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244 BANKING AND CURRENCY. The Chairm an . Before the President of the United States also ? Mr. R eynolds . 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. W e 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 ristow . May I interrupt you there a moment ? Mr. R eynolds . Certainly. Senator B ristow . 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 eynolds . I am trying to discuss the banking end of it right now, and to show what happened-------* Senator B ristow . Y ou referred to currency legislation. Mr. R eynolds . I mean banking legislation. Senator B ristow . 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 for the country ? Mr. R eynolds . Let the record show that I mean in every instance banking and currency. Senator B ristow . Excuse me for interrupting. It seems to me there is a very great distinction. Mr. R eynolds . 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 agamst 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 in 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 Chairm an . 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 eynolds . Yes. 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 eynolds . 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 Chairm an . 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 eynolds . I do not mean that. The Chairm an . I was trying to point out to you the means by which at present they were using the resources of the country banks from one end of this country to tne other, and was trying to ascertain from you as a witness if that was not true. Mr. R eynolds . Yes. Senator W eeks . 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 eynolds . Almost wholly. Senator W eeks . In other words, the country bank which does business with you asks you to recommend ? Mr. R eynolds . Absolutely. Senator W eeks . And they do not make the loan unless you do ? Air. R eynolds . W ith 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 Crawford . 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 eynolds . 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 Crawford . Of course not. The question is this------Air. R eynolds . I am only putting it to you as a matter to think over. I want to get it into the record, and I want you to give care ful consideration to it. In our city and all over this country there are industrial enterprises that have been assisted in their development and growth very largely by the dependence on these lines of credit received through the larger banks throughout the country, and if we are 246 BANKING AND CURRENCY. left in a condition that we must discontinue that, then it is a matter for you to decide how best to solve the problem so that they can go ahead with their business. I know you want to solve it for them. I am only bringing this point up as one that I have not seen any solu tion for in the bill. I have no doubt but it can be worked out. Senator H itchcock . D o you 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 eynolds . 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. W hat 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 itchcock . Let me ask you some serious questions for the purpose of developing this thought. Mr. R eynolds . Yes, sir. Senator H itchcock . 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 eynolds . 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 itchcock . The bill without amendment ? Mr. R eynolds . Yes. W e have in the banks of the country as of date June 4, 1913------Senator N elson . D o you mean the city banks ? Mr. R eynolds . N o ; national banks only. The deposits on June 4, 1913, are divided as follows----- Senator N elson . D o you mean State banks? Mr. R eynolds . N o ; national banks only. Country banks, $3,610,000,000. Senator N elson . That is in the reserve banks or regional banks ? Mr. R eynolds . I beg your pardon. Senator N elson . Y ou mean the deposits in the regional banks? Mr. R eynolds . N o ; I am talking about our present system now for the purpose of making a comparison. 247 BANKING AND CURRENCY. 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. Due from banks. $266, 000, 000 242.000, 000 405, 000, 000 — --------------913.000, 000 542, 700, 000 $310,000, 000 232, 700, 000 -----------------------542, 700, 000 1, 455, 700,000 This amount equals 20.95 per cent. Actual lawful money reserve, 12$ 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 b e..................................................................................................., . $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 banks................................................ 447, 890, 000 520, 330,000 Total.................................................................................................. 968, 220, 000 248 BANKING AND CURKENCY. 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 T ota l................................................................................................. 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. Credit in Federal reserve banks. $180, 500, 000 147,150, 000 120, 240, 000 $252, 700, 000 147, 150, 000 120, 480, 000 Cash..................................... Federal reserve banks___ 447, 890, 000 520,330,000 520, 330, 000 Total......................... 968,220,000 Reserve required in lawful money, 6.8 per cent. Senator H itchcock . That is a loss of $650,000,000 in reserves ? Mr. R eynolds . 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 r existing laws. Senator H itchcock . That is, the banks instead of turning over cash would turn over new paper ? Mr. R eynolds . Customers’ notes to that extent. Senator H itchcock . Under their endorsement ? Mr. R eynolds . 