not in the other simply because in one case we may have the power to do so and in the other we have not? Mr. R e y n o l d s . My dear Senator, that is just what we are here appealing to you not to do. Senator S h a f r o t h . What advantages could you give or what inducements to any bank to come into this voluntarily ? Mr. R e y n o l d s . Why, if you adopt all the suggestions we have made here it would correct the bill. This question of inducement and all that sort of thing gets down in the last analysis to a question either of profit or a question of doing something which will not entail a loss, and that I think enters very largely into the discussion of this whole question of not paying interest on reserves. That is not going to stop the inclination of people to use that money at a profit in some direction or other. 1 think that so long as men want to make a profit there is going to be speculation, and so long as there is speculation there is bound to be various forms of it. Of course, as bankers, we all want to encourage the system and policy which will permit of the least speculation possible. Senator S h a f r o t h . D o you believe that the national banks would come into this system with considerable unanimity if the compulsory part of it were eliminated ? Mr. R e y n o l d s . I would hardly want to say they would do it from that one thing alone. If we eliminate that, and could have some representation, I should say, “ Yes,” because other things objected to may be made workable through a process of evolution. Senator S h a f r o t h . S o the only suggestions you make us are those two things ? Mr. R e y n o l d s . That is not the only suggestion 1 make. There are many suggestions. But I regard them as infinitely the most im portant, because they are most repulsive to the people, and because we think they are unnecessary. We do not think we ought to be compelled, in the first place, to buy anything we do not want to buy, and, in the second place, we do not think we ought to enter anything in which we have nothing to say about the management. Senator S h a f r o t h . If this provision were amended just as you suggest there, what percentage of the national banks do you think would go into this voluntarily ? Mr. R e y n o l d s . I think, if you make the modifications we have recommended, a very large percentage— I believe practically all of them— would go in; all of the larger banks especially. I am not prepared to say that the small banks would, because, as I have tried to illustrate here, they have been given such satisfactory service, generally in the reserve centers where they have carried their bal ances, they are satisfied, and for the time being they would be a little cautious. They know, on the other hand, that we would have the facilities for giving them the very thing they need— rediscounts in emergencies— and they say, “ What is the use of our joining?” 240 BANKING AND CURRENCY. Senator C r a w f o r d . Would it be necessary for the success of this system for all of these little country banks to go in? Mr. R e y n o l d s . It is not. I would not have suggested that voluntarily, and I do not regard it as at all necessary, but, .gentle men, if you must know the truth of it, the reason we recommend only five Federal reserve banks was because we did not feel that the reat majority of these little banks would go in at the start, and we o not believe that it is necessary that they should. We believe that they should be given the same rights that you give larger banks, and I believe if you start out on a proper basis that in time they will gradually come in until most all will avail themselves of the privilege, unless, of course, you force them out of existence. Senator W e e k s . There is a sentiment in Washington, which I hear frequently referred to, to the effect that little banks are really in favor of the plans of the provisions now pending before the House, and that any expression that comes from them that they are not in favor of it is influenced by the larger banks. What have you to say about that? Mr. R e y n o l d s . I do not think there is anything in that at all. In the first place, I should question the correctness of that statement, because 1 have yet to find the first small bank that is in favor of the legislation. Senator N e l s o n . That has not been my experience. Mr. R e y n o l d s . On the other hand, I want to say, unqualifiedly, I have seen nowhere evidences of any large banker trying to urge, coerce, or compel people to stay out. Senator S h a f r o t h . Mr. Reynolds, how many banks or what pro portion of banks do you think, if the bill were enacted in its present form, would dissolve their national charters and take State charters ? Mr. R e y n o l d s . I am afraid a very large percentage. Of course, that is a difficult question to answer. No man can definitely foretell. It is a question of opinion, of viewpoint, and that viewpoint is made up of the consensus of opinion of men in banking with whom we come in contact. So far as the expressions which I hear are concerned, they are of a character which will justify me in saying that the bankers generally would not come in. Senator S h a f r o t h . Would that percentage be very largely among small banks or city banks ? Mr. R e y n o l d s . Well, both, I should say. That represents a principle, they feel, Mr. Shafroth— it is a principle that they do not think should be applied to force them into the system and not allow them representation. Senator H it c h c o c k . Just before you pass from that point. Under the terms of the bill, they have a year in which to reach that decision ? Mr. R e y n o l d s . Yes. Senator H it c h c o c k . How much of that time do you think would be occupied in discussion and consideration ? Mr. R e y n o l d s . I should hope all of it, because I should preach moderation myself. Sometimes men change their viewpoints when they come closer to a proposition and look it fairly and squarely in the face, and sometimes tilings which do not appeal to them just as the moment look more acceptable later. t BANKING AND CURRENCY. 241 Senator H it c h c o c k . Take your own bank; would it be submitted to your stockholders ? Mr. R e y n o l d s . Yes; it would have to be, because we could not take any action anyway that would not make that necessary. Senator H it c h c o c k . Would there likely be a diversity of opinion? Mr. R e y n o l d s . There would no doubt be that. Senator H it c h c o c k . Would that be true in the case of most banks ? Mr. R e y n o l d s . I do not think I or any other bank president can tell you what the attitude of his stockholders would be. Senator H it c h c o c k . That discussion or uncertainty might go on for the better part of a year ? Mr. R e y n o l d s . That is it, and we do not, as bankers, think there is any necessity of taking that chance without modifications such as we have recommended. Unless you have no faith in us as honest, well-meaning American citizens, who would formulate a system of banking and currency that would be successful, and I can not under stand why we should take a chance in it at all, when it seems to me so easy to work out something that would be just and fair if we could only reach that point of view. The C h a i r m a n . Mr. Reynolds, why should any of the country banks join this system at all if they get no corresponding benefits? Mr. R e y n o l d s . That is what I do not know. The C h a i r m a n . Why should the country banks, who at the pres ent keep on an average of 25 per cent of their deposits, a large part of it, with their reserve agents, not be profited by a system which would give stability to them and which would enable them to carry a much more reserve and invest their resources at a profit of 8 or 10 per cent instead of 2 per cent; is not that an advantage? Mr. R e y n o l d s . Y ou do not provide for that. There is an indirect advantage, Senator, in anything that is established that is good as a principle— an indirect advantage. It would make the position of the country banker very much more secure if this bill were enacted and the larger banks would go in it, whether or not he comes into it, be cause he would get an indirect advantage in a greater measure of rotection and safety, even though he might not be conscious of it. t would be an unconscious insurance against his being unable to meet the demands made upon him for money. The C h a i r m a n . Would it not be both direct and indirect insurance against any undue demand upon him to meet his deposits ? Mr. R e y n o l d s . Absolutely so. The C h a i r m a n . It would be both direct and indirect advantage to him in that particular, would it not ? Mr. R e y n o l d s . It would, indeed; there is no question about that. T he C h a i r m a n . Then, where he now carries an average of 25 per cent of his deposits as a reserve, because of his fear of some demand, because he, like any other of the 25,000 banks, is concerned to protect himself independently of protection that might be afforded to him through his correspondents-----Mr. R e y n o l d s . Well, now-----The C h a i r m a n . Let me finish my sentence. Since that is true, would he not therefore be justified, under this bill, in keeping a much smaller reserve than he is now? Mr. R e y n o l d s . Yes, sir; I agree to that. P 242 BANKING AND CURRENCY. The C h a i r m a n . And if he did keep a smaller reserve, he would be able to loan that amount which now is in reserve at 2 per cent at the rate of 6 or 8 or 10 per cent; is not that true? Mr. R e y n o l d s . Absolutely that difference, whatever it would be. The C h a i r m a n . If he did do that, Mr. Reynolds, would it not with draw a large volume of deposits from your bank ? Mr. R e y n o l d s . Yes, sir; it certainly would, but it would not hurt our earnings when he withdrew it. I want to make that statement perfectly clear. The C h a i r m a n . I would like you to explain why. Mr. R e y n o l d s . It would be the character of business upon which we pay interest. It is the most expensive part of the business we have, on account of the immense number of these checks, which require a large clerical force; and I say in all candor and with all frankness that if this bill is adopted to-day, I honestly believe it would make our bank $300,000 to $400,000 a year more than it is making to-day; and yet, notwithstanding that, I am here pleading with you not to pass the bill, for other than selfish reasons, because I am afraid that in the process you are going to create a condition under which business will suffer. Let us take our own business as a basis for argument. The C h a i r m a n . Just a moment. Mr. R e y n o l d s . All right. The C h a i r m a n . You say that now you carry hundreds of millions of dollars of deposits, mostly of country banks ? Mr. R e y n o l d s . Yes, sir. The C h a i r m a n . Do you wish the committee to understand that you are doing that business at a loss ? Mr. R e y n o l d s . Because we are going to do it under this condition— an entirely new condition. The C h a i r m a n . I am talking about the present conditions. Mr. R e y n o l d s . No; we are not doing it at a loss. The C h a i r m a n . What is the average profit upon that business, for your bank? Mr. R e y n o l d s . It is about one-half of 1 per cent, net. The C h a i r m a n . One-half of 1 per cent net? Mr. R e y n o l d s . On the business itself, but we have the indirect benefit which would apply in this way, that the bankers who have $100,000,000 with us are the biggest percentage of deposit customers to the smallest percentage of borrowers for we will not loan to banks to exceed 10 or 12 per cent of that money because they will not need it. They furnish the basis of loans which enables us to make loans of a million or two millions, and we get our indirect benefit there. The C h a ir m a n . What are the current rates ? Mr. R e y n o l d s . Current rates fluctuate. It may be 3J to 6 per cent. It is 6 per cent at the moment, and at the moment we are making more than one-half of 1 per cent on these balances. I am figuring on the basis of 5 per cent. When we loan a man $500,000 we get $100,000 free balances from him, on which we make some profit. I am not now referring to banks but to firms and corporations. When you follow that to its finality, the indirect advantage that comes to us is quite considerable, but I am giving figures based upon the employment of money at 5 per cent, the average rate during BANKING and currency. 243 any period of five years. There will be times when we will not be able to get more than 4J; there will be other times it will go as high as 6 per cent, but under the law of averages in any five years we are able to employ our money at an average of 5 per cent. The C h a i r m a n . What is the estimated cost of handling this vol ume of money we are speaking of, the hundreds of millions of deposits, where reloaned in part ? Mr. R e y n o l d s . 1 could not give you that. I have no estimate of that. Mr. F o r g a n . Including interest, a small fraction over 2 per cent. Mr. R e y n o l d s . About 4 per cent. When you take into considera tion that banks like ours in central reserve cities carry 40 per cent, loaning only 60 per cent, it is only a mathematical proposition; but, through the exercise of a function of banking, that money is more or less centralized, where it can be used in the channels of business, at other places where the money is needed and where the borrower could not go directly to the source. It is because of this centralizing that we can make large loans. I am objecting to the passage of this bill in its present form for the reason that most of these other gentlemen are. Because of this enforced entrance and the lack of representation in the control; but there is another reason that I am objecting to it, and that is as the representative of the country banker. I was born and raised in the country, had my early experiences in bahking in a town of 850 people, and I believe I am fairly well qualified by reason of that experience and of later experience in Chicago and other cities, where my horizon has been somewhat widened out to see this situation from the view point of the country banker. Having 5,000 correspondents, and hav ing had almost a unanimous protest go up from them, I feel it is my duty to come down here and protest for that great class of bankers who are so closely related in a business way with my own bank. I be lieve every banker who has appeared before you to-day has such sense of regard for his citizenship that he is imbued with that spirit of a desire to do what he can to work out this plan along some lines that will be absolutely fair to everybody, and 1 want to tell you that the only basis upon which a bill of the importance of this can be reached is without prejudice and without animus, and it must be met with a determination of trying to do justice to everybody and to every class and give no one any advantage; and when you can convince me that you have a bill of that character I will be the first who will join you in adopting it, no matter how it affects my institution or myself. The C h a ir m a n . Just a moment, Mr. Reynolds. You do not wish the committee to understand that your arguments heretofore have not been heard by those who have been working upon this bill ? Mr. R e y n o l d s . N o ; I do not wish to convey that impression at all. The people with whom I have had contact in this matter have been extremely courteous and have impressed me with an honest desire to try to work out the best bill possible. The C h a ir m a n . Have you not appeared before the House com mittee— last January or February? M r. R e y n o l d s . Yes; I d id . The C h a ir m a n . Did you not appear before the Secretary of the Treasury ? Mr. R e y n o l d s . Yes, sir. 244 BANKING AND CURRENCY. The C h a i r m a n . Before the President of the United States also ? Mr. R e y n o l d s . I referred to your committee. I think every utter ance I have made, publicly or privately, has attributed to every man who is trying to solve this problem the best of motives, and I would like to have it go into the record here that way. I am only trying to show that the ramifications of this great problem are so many and so varied and so great that we must be pretty careful that we make no mistake in what we do. Allow me to go on with my illustration. We have $100,000,000 of balances. If you get a currency law that is going to be effective and accomplish what you want, you are going to have to make a law that will bring in the State banks. If you bring into it the State banks and National banks-----Senator B r i s t o w . May I interrupt you there a moment ? Mr. R e y n o l d s . Certainly. Senator B r i s t o w . I have been listening with very great interest, but it seems to me that this discussion is a^question of banking and not of currency. There is no criticism here as to the present currency condition, except what we heard the other day as to currency as a base of credit, but the complaint that we hear refers to the matters of banking as to the stability or desirability of our currency. Mr. R e y n o l d s . I am trying to discuss the banking end of it right now, and to show what happened-----Senator B r i s t o w . Y ou referred to currency legislation. Mr. R e y n o l d s . I m ean banking legislation. Senator B r i s t o w . I s not there quite a distinction between legis lation affecting the banks such as we have been listening to here this morning and a general question of a currency ior the country ? Mr. R e y n o l d s . Let the record show that I mean in every instance banking and currency. Senator B r i s t o w . Excuse me for interrupting. It seems to me there is a very great distinction. Mr. R e y n o l d s . I do not want you to have any misconception yourself. If the rule of taking the reserves of banks from the centers were followed to its finality, it would mean that our institution would have to give up over $100,000,000 of bank balances. Since we carry 40 per cent of cash against our deposits it would mean that we would have to reduce our loans $60,000,000, less dif ferences in reserves required, difference in amounts of money that we might have to carry in other centers, and for a more expeditious and economic handling of whatever part of our items now m transit would be handled through these banks, all of which are important factors; but the point I want to make is this: If by giving up our reserves we must reduce our loans so largely, where will the large borrower go for his money. I can not conceive where the man who borrows $1,000,000 from us now is going to go to get that money when we must make him pay it, for he can not go to the Federal reserve banks and get discounts. The C h a i r m a n . Just a moment, Mr. Reynolds. Do not these big concerns now, when they want a large volume of money, divide their notes up into notes of $1,000 and $5,000 and $10,000? Mr. R e y n o l d s . Yfes. BANKING AND CURRENCY. 245 The C h a i r m a n . And send them through your bank to other banks for discount? Mr. R e y n o l d s . Well, they do not quite send them through them selves. They sell them in the open market. Note brokers handle such notes. There is a very large business already done, and I think it would augment that business, but when you take into consideration many big concerns must borrow $30,000,000 to $50,000,000, I think you will readily see that it will be a physical impossibility for those people to finance their entire needs in that way. That is the point I want to make. I am not making it in captious criticism at all; I am making it because I can not see how that class of business, that is now so important to our country, is going to be accommodated; I can not figure it out. The C h a i r m a n . The point you seemed to be making was that these men, notwithstanding big business might not be able to stand a change, they would withdraw so large a volume of deposits it would result that way. I do not really think it will result that way. Mr. R e y n o l d s . I do not mean that. The C h a ir m a n . I was trying to point out to you the means by which at present they were using the resources of the country banlts from one end of this country to the other, and was trying to ascertain from you as a witness if that was not true. Mr. R e y n o l d s . Yes. Senator W e e k s . A s a matter of fact, when they get money from small banks in the country they get it very largely through your recommendations, do they not ? Mr. R e y n o l d s . Almost wholly. Senator W e e k s . In other words, the country bank which does business with you asks you to recommend ? Mr. R e y n o l d s . Absolutely. Senator W e e k s . And they do not make the loan unless you do ? Mr. R e y n o l d s . With rare exceptions. They ask us about it and do not make the loan unless we O. K. the paper. The note brokers, of which we have a dozen, come to our office every day, and it is a part of our daily routine to assemble letters where we have orders from purchasers, and we try to divide that business as evenly as we can among the various brokers and as fairly among the different lines of paper which they have to sell as possible, keeping in mind, of course, safety and its ultimate payment. Senator C r a w f o r d . These deposits which might be withdrawn from that bank, nevertheless, are not absolutely obliterated. The money is somewhere. These people could borrow it from the people who have it ? Mr. R e y n o l d s . Would it be practical for some large concern that needs to borrow $40,000,000 or $50,000,000 to write to a thousand banks in the Dakotas and see how much of surplus money in the Dakotas they could borrow ? Senator C r a w f o r d . Of course not. The question is this-----Mr. R e y n o l d s . I am only putting it to you as a matter to think over. I want to get it into the record, and I want you to give care ful consideration to it. In our city and all over this country there are industrial enterprises that have been assisted in their development and growth very largely by the dependence on these lines of credit received through the larger banks throughout the country, and if we are 246 BANKING AND CURRENCY* left in a condition that we must discontinue that, then it is a matter for you to decide how best to solve the problem so that they can go ahead with their business. I know you want to solve it for them. I am only bringing this point up as one that I have not seen any solu tion for in the bill. I have no doubt but it can be worked out. Senator H it c h c o c k . D o y o u mean to take the position, Mr. Reynolds, that this would be a permanent embarrassment to the banks and to the borrowers or only a temporary embarassment while the new system is being put into operation ? Mr. R e y n o l d s . I did not describe it by the words “ permanent embarrassment.” I hope you will not get it in the record as putting me quite in that light. It will be no embarrassment to the banks, because the banks will very quickly adjust themselves to changed conditions, if they are a party to this plan. Then the public itself will have to adjust itself to the new conditions. If those people who have had to borrow $50,000,000 under the new order of things, are only able to borrow a part of that amount they will have to restrict their business. If that is best, that will be satisfactory to me. But, as I say, it is a matter that will have to work itself out, and it gets back to the public, as I have said two or three times before. What ever you do, the bankers are going to be all right, because they are going to adjust their affairs to conditions, but I hope general business will be protected. Senator H it c h c o c k . Let me ask you some serious questions for the purpose of developing this thought. Mr. R e y n o l d s . Yes, sir. Senator H it c h c o c k . The Treasury statement shows there are at the present time about $400,000,000 of country-bank deposits in the city reserve bank. A large portion of this would be withdrawn, under the terms of this bill, in the 12 reserve banks. Where would the reserve city banks get the $100,000,000 or $200,000,000 which they would be compelled to turn over to the reserve banks ? Mr. R e y n o l d s . I think I can anticipate all of the questions along that line. I intended to go ahead a few words and sit down, but Mr. Hill urged me to go ahead. I will say that, in the consideration of this matter, I have prepared some figures which I want to put into the record, containing my esti mates as to just what the effect of putting this bill into operation would be, after the full transitory period had passed. Senator H it c h c o c k . The bill without amendment ? Mr. R e y n o l d s . Yes. We have in the banks of the country as of date June 4, 1913-----Senator N e l s o n . D o you mean the city banks ? Mr. R e y n o l d s . No; national banks only. The deposits on June 4, 1913, are divided as follows----- - . Senator N e l s o n . D o you mean State banks ? Mr. R e y n o l d s . No; national banks only. Country banks, $3,610,000,000. Senator N e l s o n . That is in the reserve banks or regional banks ? Mr. R e y n o l d s . I beg your pardon. Senator N e l s o n . Y ou mean the deposits in the regional banks? Mr. R e y n o l d s . No; I am talking about our present system now for the purpose of making a comparison. BANKING AND CURRENCY. 247 Reserve city banks.................................................................................. $1,945,000,000 Central reserve city banks...................................................................... 