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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



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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 ?




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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




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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.




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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




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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.




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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.




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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.



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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

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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




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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




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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




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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.




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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




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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.



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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------




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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,




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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.




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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.




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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



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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.




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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




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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.




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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



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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.




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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



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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




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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




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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.]




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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



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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



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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



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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




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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.

!




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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




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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 ?




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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.




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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




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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 ?




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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?



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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,




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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 ?




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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


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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




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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




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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



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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.




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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?




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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 ?




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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.



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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.




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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.”




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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



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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




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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




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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.




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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



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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—



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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




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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




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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.




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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.




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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.




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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.




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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.




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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



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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

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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




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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




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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 ?




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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------




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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




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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*




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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.

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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



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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.




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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




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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.




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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




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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




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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 ?




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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.




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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.




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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,




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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




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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,




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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




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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




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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




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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



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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




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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?”




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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.



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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




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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




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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



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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?



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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



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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.




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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.




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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



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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




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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.



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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




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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




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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.




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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