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 CUKRENCY. 249 furnish by time plans would become fully operative would be 1700,330,000. Just bow 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.................................................................................................... $105, 000, 000 Deposits— Banks....................................................................................................... 520,000, 000 United States Government................................................................. 200,000, 000 825,330, 000 Resources: Loans............................................................................................................. Cash............................................................................................................... 235,230,000 590,100, 000 825,330, 000 This would give the Federal reserve banks a lawful money reserve of 81 per cent, and with a reserve requirement of 33$ 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 itchcock . That is, providing for the issue of no notes ? Mr. R eynolds . 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 itchcock . It would make a difference in reserves if you figure 80 per cent there. Mr. R eynolds . 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 with 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: W e 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 elson . May I ask you a question right there ? Mr. R eynolds . Yes, sir. Senator N elson . W hy 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 eynolds . 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 elson . 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 eynolds . That wrnuld overcome that objection. Senator N elson . 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. Mr. R eynolds . Y ou mean by that, then, not to provide some sys tem to which they could go in emergencies for additional help ? Senator N elson . 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 eynolds . 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 b e ........................................................................................ As follows: Country banks.......................................................... $3,610,000,000 Reserve city banks.................................................. 1, 800, 000, 000 Central reserve c ity ................................................. 1, 390, 000, 000 Reserve required.......................................................................................... As follows: Lawful money in vaults......................................... 391, 200,000 Due from Federal reserve banks........................... 391, 200, 000 Due from national banks........................................ 252, 300, 000 $6, 800, 000,000 6,800,000,000 1, 034, 700, 000 1,034, 700,000 Detailed statement: Country banks, 12 per cent— 4 per cent cash................................................ 4 per cent Federal reserve bank............... 4 per cent national banks.............................. 144, 300, 000 144, 300, 000 144, 300,000 432,900, 000 Reserve cities, 18 per cent— 6 per cent cash.................................................. 6 per cent Federal reserve bank................... 6 per cent national bank................................ 108, 000, 000 108, 000, 000 108, 000, 000 324, 000, 000 Central reserve cities— 10 per cent cash................................................ 10 per cent Federal reserve bank................. 138,900,000 138, 900, 000 277,800, 000 Total cash. Federal reserve banks. National banks. 0144,300,000 108,000,000 138,900,000 $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 wcnild be $391,300,000, which would release $521,800,000 of the $913,000,000 lawful money now carried. 0328°— S. Doc. 232, 63-1— vol 1------17 252 BANKING AND CURRENCY. National banks would be required to furnish funds as follows: Capital stock........................................................................................................ $105, 000, 000 Reserves at Federal reserve banks.................................................................. 391, 200, 000 Assume Government deposits.......................................................................... 75, 000, 000 571, 200, 000 Turning in lawful money of $521,800,000 would require rediscounts of $49,400,000, add to cash of $521,800,000 the amount of Govern ment deposits in gold, $125,000,000, and the Federal reserve banks will have $646,800,000, and the statement of the Federal reserve banks would be about as follows: Liability: Capital.......................................................................................................... $105,000,000 Deposits........................................................................................................ 591, 200, 000 696, 200, 000 Resources: — ■ — Loans............................................................................................................. 49, 400, 000 Cash.............................................................................................................. 646,800,000 696, 800, 000 Thus being able to expand credit $1,291,000,000. This plan differs from that covered by the bill in that under it banks in country towns and reserve cities would have the right to count as reserve $252,000,000, upon which they would get 2 per cent interest or $5,040,000 per annum. Senator N elson . I s not that really the result of adopting the present system ? Mr. R eynolds . 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 elson . Still it keeps up the system ? Mr. R eynolds . 