1,569,000,000 7,124,000,000 Reserves carried....................................................................................... 1,455, 700,000 Of which— Lawful money was.................................................................... Amount due from banks........................................................... 913,000,000 542, 700,000 Total........................................................................................ 1,455,700,000 Detailed statement. Country banks, 15 per cent: Cash................................................................................................... Due from banks................................................................................ $266,000,000 310,000,000 576,000,000 Reserve city banks, 25 per cent: Cash................................................................................................... Due from banks................................................................................ 242,000,000 232, 700,000 474, 700,000 Total reserve, city banks, 25 per cent, cash............................... 405,000,000 Total. Cash in vault. $266,000, 000 242.000.000 405.000.000 ----------------913,000, 000 542, 700,000 Due from banks. $310, 000, 000 232, 700,000 542, 700,000 1,455, 700,000 This amount equals 20.95 per cent. Actual lawful money reserve, 12} per cent. Assuming deposits with our present banks would continue the same as they now are and deducting amount to meet the changed conditions on account of change in reserve requirements when the plan would be fully operative, three years after the passage of the bill, deposits would be............................................................................................... $6, 581,000,000 Divided as follows: Country banks............................................................................ Reserve city banks.................................................................... Central reserve city banks........................................................ 3, 610,000,000 1, 635,000,000 1,336,000,000 6, 581,000,000 Now, I am taking present figures as to volume of business, with only such changes as the law would make, and I only offer them as my belief as to the condition that will exist at that time. Reserve that would be required................................................................. $968,220,000 As follows: Lawful money in vault................................................................. Credits with Federal reserve bank-;........................................... 447, 890,000 520,330,000 Total........................................................................................... 968,220,000 248 BANKING AND CURRENCY. Detailed statement: Country banks, 12 per cent— Cash................................................................................................ $180,500,000 Federal reserve banks................................................................... 252, 700,000 Total............................................................................................ 433,200,000 , Reserve city banks, 18 per cent— Cash................................................................................................ Federal reserve banks................................................................... 147,150,000 147,150,000 Total.......................................................................................... 294,300,000 Central reserve city banks, 18 per cent— Cash................................................................................................ Federal reserve banks................................................................... 120,240,000 120, 240,000 Total............................................................................................ 240,480,000 Totals. Cash in vault. Cash................................... Federal reserve banka___ Credit in Federal reserve banks. $180, 500, 000 147,150, 000 120, 240,000 $252, 700, 000 147,150, 000 120,480, 000 447, 890,000 520,330,000 520,330,000 Total....................... 968,220,000 Reserve required in lawful money, 6.8 per cent. Senator H it c h c o c k . That is a loss of $650,000,000 in reserves % Mr. R e y n o l d s . It is not a loss of that much— $465,000,000 actual money. I will come to that here. Counting reserve of 33J per cent in lawful money, which Federal reserve banks would be obliged to carry, against the $520,330,000 that banks would carry with them, the reserve in lawful money against deposits in both classes of banks would have to be $621,300,000, or 8.7 per cent. As a minimum, it will be seen that the amount of lawful money banks would then have on hand would be $447,900,000, as compared to $913,000,000 under existing laws. Senator H it c h c o c k . That is, the banks instead of turning over cash would turn over new paper ? Mr. R e y n o l d s . Customers’ notes to that extent. Senator H it c h c o c k . Under their endorsement ? Mr. R e y n o l d s . Yes, sir. This would release $465,100,000 in lawful money, which banks could use in depositing their reserves in Federal reserve banks. Assuming that all the national banks would go into the systems, they would be obliged to place with those banks the following amounts: On account of subscriptions to capital in Federal reserve banks, $105,000,000; reserves, $520,330,000; total amount to be controlled, $625,330,000. Now, in addition to this amount we will assume the Government would have on deposit with national banks an additional $75,000,000, which they would no doubt have to give up, since it is estimated there would be $200,000,000 of Government funds deposited in the Federal reserve banks. The total amount necessary for national banks to BANKING AND CUBRENCY. 249 furnish by time plans would become fully operative would be $700,330,000. Just how such a vast sum could be paid into the Federal reserve bank and the effect it would have on business has been the cause of much speculation. It seems to me that the most natural as well as practical way would be as follows: Inasmuch as under the new requirements for reserves that will have been made effective, the amount of lawful money now carried by banks in excess of amount that will then be required, or $465,100,000, can be turned over to the Federal reserve banks without inconvenience, and the balance of the amount necessary to furnish the $700,330,000 required can be rediscounts of $235,230,000. A t . that point the Federal reserve banks would have $465,100,000 in lawful money against which they would have loaned to national banks $235,230,000. The Government in completing its deposit of $200,000,000 will pay into the Federal reserve banks an additional $125,000,000 in gold. That will make the holding of gold, or lawful money, by the Federal reserve banks $590,100,000, and the combined statements of those banks would be about as follows: Liabilities: Capital................................................................................................... $105,000,000 Deposits— Banks.............................................................................................. 520, 000, 000 United States Government........................................................... 200, 000,000 825, 330,000 Resources: Loans..................................................................................................... Cash....................................................................................................... 235,230,000 590,100,000 825, 330. 000 This would give the Federal reserve banks a lawful money «reserve of 81 per cent, and with a reserve requirement of 33J per cent would give it an ability to extend credits to banks on rediscounts of $810,000,000 in addition to the $235,200,000 above referred to. That is my deduction of the result as to how this bill would work out in actual practice. Senator H it c h c o c k . That is, providing for the issue of no notes ? Mr. R e y n o l d s . I do not care anything about the issuing of the notes; that has nothing to do with the statement. I give the figures I want to draw my facts against. Senator H it c h c o c k . It would make a difference in reserves if you figure 80 per cent there. Mr. R e y n o l d s . For $200,000,000 or $300,000,000 it would be left with that percentage— 81 per cent reserve over all liabilities to that point. If it issues $300,000,000 of notes, it would have less of reserves. Gentlemen, I have been delegated to ask you to make a modifica tion in the section of the bill relating to these reserves, and our com mittee adopted the resolution authorizing us to present it to you for the reason that the claim was so insistently made by the bankers from country towns that it would have to be done to make the plan fair to them, and I appear before you for that purpose. 250 BANKING AND CURRENCY. Fearing that the withdrawal of such a large sum from the banks will seriously disturb the credit relations between them and their customers, and believing there is no necessity for the Federal reserve banks to lock up so much money at the start, thereby impounding it and rendering it not available for public service, except through indirection of rediscounting by the banks, and with a view of making the plan less onerous to the banks in the country towns and ordinary reserve cities, the conference recommended that section 20 be stricken out and a new section be substituted providing that reserves shall be held against net deposits according to the present system and against time deposits maturing in 45 days, according to the following system: Country banks: Reserves of 12 per cent, 4 per cent in vault, 4 per cent witn Federal reserve banks, and 4 per cent with approved reserve agents, as at present. Reserve city banks: Reserves of 18 per cent, 6 per cent in vault, 6 per cent with Federal reserve banks, and 6 per cent with approved reserve agents. Central reserve cities: Reserves of 20 per cent, 10 per cent in vault, and 10 per cent with Federal reserve banks. The changing over of reserves to be accomplished gradually as follows: One-third in 60 days, one-third in 14 months, and one-third in 26 months. Under this plan the following would be the result: We recommend that reserves in central reserve cities be increased 2 per cent, for the reason that if you adopt our recommendation, we would still act as reserve depositary for a considerable amount of money, and we felt that in justice to the situation that our own requirement in central reserve cities should be increased 2 per cent. If you do not grant our petition in this respect, then we do not see any necessity for making any distinction between the ordinary and the central reserve cities. The distinguishing difference between our recommendation and the plan as it is provided here is that we have asked that you allow one-third of the 12 per cent of country banks, and one-third of the 18 per cent of ordinary reserve city banks to be continued as reserve balances for those institutions rather than to require that it should be held in their own vaults and in the vaults of the Federal reserve banks. Senator N e l s o n . May I ask you a question right there ? Mr. R e y n o l d s . Yes, sir. Senator N e l s o n . Why would it not be better to limit the reserves, making it a good deal smaller and to have each bank retain its own reserves— make it a small amount, and not have a reserve in other banks ? Mr. R e y n o l d s . Divide the efficiency, or rather you impair the efficiency of money when you do that. You get closer and closer to the old practices when you paid a hundred cents on a dollar in actual money m every transaction. Senator N e l s o n . Suppose you only require country banks to keep 5 per cent reserve and to keep it in their own vaults, and sup pose you let banks in the central reserve cities keep only 10 per cent and keep it in their own vaults ? Mr. R e y n o l d s . That would overcome that objection. Senator N e l s o n . Suppose you had at the central reserve banks 15 or 20 per cent, as you might say. If you reduced it you would BANKING AND CURRENCY. 251 have a real reserve; each bank would carry its own reserve and would not have to be dependent on any other bank. There would not be any interlocking of reserves. M r. R e y n o l d s . Y o u m ean b y th at, then, n ot to provide som e sys tem to w hich th ey could go in emergencies for additional help ? Senator N e l s o n . If country banks were depositing with city banks, and city banks were depositing with central reserve city banks, there would be no impediment; they would have to keep exchange moneys just the same, but why not, if you want a reserve, make it an actual reserve in the bank ? Mr. R e y n o l d s . Senator, will you let me finish, and I will try to answer your question ? It conforms to an idea that I want to express along this line anyway. I have made a sketch of the plan as I believe it will be, so far as the banking condition would be concerned, at the end of three years after this system would become entirely operative, to show what con ditions would be at that time, and without going into details I would say that it would result as follows: Deposits would be.................................................................................. $6, 800,000,000 As follows: Country banks...................................................... $3, 610, 000, 000 Reserve city banks.............................................. 1, 800, 000, 000 Central reserve city............................................. 1, 390, 000, 000 ---------------------6, 800, 000,000 Reserve required.................................................................................... 1,034,700,000 As follows: Lawful money in vaults...................................... 391, 200,000 Due from Federal reserve banks......................... 391, 200, 000 Due from national banks..................................... 252, 300, 000 ---------------------1,034, 700,000 Detailed statement: Country banks, 12 per cent— 4 per cent cash............................................... 144, 300,000 4 per cent Federal reserve bank.................. 144, 300,000 4 per cent national banks............................. 144, 300, 000 ----------------------432, 900, 000 Reserve cities, 18 per cent— 6 per cent cash.............................................. 108, 000, 000 6 per cent Federal reserve bank.................. 108, 000, 000 6 per cent national bank.............................. 108, 000, 000 ---------------------324, 000, 000 Central reserve cities— 10 per cent cash............................................ 138, 900, 000 10 per cent Federal reserve bank................ 138, 900, 000 ---------------------277, 800, 000 Total cash. Federal reserve banks. National banks. £144,300,000 108,000,000 138,900,000 $144,300,000 108,000,000 138,900,000 $144,300,000 108,000,000 391,200,000 391,200,000 252,300,000 The lawful money required as reserves for national banks wmild be $391,300,000, which would release $521,800,000 of the $913,000,000 lawful money now carried. 9328°— S. Doc. 232, 63-1—vol 1------ 17 252 BANKING AND CURRENCY. National banks would be required to furnish funds as follows: Capital stock................................................................................................. $105, 000, 000 Reserves at Federal reserve banks.............................................................. 391, 200, 000 Assume Government deposits..................................................................... 75, 000, 000 571, 200, 000 Turning in lawful money of $521,800,000 would require rediscounts of $49,400,000, add to cash of $521,800,000 the amount of Govern ment deposits in gold, $125,000,000, and the Federal reserve banks will have $646,800,000, and the statement of the Federal reserve banks would be about as follows: Liability: Capital....................................................................................................$105,000,000 Deposits................................................................................................. 591, 200, 000 696, 200, 000 Resources: ======== Loans...................................................................................................... 49, 400, 000 Cash........................................................................................................ 646, 800, 000 696, 800, 000 Thus being able to expand credit $1,291,000,000. This plan differs from that covered by the bill in that under it banks in country towns and reserve cities would have the right to count as reserve $252,000,000, upon which they would get 2 per cent interest or $5,040,000 per annum. Senator N e l s o n . I s not that really the result of adopting the present system ? Mr. R eyn olds. Yes; it reduces pyramiding of reserves, and I say pyramiding” to conform to the general phraseology, because people discuss it in that way— about $290,000,000, or about 55 per cent. Senator N e l s o n . Still it keeps up the system ? Mr. R e y n o l d s . Yes; to a certain extent. My theory and the theory of the people who made this recommendation was that while we might agree with you in principle that the pyramiding of reserves was not a proper banking principle, still we have a condition and not a theory, and our theory in asking for this change is that we may be given more time to comply with the change which is being provided for in this bill as it now stands. Answering your question about the concentration of these balances at central points I want to diverge a little and say what I had not intended to say, namely, that I believe the reason for the greatest measure of efficiency that we have had under this national banking system, which was organized with a dual purpose of providing a banking system on the one hand and a market for the (government bonds on the other, has been because of the growing use of what we call “ country checks,” which are instruments of credit in our business. The tendency for the use of checks rather than money has grown to such an extent that we are to-day doing our business on 95 per cent of credit and the use of less than 5 per cent of actual money. In practice that has worked about as follows: Formerly in the movement of the wheat crop from the Dakotas and the Northwest, or the cotton crops of the South or the wheat of the Southwest, it was necessary to send to those sections through central reserve banks, large sums of money to be paid out when those crops BANKING AND CURRENCY. 253 were brought into the market. As the growing use of checks was adopted in the communities where a development was taking place all the time and where more land was being brought under cultiva tion, the local people organized little banks ail through those sections of the Dakotas, Kansas, Missouri, Iowa, Nebraska, and you will find scattered all over those States a large number of small banks. Those banks number among their stockholders the doctors, merchants, and also the farmers of their communities. The result is that almost every farmer of any consequence in those neighborhoods is a stock holder in some of those banks, and through the process of evolution in the handling of our business, through which credit instruments have taken the place of the use of actual money, the farmer in Dakota who sells his wheat to-day goes to the bank in Senator Crawford’s town and exchanges it, not for money, but for credit. He accepts a check on a bank for his wheat. The farmer in turn takes the check and deposits it to his credit at the bank, and pays his bills by checking against it. The value of his account in that bank to him at least depends upon whether or not his check will pass current where he wants to use it. The natural tendency has been that the banker has gone into an active, energetic campaign to make those checks circulate just as widely as he can, thereby encouraging and increasing nondeposits and encouraging every farmer that he could to come in and open an account. In undertaking to do that he has tried to have his checks cover the whole area of the country, and through this process we are now handling hundreds of millions and billions of dollars worth of products of the soil of this country entirely by the use of these in struments of credit. The country banker believes that if you take away from him the right to make these checks available as readily as they are to-day for reserve and other purposes, that you are going to hurt him in the conduct of his business m his community and in his relations with the farmer. As I have said before, we come to you and ask you to make these modifications very largely at the request of the country banker himself. Senator N e l s o n . Mr. Reynolds, let me interrupt you. Mr. R e y n o l d s . Yes. Senator N e l s o n . The country banker can not check against the reserve money. He must have other deposits in the bank to check against. Mr. R e y n o l d s . I wish that were true, because if it were we would not have any trouble. Senator N e l s o n . I s not that a matter of law— can he check against reserve money and withdraw his reserves ? Mr. R e y n o l d s . Yes-----Senator N e l s o n . Suppose this country banker has all his re sources, except what he is required to keep in his own vault, in your bank and that was all he had on deposit, and he should draw that out by check. Mr. R e y n o l d s . Yes; he would do it in this way. Senator N e l s o n . He would be violating the law, would he not? Mr. R e y n o l d s . I agree with you— technically but not literally. I think I can explain that to your satisfaction. Here is what would be done: He would go to the bank and say, “ I want a $10,000 Chicago 254 BANKING AND CURRENCY. draft.” The banker would have $10,000 or $12,000 at Chicago, and it might be $2,000 or $3,000 more than the legal requirement would make it necessary for him to carry, but he would nave to carry a reserve of $2,000 or $3,000 in order to give you that check. He goes to the grain merchant that night and he says: I have got to have some Chicago exchange, and you are owing me some money, and I am carrying that grain. I will have to realize against your note. You must load up two or three cars of grain and send it into Chicago and draw your draft against the commission merchant, attach bill of lading, and make some exchange for me. The minute he gets that draft attached to that bill of lading it is entered on his books, and in the meantime the cars of grain are started on their way to Chicago, which may be from one to four days’ distance from the shipping point, and it is a reserve, under the law, the moment he enters it on his books. Senator N e l s o n . But does it not after all amount to this in the long run, that in order to have a permanent checking account he must have some more deposit than his mere reserve ? Mr. R e y n o l d s . As I say, it is a question of efficiency of reserve. If you can maintain through the enactment of law or through the establishment of some policy in business, which will establish a greater source of confidence in the community and in our business institutions, whv, yes; but, on the other hand, you can not reduce your reserve, Senator Nelson, to a point that will be dangerous without taking chances. Senator N e l s o n . Let me put you a case there. Take a country bank. Suppose he requires a country bank to have 5 per cent reserve, and no more, but keep it in his own vaults. All the other funds of the bank would be at his command, and it could keep as big an account with the bank as it saw fit— checking account. If, in addition to that, you required a country bank to put 7 per cent moie, in addition to the 5 per cent, with that bank, as a reserve fund, that is tied up, if the law is complied with; that is now available; it is only a benefit to your bank, but it is not a benefit to the country bank. Would it not be better for the country bank to say to it: All but 5 per cent of your liability you can use freely; deposit it wherever you like and check against, but whatever little reserve you have you must keep it in your own vaults. Mr. R e y n o l d s . I think you will recall that I made the statement that in my belief the scientific method of handling those reserves was to make no requirement. I would accept your amendment as not requiring that amount, because I think that every country bank should keep 5 per cent reserve in its own vaults. Senator C r a w f o r d . Would not Senator Nelson be assuming just directly the opposite of the whole theory of this proposed legislation, where it is claimed that all the reserves of the country could be in one central reservoir, mobilized so that they could be used to strengthen the weak spots here and there? Mr. R e y n o l d s . Yes, sir. Senator C r a w f o r d . So that you could concentrate all of them ? Mr. R e y n o l d s . Yes, sir. Senator C r a w f o r d . If Senator Nelson’s idea was carried out, that each bank’s reserve should be kept in its vaults and held there alone, would not that be just the opposite of this theory of mobilizing all of these reserves in one big central reservoir ? BANKING AND CURRENCY. 