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 Soutn 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 all 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 in 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 elson . Mr. Reynolds, let me interrupt you. Mr. R eynolds . Yes. Senator N elson . The country banker can not check against the reserve money. He must have other deposits in the bank to check against. Mr. R eynolds . I wish that were true, because if it were we would not have any trouble. Senator N elson . I s not that a matter of law— can he check against reserve money and withdraw his reserves ? Mr. R eynolds . Yes------Senator N elson . 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 eynolds . Y es; he would do it in this way. Senator N elson . He would be violating the law, would he not? Mr. R eynolds . 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 have 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 elson . 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 eynolds . A s 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, why, 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 elson . 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 eynolds . 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 Crawford . 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 eynolds . Yes, sir. Senator Crawford . So that you could concentrate all of them ? Mr. R eynolds . Yes, sir. Senator Crawford . 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 m y 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 elson . Mr. Reynolds, you are objecting, and rightly I think, to two features of this bill: One is the 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 m ay do it. Senator N elson . Would they not do it? Mr. R eynolds . They may do it, if a man is conservative and applies your theory of maintaining reserves. Senator N elson . 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 eynolds . 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 elson . He can keep it in his own vault? Mr. R eynolds . 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. Hill 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 auestions 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, 1 would feel the need of protecting that just as much as the local man would; on the other hand, in Chicago or New York, where we would have a plethora of money which we would be glad to put out if it were safe to do it, would feel the same 256 BANKING AND CURRENCY. anxiety to loan that money to the Federal reserve bank voluntarily that I would if I was dealing with these banks on an individual basis. I only offer that as a suggestion. I would like you to think it over. I have nothing more to say now in favor of it. Senator N elson . 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 eynolds . 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 elson . Y ou must take this in a Christian spirit. Mr. R eynolds . Certainly I will. [Laughter.] W e 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 elson . I do not want you to understand that that idea is bothering me. Mr. R eynolds . 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 elson . Y ou could modify your plan so as to have each bank have one representative ? Mr. R eynolds . Yes; That would be a good idea. I feel I have already taken up a groat deal more time than I should. You gentle men have been very patient this week. Senator N elson . Y ou have been more patient with us. Mr. R eynolds . 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 behove 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, and which will insure a con tinuation of the prosperity that this great country enjoys. Possess ing as we do to-aay 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 itchcock . 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 eynolds . There should be none if this bill passed in its present form. Senator H itchcock . 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 eynolds . That is, after 36 months. My figures are based on the ultimate period. Senator H itchcock . W hat is the ultimate period ? Mr. R eynolds . Thirty-six months. Senator H itchcock . 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 eynolds . That is my understanding— regional reserve banks. Senator B ristow . It is about lunch time, and we will want to ask Mr. Reynolds a good many more questions. Mr. R eynolds . 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 not. I have checked my baggage. Senator B ristow . Y ou never ought to do that wnen you are attend ing a hearing, until after the hearing is over. The Ch airm an . 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 eynolds . 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 elson . Y ou are giving us much valuable information, and I feel very much obliged to you. and I hope you will stay with us. Senator H itchcock . 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 ’ 3 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 Chairm an . 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 Chairman . 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 CUBKENCY. STA TE M EN T OF EON. E. J. H i l l , VICE PR ESIDENT NATIONAL BA N K OF NORW ALK, NORW ALK, CONN. Mr. H ill . 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 Chairm an . Mr. Hill, in fact the demands on the Treasury at times exceed $35,000,000, do they not? Mr. H ill . 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 outstanding. 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 further 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 itc h c o c k . This overdrawing is something new, is it not ? BANKING AND CURRENCY. 259 Mr. H ill . 