255 Mr. R e y n o l d s . It would; but in my opinion that would materially contract the amount of credit that could be extended safely. Any system that does not have some outlet for expansions of credit in times of need will be deficient. Senator N e l s o n . Mr. 11 1 ‘ecting, and rightly I think, to two features compulsory feature requiring the banks to enter the system; the other is the compulsory feature requiring the central reserve banks to supply the demand for money. Is there not some compulsion in this system of reserves in requiring a country bank to deposit this money with your city banks for the purpose of giving you a larger loanable fund and a larger workable capital? Is not that a compulsory law in principle as against the country bank? Mr. R e y n o l d s . There is no such law. They may do it. Senator N e l s o n . Would they not do it? Mr. R e y n o l d s . They may do it, if a man is conservative and applies your theory of maintaining reserves. Senator N e l s o n . Y ou do not come to the point. Under the law when you require a country banker to keep a certain amount of his reserves with you or some other bank, when you require the bank to do that whether it is willing or not, to enable you to gather up more funds to run your big banks and make your big million-dollar loans, is it not a species of compulsion as against the country bank ? Mr. R e y n o l d s . N o ; because he does not have to do it to-day. There is no law that makes him keep it with the reserve correspondent, but he has the right. Senator N e l s o n . He can keep it in his own vault ? Mr. R e y n o l d s . Absolutely; if he pleases, he can do so to-day. The bill under consideration is compulsory in that respect, so far as our deposits of these reserves go. I must cease here, because Mr. Ilill wants to be heard, and we want him to be heard, but before doing so I want to touch one phase of this matter that has not been taken up, and I want to make a sug gestion for the consideration of the committee. It is this: Whether or not some of these questions—I don't want to be understood as saying I could pretend to settle them—but whether or not some of these questions might not be minimized through the adoption of something along this line, namely, that the national banks in taking stock in these Federal reserve banks, instead of taking all of their subscription of stock in the Federal reserve bank in the community in which it would be situated, or in the zone in which it would be situated, that they take a proportionate interest in all of the Federal reserve banks, wherever they are located. In the first place, would it not take away something at least of the sting in not being allowed representation; would it not also do away to a certain extent with the onus of one Federal reserve bank being obliged to rediscount for another? For instance, if I own or my institution owns stock in all the Federal reserve banks in propor tion to my holdings of $105,000,000 of the entire capital of all and a condition would exist in this man's section at New Orleans where they needed more money, I would feel the need of protecting that just as much as the local man would; on the other hand, in Chicago or New York, where we would have a plethora of money which we would be glad to put out if it were safe to do it, would feel the same 256 BANKING AND CURRENCY. anxiety to loan that money to the Federal reserve bank voluntarily that I would if I was dealing with these banks on an individual basis. I only offer that as a suggestion. I would like you to think it over. I have nothing more to say now in favor of it. Senator N e l s o n . That is a very good suggestion, Mr. Reynolds, but you overlook the fact that it would neutralize that theory to keep away from Wall Street and a central bank. If you allowed the big banks of New York to subscribe in these other regional banks of the country, there would be great danger that Wall Street might dominate it. Mr. R e y n o l d s . Of course, I have a pair of glasses that can not give me a focus of that viewpoint, I am sorry to say, and I have been 33 years in banking, and I have the first time------Senator N e l s o n . Y ou must take this in a Christian spirit. Mr. R e y n o l d s . Certainly I will. [Laughter.] We will do that as far as we are able, but I have yet the first time to have anybody to try to influence me in the conduct of my business in its relations to some one else. I know that is a much-discussed question, and it is probably not best for me to try to discuss it here. Senator N e l s o n . I do not want you to understand that that idea is bothering me. Mr. R e y n o l d s . I understand. In the organization, we will say, 5 of these Federal reserve banks which we have discussed and the problem of control, but if there was a general ownership, every bank that would go into the system would have a little ownership in each one of these banks, and the Federal reserve board should be made up of 11 instead of 7, of which the Federal reserve banks, 5 in number, should elect 5, the President appoint 5, and the Secretary of the Treasury should be a member ex officio. I just wanted to put that in the record and have you think about it. I have nothing more to say on it. Senator N e l s o n . Y ou could modify your plan so as to have each bank have one representative ? Mr. R e y n o l d s . Yes; That would be a good idea. I feel I have already taken up a great deal more time than I should. You gentle men have been very patient this ^eek. Senator N e l s o n . Y ou have been more patien t w ith us. Mr. R e y n o l d s . It has been a pleasure for us to be with you, I am sure, because we recognize the immenseness of the problem which you are trying to solve, and we believe you are doing, and we hope you will believe we are, the best we can to help work out something which will be absolutely just and fair in all respects, and which will be workable and which will reflect credit upon not only the adminis tration, but upon the American people, ana which will insure a con tinuation of tne prosperity that this great country enjoys. Possess ing as we do to-day 40 per cent of the banking power of the world, we are not beginning to wield the influence or exercise the prestige that we should in the world's business, and with the modification of our tariff law, which, if I interpret it correctly, will mean we must depend more upon our ability to do a world business than we have ever done before, it seems to me that we ought to correct our system of banking and currency so as to put us in a position where we could compete BANKING AND CURRENCY. 257 with the world financially. We ought not to pay tribute to England on every pound of coffee, tea, every pound of wool, and everything else that we import into this country. Senator H it c h c o c k . If this bill is passed in anything like its present form, should there continue to be the distinction made between cen tral reserve cities and reserve cities ? Mr. R e y n o l d s . There should be none if this bill passed in its present form. Senator H it c h c o c k . If it is passed in its present form, a bank will be allowed to count in its reserve four-eighteenths of what is required in Chicago, St. Louis, or New York ? Mr. R e y n o l d s . That is, after 36 months. My figures are based on the ultimate period. Senator H it c h c o c k . What is the ultimate period ? Mr. R e y n o l d s . Thirty-six months. Senator H it c h c o c k . After 36 months, then, all of the reserve of the bank must either be in its own vault or with its central reserve bank? Mr. R e y n o l d s . That is my understanding—regional reserve banks. Senator B r i s t o w . It is about lunch time, and we will want to ask Mr. Reynolds a good many more questions. Mr. R e y n o l d s . I am very anxious, if I can, to get away at 3.10. I do not know what the prospect will be. I should be very much disappointed if I do mot. I have checked my baggage. Senator B r i s t o w . Y ou never ought to do that wnen you are attend ing a hearing, until after the hearing is over. The C h a i r m a n . I am sure the members of the committee, Mr. Reynolds, will not be here, on account of the conference which is to take place, and we particularly wish to hear you. Mr. R e y n o l d s . Of course I will remain if you wish. I am not generally regarded by my friends as being a quitter; so, if I am wanted, I will remain. Senator N e l s o n . Y ou are givin g us m u ch valu ab le inform ation, and I feel v ery m uch obliged to y o u , and I hope y ou will stay w ith us. Senator H it c h c o c k . In view of the fact that the Senate is to meet at 2 o’clock, and there will probably be some debate on Senator Weeks’s resolution, I move that we adjourn the hearing of this com mittee until 3 o’clock, with the possibility that we might not convene until 3.30. (The motion was carried.) The C h a i r m a n . The committee will now take a recess until the hour stated in the motion. (Thereupon, at 1.35 p. m., the committee took a recess until 3 o’clock or 3.30 o’clock this afternoon.) AFTER RECESS. The C h a i r m a n . The committee will come to order. Mr. Forgan, I understand that Mr. Hill will be the next witness. Mr. Reynolds will be heard after Mr. Hill gets through. It will only take a few moments, and then he will be open to cross-examination. 258 BANKING AND CURRENCY. STATEMENT OF HON. E. J. HILL, VICE PRESIDENT NATIONAL BANK OF NORWALK, NORWALK, CONN. Mr. H i l l . Mr. Chairman and gentlemen of the committee, the two topics which I have been requested to present to you are different in character, yet having some relation to each other. The first refers purely to the mechanical part of the bill. It is found in section 16, and again referred to in the bill in section 21, the two provisions being somewhat in conflict with each other. The committee desir ing to assist in the preparation of this bill in every way that it could, thought it was their duty to point out this inconsistency. I will be but a moment or two in doing it. The law was changed in 1874. It now provides that the 5 per cent redemption fund for national-bank notes, which previously had been held as an entirely separate fund, should be put into the general funds of the Treasury. This section 16 which you propose provides that all of the funds of the Treasury which are now classed as general funds shall be transferred as deposits to these reserve banks which, of course, would take the 5 per cent redemption fund, it now being a part of the general funds of the Treasury. It is true that this redemption could be carried on by some one of the Federal reserve banks acting as the fiscal agent of the Govern ment. I will give you the statistical position of the fund in a moment, and without any argument submit the proposition on the statistics of the fund, that it would have to be by the Federal reserve bank, which is to be located in the city of Washington, or, much better still, continued as now by the Treasury Department with the present organization. The C h a i r m a n . Mr. Hill, in fact the demands on the Treasury at times exceed $35,000,000, do they not? Mr. H i l l . That is just what I am going to show. I am satisfied that your judgment will be that conditions make it impossible to divide up this fund among the banks, and have the work done with the economy and satisfaction which now characterize it. The pro posed bill distributes the fund but provides no new plan of redemp tion. The makers of this bill admit the necessity of its continuance when they require precisely the course of procedure for the redemp tion of the Federal reserve bank notes which is now going on with regard to the national-bank notes. But in the same bill they take out of the Treasury the machinery for carrying on national bank note redemption which they insist upon being put in operation by the Treasury with reference to the new notes. The two things are in conflict with each other. The condition of that fund during the past year has been as fol lows— and I quote from the report of the Secretary of the Treasury: The average amount of national-bank notes in circulation during the fiscal year was $739,940,744, and the amount of such notes presented for redemption was $649,954,710, or 87.84 per cent of the average amount ou tstanding. The national-bank notes assorted and delivered during the year amounted to $645,011,311, of which $198,550,800, or 30.78 per cent, were returned to the respective banks of issue for farther circulation. Redemptions of national-bank notes during the year have been constantly in excess of the 5 per cent fund required under section 3 of the act of June 20,1874, to be kept by the banks on deposit in the Treasury of the United States for the redemption of their notes. Consequently that fund has been overdrawn during the whole year and the Treasury has had to advance payment for notes as they were presented out of the general fund. The largest overdraft was $26,927,389.52, on February 3, 1912. Senator H it c h c o c k . This overdrawing is something new, is it not ? BANKING AND CURRENCY. 259 Mr. H i l l . N o , sir. It has been overdrawn 12 years out of the past 21. It is utterly inadequate to meet the requirements for the re demption of national bank circulation. I am going to show that. Senator P o m e r e n e . What do you mean by that statement, “ dur ing 12 years out of 21 years it was overdrawn” ? Mr. H i l l . Yes, sir. If the gentleman desires to see the figures-----Senator P o m e r e n e . Oh, no; I do not ask that. Mr. H i l l . I have the report of the Treasurer here, showing that for 12 years out of 21 years this fund has been overdrawn. The C h a i r m a n . Fifteen millions has been overdrawn, has it not ? Mr. H i l l . Oh, yes; twenty-six millions. Senator S h a f r o t h . The large amount that you have specified there as having been presented to the Treasury for redemption; was that presented to the Treasurer for the purpose of retiring the cir culation ? Mr. H i l l . I will give you exactly what was given to the owners as a substitute for that circulation. I have it all here. Senator H it c h c o c k . Before you leave that point I would like to ask what per cent would be adequate if 5 per cent is inadequate? Mr. H i l l . I will take that up, too, under the new note provision, which will be my next subject. There is to-day— or was a month ago— $43,889,222 of nationalbank notes down here in the Treasury to be paid for by the banks, and I presume the condition is the same to-day. Senator N e l s o n . What Mr. Hill means, Mr. Chairman, is with reference to notes of banks which have gone out of existence. Mr. H i l l . No; the notes of such banks are carried in what is known as the national bank note redemption fund. I am referring only to the 5 per cent redemption fund. The C h a i r m a n . Yes; I understand. Mr. H i l l . It is an important part of this to show where these redemptions come from. Three hundred and twenty-seven million and a little more have come from New York City, 47 million from Boston, 43 million from Philadelphia, 13 million from Baltimore, 71 million from Chicago, 14 million from Cincinnati, 29 million from St. Louis, 6 million from New Orleans, and 95 million from all other places. Senator H it c h c o c k . Do you mean they represented the notes of banks ? Mr. H i l l . Presented by those banks. Senator H it c h c o c k . Were they the notes of those banks ? Mr. H i l l . Oh, not at all; there is no distinction made until the notes get down here. That would be one of the troubles in connec tion with the 12 reserve banks. Senator H it c h c o c k . They send in indiscriminately notes from all over the country ? Mr. H i l l . Yes, sir. With more than 7,000 national banks and with the enormous transactions shown, it is manifest that all redemp tions must be in one place. Each bank when national-bank notes are received over the counter separates its own and bulks all others for exchange for reserve credit with its reserve agent, and the reserve agent forwards them in bulk for redemption and exchange for legal tender. That is your process, is it not, Mr. Forgan ? Mr. F o r g a n . Yes, sir. Mr. H i l l . And yours, Mr. Reynolds 1 260 BANKING AND CURRENCY. Mr. R e y n o l d s . Yes, sir. Mr. H i l l . T o distribute this 5 per cent fund among the Federal reserve banks and require them to make redemptions would enor mously increase the redemption charges. Of the 645 millions assorted during the year less than 200 millions were in good condition; 417 millions were destroyed and reissued. The reissued notes were taken from the stock .printed here and kept on hand at the Bureau of Engraving and Printing, and the supplementary process completed in the Treasury Department and the record made. Twenty-eight millions destroyed and finally retired. It shows the necessity for the retention of the necessary funds for doing this work by the Government or some one central agency. Indeed, as stated, in providing for the redemption of the new Federal reserve notes, this bill calls for a 5 per cent redemption fund to be kept in the Treasury. The necessity for its continuance in the case of the present national-bank notes during the remainder of their life is manifestly far greater. I want to call your attention to one other thing. The Senator from Minnesota (Mr. Nelson), so far as I can judge, during these hearings has advocated the reduction of the reserve, and I think the Chicago conference advocated the reduction of the reserve, and the bill itself advocates the reduction of the reserve. To the New England banks it does not make any difference whether you reduce it or not. You are looking at the question from one standpoint and we look at it from another. We have got to keep a larger reserve than is provided for in the bill. You can not say to a New England bank in a manufacturing community with its pay rolls made up every week that that bank can allow itself to run down to 10 or 12 per cent. It has got to keep 20 or 25 per cent in a country bank m a manufacturing town with pay rolls weekly. The situation is entirely different from what it is m a farming community. Senator H it c h c o c k . I want to ask you a question before you get away from that point. I want to ask you whether the presentation for redemption during 12 months of 87 per cent of this bank currency does not indicate that it is an inferior currency ? Mr. H i l l . It indicates that it is a rigid currency, not elastic. The first thing I ever had to do with a bank was when I was a boy. I had to sweep the bank out and count redemptions. Our redemptions averaged-----Senator H it c h c o c k (interrupting). And under this bill we could naturally expect that the redemptions would run up to about 87 per cent ? Mr. H i l l . Oh, they would be once in six weeks. Senator H it c h c o c k . Would be what ? Mr. H i l l . About once in six weeks. Senator H it c h c o c k . So that they would be constantly presented for redemption? Mr. H i l l . Yes. Without redemption you have a perfectly rigid currency. Senator H it c h c o c k . It simply goes in and comes right out again, I understand? Mr. H i l l . It comes in and goes out again to perform a new trans action. It might perform a transaction in Kansas and the next day perform a transaction in North Dakota. BANKING AND CURRENCY. 261 Senator H it c h c o c k . But all through the year we still have about $700,000,000 of national-bank notes ? Mr. H i l l . Oh, yes; either in use or idle in the vault of the bank. Senator H it c h c o c k . Because the banks do not want them and want to get rid of them and want reserve money ? Mr. H i l l . Yes; they want to keep their own notes in use and ex change the notes of other banks for reserve money. Mutilated cur rency also must be exchanged for new notes. Senator H it c h c o c k . Does not that argue in favor of providing an increase of the reserve money instead of providing an increase in inferior currency? Mr. H i l l . That is another matter. I am merely giving the statis tical position of the 5 per cent fund now, and leave its disposition to the judgment of the committee. The facts will show as they are submitted here and you will find them in full detail in the Treas urer’s report. I thmk you will find that it will be impossible to make the change in the national-bank redemption business called for under the terms of this bill. I doubt the wisdom of changing the present plan. Senator H it c h c o c k . The reason they are sent in for redemption so rapidly is because they are not legal tender ? Mr. H i l l . N o . That is only one reason. Senator H it c h c o c k . What is the reason ? Mr. H i l l . They are not sent in fast enough. They go in to get legal tender and to keep their reserve credit at their reserve bank. Senator H it c h c o c k . Yes. Now, if you provide legal tender-----Mr. H il l (interrupting). That is only one reason. The other rea son is this: Each national bank, of course, wants to keep its own notes in circulation, and one of the inspiring causes for sending others in, aside from legal tender, is that if they can get rid of the other bank’s circulation it makes a gap to insert others. Senator H it c h c o c k . But there has not been any increase in the legal tender; it is a nominal increase during the year. The banks can easily put out more legal tender, if they desire. All they have to do is to buy more bank notes, if they desire. Mr. H i l l . I do not want to exhaust m y time on the 5 per cent redemption fund which I consider a comparatively unimportant topic; but let me call your attention to the terms of this bill, which I am sure you will amend in some way, where you propose to cut down the reserve of the country bank from 15 to 12 per cent. As a matter of fact, in most country banks you actually increase it, notwithstanding your proposed reduction from 15 to 12 per cent. Take a bank of $100,000 capital and deposits around $150,000 to $200,000— certainly $150,000 would be fair for most New England country banks. You take away the privilege of counting this redemption fund as a part of our reserve, and yet we have got to keep it in lawful money. Senator N e l s o n . But that is only 5 per cent on circulation. Mr. H i l l . But I have made the calculation on the basis of a bank with $100,000 capital. Senator N e l s o n . The country banks have not taken out their circulation. Mr. H i l l . Most of the banks have. The city banks have not. Senator N e l s o n . The country banks have ? 262 BANKING AND CURRENCY. Mr. H i l l . But the city banks have not. The country banks, most of them, have taken out the circulation to the full amount of their capital; and it depends entirely on the ratio of their deposits to their capital as to whether you reduce the reserve or not, notwithstanding you have cut down the required amount from 15 to 12 per cent. Senator H it c h c o c k . This redemption of their notes would be enor mously increased, would it not, it it were not for the fact that the State banks can hold them as reserves ? Mr. H i l l . Yes; the State banks do that. The trust companies can hold them. I do not think there are many States in the Union that rescribe that the reserve of State banks and trust companies shall e in legal tender. I do not think our law requires that New Eng land savings banks shall have legal-tender reserves. I think there are three savings banks in the town in which I live, a town of 26,000 people, ana their deposits will run up to five or six millions. I think they are required by law to keep a 3 per cent reserve, but I do not think it specifies that it shall be in either gold, silver, green backs, or bank notes. That law has been enacted within five years. They were not required by law to keep any, formerly; but, of course, they are not institutions organized for profit; they are purely mutual, without any stock, the depositors ownmg them. The C h a i r m a n . Do you happen to know what percentage of these national banks' currency is sent in for redemption in a mutilated condition ? Mr. H i l l . Yes, sir. I think 28 millions out of that lot was destroyed as unfit for circulation last year. Senator S h a f r o t h . H ow much was sent in for retirement ? Mr. H i l l . There is now, I think, something like $20,000,000 of lawful money which could go into the Federal reserve banks with perfect propriety. Still, I think it would be better to keep it where it is. Twenty million dollars of lawful money reported in thi$ statement of July 1, which represents retired national-bank circula tion paid for in lawful money, and the fund is held here as a trust fund waiting for it to come in. A good deal of it never will come in, and the Government will get the profit of the loss or destruction. Whatever went down on the Titanic will be profit to the Government. The money has been held as another trust fund under the name of “ The national bank note redemption fund” . E The C h a i r m a n . Under the Suffolk plan, which required this con stant redemption, to which you referred as the New England plan, there was no way provided for the redemption except sending it back to the bank and having it redeemed ? Mr. H i l l . It did not go. to the bank at all direct. It all went to the Suffolk Bank in Boston. There it was assorted, made up in bundles once a week and the notes of each bank sent home. It was my business to count these, and take out the soiled and torn notes, and do them up again according to the denominations ready to be paid out again over the counter. The C h a i r m a n . Under this bill, it being provided that the volume of the currency issued as Treasury reserve notes shall be limited to the commercial paper of like volume transferred, and that when that commercial paper is retired, like money, it shall be restored, would not that automatically retire such notes ? Mr. H i l l . Absolutely, unless other commercial paper was substi tuted, as the bill provides may be done. BANKING AND CURRENCY. 263 The C h a i r m a n . Therefore that system would also serve to retire such outstanding notes, would it not— the system of retiring this commercial paper ? M r. H i l l . Yes; unless substitution was made as stated. going to talk along that line now. I am My second subject is: Why the notes should be issued by, and be in fact the obligations of, the Federal re serve banks instead of the Government. I tried to boil this argument down to 15 minutes. It ought to take 30 days. [Laughter.] In my judgment, the Government has no right to issue them in the form and manner which the bill proposes. Under its sovereign power it can, through Congress, borrow money on the credit of the United States, coin money, regulate the value thereof and of foreign coin, and provide for the punishment of counter feiting the securities and coin of the United States. These new notes are not money, not legal tender; they are to be loans of the credit of the whole people, for a usage charge paid by 12 or more specific banks which are to be created. Senator W e e k s . They can be made legal tender by act of Congress. Mr. H i l l . I do not think that would alter the situation materially if the same use was made of them; but under the terms of the bill— and I am discussing this proposition from the basis of the terms of the bill— they are obligations of the Government for which the United States has received nothing and for the payment of which at any time it assumes the responsibility looking to the Federal reserve bank to recoup itself. The notes, under the terms of the bill, would be unquestionably good if issued by the banks alone. Why should the burden of current redemption be placed on the Government and the banks also and the cost to the people greatly increased for both the loan and its responsibilities? Irredeemable Government demand notes are robbery and redeemable ones are dangerous and expensive. The nations with which we will have to compete in the future have long since stripped themselves of the very burdens which we propose to assume needlessly. Why should we not profit by their experi ence? Great Britain coins gold as full legal tender, silver as sub sidiary coin, and stops there. The Bank oi England issues its notes and is bound, by redemption in gold, to maintain their parity. Germany, with true German persistence and thoroughness, has dug herself out of the morass of the different State system of fiat money and, like England, is now coining full tender gold and limited tender silver, and the Imperial Bank issues bank notes and maintains their parity by gold redemption. The Bank of France issues the circulating notes, and redeems them in the coin of the realm. . They stand on solid ground, stripped to the waist for the keen con test which is sure to come under our new revenue policy, throwing upon the banks the burden of securing and maintaining a sufficient supply of the world's redemption money—gold. ^ What we ought to do, in my judgment, and do it now, is to adopt a like policy here, and so meet them face to face with a footing as sure as their own. This bill puts the Government squarely into the banking business, as a business for profit, and every cent of the cost of the business and 264 BANKING AND CURRENCY. profit as well will in the end be paid by the consumer of foreign and domestic products. A bank is organized to loan credits. A government is not. A bank has convertible assets to meet its liabilities. A government has nothing but its taxing power. A bank note is in effect a check at sight upon the bank reserve, and in practice is exchanged as a demand credit mstrument for the promissory notes of its customers, payable at fixed dates. A wise adjustment of due dates of loans, coupled with long expe rience as to the life of the bank note, fixes the amount of reserve necessary to be held against them. The security for their payment is the reserve, the distributed payment of customers’ time notes, and the capital and surplus of the bank as a margin. A government possesses no such margin of safety in the form of capital and surplus. It has no constantly inflowing stream of assets, except its revenues, which have, by appropriations, been pledged in advance to other uses. It possesses none of the functions of a bank, and there is no reason why it should have them, for it deals with past expenditures of its own, while banks handle future commercial trans actions of its customers. The authors of this bill, evidently desiring to put the general credit of the Government behind the credit instruments which the Federal reserve banks may use, have invested the Federal reserve board with all the note-issuing power of a central bank and made them the judges of the pledged collateral security for the issues, and with the first lien on all the assets of the Federal reserve banks which the law gives the final payment of the Government notes will be unquestionably secure, for aside from the pledged security and capital and surplus of the Federal reserve banks every dollar of the reserve deposits of all the member banks becomes by that lien an additional guaranty of the skill, ability, good judgment, and banking experience of the Federal reserve board and of their intimate knowledge of the credit of the pledged collateral. The final payment of the Government obligations will be certain, but it would seem to me that in an honest effort to reform our cur rency system and to make it more elastic and responsive to trade requirements the bill tends to a complete control by the Government of the individual credit of the people. Our people in New England look at it in that way. Personally, I do not think this is necessary or wise, or that it is a proper function of Government under our system. Iii my judgment, the machinery by which the bill proposes to do this will not work in actual practice. The note issue must either be by the banks or by the Government. It can not be by both and maintain current redemption except at enormous cost; and without such current redemption a credit instrument put out .to circulate as money but without the legal tender quality is of little use, regardless of the certainty of its final payment and retirement. In effect, as originally prepared and as last published in the papers, the currency note which the bill contemplates is a joint and several note of the General Government and 12 Federal reserve banks redeemable at the Treasury in Washington and by all of the Federal reserve banks in gold, on demand. It is a legal tender to any of them, by any individual and by all of the 25,000 banks of the country. BANKING AND CURRENCY. 265 The amount of the issue is unlimited except in the judgment of the Federal reserve board. Is it not clear that each one of these parties to this obligation, regardless of their final responsibility to each other, must be ready at all times to currently redeemwhatever portion of the entire issues may be presented in the ordinary course of business, and in times of stress and emergency to redeem in very much larger amounts ? I think every one of you will admit that. Under these circumstances the reserve provisions and redemption power of each of the parties becomes all important. What are they ? First, the Federal reserve bank. The notes are loaned to it by the Federal reserve board on an interest charge fixed by them. Col lateral is segregated in the vaults of the bank itself, and no reserve is required until the notes are actually paid out, and then only to the amount of one-third of the notes paid out by it. In those parts of the country where bank capital is superabundant and deposits are large, by reason of business being conducted on actual investment, rather than being based on future contingencies, it is fair to assume that the Federal reserve bank so located may see neither profit nor necessity for taking out notes, and consequently will have no need whatever for a note reserve in the performance of its duty toward its locality. And yet its responsibility in law for current redemption of notes issued by other banks is just as great as is that of the Federal Treasury, which compels all of the issuing banks to maintain a redemption fund of 5 per cent with it. Second, no matter where located, each Federal reserve bank is only required to maintain a redemption reserve of one-third of its own actual note issues, but assumes the burden of responsibility of re demption of the notes of alt the other banks. Would not such a redemption system break down in the first approach of panic, or general liquidation of foreign and domestic credits? Third, the Federal Treasury is also responsible for the payment in gold on demand of all of the nptes which the Federal reserve board may have authorized, reserving to itself the right to require a deposit in the Federal Treasury of 5 per cent of the amount so authorized, whether the notes have actually been paid out or not by the Federal reserve banks, or even if they are stored in their own vaults for future use. I do not want to misrepresent anything. This bill as first brought out, gentlemen, was a straight gold-redemption bill and announced in the papers as an administration measure, and I held up both hands in joy. The redemption machinery was not satisfactory. The reserve provisions were changed and the new bill published in the Journal of Commerce in its issue of the 25th of July, and then changed again and published in the New York Evening Post of August 11, providing for redemption in lawful money, which means gold, silver, or greenbacks. I do not knoW why these changes have been made four times since the bill was drafted. I am simply discussing now the basis on which I hope this committee will finally put the bill through as it started, as an administration measure, with the notes redeemable in gold. Senator H it c h c o c k . What does “ lawful money” mean? Mr. H i l l . Gold, greenbacks, or silver—nothing else. Senator H it c h c o c k . Of course, greenbacks are as good as gold, are they not? 266 BANKING AND CURRENCY. Mr. H i l l . Silver dollars are also the equivalent of gold if their parity is maintained by exchangeability for gold under a Treasury order, to which I shall refer before I get through. Is 5 per cent enough? If so, why is the bank required to keep intact a 33J per cent reserve? With these notes made the direct obligation of the Government, instead of the banks, and redeemable on demand in gold by the Treasury, no man can point to any differ ence in the redemption responsibilities of the Treasury between this new greenback and the old one, of which we have 346 millions still outstanding. Understand me, I am referring to current redemption. The bitter experience of the past has taught us that a $100,000,000 fund, or 29 per cent of the whole, was not sufficient to maintain their parity when the demand for gold became urgent, and $250,000,000 of bonds marketed at great cost are a monument to the unwisdom of issues of Government demand obligations. Senator N e l s o n . But that was chargeable to the silver-purchasing clause. Mr. H i l l . Yes; and the deficiency in the revenues. whether there will be a deficiency again ? Who knows Senator N e l s o n . Y ou could not charge them to the greenbacks. Mr. H i l l . I am saying that the current redemption responsibilities of these two classes of notes, so far as current redemption is concerned, is indistinguishable. By the gold standard act of March 14, 1900, the reserve against the 346 millions of the old greenbacks was in creased to 150 millions, or 43 per cent, and with it authority given for an unlimited bond issue besides. With identical responsibility for redemption at the Treasury, and with the Treasury stripped of all other current funds by compulsory deposit of them in the banks, who can justify pinning the credit of the Nation to a 5 per cent redemption fund, for the one issue, and the maintenance of 43 per cent reserve for the other? The 5 per cent redemption fund for national-bank notes is cited as such justification. The argument is not a good one. The conditions of that fund for the past year have been explained. There has not been a minute when it has not been overdrawn, the overdraft running as high as 26 millions in February and ending the year with an 8-million deficit. The statements of August 1 shows almost 44 millions of nationalbank notes in the Treasury to be redeemed by the banks, and only 26 millions to the credit of the 5 per cent redemption fund. And this is in a normal business year. Soon after the panic of 1907 and when currency had again become redundant, when studying the provisions of the Vreeland-Aldrich bill, I visited the redemption bureau of the Treasury and saw there a room full of national-bank notes, piled against the walls to the ceiling, sent back for redemption. My recollection is that there were more than $40,000,000, unassorted, paid for by the Treasury, waiting to be separated and charged up in the respective amounts, for which each of the 7,000 national banks was liable. There is one trouble. They have got to assort them and separate them, and it may be weeks and weeks afterwards before they get their remittances from the banks. Senator N e l s o n . Suppose the notes are retired when redeemed, like the Bank of England notes? BANKING AND CURRENCY. 267 Mr. H i l l . They have got to be assorted. There are 7,000 national banks, and it takes time to do it when they come in in bundles. Why, Mr. Chairman, I saw bundles of notes down there in the original packages in which they were shipped, with the strings uncut, and with the Treasury seal on them, sent out in the latter part of the panic of 1907, and when the panic was over immediately returned for redemption, unused. From the report of the Treasurer for 1912 I imagine the conditions are not very different now, for he strongly urges the necessity for increasing the fund. But the difference in the character of the two issues is very great. The national bank circulation is practically a loan on the Government bonds, by which they are secured and to carry the profit of more than 1 per cent above the normal discount rate. No reserve is required against it, and it has become a fixed and rigid part of our circulating medium. Its average life last year was 7 months. The issue under this bill is taxed at its source, and the redemption forced under the provisions of the bill. It is practi cally an emergency circulation, securing its elasticity by frequent redemption and retirement and reissue. The gold standard act of March 14, 1900, made a dollar consisting of 25.8 grains of gold, nine-tenths fine, the standard unit of value, and declared that all forms of money issued or coined by the United States should be maintained at a parity of value with this standard, and that it should be the duty of the Secretary of the Treasury to maintain such parity. No backward step should now be taken. The requirements of trade will send the great bulk of these notes, as in the case of national-bank circulation, but with accelerated speed, through New York City into the Federal Treasury, and unless the gold-standard act is to be in effect repealed, they must there be redeemed by the Treasury in gold, and the burden of securing and maintaining the gold supply of the country, now borne by the Treas ury, very materially increased. By making the note issues the obligations of the Federal reserve banks, and each one responsible for the gold redemption of its own issue, the burden would be placed where it belongs, upon the banks which receive the benefit and where the facilities for carrying that burden exist. We have now, as Treasury obligations, in round numbers, green backs, $346,000,000, redeemable in gold; national-bank notes, $725,000,000, redeemable in legal tender; silver dollars, $565,000,000, ex changeable for gold; making a total of $1,636,000,000. Immediately after the passage of the gold-standard act, making it the duty of the Secretary of the Treasury to maintain the parity of all forms of money issued or coined, Mr. Gage was asked the question: How do you propose to perform your duty with reference to the silver dollars? His reply was that there was only one way in which it could be performed, and that was to make them exchangeable for gold on the demand of any citizen of the United States; and the order was issued, and my recollection is, or my impression is— and I would be glad to have the committee ascertain the fact— that it is still in existence in the Treasury Department, and the Treasury Department is per forming that function. That is responsible for 565 millions. 9328°— S. Doc. 232, 63-1— vol 1------18 268 BANKING AND CURRENCY. Senator N e l s o n . I s there any record of silver dollars presented for redemption in gold ? Mr. H i l l . Are there any such cases ? Senator N e l s o n . Yes, sir. Mr. H i l l . I do not know. I do not know whether any records have been kept by the Treasury Department. That could be ascer tained. I would be very glad if the committee would ascertain that from the Treasury Department. This bill proposes an unlimited issue of further Government demand obligations to be superimposed on such a foundation as this. Tne Bankers’ Association proposes that the Federal reserve banks make their own obligations, secured bv the same collateral, with a reserve of 40 per cent in gold instead of 33 J, and bear all the burden and cost of redemption. These men ask it, not for profit to themselves, for not a dollar of these notes will be issued by them, but all will be the obligations of the one or more Federal reserve banks which the bill creates. The existing banks ask it for the common good, and in the honest belief that the world's experience and our own for the past 50 years should not be ignored. That is all I have to say, gentlemen. Senator H it c h c o c k . The question was asked whether or not silver was sent to the Treasury for exchange in gold. Mr. H i l l . I do not know. But I will state to you, in my judgment, that with an unlimited issue of paper money, redeemable in silver or greenbacks, the first tendency or the gold now in the United States would be to leave the country, and silver dollars would very soon be p resen te d for exchange for gold, if they are not now. Sen ator H it c h c o c k . D o y ou th in k th at a n y q u a n tity of b a n k n otes w ould be injected into the currency which w ould result in driving gold out of the country ? Mr. H i l l . Not under the terms of the bill proposed by the Bankers’ Association, for this reason: Under the terms of the bill proposed by the Bankers’ Association there is no more profit to the Federal reserve bank in discounting paper and paying notes over than there is in giving a book credit. Indeed, not quite as much. The only reason for issuing a note at all, Senator Hitchcock, is that there are times in the different seasons when a man can not pay off his cotton pickers and his orange pickers and his harvest hands in checks. He has got to have actual money or a substitute for it. This bill provides that you may take those substitutes in the form of currency, and if they are made absolutely safe, there is no difference to the bank or the borrower so far as the discount transaction is concerned. They would give him credit on it. Instead of his drawing his checks, they could give him bank notes if he preferred. Senator H it c h c o c k . I want to ask you under what circumstances the Gresham law operates to drive gold out of the country ? Mr. H i l l . Simply that it is the most valuable thing as the world’s medium of exchange, and a man will want to hide it. Senator H i t c h c o c k . Let me ask you whether a gold certificate is not more valuable than a bank note? Mr. H i l l . N o ; not if the bank note is absolutely redeemable in gold. A Bank of England note is as good as our gold certificate anywhere in the world. BANKING AND CURRENCY. 269 Senator H it c h c o c k . Does not gold go out of the country if the cur rency becomes redundant ? Mr. H i l l . Yes, of course; if the currency becomes redundant. Senator H it c h c o c k . What is to prevent the currency becoming redundant under the system where there is an unlimited bank issue of notes ? Mr. H i l l . It simply can not, because they can not issue any except they have a 40 per cent reserve, under the terms of this bill. They have got to pay gold, and the whole thing has got to respect the busi ness activities of the country, and be gauged by the supply of gold. Senator H it c h c o c k . Not under the terms of the bill-----Mr. H i l l . I am talking about the amendments which these gentle men propose, which I hope from the bottom of my heart will be accepted. That is my hope as a country banker, from a State that has not a reserve bank in it. When this bill came before the Asso ciation of Bankers of the State of Connecticut I think it was unani mously voted not to be accepted by them. The same thing has occurred in Vermont, I think. They are willing, under any safe and sane plan, to make the sacrifice for the general good, of uniting in massing the reserves of this country to meet the emergencies of the future. That is the sum of the whole business; that is all there is to it, if it can be done on a perfectly safe basis. Senator H it c h c o c k . I want you to state specifically whether, if the currency became redundant by an excessive issue of credit money, gold would leave the country ? Mr. H i l l . I do not see how currency could become redundant under the bankers' plan. Senator H it c h c o c k . I am not saying that. I am asking you to suppose it. Mr. H i l l . Oh, I think it would. That is the reason I voted against the Vreeland-Aldrich bill. I thought it would be inflation. Senator H it c h c o c k . This bill provides no limit, and your measure provides no limit to the volume or credit currency which it is proposed to issue. Mr. H i l l . Oh, I do not think that this bill, even if drawn on the basis of the redemption features which are contained in your bill, would prove an inflation measure. I think it would be scientifically wrong. I think the trouble about the bill is that while it would not be an inflation measure it would break down in operation and would break the Treasury of the United States or else compel them at their expense to furnish the gold as the basis for redemption. Senator H it c h c o c k . I quite agree with you that the failure to provide a redemption from the gold in the Treasury is a vital one in the bill; but I think, also, your scheme is defective, because you pro vide no limit upon the issue of a credit currency; and the result might be an inflation or a redundancy. Mr. H i l l . There is a limit of 40 per cent reserve. It can not go beyond two and a half times that reserve in gold. There was a new feature which came to me at Chicago. I had never thought of it before. I had always believed that a perfectly safe measure would be a 50 per cent reserve in gold and the balance covered by good commercial paper—which, if I am not mistaken, is the German policy, is it not, Mr. Forgan ? Mr. F o r g a n . Yes, sir. 270 BANKING AND CURRENCY. Mr. H i l l . Y ou have 33+ per cent in gold. The banks* suggestion is 40 per cent, and both of you cover the entire amount of the paper by acceptable commercial credits. Mr. W e x l e r . Accruing in 90 days. Mr. H i l l . Accruing in 90 days. Senator H it c h c o c k . You spoke of 40 per cent gold reserve, and yet every bank of issue in Europe carries a much larger reserve. Mr. H i l l . Yes, sir; as a matter o f choice. Senator N e l s o n . But, gentlemen, will you allow me to state in this connection that the volume of currency should be measured, not by the gold reserve, but should be measured by the amount of commercialloans that are made ? Mr. H i l l . Both. Senator N e l s o n . N o , no. This currency is issued on commercial loans, such loans as provided in the bill. Mr. H i l l . Let me ask you this question, Senator Nelson: How can the volume of currency with a 40 per cent gold reserve exceed two and a half times the reserve ? Senator H it c h c o c k . That is another condition. Mr. W e x l e r . Your statement is erroneous in this respect: The credit is covered by the amount of commercial credit, and the amount of notes is regulated by the amount of gold against it. Mr. H i l l . These gentlemen have great interests, which they have to look after. My time is my own. I will be glad at any time next week or after, if you desire to cross-examine me, to come down and submit myself for your examination, and I hope some word that I have said has had some influence upon your determination of this matter. I want to say to the gentlemen of the committee that the reason I am here is that I went to that conference in Chicago as a delegate from the State Association of Bankers in Connecticut. These gentle men were strangers to me, most of them, at that time. I was ap pointed on the committee by which these resolutions were made. I do not know the politics of these gentlemen. There is not any political consideration in any recommendation that is given to you. There has not been during that Chicago conference any mention of politics. The C h a i r m a n . I do not think, Mr. Hill, that any intimation of that nature has been suggested by the committee. Mr. H i l l . No; but I want to refer to the fair way in which this whole thing has been done. There was one motion made on that committee, and I made it myself. When they said, “ We recommend one central national bank or, if for political considerations that can not be obtained”— and I moved to strike out “ for political considerations,” and it was stricken out. That is the only political reference that has been made in this conference, all the way through, straight down to the present time. And I believe, Mr. Chairman, that no man ever came before a committee of this kind with purer motives or clearer intentions to act for the best interests ana welfare of this whole country than these gentlemen here to-day. The Ch a i r m a n . Y ou think that a redundant currency would retire gold or cause gold to go in hiding ? Mr. H i l l . I think that has been the experience of all mankind for the last 50 years, since the Gresham law was enunciated. BANKING AND CURRENCY. The C h a irm a n . Y ou thought that the Yreeland-Aldrich would make a redundant currency, did you not ? 