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 om erene . W hat do you mean by that statement, “ dur ing 12 years out of 21 years it was overdrawn’' ? Mr. H il l . Yes, sir. If the gentleman desires to see the figures------Senator P om erene . Oh, no; I do not ask that. Mr. H ill . I have the report of the Treasurer here, showing that for 12 years out of 21 years this fund has been overdrawn. The Chairm an . Fifteen millions has been overdrawn, has it not? Mr. H il l . Oh, yes; twenty-six millions. Senator Shafroth . 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 ill . I will give you exactly what was given to the owners as a substitute for that circulation. I have it all here. Senator H itchcock . Before you leave that point I would like to ask what per cent would be adequate if 5 per cent is inadequate? Mr. H il 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 Treasur}7 to be paid for by the banks, and I presume the condition is the same to-day. Senator N elson . W hat Mr. Hill means, Mr. Chairman, is with reference to notes of banks which have gone out of existence. Mr. H ill . N o ; 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 Chairman . Yes; I understand. Mr. H ill . 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 itchcock . D o you mean they represented the notes of banks ? Mr. H ill . Presented by those banks. Senator H itchcock . Were they the notes of those banks ? Mr. H ill . 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 itchcock . They send in indiscriminately notes from all over the country? Mr. H ill . 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 organ . Yes, sir. Mr. H ill . And yours, Mr. Reynolds ? 260 BANKING AND CUEEENCY. Mr. R eynolds . Yes, sir. Mr. H ill . T o distribute tbis 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. W e 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 in a farming community. Senator H itchcock . 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 ill . 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 itchcock (interrupting). And under this bill we could naturally expect that the redemptions would run up to about 87 per cent ? Mr. H ill . Oh, they would be once in six weeks. Senator H itchcock . Would be what ? Mr. H ill . About once in six weeks. Senator H itchcock . So that they would be constantly presented for redemption? Mr. H ill . Yes. Without redemption you have a perfectly rigid currency. Senator H itchcock . It simply goes in and comes right out again, I understand? Mr. H ill . 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 itchcock . But all through the year we still have about $700,000,000 of national-bank notes ? Mr. H ill . Oh, yes; either in use or idle in the vault of the bank. Senator H itchcock . Because the banks do not want them and want to get rid of them and want reserve money? Mr. H ill . Y es; 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 itchcock . Does not that argue in favor of providing an increase of the reserve money instead of providing an increase in inferior currency? Mr. H ill . 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 itchcock . The reason they are sent in for redemption so rapidly is because they are not legal tender? Mr. H ill . N o. That is only one reason. Senator H itchcock . What is the reason ? Mr. H ill . 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 itchcock . Yes. Now, if you provide legal tender------Mr. H ill (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 itchcock . 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 ill . I do not want to exhaust my 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 elson . But that is only 5 per cent on circulation. Mr. H ill . But I have made the calculation on the basis of a bank with $100,000 capital. Senator N elson . The country banks have not taken out their circulation. Mr. H il l . Most of the banks have. The city banks have not. Senator N elson . The country banks have? 262 BANKING AND CURRENCY. Mr. H ill . 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 i t 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 ill . Y es; 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 savmgs 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, and 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 owning them. The Chairm an . D o you happen to know what percentage of these national banks’ currency is sent in for redemption in a mutilated condition ? Mr. H ill . Yes, sir. I think 28 millions out of that lot was destroyed as unfit for circulation last year. Senator S hafroth . H ow much was sent in for retirement ? Mr. H il 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 this 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” . The Chairm an . 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 ill . 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 Chairman . 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 ill . Absolutely, unless other commercial paper was substi tuted, as the bill provides may be done. E BANKING AND CURRENCY. 263 The Oitairm an . Therefore that system would also serve to retire such outstanding notes, would it not— the system of retiring this commercial paper ? Mr. H ill . Yes; unless substitution was made as stated. I am going to talk along that line now. 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 eeks . They can be made legal tender by act of Congress. Mr. H ill . 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. W hy 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. WT hy 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 of 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 instrument 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. In 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 redeem whatever portion of the entire issues may be presented in the ordinary course of business, and in times of stress and emergency to redeem in verjr 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 all 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 notes 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 itchcock . W hat does “ lawful money” mean? Mr. H ill . Gold, greenbacks, or silver— nothing else. Senator H itchcock . Of course, greenbacks are as good as gold, are they not ? 