271 bill Mr. H i l l . And I voted against it— 1 of 16. The C h a i r m a n . Can you tell me how much redundant currency there would be under that bill? Mr. H i l l . I prophesied at the time, if the bill was carried out authorizing the issue of notes on the basis of existing debts without any reserve, that it was bound to result in inflation. Besides, the Vreeland part of that bill made a general partnership of all the banks of each district. The C h a i r m a n . That would have been impossible. Mr. H i l l . Absolutely impossible. Senator H i t c h c o c k . D o you not propose to have the banks go into partnership ? Mr. H i l l . Only to the extent of a limited joint partnership; not a general partnership. 1 want to correct another statement made here. That bill did not >ass as a result of a Republican caucus. There never was a RepuV ican caucus on that, or any other legislative question during the 18 years I was in Congress. Every man stood as an independent representative to vote as he saw fit, and 16 of us voted against the Yreeland-Aldrich bill. The C h a i r m a n . Will you not sit down and let me ask you a few questions ? Mr. H i l l . Certainly. I thought you were through with me and wanted to let these other gentlemen take my place. The C h a i r m a n . No; I want to ask you a few questions, if you will permit me to do so. Mr. H i l l . I would be glad to. The C h a i r m a n . I s it not a fact that the Bank of England, whose stock is owned by private persons, that the Bank of Germany—-the Reichsbank, so called—whose stock is owned by private persons, that the Bank of France, whose stock is owned by private persons, issue legal-tender notes ? Mr. H i l l . Yes, sir. The C h a i r m a n . I s it not a fact that the Supreme Court of the United States has declared that Congress has the right to issue legal-tender notes ? Mr. H il l . Yes, sir; as a war measure. Senator N e l s o n . Oh, no. Mr. H i l l . I differ w ith you . Senator N e l s o n . That was the case at first, and then, afterwards, it was given as a peace measure. Mr. H i l l . But the Government would not get value received for this legal tender, and they would not get a cent except for the use of it. You can not loan our credit as individuals to 12 banks. That is a legal proposition that I do not care to discuss, however. The C h a i r m a n . I am not discussing it; I am merely asking for your evidence as a witness. I am not asking you for the reasons, but for the facts, desiring that the facts show on this record from you. Mr. H i l l . I will answer that, so far as the German bank is con cerned, it is organized in no such way as this is. The C h a i r m a n . That is not the question. Do they issue legaltender notes ? 1 272 BANKING AND CURRENCY. Mr. H i l l . They have the right to issue legal-tender notes. The C h a irm a n . Does the Bank of France ? Mr. H i l l . Yes, sir. The C h a irm a n . Is not that true, then, of the Bank of England and Gc ? The C h a irm a n . That is the point I wished to have in the record. Mr. H i l l . These notes would be legal tender for the banks char tered by the United States Government, but I do not believe the Government would ever attempt to make them legal tender between individuals. They have the right absolutely to make them legal tender between their own creatures. The C h a i r m a n . I am not speaking of the right, I am speaking of the fact. Mr. H i l l . Somebody will raise the question of right before this matter is finished. The C h a i r m a n . Probably; and I have no objection to your raising it before you get through. I would like to ask you if it is not also a fact that nineteen-twentieths of the redemption of the national-bank notes is due to the fact that these notes in gold get legal-tender money ? Mr. H i l l . No, sir; I do not think so at all. I think you are en tirely mistaken. I think the bulk of the redemptions is shown by the statements here that the banks send their notes through the New York, Chicago, and other reserve centers’ to get reserve credit on them, and they send them to Washington to get reserve money. The C h a irm a n . What is reserve money ? Mr. H i l l . Reserve money, under the law, for a national-bank note, is a greenback. In fact, it is now gold, silver, and greenbacks. Tne C h a i r m a n . Then you have answered my question affirma tively ? Mr. H i l l . Yes, sir. The Government has an absolute right to make any requirement that it sees fit concerning its own creatures. But you do not for a moment think they could make regulations concerning the operations of State banks and trust companies, which constitute two-thirds of the banks of the United States ? The C h a i r m a n . I am trying to elicit certain facts from you, as a witness. Mr. H i l l . Yes, sir. The C h a i r m a n . Y ou said a few moments ago that 28 millions out of 600 millions of national-bank notes were redeemed on account of their being mutilated currency ? Mr. H i l l . I said that as a matter of memory. The C h a i r m a n . That is near enough to serve the purpose of my inquiry. Mr. H i l l . I think it was 28 millions destroyed and retired. The C h a i r m a n . So that, out of 600 millions, 28 millions were re deemed and canceled because mutilated ? Mr. H i l l . Yes. The C h a irm a n . That is less than 5 per cent, is it not ? Mr. H i l l . Yes, sir; less than 5 per cent. Let us be correct. That was simply because it was destroyed and mutilated. Four hundred millions were destroyed and canceled because of their condition and reissued. But the 28 millions which I have referred to were mutilated b a n k in g and currency. 273 notes sent in by the Subtreasuries whose duty it is to select them out whenever they come into the Subtreasury; and they were destroyed and retired. The business of the Subtreasury is to clean up the note condition, so far as it comes to them. The C h a i r m a n . Y ou spoke of these notes as being unlimited. Are not these Federal reserve notes proposed by this bill really limited in volume to the amount of a certain commercial paper, or the qualified notes turned over to the Federal agents ? Mr. H i l l . Some people disagree in regard to that. The C h a i r m a n . S o that it does not go beyond that limit ? Mr. H i l l . Oh, not at all. The C h a i r m a n . And when that commercial paper is retired, these notes can be returned to the Federal agent for retirement from circulation ? Mr. H i l l . Yes, sir. I said in the beginning that the notes under this bill are absolutely good. I started with the proposition that they were absolutely good, just as good as the proposition submitted by the Bankers' Association. Senator N e l s o n . There is one thing that is not clear to my mind. Where are these Federal reserve banks to get the gold ? What provi sion is there for them to secure the gold ? Mr. H i l l . That is their business. Do not shove it onto the United States Treasury. They have got to get it. Senator N e l s o n . N o ; but whether it is the United States or the banks, in either case what provision is there in here for it ? Mr. H i l l . The gentleman from New Orleans will buy bills o f exchange on cotton, if it is to his advantage to do it. The gentleman from Chicago will buy bills of exchange on some other commodity. It is the business of the banks, just as it is the business of the Bank o f England to get its gold from us or elsewhere. And why shove it onto the United States Treasury, already having 1,636 millions to be responsible for ? S en a tor N e l s o n . H ow m a n y o f these reserve ba n k s w ill b e tra d in g o n ly in se co n d h a n d ------Mr. H il l (interrupting). Oh, they will trade in first hand, the principal banks. The reserve banks have it as a part of their business. Senator N e l s o n . But they do not trade in these products they bring in from abroad ? Mr. H i l l . They trade in the paper that represents the products, and in so doing practically trade in the products. Senator C r a w f o r d . Will these notes have to be redeemed in gold when they are presented to the Treasury of the United States ? Mr. H i l l . Absolutely, under the terms of this bill. Senator C r a w f o r d . Where is the United States to get it ? Mr. H i l l . That is where the machinery will break down. Senator C r a w f o r d . The bill does not specifically provide a method by which the Treasurer is to keep the gold there to redeem them when they are presented there. Mr. H i l l . That is precisely the point that I* am presenting to you. You have a 43 per cent reserve now for the old greenback, and this bill provides for a 5 per cent reserve for the new one, with the same redemption responsibilities. 274 BANKING AND CURRENCY. Senator C r a w f o r d . Apparently that is a weak link or a missing link, in the bill. Mr. H i l l . I think that in operation it would prove a breaking link. Senator N e l s o n . What do you make out of this provision? I will read it: Whenever the Federal reserve notes issued tbrorgh one Federal reserve bank be received by another Federal reserve bank, they shall be ret med for redemption to the Federal reserve bank through which they were originally issued. Now, listen to this: Or shall be charged off against Government deposits and returned to the Treasury. They are charged off against the deposits that the Government has in these banks ? Mr. H ill . They may be. Senator N e l s o n . Without regard to the 5 per cent ? Mr. H i l l . Yes, sir. I have looked at that with a great deal of care, and have said to myself: How on earth will the Treasury at Washington, which is keeping these accounts by book accounts, know whether they can draw on a Federal reserve bank, when possibly two days before a million reserve notes have been charged up against their balance of a half a million and they are overdrawn already? I have not attempted to solve that part of it. Senator N e l s o n (reading): Or shall be presented to the Treasury for redemption. In other words, when a reserve bank gets those notes, if they are the notes of another bank, they can do one of two things: Either charge it off against the Government deposits or forward it to the Treasury for redemption ? Mr. H i l l . Senator, you will find it all full of just such difficult problems for solution; and it all comes right down to this, that that note is a joint and several note of 13 persons or artificial persons. Senator N e l s o n . I should put it in another form: It is the note of the United States guaranteed bv the original reserve bank. Mr. H i l l . I am speaking of the redemption responsibilities only— the machinery part of it—that can not be carried out in the form in which it is proposed. The C h a i r m a n . What is the difficulty, Mr. Hill, if this note is to be charged against the Government deposit of a reserve bank? Suppose that the Government has no deposit there; then it has the option of sending it in for redemption. What is the difficulty about that ? Mr. H i l l . Oh, no difficulty, except the Government at Washington, where the accounts are kept, will not know anything about the con dition of their balance. Supposing a million dollars of notes came in to a Federal reserve bank in San Francisco and they were obliged to redeem them—or accept them, if you please— accept them at par, and due to the time consumed in the passing of the notes across the con tinent the bank at San Francisco would be overdrawn. If they had a deposit of a half a million, it would be overdrawn half a million. The C h a i r m a n . Then, you assume that the Government would not be advised of the matter ? Mr. H i l l . I assum e it w o u ld b e . The C h a i r m a n . They would not know it? b a n k in g and currency. 275 Mr. H i l l . I should think that it was the business of the Federal reserve bank to notify the Government. I did not pay any attention to that; I do not call attention to it at all, and I think the other members of the committee in Chicago did not pay any attention to it, because they thought it was a matter for your committee to decide. But that is another weak link, it strikes me. Senator N e l s o n . How do you construe this provision of the bill? Notes presented for redemption at the Treasury of the United States shall be paid and returned to the Federal reserve bank from which they were originally issued. Mr. H i l l . That is all right. They would pay it if they had the money; and it would be their business to get the money. Senator N e l s o n . The United States redeems them and sends them back to the bank from which they were issued. When they come back to the bank from which they were issued, what becomes of them ? Mr. H i l l . They can retire them if they see fit or reissue them. The whole trouble comes from the fact that this is a joint and several note with equal responsibilities, on the part of each one, except on the final pkyment. Senator H it c h c o c k . I want to presume a case. Under the bill as it is, we will assume a reserve bank located in San Francisco. Supose business is active, and it has been rediscounting paper until it as its reserve down to 33^ per cent, and other paper is presented for discount, and the reserve bank applies to Washington for, say, $1,000,000 of notes. How would the reserve bank at San Francisco place $300,000 reserve against that $1,000,000 of notes when its reserve is already reduced to 33 per cent ? Mr. H i l l . It can not take out a note, and it could not discount it under those circumstances. Senator H it c h c o c k . That is what I would like to understand. I would like to have any banker answer the question. Mr. H i l l . Just a moment. Pardon me, I want to say this, that none of these problems have arisen because for the last 20 or 30 years—I remember that far back—we have not had to have a reserve against note issues. Senator H it c h c o c k . What have you to say about that, Mr.— I was going to say the Senator from New Orleans, but he is not that yet. I will say the banker from New Orleans. Mr. W e x l e r . I did not quite catch your question, Senator. Senator H it c h c o c k . I say, suppose that a San Francisco reserve bank has been rediscounting paper very actively until its reserve has been reduced to 33^ per cent, and there is still a strong demand by banks ha that region for the discounting of paper, and the reserve bank applies to the Treasury for $1,000,000 of Government notes-----Mr. W e x l e r . Government notes ? Senator H it c h c o c k . Under this bill they would be Government notes, United States notes, which it desires to loan out to its banker customers. How can it then place the reserve or segregate the reserve of $333,000 against those notes without destroying its reserve? Mr. W e x l e r . It can not do it. Mr. F o r g a n . It will have to get an authorized loan. Mr. W e x l e r . It has reached the limit of its loaning capacity, and it will either have to call on the Federal reserve board to force one of the other reserve banks to rediscount some of the paper or the banks would have to stop loaning and begin to call in the loans. E 276 BANKING AND CURRENCY. The C h a i r m a n . That is another check on these notes ? Mr. W e x l e r . An absolute check. The C h a i r m a n . And therefore the danger of redundancy is dimin ished by that provision? Mr. H i l l . Unquestionably. There is no way in the world that you can have an inflation of credit if you draw this bill in the man ner that has been suggested. It will be beyond human power to ex pand the circulation beyond the limitation of the gold reserve required under the law. The only way you can increase it is if you have a tremendous era of prosperity, big crops which you will export, and have a large balance of trade and bring in more gold, circulation based on it will naturally flow from the banks. You can expand your credit, and in times like that you will need it. The C h a i r m a n . Suppose that the San Francisco reserve bank finds itself utterly unable under the terms of this bill to give to its customers the relief which the bill is supposed to give. Up to this time it has taken out no notes at all; it has not taken advantage of that provision of the bill, and yet when it comes to the point where it needs to do so it has absolutely no ability to do so. Mr. H i l l . But, Senator, you are supposing a perfectly impossible situation. I can not conceive that all the borrowers in San Fran cisco who would have to have discounts on these notes would all reserve nothing but book credits and none of them would have ever taken out a note. Your proposition would imply that all of the banks in San Francisco had taken book credits and none of them had ever needed these notes for circulating purposes. That condi tion could not possibly exist unless they are all dead out there. Senator H i t c h c o c k . Let me show you how it can exist very well. When this bill goes into effect the reserve banks must begin at once to use notes. They will have the deposits in their banks. They will have $500 non r»f rlArinQit.a smrl t.ViAV will "hn.vA ffclOO 000 000 nf reserve, is there. Senator N e l s o n . But there is nothing, Senator Hitchcock, to require either that subscription of capital or deposit of reserve to be in gold. Where does the bank start with its gold? The point I make is, where does this reserve bank start with its gold reserve for the redemption ? They can pay the subscription in any legal tender money, and their reserve may be in any legal tender money. How does the bank get its gold to start business with ? The first business comes from commercial paper. That commercial paper may or may not bring gold. Where does the bank get its gold, and how? Senator H it c h c o c k . Not only that, but when the point is made that to require 400 banks in central reserve cities to turn over $300,000,000 in cash to these reserve banks to begin business with, it is said that that would result in a contraction of credit in those reserve cities, and that in order to avoid that it is proposed to have these banks, instead of turning over cash to the reserve banks, to take it from commercial paper. So they will not only have very little in the way of gold, but they will have very little in the way of any cash. Mr. F o r g a n .. May I say a word on this point? The C h a i r m a n . Certainly, Mr. Forgan. BANKING AND CURRENCY. 277 Mr. F o r g a n . I do not know who is the author of this [exhibiting a paper], but whoever the author is, he knows this subject. This was passed to me by some one in this corner. Mr. W e x l e r . Mr. Roberts. Mr. F o r g a n . He has cleared up this subject in a way that I would like to bring before the committee. Considering the case presented by Senator Hitchcock, the object that the bank would have in asking for these notes would be to liquidate its deposit liabilities, to exchange its deposit liabilities, for the convenience of the public, into notes; and that it could do without any change in its reserves as against its liabilities. So that what we have been saying was impossible is perfectly possible and perfectly practicable. Mr. H i l l . Yes, but this law requires a deposit of 5 per cent reserve in the Treasury before notes can oe taken out, and the question sug gested an exhausted reserve. The C h a i r m a n . The committee will stand- adjourned for eight minutes, until the members have an opportunity to vote, and the hearing will then be resumed. (A recess was thereupon taken for eight minutes, after which the following proceedings were held:) The C h a i r m a n . The committee will come to order. Senator S h a f r o t h . I would like to ask Mr. Hill a question or two if I may. FURTHER STATEMENT OF JAMES B. FORGAN, CHICAGO, ILL. Mr. F o r g a n . Mr. Chairman, will you allow me to correct a state ment I made this morning for the record ? The C h a i r m a n . Certainly. Mr. F o r g a n . When Mr. Reynolds was speaking he was asked by one of you gentlemen what the expense to a bank was on bank-deposit accounts, and as he did not readily answer and did not seem to have the figures right at his fingers' ends I volunteered that it was a fraction more than 3 per cent. I want to correct my statement and say that when I said that I had in mind the cost to the First National Bank of Chicago of all deposits including the commercial deposits and the bank deposits, and my statement should have been, when it is confined to bank deposits, 4J per cent. Senator S h a f r o t h . Mr. Forgan, while you have the floor I would like for you to make an explanation as to your theory of this bill creating a contraction of the currency. I understand that your theory is that a contraction will follow if this bill is passed in its pres ent form. Therefore I would like to have you explain to the com mittee your reason for believing that. Mr. F o r g a n . Not a contraction of the currency, but a contraction of credit in the banks. Senator S h a f r o t h . Well, a contraction of credit in the banks, then. The C h a i r m a n . Y ou said you had a table in respect to that ? Mr. F o r g a n . Yes, sir. The C h a i r m a n . Will you have the table submitted to the stenog rapher to put it in the record ? 278 BANKING AND CURRENCY. Mr. F o r g a n . I will give it that way. Senator S h a f r o t h . Y ou may give it any way you wish. Mr. F o r g a n . I would prefer to make the statement and to give it with qualifications. Senator S h a f r o t h . Y ou may proceed in any way you see fit. Mr. F o r g a n . It will not take a minute. The loans and bond investments of the national banks, exclusive of their Government bonds pledged as security for their note circu lation, amount, in round figures, to $7,336,000,000. The aggregate net deposits of the national banks on which their legal reserve is figured amount to $7,124,000,000. (See comptroller’s report of June 4, 1913.) Thus the aggregate loans, including bond investments, of the national banks are practically an offset against the amount of their aggregate net deposits. In other words, these two items rep resent the amount of credits exchanged between the banks and the public, the amount owed by the banks to the public being practically offset by the amount owed by the public to the banks. This ex change of credits is based on and supported by actual money in the banks. The established relation between the amount of actual money held by the banks and the fabric of credits existing between the banks and the public is therefore in the ratio of $917,000,000 to $7,336,000,000, or 12^ per cent of money to the amount of credits. If from the amount of money on hand, $917,000,000, the national banks are required to make the following payments to the Federal re serve banks, viz, 10 per cent of their aggregate capital, $105,000,000, and 3 per cent of their net deposits, $213,000,000, they would have to turn over more than one-third of their entire holdings, or $318,000,000, and would have left money on hand amountmg to $599,000,000. I might explain that in a very ready way by taking three articles this way [indicating]. Suppose these three articles represent a total amount of money m all the national banks, figuring on the net de posits and not on the gross deposits. The difference between the figures I give you and M r. Reynolds’s figures is that he figures on the gross deposits and I figure on the net deposits. Senator N e l s o n . What is the difference oetween gross and net? Mr. F o r g a n . My reason for figuring on the net is that when we are figuring the reserve deposits to be paid into the Federal reserve banks on the main reserves we will be allowed to figure, I presume, the same way as we are allowed to figure our legal reserves now. We are allowed to deduct from gross deposits balance due from banks against balances due to banks; the clearing-house checks are de ducted; all national-bank notes on hand are deducted from the gross deposits to produce the net deposits. Therefore our deposits are very largely reduced on which we keep our reserves, and I figure, there being nothing in the national-bank law to prohibit that method of figuring reserves and that system having been adopted by the comptroller’s department, the same practice will be continued in this case. Now, if these three items represent $900,000,000 and you take a third of that away we have two-thirds left. And you have the same liability as you had before. You have the same fabric of credit in the banks left when you have $600,000,000 of cash that you had BANKING AND CURRENCY. 279 before when you had $ 9 0 0 ,0 0 0 ,0 0 0 ; so that the basis of the fabric of credit existing between the bank and the public has been changed from 12^ per cent, as I have shown, which is $8 of credit for $1 of money. It has been increased to whatever that proportion is. It would be something like $12 of credit to $1 of money, and in that way the banks will be very much more expanded. Senator N e l s o n . You mean inflated. Mr. F o r g a n . Yes; inflated. I would like to say right here, be cause it came up before: In our conference in Chicago there was a question raised by Mr. Dawes, ex-Comptroller of the Currency and now president of the Central Trust Co. there-----The C h a i r m a n . Y ou are speaking of Charles G. Dawes ? Mr. F o r g a n . Yes, sir; Charles G. Dawes; he made the statement that this would produce a great inflation and I followed him by say ing that it would cause contraction. The C h a i r m a n . H ow much gross do you figure; $1,800,000,000, according to your estimates? Mr. F o r g a n . Yes, sir; $1,800,000,000. My idea— and I want this to be put clearly before you, and as I show, the contraction was to bring the present fabric of credit existing on the banks down to the present ratio of $8 credit to $1 of money and would require the calling of loans and the contraction of credits to the public to that extent. He figured that this contraction would not be enforced and therefore there would be a great expansion, and he came to me after he had taken my figures home and said: You and I are exactly on the same basis. You say that if the thing was put into effect—which could not be done—it would cause contraction. It would make con traction necessary, but the contraction would not take place. Therefore the banks would be placed in an expanded condition. Therefore he and I were really on the same track. As I was saying, taking that one-third of the money, or about one-third, would leave money on hand amounting to $599,000,000 in the banks. On the established basis of 12£ per cent of money to existing credits, which seems little enough, this would provide for credits between the banks and the public aggregating $4,792,000,000, calling for a com pulsory contraction in such credits of $2,544,000,000 from their present amount of $7,336,000,000. The Federal reserve banks, with a capital paid in of $105,000,000, and reserve deposits similarly paid in of $213,000,000, would have in money to start with, $318,000,000, which, on the basis of the 33 J per cent cash reserve they are required to carry against their total demand liabilities would enable them to expend until they had assumed total liabilities of $954,000,000. Senator C r a w f o r d . Y ou can not extend credit to anyone except to the banks ? Mr. F o r g a n . N o , sir; as I was saying, that would be $ 9 5 4 ,0 0 0 ,0 0 0 , of which they would have already assumed liability for the reserve deposits, $ 2 1 3 ,0 0 0 ,0 0 0 . Their net expansion capacity would there fore be $ 7 4 1 ,0 0 0 ,0 0 0 , and this would be the limit of their ability to rediscount for their member banks, whose compulsory contraction of credits as shown above if they are to be kept in their present basis would be $ 2 ,5 4 4 ,0 0 0 ,0 0 0 , showing that their ability to rediscount 280 BANKING AND CURRENCY. would fall short of the contraction of credits in their member banks by $1,803,000,000. After 14 months, when the minimum reserve deposits lequired are to be raised from 3 to 5 per cent, the contraction would be proportionately greater. Senator H it c h c o c k . That would be without their issuing any notes. They could do that from the cash which they received from deposits ? Mr. F o r g a n . It would make no difference what form the credit took; it would not make any difference whether it was deposit liabilities or note liabilities. Tney might be all notes or all deposits. There would not be a particle of difference, as they keep a reserve on both. Senator H i t c h c o c k . Y ou figure, then, that there would actually be a contraction of $100,000,000 of actual bank credits of the country ? Mr. F o r g a n . I have not finished my argument, Senator. Right there, however, I want to impress upon your minds that I did not want to give these figures to scare anybody, because it does not mean the thing can not be worked out. It does not mean that at all. It means that this $1,800,000,000 is the amount of contraction that would take place in order to continue the national banks on their present basis of $8 of credit to $1 of money, which I do not think necessary, but it produces a condition that has to be faced. Now I will go on to explain. Such a contraction of the credits, if enforced, between the national banks and the public could not be accomplished without a cataclysm in business. In order that these figures should not overstate the effect on the credits between the public and the national banks by such a diversion of money equal to one-third of all the money in the national banks, from these banks into the Federal reserve banks, the 3 per cent reserve deposit required on their “ total demand liabilities” has been figured on their net and not on their gross deposits, under the assump tion that the same offsets would be allowed them that are now allowed when figuring their legal reserve requirements. These figures do not include the Government deposits which within 12 months are to be transferred to the Federal reserve banks. With the exception of the free money in the Treasury such deposits would be transferred from the national banks and would require them to part with a further amount of money, equal to the amount of the Government deposits they hold, which would still further proportion ately decrease their money reserve and increase the contraction of their loans necessary to maintain their present credit expansion basis. These transfers of Government deposits having to be made within 12 months, would have no effect on the above transactions, all of which must occur within 60 days. Senator N e l s o n . Those Government deposits would be a checking account, would they not ? Mr. F o r g a n . Yes. I do not wish to be misunderstood here, and I want you to understand my position. They say figures will not lie. The C h a i r m a n . Figures lie and then they prove it, as they say. Mr. F o r g a n . If you rely on them you had better rely upon some thing that is fundamentally true. ^I do not wish it to be understood that these figures forecast pre cisely what would occur were the Federal reserve act passed and were the national banks to operate under it. I am well aware that no BANKING AND CURRENCY. 281 calculation can possibly be made to correctly forecast what would actually occur in such an event. I am satisfied, however, that the figures portray as accurately as possible the situation which would be confronted were the 12 Federal reserve banks organized and should the national banks undertake to operate under the new law and maintain their present credit expansion basis of $5 credit to $1 money. The discrepancy between the loaning capacity of the Federal reserve banks and. the contraction of credits in the national banks shown in the figures may be further elucidated as follows: It is pro posed to transfer bodily from the national banks practically onethird of the actual money now lodged in their vaults and place it in the vaults of the Federal reserve banks. As we have seen, the money in the vaults of the national banks forms the basis of a fabric of credits existing between them and the public in the ratio of 12^ per cent of actual money to the amount of such credits outstanding. This fabric of credits must be adjusted to the reduced holdings of actual money by the banks if the established ratio of 12J per cent of money to total credits is to be maintained, otherwise to a propor tionate extent there will be an overexpansion of credits in the banks. The credit expansion of the Federal reserve banks is fixed on the basis of a 33J per cent money reserve against their total liabilities. They are therefore restricted m their credit expansion to $3 of credit against $1 of money, while the national banks have been doing business on a 12^ per cent money basis, or $8 oi credit against $1 of money. As a basis of credit, therefore, the one-third of the money now in the national banks when transferred to the Federal reserve banks would lose nearly two-thirds of its present expansive power. Senator S h a f r o t h . Mr. Forgan, would it not be true that that partnership relation, if it might be so termed, between the Govern ment and the banks would produce a confidence in the public that would have a tendency to increase their deposits with the banks generally ? Mr. F o r g a n . That is on the assumption that they have any more to deposit. I think they have deposited most of it now. Senator S h a f r o t h . Well, a part of the money is held in savings deposit vaults ? Mr. F o r g a n . But I think it is comparatively a small part. Senator S h a f r o t h . Is it not a fact also that many of the banks, especially country banks, keep a very large reserve that they would not have to keep if they were permitted to discount their paper at one of the banks, and would not they have a tendency to overcome some of these objections? Mr. F o r g a n . Yes, sir; I want that distinction understood. I do not consider the maintenance of the $8 to $1 basis necessary in the banks when they have these Federal reserve banks to go to to get rediscounts. I do not think it is necessary. I only put it before you as a condition produced by the operation of the plan which is pro posed. I do not think there is any doubt about the condition, and it is for you to consider what the effect of it will be. Senator C r a w f o r d . Well, would it be safe banking to have $12 credit against $1 money? Mr. F o r g a n Well, it would not, under the present circumstances, certainly, because it would affect our reserves. 282 BANKING AND CURRENCY. Senator C r a w f o r d . Well, under what circumstances would it be safe? Mr. F o r g a n . If we had a Federal reserve bank, established where we could always depend upon getting a satisfactory circulating medium to liquidate our deposits with when they were drawn upon, I think it would be safe at least to materially increase it. It would not have to go to the full $12 limit, because we would have some rediscounts; but even if they rediscounted to that extent, it would be an additional expansion of the credit on the part of the banks. Senator C r a w f o r d . Well, you would not want this Federal reserve bank to do a general business with the public, and do it on a basis of $1 cash to $8 credit? Mr. F o r g a n . No, sir; I would not; and that is one reason why, if it was a Federal reserve bank, and was running under competition with the banks and keeping a reserve of that kind, it could not do it. Senator N e l s o n . N o w , Mr. Forgan, I want to ask you a few ques tions bearing on this question of credits. Now, you have in your banks what I would call two different classes of deposits; what I would call book, or credit, deposits, and check deposits, have you not ? Mr. F o r g a n . Yes. Senator N e l s o n . I mean by that, that if I come in and give you my note for $1,000 and you credit your books with that-----Mr. F o r g a n . Yes. Senator N e l s o n . On one side you have $1,000 of deposits? Mr. F o r g a n . Yes. Senator N e l s o n . And on the other side you have my note as an offset against it? N o w , the bulk of your deposits in the large cities are of that character, are they not ? Mr. F o r g a n . I should say yes, largely— or just the same thing when checks are deposited. Senator N e l s o n . I want to call your attention to the fact—I ask you this question both in connection with this subject and in con nection with the interrogatories of Senator Hitchcock here to-day, speaking about the disproportion, or how the capital of the banks has grown less, as compared with the amount of deposits— and that is, that the capital and surplus of your banks would be an offset to those deposits that I call “ cash deposits,” would it not? Mr. F o r g a n . Yes. Senator N e l s o n . Well, the notes given for your credit deposits would be an offset for that, would they not ? Mr. F o r g a n . Well, you could consider them so. Senator N e l s o n . So that, as to your credit deposits, which are the bulk of your deposits, to have, in addition to your capital and surplus, you have in addition to that the notes of the depositors, the paper depositors? Mr. F o r g a n . Yes, sir; but the depositor’s note does not lie in the bank concurrently with his deposit which he gives. He gives his note payable in three months; but he may check the money out the next day. Senator N e l s o n . But that is how you get such enormous deposits on your books in the large cities— that they are in the shape of credit deposits, are they not, as distinugished from cash deposits ? BANKING AND CURRENCY. 283 Mr. F o r g a n . Yes. But I do not distinguish, when you come to credit deposits; I do not see any distinction between the notes-----Senator N e l s o n (interposing). Well, is that not the reason? Mr. F o r g a n . Will you please wait a minute and let me explain. I do not think you understand what I was going to say. I do not see any distinction between the notes discounted which our customers de posit and other people’s checks on other banks, which they also deposit. They are alt credit deposits. Senator N e l s o n . N o ; but I want to call your attention to one practical distinction that I have observed, and 1 think you know it. You take a small country bank, one of the $25,000 national banks in a rural community. Seventy-five per cent of their deposits consist of cash actually paid in over the counter. It is only a small bagatelle that comes in in the form of such credit deposits as you have in the large cities. Mr. F o r g a n . Y e s . Senator N e l s o n . S o that there you have a difference between countiy banks and large city banks in that respect. In the country bank it is cash that is deposited. With you it is simply a boot deposit. Mr. F o r g a n . Well, if you take the other side, Senator, they pay out cash over the counter for most of the transactions, and we pay simply a balance to the clearing house, the difference between what we have against the other banks, every day, and what they have against us. So that we do not have to pay out nearly as much money proportionately as they do. Senator N e l s o n . I know you do not have to pay out the cash, as the country banks do. Mr. F o r g a n . I mean that proportionally we do not pay out as much cash or take in as much cash as the country banks. Senator N e l s o n . You have the commercial paper, and they have the money, largely, and against that both you and they have the surplus and capital? Mr. F o r g a n . Yes; in the statement I made just now, the first statement I made, you take all the banks together and the obligations of the public to the banks in the shape of loans is practically offset by what is called their net deposits. Senator N e l s o n . Yes. Mr. F o r g a n . And that carries out your theory that the rest of it is represented by the capital. Senator N e l s o n . And surplus of the banks? Mr. F o r g a n . Yes. Senator W e e k s . Mr. Chairman, I want to ask Mr. Hill a question. I do not know whether he is going to remain in the city or not. You have been giving a good deal of attention and study, Mr. Hill, to the question of issuing bank notes or Treasury notes ? Mr. H i l l . I have in years gone b y ; I have not recently. This whole thing is a new proposition to me, during the last two weeks. Senator W e e k s . Y ou have been looking up authorities, and all that sort of thing? Mr. H i l l . Yes. Senator W e e k s . N o w , have you found any testimony or any authority which advocates issuing Treasury notes in preference to issuing bank notes? 9328°— S. Doc. 232, 63-1—vol 1------19 284 BANKING AND CURRENCY. Mr. H i l l . N o ; I have not. Senator W e e k s . Have you ever heard of any? Mr. H i l l . And I will state furthermore, that I have seen, within a month, the statement that even Spain has taken the same course that Germany took years ago, that England has always pursued, in throwing the responsibility for the maintenance of the gold basis of the country, upon the banks. I do not know how correct that is; but I have seen it in the newspapers— I will not go into the way in which they did it, because that would raise another question. I do not know of any country that has adopted the policy of government paper currency in recent years; and I know the leading countries of the world are getting away from it as fast as they can, and throwing the burden of maintaining the gold supply upon the banks, where, in my judgment, it ought to go, and where only it can safely go. Senator N e l s o n . We have an evidence in our experience with the national-bank notes. They have not been the promises of the Gov ernment; they have been the promises of the bank. And yet the people have accepted them with as much confidence as any other part of our currency. Mr. H i l l . Because they are secured, dollar for dollar, by Govern ment obligations. Senator N e l s o n . And with that past experience with our notes, we could not have any more difficulty with these new notes, if they were issued by the reserve banks instead of by the Federal Government ? Mr. H i l l . I think the notes are good under either plan, whether issued under the plan as it is drawn— I mean with the bill as originally drawn, with gold redemption, and not as it stands now, with ulawful money” redemption. But the note would be good under either plan. The bankers’ proposition, while it fixes the reserves normally at 40 per cent, leaves that 40 per cent untaxed. If the reserve falls below the 40 per cent, under the proposition which they suggest, for every per cent which the reserve Tails, the bank is taxed on that decrease of reserve, until it gets down to 33J per cent, the normal ratio of the pending bill. So that, in either case, I think the notes are abundantly protected. Senator N e l s o n . Y o u would have that reserve in gold ? Mr. H i l l . Yes, sir. Gold is the world’s money. If we were by ourselves, and had no international trade (and everything points to an enormous increase in our international trade in the future), we might consider some other proposition. But the demand for gold is bound to be greater in the future against this country than it is now in my judgment ; and therefore I think we ought to fortify ourselves when we can do it without cost to us. Senator N e l s o n . Y ou believe it is wiser to throw the burden of maintaining the gold reserve on the banks than to have it rest upon the Government ? Mr. H i l l . Why should that not be done ? Why should that burden be upon the Government, requiring the Government to tax it back on the people of the country ? These reserve banks are going to make a profit, or else they would not be incorporated. Why should it not come out of them ? The 25,000 existing banks do not make a cent out of it, they do not issue any notes under this bill. Why should not these reserve banks, whether they consist of but 1 or 12, take upon BANKING and currency. 285 themselves the burden of furnishing the gold supply, as they do in every competing country in the world ? Senator M c L e a n . Mr. Chairman, I would like to ask Mr. Hill a question. The C h a i r m a n . The Senator from Connecticut will proceed. Senator M c L e a n . We have got $1,000,000,000 in gold which is represented by certificates. Mr. H i l l . I do not think we have, Senator. I will tell you that there are-----Senator S h a f r o t h (interposing). $1,100,000,000. Mr. H i l l . I do not think we have. Senator S h a f r o t h . That is the last report of the Treasury. Senator M cL e a n . But according to the report, there is some $500,000,000 held in the banks ? Mr. H i l l . Exactly. Senator M cL e a n . Nobody knows where the other $500,000,000 are. Is it not possible that those gold certificates are, many of them, in Europe ? Mr. H i l l . I have seen them myself there, over and over again. Senator M cL e a n . Did you ever find any greenbacks there ? Mr. H i l l . Rarely, if ever. I have seen in almost every civilized country in the north temperate zone American gold certificates, our people knowing they can travel with them and foreigners know ing them to be gold receipts which can be held or transported with out loss by abrasion. I asked Mr. Roberts a few moments ago if the Treasury Depart ment had anyway by which they could trace United States gold cer tificates in the vaults of the banks of Europe. There is $440,000,000 of them missing somewhere. It may be in the pockets of this committee— I wish they were [laughter], but who knows where that money is ? Nobody knows where it is. Senator M c L e a n . A s a matter of fact you do see the gold certifi cates abroad ? You do find them abroad ? Mr. H i l l . I have seen many of them abroad, and I have carried them abroad myself. You will find them in the hotels on every tourist line of Europe and around the world. Senator S h a f r o t h . Mr. Hill, you have explained the defects, very largely, of this bill. Now, I would like to have you state what kind of currency you think we ought to have ? Mr. H i l l . I will tell you what I think as to these banks that are to be created. In the first place, I would create one central national bank with complete supervision by the Government but without control by the Government, because that control means control of individual credit, and you can control it from the Federal reserve board straight down to the farmer who takes his note for discount to the smallest country bank in the United States. Senator S h a f r o t h . Now, then, you would have a great central bank—■ —■ Mr. H i l l . I would have a central reserve bank, or a reserve asso ciation, or whatever you choose to call it. My general idea of this whole proposition is this: There is this great good that is going to come out of this legislation, and I con gratulate this committee upon being the parties who will bring it about, that the one thing to be secured is the massing of the reserves. 286 BANKING AND CURRENCY. But, gentlemen, it has got to be on a basis that makes it an induce ment to the country banks of this country to participate in it as a patriotic movement. There is nothing in either bill to-day— either as presented by your committee or by the bankers’ committee (and this bill is the more liberal). There is nothing in either bill to-day that would induce a country bank to go into this proposition, com pared with the advantages which they would get of nome supervision under their State law, except a patriotic desire for the good of the whole country and a sacrifice on their part to accomplish it. Now, that is my judgment. Now, how are you going to do it? It is a matter of detail for you to work out. We must have the massing of the reserves for mutual support by all of the weak in times of stress. You do not need this massing at any other time. You do not need it except when the emergency is on you, but you have got to have it organized and ready and doing a fairly profitable business when you do not need it in order to have it when you do, and your problem is how to establish it at the least possible cost of maintenance and have it re a d y when you want it. And in my judgment— I do not quite say-----The C h a i r m a n . Pardon me, I do not think you have answered the question proper. Mr. H i l l . What is that, Mr. Chairman ? The C h a i r m a n . It does not specifically answer the question of Senator Shafroth. Mr. H i l l . In my judgment, it is a mistake to attempt to go beyond that point. Let it grow by an evolution beyond that point. Senator S h a f r o t h . Would you have the central bank issue all of the currency? Mr. H i l l . Absolutely. Senator S h a f r o t h . What limitation would you put upon the cen tral bank ? Mr. H i l l . None but the requirements of the business of the country. With prompt redemption, after it has done its first work. Senator S h a f r o t h . Would you leave that to the board of directors ? Mr. H i l l . With the limitations of a gold reserve and the security of commercial paper. Senator S h a f r o t h . What percentage of gold reserve would you have ? Mr. H i l l . I thought I would make it 50 per cent. These gentle men recommend 40 per cent. I concede tneir judgment is better than mine, for this reason: I stated 50 per cent in my study of this bill, and had the remainder of the note secured by collateral paper, accepted paper. They make it 40 per cent and the whole note secured by collateral. Consequently I think their proposition is better. Senator S h a f r o t h . Would the board of directors have the power to retire the currency at any time they wanted to do so ? Mr. H i l l . It would retire itself. Senator S h a f r o t h . Well, but would they, in fact, have that power under your plan ? Mr. H i l l . What difference would it make whether they retired it themselves------ BANKING AND CURRENCY. 287 Mr. W e x l e r (interposing). They could not retire it themselves. Senator S h a f r o t h . Your theory is that the central bank would have the power to issue notes and borrow money ? Mr. H ill . It would not make any difference whether it had the power to issue notes or not. The power to issue notes is a mere buga boo. There is no difference between the expansive power of a prop erly secured ifi|te circulation and that expansion put upon the books of the bank as a credit except in the form which the credit takes. Senator N e l s o n (interposing). Mr. Chairman, I would be glad to hear Mr. Forgan, Mr. Wexler, and Mr. Reynolds on this question o f the character of the bills, whether they ought to be the bills of the bank or the bills provided in this proposed legislation, the promises of the Federal Government. I would like to hear each of these gen tlemen discuss that question. Senator P o m e r e n e . Well, it is half past 5 o’clock now, and that would take a long time. The C h a i r m a n . It has been suggested to the chairman that we adjourn now until to-morrow morning at 10 o’clock. But before adjourning for the day I should like to ask one question of Mr. Hill. Mr. H i l l . Would you like to have me stay over until to-morrow, Mr. Chairman ? The C h a i r m a n . No; I do not want to keep you, so far as I am concerned. I just want to ask you this question: You stated, I be lieve, that you object to the Government*control of this bank? Mr. H i l l . Yes, sir. The C h a i r m a n . Because, in reality, it means Government control of individual credit ? Mr. H i l l . Yes, sir. The C h a i r m a n . Right “ down to the crossroads” ? Mr. H i l l . I th in k it d oes. The C h a i r m a n . Would you prefer to have that control, then, exercised by private persons ? Mr. H ill . I would prefer to have that distributed, and you can not stop it. The C h a i r m a n . Why ? Mr. H i l l . No; it is not possible. There are 17,000 banks that are not under the control of the Government. There are private bankers, some of the largest institutions in the country. I do not believe it is possible, by legislation, to get such a control. You may control it, so far as tne national banks come into the system. The C h a i r m a n . I merely wanted to get your point of view, Mr. HUl. (Thereupon, at 5.30 o’clock p. m., the committee adjourned until to-morrow (Saturday) morning, at 10 o’clock.) 288 BANKING AND CURRENCY. S A T U R D A Y , SEPTEM BER 6, 1913^ C o m m it t e e o n B a n k i n g a n d C u r r e n c y , U n it e d S t a t e s S e n a t e , Washington, D. 0. The committee assembled at 10.15 o’clock a. m. Present: Senators Owen (chairman), Hitchcock, Reed, Shafroth, Hollis, Nelson, and Bristow. The C h a ir m a n . Mr. Forgan, I understand that you wish Mr. Reynolds to take the stand and answer questions by members of the committee ? Mr. F o r g a n . Mr. Reynolds and Mr. Wexler are both here Mr. Chairman. The C h a ir m a n . All right. Mr. Reynolds, will you proceed now. Senator S h a f r o t h . Mr. Chairman, Mr. Milliken has some ques tions here in tabulated form which he would like to ask Mr. Reynolds; and it concerns a theory which he holds and which he understands very thoroughly; and I should be glad if you will allow Mr. Milliken to ask them directly. Is there any objection to that? The C h a ir m a n . I have no objections, if it is agreeable to the com mittee. Senator H i t c h c o c k . If he desires simply to ask one or two ques tions, I have no objection. ADDITIONAL STATEMENT OF GEORGE CHICAGO, ILL. M. REYNOLDS, OF Mr. M i l l i k e n . I would like to ask Mr. Reynolds about the Euro pean test of solvency, as compared to the American test of solvency. Mr. R e y n o l d s . Can you not put all of that in one question? M r. M i l l i k e n . I h a v e g o t it o n on e sheet o f p a p e r here, M r. Rey n old s. Suppose we should adopt the European test of bank solvency by requiring the national banks to state the liquidity of their portfolio (the portfolio being the portion of their assets which represents their deposits and other demand obligations) and its ratio to their deposits and other demand obligations, would that not tend to better banking in this country ? That is the question. Mr. R e y n o l d s . Yes; I am inclined to think it would. I think any thing that would be in the nature of greater publicity of actual sound or unsound conditions would be helpful. M r. M i l l i k e n . T h e se c o n d q u e stio n is : T o illu stra te, le t m e su p p o se th ere are tw o b a n k s r e p o rtin g u n d er th is test, o n e o f w h ich w e w ill ca ll b a n k A an d th e o th e r b a n k B, a n d th eir p o r tfo lio s s h o u ld b e as fo llo w s : The portfolios of both banks and the ratios thereof to their deposits and other demand obligations would be as follows: Now, the first I will give you is the amount of gold and other cash items, and then the the next is the commercial paper maturing. Bank A has in gold 10 per cent of its deposits, and it has 45 per cent of commercial paper maturing within 15 days, 25 per cent of commercial paper maturing within 16 to 30 days, 15 per cent of com mercial paper maturing within 31 to 60 days, and 5 per cent of com mercial paper maturing in 61 to 90 days, and no commercial paper maturing after 90 days. b a n k in g and currency. 289 Bank B has 20 per cent of its deposits in gold, 15 per cent in com mercial paper maturing within 15 days, 15 per cent in paper maturing in 16 to 30 days, 15 per cent of commercial paper maturmg within 31 to 60 days, and 35 per cent of commercial paper maturing in 61 to 90 days, and no commercial paper maturing after 90 days. Now, is it not a fact that bank A is in a better position to meet its obligations than bank B, even though the latter, at the particular time this statement is made, has 100 per cent more gold in its vaults than bank A ? Mr. R e y n o l d s . I w o u ld s a y yes. Mr. M i l l i k e n . Therefore, our test of solvency, which requires the bank to state the extra liquidity— our test now requiring the bank to state the extra liquidity of the smallest portion of its assets is a fallacy, is it not, without stating the liquidity of the balance of its assests? It is a monetary fallacy, which is not required in any country of the world but ours; is not that true ? Mr. R e y n o l d s . Yes; that is, practically, I will not say it is not required in any country, but it is not required in most countries. That is upon the theory that the question of reserves should be left to the judgment and skill of the managers. Mr. M i l l i k e n . The managers of the bank ? Mr. R e y n o l d s . Yes. M r. M i l l i k e n . N o w , w h a t o th e r c o u n tr y is th ere w h ich requires a legal g o ld test b u t ours ? Mr. R e y n o l d s . I do not know of any, offhand. Mr. M i l l i k e n . There is not a country in the world; ours is the only one. Not a single European country. The European expert, Prof. Lazotti, of Italy, the great minister of finance of that country, the man who gave them the rural credit system, says that is the most dangerous feature in our whole banking system. Mr. R e y n o l d s . If I understand you correctly, your whole theory, or question, is as to whether a very large percentage of your liabil ities covered by short-time maturmg commercial paper, with a small cash or gold reserve, is not better than a somewhat larger gold reserve with a very much smaller percentage of short-time com mercial paper ? Mr. M i l l i k e n . Yes. Mr. R e y n o l d s . I certainly agree with you. Senator N e l s o n . But you will admit that, in one respect, their bills of exchange or commercial paper is different from ours. Ours is strictly in the form of notes ? Mr. M i l l i k e n . Yes. Senator N e l s o n . And theirs is mostly in bills or drafts. M r. M i l l i k e n . Y e s, sir. Senator N e l s o n . With the indorsers and acceptors on it? Mr. R e y n o l d s . Senator Nelson, the value of their short-time commercial paper over ours under the present system could be illus trated in this way: That those banks, which are joint-stock banks, discount this paper and turn it into cash at any time; and they are more liquid by reason of that fact than under our present system; but no more liquid than we would be under the same conditions, if these Federal reserve banks were established as now contemplated. Is that not right? M r. M i l l i k e n . I b e lie v e w e co u ld h a v e a b e tte r d is co u n t b a n k . 290 BANKING AND CURRENCY. Mr. R e y n o l d s . Well, I am only trying to illustrate the point. M r. M i l l i k e n . Yes. But at present the banks have got no place at which to rediscount their commercial paper? Mr. R e y n o l d s . The figures of foreign discount institutions show that the major portion of the discounts taken by them are very short time. You take in France, they will have an average from 14 days to 20 days. In London, they will average from 7 ,£o 15 days, illus trating by that that the average joint-stock bank calculates that a large quantity of liquid commercial paper of such a kind as is eligi ble for discount at the central bank is the thing they count upon most for their reserves. M r. M i l l i k e n . C erta in ly. Mr. R e y n o l d s . Credits there run for a very short time; a great deal of money runs over week ends, or from 5 to 7 days. So that if a joint-stock bank in London wanted to realize £1,000,000 they take out of their portfolio paper sufficient to get that amount of money. M r. M i l l i k e n . T h e sh o rte st tim e p a p e r ? Mr. R e y n o l d s . The shortest time paper they have. It may run 2 days or 5 days, or 7 days, with the result that the average discount over there runs from 7 to 14 days. M r. M i l l i k e n . Yes. Mr. R e y n o l d s . That is the real test of it. Senator N e l s o n . Then, they have in these countries what they call “ accepting houses” ? Mr. R e y n o l d s . Yes, sir. Senator N e l s o n . That makes a business of accepting bills of exchange ? Mr. R e y n o l d s . Yes, sir. The C h a i r m a n . Mr. Reynolds, we have examined the pending measure at considerable length, in showing what the objections to it are. What features of the pending measure do you regard as of value ? Mr. R e y n o l d s . Well, there are many advantages. I think the most important feature of all —and it is an extremely important one— is that it will provide with proper elasticity in credit ana currency. I think that it will have a tendency to mobilize reserves, to the extent that it will give greater efficiency to the use of all lawful money as reserves in the safeguarding and protection of our credit. The C h a ir m a n . Might these banks not also serve as a convenient method of transferring credits from one part of the country to another if they kept accounts with one another? Mr. R e y n o l d s . Yes; if they kept accounts with one another. The difficulty with that is, that at certain seasons of the year, the tendency is all in one direction, and in certain other seasons of the year it is all in the other direction. Now, that may be overcome partly with a common ownership of the assets in one point, which would make these transfers of funds purely bookkeeping entries; so far as the institutions would be concerned there would be no transfer of the money. But they could make these transfers, as you intimated, through keeping accounts with one another. On the other hand, the more money there is tied up in banks carry ing balances of one of the Federal reserve banks with another, in order to meet the exchange requirements of the country, the less BANKING and ctjeren cy. 291 ability they would have for doing business, and the greater the contraction of general business would be. The C h a ir m a n . Well, might these reserves of the reserve banks not be kept with each other in cash, and in that way the matter of exchanges be facilitated ? Mr. R e y n o l d s . Well, I calculate that this bill, if it were put into effect, would require that the balances due from one Federal reserve bank to another should require 33£ per cent reserve in the bank to which it was due; so that the more balances you carry, the more reserves there would be necessary. Now, you are getting back to the question of pyramiding. We can now run, in the reserve cities, on the basis of 35 per cent reserve. Now, if you undertook to bring about pyramiding by requiring them to keep balances with one another in order to accomplish the same thing the national banks are now doing, you would reduce the effi ciency of the reserve by raising it 25 to 33J per cent, because it re quires a larger amount of money against those balances. The C h a ir m a n . Upon that assumption, that is true. Mr. R e y n o l d s . Yes, sir. Senator S h a f r o t h . Have you finished your question, Mr. Chair man? The C h a i r m a n . Yes, Senator Shafroth. Senator S h a f r o t h . Mr. Reynolds, the currency which is provided in this bill consists of Treasury notes, and they are not made legal tender. In your judgment, would it strengthen the currency to make those notes legal tender? Mr. R e y n o l d s . No, sir; I do not think they should be made legal tender. Senator S h a f r o t h . Why? What objection is there to making them legal tender ? Mr. R e y n o l d s . Simply because, in my opinion, a bank note should be created to serve only the purposes which a check would serve. They are not money; and I think the fundamental point in the con sideration of that subject is to keep in mind constantly that they are not money. They are obligations; they are credit instruments; they are a means of exchanging a credit into a general form which is known by everybody and accepted by everybody to such an extent that they will pass current everywhere, whereas oftentimes an indi vidual check or draft would not pass current. Senator S h a f r o t h . But these notes are notes of the United States, are they not ? Mr. R e y n o l d s . Yes. They are the joint obligations of Federal reserve banks and the Government. Senator S h a f r o t h . But what is the objection if they are notes issued by the United States Government; is there any objection to making them legal tender? Mr. R e y n o l d s . I think there is a decided objection. What value would the Government get if it issued these notes under these con ditions ? Does not the question of the creation of credit follow the same principles of economics applied to you as an individual, to a municipality, a commonwealth, or a nation ? Should not credit always, under all conditions, be created against the receipt of actual assets ? In other words, if I give an obligation I must get an asset for it. 292 BANKING AND CURRENCY. Now, I understand that it is not the purpose of this bill to provide that the Government gets an asset; but it creates a liability. Would you gentlemen sign a note which might come back upon you for pay ment without getting some asset as against the liability which you create with which you could liquidate the obligation ? It seems to me that it is the same principle. The C h a irm a n . D o you think, then, that the principle in use by the Bank of England is unsound ? Mr. R e y n o l d s . I did not understand that, Mr. Chairman. The C h a ir m a n . D o you think the principle in use by the Bank of England is unsound; it makes its notes legal tender? Senator S h a f r o t h . And so does the Bank of France. Mr. R e y n o l d s . N o ; I do not say that, because the Bank of Eng land, in a great part, has its notes secured by gold— they are ware house receipts. The C h a ir m a n . But the Government’s promise to pay is also the basis of their notes, is it not ? Senator S h a f r o t h . To the extent of $90,000,000. Mr. R e y n o l d s . Well, that is to the extent of the amount of bonds which they have back of those notes. The C h a irm a n . I am speaking of whether you regard it as an erro neous system, the principle of the Bank of England— supplementing the question which the Senator from Colorado asked you ? Mr. R e y n o l d s . Well, I do not know that I could give a satisfactory answer to that question offhand. Senator N e l s o n . In the case of Bank of England notes, you know that for every bill outside of these ninety millions of debt the Govern ment is backed by $1 in gold? Senator S h a f r o t h . Yes. Senator N e l s o n . They simply serve the purposes of our gold cer tificates here. The bank of England has $1 in gold for every one of those notes ? Mr. R e y n o l d s . No. Senator S h a f r o t h . There is a reserve of about 60 per cent in the Bank of England. Mr. R e y n o l d s . The larger you make your reserve the more you minimize the danger against the issuing of those notes. Mr. M i l l i k e n . Mr. Chairman, will you permit me to make a statement ? The C h a irm a n . If the committee has no objection. Senator H i t c h c o c k . Would it not be better to wait until Mr. Mil liken comes on the stand ? I think that ought to be a separate matter. The C h a irm a n . Then, you may make your statement later, Mr. Milliken. Senator S h a f r o t h . D o you regard the legal-tender character of the United States greenback notes as being a detriment or a benefit ? Mr. R e y n o l d s . Well, it is a benefit in that it can be kept in circu lation better; but it is a detriment in every other respect, because it requires the Government to do just exactly what the Bank of England does— carry an immensely large gold reserve against it— which must be extremely expensive. Senator S h a f r o t h . Well, if they were made a legal tender, they would have to carry a still larger reserve, would they not ? Mr. R e y n o l d s . I th in k th e y w o u ld , th en . b a n k in g and currency. 293 Senator S h a f r o t h . Well, then, the legal-tender character which is attached to the greenback note is really a benefit in the matter of strengthening the currency ? Mr. R e y n o l d s . Well, it keeps them in circulation better. It en ables the banks to carry them in their reserves, and I think if you will take the statement of the Comptroller of the Currency you will find that those legal-tender notes are, to a very large extent now adays, locked up in the vaults of the national banks and kept there permanently as their reserves. The C h a i r m a n . Well, for that very reason-----Mr. R e y n o l d s (interposing). Yes, I think it is for the reason that they are legal tender. But if you make the notes which it is pro posed to have these institutions issue— if you make them legal tender, then you provide for what I am afraid will be a violent inflation in credit. Senator S h a f r o t h . Then you think it would be a detriment to make these notes legal tender, even if they are Treasury notes of the United States Government. Mr. R e y n o l d s . I do. I think it would provide for a greater inflation than necessary, and in explanation of that statement I will say that I think that, for the reason that it is only in rare intervals, now and then, under existing conditions that we need more credit, or more money. I do not believe you want that any more than the bankers do. Senator S h a f r o t h . D o you think that to make the present nationalbank note full legal tender for the payment of debts would be a detri ment or a benefit ? Mr. R e y n o l d s . N o ; I do not. I differ from a great many of my colleagues as bankers on that subject, in this respect, that I have believed for some time that a national bank note issued by an insti tution other than my own should, in view of the fact, first, that it is obliged to pay par or more for the security which secures the note, be counted as reserves. In other words, I thmk the note of Mr. Forgan’s bank, secured as abundantly as it is secured, with the additional liability of his bank, and also the promise of the Government to pay it, should be counted as reserve in hand. And, by way of illustrating how that works under existing condi tions, I have in my pocket a statement from our institution, received three or four days ago, and I find that we have due from the United States Treasury $1,437,000 against a requirement of 5 per cent of $450,000j leaving $987,000 as representing the amount of national bank notes which we have in process of transportation to Washington and return, in order to present those notes for redemption and get them into lawful money. Senator S h a f r o t h . And use that lawful money for reserves ? Mr. R e y n o l d s . Yes. Now, every night we assort our money received during the day and every bank note of banks other than our own bank, which we are unable to pay out during the day, is forwarded to Washington for redemption. And on this statement which I have, if we had not been obliged to do that, but could have counted those notes as legal money, we would have had $987,000 greater reserves, which would have been the basis of security for credit, on the basis we are now running, of 8 to 1 as Mr. Forgan showed, which would allow for a good deal of expansion. 294 BANKING AND CUBEENCY. Senator S h a f r o t h . Well, you think that if the present bank notes were made legal tender, that it would create an expansion of credit ? Mr. R e y n o l d s . Yes; I think it would, to some extent. Senator S h a f r o t h . In the same way as if this Treasury note was made so ? Mr. R e y n o l d s . Yes, sir; I do. Senator S h a f r o t h . That would be due to the fact that it could be counted as reserves, and would, therefore, be a safer currency to build on ? Mr. R e y n o l d s . Yes, sir. I think the better policy is not to make either of them legal tender, but to go ahead ana legislate along lines that will provide for proper elasticity in these unusual times that I have referred to, through a private bank of discount, where an elas ticity in credit and an elasticity in note issue, which must be coinci dent with each other, can be accomplished. Senator S h a f r o t h . Mr. Reynolds, do you consider that action of the European banks— the Bank of Germany, the Bank of France, and of England—in making their notes legal tender has been a detri ment or a benefit ? Mr. R e y n o l d s . Well, you have a very different system of business in those countries. I do not know that I am sufficiently posted to justify me in answering that and standing upon my answer. But here is the difference as it appears to me at the moment: In this country banks are obliged to carry now about $1,500,000,000 in reserve, and it is specified in the law that those reserves— particularly outside of this $542,000,000 bank balances—must be in lawful money, or legal tender. Now, there is no such law as that in Europe. There is no law anywhere requiring joint-stock banks in England and in other countries to carry reserves, and I think when you take that into consideration you make the cases so dissimilar that they are not parallel at all. Senator N e l s o n . Then there is another consideration, Mr. Rey nolds, that in the European country they have only one bank of issue. Mr. R e y n o l d s . Yes. Senator N e l s o n . And at present we have in the national system of this country over 7,000 ? Mr. R e y n o l d s . Yes; but the answer to the question as I meant to make it is to make the reserves carried entirely apart from the reserves for circulating notes or reserves against deposits. , We have to carry that $1,000,000,000 here under the law; and it ties up an immense amount of money in our vaults that can not go out— and that requirement does not exist in those countries. If you were to go tp London and ask a joint-stock banker to tell you how much money he had in his till, or his own safe, he will not tell you. He will immediately tell you about his cash, and due from bank— he will tell you that his till money plus a balance in bank makes what he calls his “ cash means,” and what we call our reserves over here. In 1908, when I was over there, the only question that the London banker would not answer very frankly was as to the amount of actual money in his vault. We made an estimate, however, as best we could from information gained on other matters and from conversa tions, and estimated the amount not to exceed 3£ per cent. BANKING AND CURRENCY. 295 Senator S h a f r o t h . In actual cash? Mr. R e y n o l d s . In the vaults of the London banks. Now, in Berlin, some of the joint-stock banks boasted that they kept no money in their vaults. They claimed that they could do all the business of Germany safely and efficiently with less than 1 per cent of money in their till. That represented the other extreme. They boasted of that as an example of the efficiency of reserve money in their system, through the mobilization of all of their reserves in the Reichsbank. Now, in the passage of this bill as proposed, you, in my opinion, only go half way toward what they have done in the mobilization of reserves in Europe. Do not misunderstand me, for I do not mean to say that I do not think that what this bill proposes will not do good. I think it will do great good. Just in proportion as it does mobilize reserves and make them available for use, it will help the situation. For example, if we have too much money in New York and too little money m the South and the West, it is only through the mobiliza tion of these reserves, where credit can be changed against them, that we can get relief. If we have to send the actual money and have the business done through the payment of money itself, we can not accomplish fully all that is needed. Senator S h a f r o t h . Then, your only objection to the legal-tender character of a United States note, or a Treasury note, such as is issued here, is not that it weakens currency, but that it has a tendency to inflate credit. Mr. R e y n o l d s . Absolutely. Senator S h a f r o t h . And that is the only objection you see to it? Mr. R e y n o l d s . Well, from that point of view; yes. The C h a i r m a n . Do you mean to say “ inflate” the credit or “ enlarge” the credit? Mr. R e y n o l d s . Well, either one. The C h a i r m a n . Well, one is in a harmful degree and the other is not necessarily harmful. Mr. R e y n o l d s . I would say “ inflate,” then, because I would think it would have a tendency to create more notes than there should be. That, I think, would answer your question. The C h a i r m a n . But I was speaking of credits, not notes. Mr. R e y n o l d s . Yes, sir. Senator S h a f r o t h (interposing). Will you estimate the extent of inflation that would be brought about by the making of these notes legal tender ? Mr. R e y n o l d s . I could not do that offhand. It would be a com plex mathematical problem, and this is too important a matter for me to make a mere guess of that character. The C h a i r m a n . Is it the general practice of the banks to send these national-bank notes in for redemption when they come into their hands ? Mr. R e y n o l d s . I do not imagine it is, Mr. Chairman, with the smaller banks; but the national-bank examiners in an institution like ours insist on a separation of the money. Up to about two years ago they permitted us to count different kinds of money as lawful money. That is to say, we might have $100,000 in a package of $1,000,000 296 BANKING and currency. that would be bank notes, and they would pass those notes without any criticism. Mr. F o r g a n . Well, they took the percentage into consideration. Mr. R e y n o l d s . They pretended to take the percentage; but they did not count it literally. Mr. F o r g a n . N o. Mr. R e y n o l d s . But they now require us to separate and segregate the different kinds of money, and our reccfcds show every night what kind of money we have; ana in that way we are every day forwarding them to the Treasury Department at Washington as the only basis upofL which we can get legal money against those notes. As I say, we have $987,000 tied up at this moment. Senator S h a f r o t h . Do you send those notes to the Treasury Department by express ? Mr. R e y n o l d s . JBy express, yes; and it is rather an expensive proposition. In the first place, it takes about three men in our insti tution to assort and count the money, and then we have to pay the express charges both ways. The C h a i r m a n . If that money was legal tender, it would not be sent in for redemption, would it ? Mr. R e y n o l d s . It would not be sent in for redemption; no. The C h a i r m a n . That would at least be an economic advantage in that particular, would it not ? Mr. R e y n o l d s . Well, you might save a quarter at one end and lose a dollar on the other end. The C h a i r m a n . What is the dollar that you would lose on the other end ? Mr. W e x l e r . It might be legal tender and still not legal reserve money. The C h a i r m a n . It would under the law; if it were legal tender it would be lawful money ? Mr. W e x l e r . It would not necessarily be counted as the national bank reserves. I think the two are quite different; that is, as to whether a note is legal tender and whether it is good to count as reserves. The C h a i r m a n . The two things need not go together, of course, but under the present law legal tender, being lawful money, would come within that rule ? Mr. F o r g a n . But if they were legal tender you could force any body else to take them, so that they would be equal to gold. Mr. R e y n o l d s . And that is very largely the explanation of the reason why the banks which issue a large amount of national-bank notes are glad to have State banks take their circulation and lock it up as a part of their reserves. The C h a i r m a n . Does not the legal-tender quality of the notes of the Bank of France and of the Bank of Germany relieve to that extent the need for actual gold ? Mr. R e y n o l d s . No; I would not say that. Mr. S p r a g u e . Mr. Chairman, might I be permitted to make a state ment at this tme ? The C h a i r m a n . Yes. Gentlemen, this is Prof. Sprague, of Har vard University. BANKING AND CURRENCY. STATEMENT 297 OF PROF. 0. M. W . SPRAGUE, OF HARVARD UNIVERSITY, CAMBRIDGE, MASS. Prof. S p r a g u e . The issues of the Reichsbank of Germany were made legal tender only three years ago, in the last revision of its charter. They had been accepted quite readily by the other banks, and the proposition to make them legal tender was in no sense a bank ing proposal. They were made legal tender because it was thought that in case of war the notes would be more serviceable for the Government, since in case of war a very large issue of Reichsbank notes will unquestion ably be made. It was thought desirable to insure the general accepta bility of those notes for that reason and for that reason alone. Similar is the case of the Bank of France. The notes were made a legal tender at the time of the Franco-German War, in 1870, in order to secure their general acceptability throughout the country. The Government was at that time, through the Bank of France, making large loans, and the notes were going into circulation in enormous quantities, and were not, at the moment, redeemable in gold. Senator S h a f r o t h . That was considered, then, the strengthening feature to the currency, was it not ? Prof. S p r a g u e . Yes; but not for banking purposes at all. Senator S h a f r o t h . Yes; purely as a national currency? Prof. S p r a g u e . Yes. Senator B r i s t o w . I understand you, Mr. Reynolds, from your remarks, to object to the greenback as a currency? Mr. R e y n o l d s . Yes, sir. Senator B r i s t o w . What is your objection to it? Mr. R e y n o l d s . Well, the objection to it is that it is an inflation through the creation of fictitious credits. Senator B r i s t o w . What is the difference in principle between the national bank notes and the greenbacks ? Mr. R e y n o l d s . Just the difference that one is absolutely secured by specific deposit of specific collateral in one form or another, while tne other has nothing but a general promise to pay back of it. Senator B r i s t o w . Well, that is a Government obligation in both cases ? Mr. R e y n o l d s . It is a Government obligation in both cases; yes, sir. Senator B r i s t o w . So that in principle it is the same, is it not ? Mr. R e y n o l d s . Well, it is entirely different in principle, in that one is secured and the other is not. If you were to let the national bank issue its notes without any collateral deposit, they would be the same. Senator B r i s t o w . Mr. Chairman, there is a call for a vote, and we will have to go to the Senate; so I will continue this line of ques tions later. (Thereupon, at 10.50 a. m., the committee took a recess of 15 minutes, at the conclusion of which the following proceedings were had:) The C h a ir m a n . Senator Reed, did you desire to ask some ques tions? 298 BANKING AND CURRENCY. Senator R e e d . Mr. Reynolds, you have spoken of bank notes, and have said that back of every bank note there was security. Now, just what is back of a bank note? Mr. R e y n o l d s . I am speaking about the notes that this bill con templates issuing. They have back of them, first of all, a gold re serve of 33§ per cent. They have, in addition thereto, a specific deposit of 100 per cent of that in commercial paper; and in addition thereto they have the entire liability or responsibility of the banking institution issuing the notes. Senator R e e d . N o w , referring to this bill, there would be 3 3 J per cent gold on deposit all the time in the vaults of the reserve banks— the regional bank. There would be no money issued unless it was backed by that 33§ per cent, in the first place ? Mr. R e y n o l d s (interposing). There could not be, under the law. Senator R e e d (continuing). And, second, there would be 100 per cent of notes of customers; and those notes would be indorsed, in turn, by the member bank— but, of course, these notes do not have to be indorsed by all the member banks ? Mr. R e y n o l d s . N o, sir. Senator R e e d . They would only be indorsed by the bank that wanted to obtain the money ? Mr. R e y n o l d s . They would be indorsed by the bank that would rediscount the paper with the Federal reserve bank. Senator R e e d . Yes. The method would, then, be that if the First National Bank of Oklahoma wanted to get $100,000 of notes issued to it, it would take $100,000 of securities which would consist of the promissory notes of A, B, C, etc., and carry them to the regional bank, and the regional bank would deliver to them $100,000 of currency. Is that correct ? Mr. R e y n o l d s . Yes, sir. But it might be received by them, Senator Reed, through another process. Of course, in the natural transactions of business between banks, the Oklahoma bank might secure credits— I mean by that checks or drafts upon other member banks— which it could deposit with the Federal reserve bank, thereby increasing its balance with that bank to an amount greater than its required reserve, and whatever amount they would have to their credit in excess of the amount which they would be required to carry with that bank as a part of their reserve, they could get in bank notes by issuing their check upon the Federal reserve bank. Senator N e l s o n . May I put a question right there, in connection with that, Senator Reed ? Senator R e e d . Certainly, Senator Nelson. Senator N e l s o n . N o w , the bank deposits its commercial paper and takes the currency of the regional bank, which supplies the reserve of 33J per cent. Is that supplied by the bank asking for the cur rency, or is it supplied by the regional bank ? Mr. R e y n o l d s . It is supplied by the regional bank. Senator R e e d . N o w , where does the regional bank get its gold? Mr. R e y n o l d s . The currency? Senator R e e d . The gold. Mr. R e y n o l d s . Well, it must get it by assembling gold in its natural conduct of its business. It will have deposited with it various forms of credit, and it will have more or less deposited with it in the natural course of business. For instance, in the transaction BANKING AND CURRENCY. 299 of business our institution, if it should have a deficiency with the Federal reserve bank at the close of the day and it would be our duty to make that good, we might have an excess of reserve money in our vaults which we could deposit there and make it good. Senator R e e d . Y ou would be required to send up gold, would you n ot ? Mr. R e y n o l d s . We would not be required to send up gold. That duty, or the duty of maintaining the gold reserve, would devolve upon the management of the Federal reserve bank. They would have to look out for that in their transactions of business with the member banks. It could be done in many ways, chief among which would be by the converting, if it wanted the actual specie, of the gold certificates which would come into its hands. Senator R e e d . Y ou have come to the very question I was going to ask. The Government has $1,100,000,000 of gold certificates outstanding ? Mr. R e y n o l d s . Senator R e e d . Yes, sir. And back of that, it has the same amount of gold; and that, I believe, you bankers insist is not entitled to be signified by the name of money. You say it is a warehouse receipt. It is a pretty good one, however, is it not? Mr. R e y n o l d s . Yes, it is. Mr. W e x l e r . It comes nearer to being money than anything we have got. Senator R e e d . N o w , about the first thing the banks would begin to do under this sy stem w ould be to lay aside all the gold certificates th ey could get, w ould it n ot ? Mr. R e y n o l d s . That is what they would do, in my opinion. Senator R e e d . And about the next thing they would do would be to transfer the present gold that is held back of those certificates into their own vaults, would it not ? Mr. R e y n o l d s . Well, they might, or they might not. Senator R e e d . Well, do you not think, Mr. Reynolds, in all candor— and that, of course, is what we all want to use— that that is practically inevitable ? Mr. R e y n o l d s . I do not honestly believe that, Senator Reed. Senator R e e d . D o you not think it is very likely ? Mr. R e y n o l d s . N o , I do not, and for this reason, that there is a great abrasion in the use of coins, which ultimately brings a great loss to large institutions like ours, and so long as certificates will serve the same purpose as gold will serve, we much prefer the cer tificates. And I might carry the illustration a little further, by stating that if we, in Chicago, were to fill the order of the ordinary country banker, or reserve city banker for currency by sending them gold, we would insult them mortally, because they say that they do not want it; they want currency, because it is more convenient to handle and to transport. Senator R e e d . Let us look at it in another way. You would accumulate these gold certificates, at least, putting them into your reserves as gold, would you not? Mr. R e y n o l d s . Not more than the legal reserve requirements would make it necessary. 9328°—S. Doc. 232, 63-1—vol 1------20 300 BANKING AND CURRENCY. Senator R e e d . But the legal requirement would be 33 £ per cent of all the money that was issued by the banks. And as you want to issue enough money to transact the business of the country, how much will that be ? Mr. R e y n o l d s . Well, but we need but little more m o n e y now than we have now. It is only at certain seasons of the year, in the cotton season, or the season when we have an undue activity in business, that we need much more of a circulating medium. Senator R e e d . N o w , y o u h ave to keep 33£ per cent of you r deposits-------Mr. R e y n o l d s (interposing). I beg your pardon? Senator R e e d . Y ou h av e to keep now 33 $ of y ou r deposits-------Mr. R e y n o l d s (interposing). You are speaking of Federal reserve banks? Senator R e e d . Yes; I am speaking now of this plan— this scheme that is outlined in this bill. Mr. R e y n o l d s . Yes, sir. Senator R e e d . N o w , what are the aggregate deposits of all the national banks to-day ? Mr. R e y n o l d s . $7,100,000,000. Senator R e e d . Well, it is proposed to take into this bill— at least it has been advocated here—State banks and trust companies ? Mr. R e y n o l d s . Yes, sir. Senator R e e d . Very well. How much free gold, about, Mr. Rey nolds, is there now in the banks available for gold reserves ? Mr. R e y n o l d s . I have not that at the end of my tongue, but there is somewhere around $500,000,000 and $600,000,000, I should say. Senator R e e d . $500,000,000 or $600,000,000 ? Mr. R e y n o l d s . Yes; I should say that. The report will show. Senator R e e d . Well, there is $600,000,000 of free gold in the banks to-day. You are going to establish a system now which, without any emergency currency and without any inflation of any land, amounts to $7,000,000,000, m round numbers. You must have 33J per cent of that in gold. Now, where are you going to get that gold if you do not go down to the Treasury of the United States and get this $ 1, 100,000 ,000 ? Mr. R e y n o l d s . Well, Senator Reed, you were not here yesterday, I believe ? Senator R e e d . No; 1 unfortunately could not be here. Mr. R e y n o l d s . I submitted then a statement showing what I believed would be the status of the reserves of the various banks of the country, and of the Federal reserve bank after this whole plan, if it is enacted into law as it is now proposed in the bill, should go into effect, and on the assumption that all the national banks would come into it; and that statement shows that after the plan should be put into operation that the requirements for reserves would be $968,000,000, of which $447,000,000 would have to be in their vaults, as compared with $913,000,000 at this time. (Thereupon, at 11.18 a. m., a recess of 10 minutes was taken, after which the following proceedings were had:) The C h a i r m a n . Senator Reed, do you desire to continue your questions ? BANKING AND CURRENCY. 301 Senator R e e d . Yes, Mr. Chairman. Mr. Reynolds, I do not under stand how you can have $7,000,000,000 of circulation out, and 33 per cent of that gold. Mr. R e y n o l d s . We have not $7,000,000,000 of circulation out; we have $7,000,000,000 of deposits. Senator R e e d . I meant to say $7,000,000,000 of deposits, with 33J per cent back of it, unless you have over $2,000,000,000 of gold in your reserve. Mr. R e y n o l d s . We do not expect to have that in this bill. It does not provide for that, Senator Reed. Senator R e e d . Y ou do not expect to have what? Mr. R e y n o l d s . $7,000,000,000, secured by $2,000,000,000 of gold. As a matter of fact. Senator, if 1 am correct-----Senator R e e d (interposing). Oh, I am confusing two different things; I see the difference now. Mr. R e y n o l d s . I think you are confusing credits and notes. Senator R e e d . I see that very plainly now. I did not have my mind on this examination just then. Coming, now, to the question of circulation, what would be the circulation in normal times ? Mr. R e y n o l d s . Well, it would be not a great deal more than we have outstanding now. Senator R e e d . Yes; how much? Mr. R e y n o l d s . I should say $700,000,000. Senator R e e d . $700,000,000. Now, you say that a greenback is not good money-----Mr. R e y n o l d s (interposing). No; I do not want to say that it is not good money. The question of the security of it makes for its good ness or badness, in my opinion. And I want to say now, with the cash reserves— gold reserves— of 40 per cent, which is carried against greenbacks, we do regard that as good money. Senator R e e d . Well, do you not think that the Government of the United States back of a note is a little higher security than the promise to pay the same amount by some individuals ? Mr. R e y n o l d s . Well, I think that of the two promises to pay, the promises of the Government would be stronger, but I do not care so much for their promises to pay as I do for my belief in their ability to pay on demand. Senator R e e d . Well, it the Government of the United States has a gold reserve of 33J per cent, and then issues its note, back of which is the faith and credit and taxing power of the United States, which is absolutely unlimited to-day for all practical purposes—would you think that is as high a class of security as a note of a bank with th€ same gold reserve and nothing else back of it except the capital of the bank and the notes of private individuals ? Mr. R e y n o l d s . Yes; I do. I think a Treasury note with 33J per cent of gold reserve back of it creates a fairly stable reserve. I would not agree in theory, however, that it is better than the other, because if they both served the same purpose, one would be as good as the other. Senator R e e d . Well, I am not talking about the question of whether they serve the purpose, because as a matter of fact, the green back, without any reserve at all back of it for many years circulated 302 BANKING AND CURRENCY. generally and was accepted generally by the people, and in that sense served the purpose as a gold certificate. Mr. R e y n o l d s . Well, there came a time when it did not do that, Senator. Senator R e e d . Well, it has not come since we remonetized gold. Mr. R e y n o l d s . N o . Senator R e e d . I mean since we demonetized silver. Mr. R e y n o l d s . We did not have much to do with it. Senator R e e d . N o w , I get the idea from you, then, that if the Government had a 33 J or a 40 per cent gold reserve and issued the money itself, that would be reasonably stable money ? Mr. R e y n o l d s . I think it would; yes, sir. Senator R e e d . It would be what you call safe money, would it not ? Mr. R e y n o l d s . Yes; I should sa y it w ould. Senator R e e d . N o w , what objection is there to the Government retiring its gold certificates and issuing greenbacks in lieu of them and utilizing its present gold reserve of $1,100,000,000 back of the greenbacks, or the Treasury notes, or whatever you call them? Mr. R e y n o l d s . Well, I think you would find that you would not have that supply of gold by the time you got to that issue, because the people have the gold certificates now and they know they are secured by 100 cents on the dollar, and you would have to have those certificates surrendered voluntarily in order to enable you to utilize that gold. Senator R e e d . They circulate regularly, do they, through these channels ? Mr. R e y n o l d s . Yes; I think they would, Senator. You would create the condition to which you referred awhile ago, namely, that under those conditions the banks would probably cash in their gold certificates and take the coin itself in lieu of it. Senator R e e d . Y ou do not want me to understand, now, that if the Government was to embark upon the policy of issuing this money and have a reserve of 40 per cent in gold, that the banks of this country would organize a raid upon the notes of the Treasury and block the Government in that sort of beneficent purpose ? Mr. R e y n o l d s . No. Senator R e e d . If you do, I should have to revise my opinion of the banks. Mr. R e y n o l d s . N o ; I do not think that. But in addition to the amount of the notes of that character held by the banks there would probably be $600,000,000 to $700,000,000 of it in the hands of the people. How are you going to get those notes surrendered that are held in the pockets and the hands of people individually? Senator R e e d . D o not they all come into the banks, or substantially all of them, every week in the year ? Mr. R e y n o l d s . They do in the natural course. I can not think there is any tendency toward discrimination under conditions between those notes and other kinds of money. Senator R e e d . Y ou bankers want the Government to remodel this currency system, and I think you are asking for some bill, perhaps, with more eagerness than any other class of people, and for which I do not at all criticize you. Suppose that the bill that was proposed by Senator Shafroth should be concluded by us to the best plan, and, speaking roughly—if I do not state it right Senator Shafroth will BANKING AND CURRENCY. 303 correct me—lie advances the idea in that bill that the Federal Gov ernment, whenever a gold certificate comes into its possession, shall retire that certificate, when it comes in in the natural channels of trade, payment of dues, etc., by simply taking it and destroying it, thus retaming the gold; and then issuing $2 for each gold dollar of Federal notes, by whatever name they may be known, and back of these notes retaining one gold dollar; that is, for $2 of paper retain ing $1 of gold. If that plan should be determined on, would we not have the cooperation of the banks ? Mr. R e y n o l d s . In so far as they would have an ability. Senator S h a f r o t h . Let me explain it just a little further. Mr. R e y n o l d s . Yes. Senator S h a f r o t h . The certificates that come into the Treasury are canceled; a note takes the place of the certificate— a United States note, full legal tender—for the payment of all debts; and then another note is issued with which to retire the national-bank notes when they come into the Treasury, upon request of the national banks. In other words, if you want the currency of your national bank retired you let the United States Government assume the redemption of them, and they have to retire that quantity and issue in lieu of those notes the full legal tender. To state it another way, it does not inflate the currency one particle; it just substitutes for the gold certificate a like amount of legal tender notes, substitutes for the bank notes as they come in voluntarily by the bank, dollar for dollar, those, and leaves a surplus of reserve over 50 per cent of about $178,000,000 of gold. Mr. F o r g a n . Does the Government retire the bonds ? Senator S h a f r o t h . Yes. The Government pays to the banks the 2 per cent bonds in full at par. Mr. W e x l e r . Do they provide redemption facilities for the notes? Senator S h a f r o t h . Not except they come into the Treasury. It is supposed that the inducement for the banks to retire their circula tion will be that they will get full legal-tender money for their 2 per cent bonds. Mr. W e x l e r . I mean after that operation has taken place, and you have made retirement of the notes outstanding, with 50 per cent gold reserve, then what machinery have you for adjusting the quan tity of notes outstanding to the requirement of commerce for the retirement of the excess ? Senator S h a f r o t h . There is nothing. There is the really inflexi ble part of the currency. It does not deal with the question of the emergency currency; it only deals with the question of having dollar for dollar for the gold certificate and dollar for dollar for the bank notes, and then provides that there shall be a gold reserve main tained at 50 per cent, and that in addition to that the Treasurer is directed to buy gold or to sell bonds for the purpose of maintaining that reserve at 50 per cent. Mr. R e y n o l d s . H o w do you provide that you are to maintain this 50 per cent to start with ? oenator R e e d . In the first place, we put it in the vaults and keep it there, and we do not issue any more money— that is, under this plan— than 2 for 1. I am not advocating this plan; I am asking for information. 304 BANKING AND CUBBENCY. Mr. R e y n o l d s . We understand your attitude, I think, Senator, thoroughly. Senator R e e d . In other words, we now have $1,100,000,000 of gold in the vaults, for which there is a gold certificate, and that is 100 per cent reserve. We may use that term. It seems to be conceded that 40 per cent is enough for banks to have. Instead of retaining that gold dollar for dollar for these certificates, to transform it into a 50 per cent reserve. Having a 50 per cent reserve, we would not, as Senator Shafroth has stated, inflate the currency. If that could be done, the first question I want to get at is that that would furnish a reasonably stable and safe money, would it not ? Mr. R e y n o l d s . I think it would, and I think, frankly, that you