266 BANKING AND CURRENCY. Mr. H ill . 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? W ith 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 su ftcient 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 elson . But that was chargeable to the silver-purchasing clause. Mr. H ill . Y es; and the deficiency in the revenues. Who knows whether there will be a deficiency again ? Senator N elson . Y ou could not charge them to the greenbacks. Mr. H ill . 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 Yreeland-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 tne 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 elson . Suppose the notes are retired when redeemed, like the Bank of England notes ? BANKING AND CURRENCY. 267 Mr. H ill . 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, T 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. W e have now, as Treasury obligations, in round numbers, green backs, $346,000,000, redeemable in gold; national-bank notes, $725,000,000, redeemable in legal tender; silver dollars, $565,000,000, ex changeable for gold; making a total of $1,636,000,000. Immediately after the passage of the gold-standard act, making it the duty of the Secretary of the Treasury to maintain the parity of all forms of money issued or coined, Mr. Gage was asked the question: How do you propose to perform your duty with reference to the silver dollars? His reply was that there was only one way in which it could be performed, and that was to make them exchangeable for gold on the demand of any citizen of the United States; and the order was issued, and my recollection is, or my impression is— and I would be glad to have the committee ascertain the fact— that it is still in existence in the Treasury Department, and the Treasury Department is per forming that function. That is responsible for 565 millions. 9328°— S. Doc. 232, 63-1— vol 1------18 268 BANKING AND CURRENCY. Senator N elson . I s there any record of silver dollars presented for redemption in gold ? Mr. H ill . Are there any such cases ? Senator N elson . Yes, sir. Mr. H il l . I do not know. I do not know whether any records have been kept by the Treasury Department. That could be ascer tained I would be very glad if the committee would ascertain that from the Treasury Department. This bill proposes an unlimited issue of further Government demand obligations to be superimposed on such a foundation as this. The Bankers’ Association proposes that the Federal reserve banks make their own obligations, secured bv the same collateral, with a reserve of 40 per cent in gold instead of 33$, 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 itchcock . The question w as asked whether or not silver T was sent to the Treasury for exchange in gold. Mr. H il 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 presented for exchange for gold, if they are not now. Senator H itchcock . Do you think that any quantity of bank notes would be injected into the currency wdiich would result in driving gold out of the country ? Mr. H il 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 itchcock . I want to ask you under what circumstances the Gresham law operates to drive gold out of the country ? Mr. H il 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 itchcock . Let me ask you whether a gold certificate is not more valuable than a bank note? Mr. H ill . 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 w'orld. BANKING AND CURRENCY. 269 Senator H itchcock . Does not gold go out of the country if the cur rency becomes redundant ? Mr. H ill . Yes, of course; if the currency becomes redundant. Senator H itchcock . W hat is to prevent the currency becoming redundant under the system where there is an unlimited bank issue of notes? Mr. H ill . 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 itchcock . Not under the terms of the bill------Mr. H ill . 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 itchcock . 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 ill . I do not see how currency could become redundant under the bankers’ plan. Senator H itchcock . I am not saying that. I am asking you to suppose it. Mr. H il 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 itchcock . This bill provides no limit, and your measure provides no limit to the volume of credit currency which it is proposed to issue. Mr. H il 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 itchcock . 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 ill . 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 policv, is it not, Mr. Forgan? Mr. F organ . Yes, sir. 270 BANKING AND CURRENCY. Mr. H ill . 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 ill . Accruing in 90 days. Senator H itchcock . Y ou spoke of 40 per cent gold reserve, and yet every bank of issue in Europe carries a much larger reserve. Mr. Htll . Yes, sir; as a matter of choice. Senator N elson . 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 com mercial loans that are made ? Mr. H ill . Both. Senator N elson . N o, no. This currency is issued on commercial loans, such loans as provided in the bill. Mr. H ill . 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 itchcock . That is another condition. Mr. W e x l e r . Your statement is erroneous in this respect: The credit is covered by the amoimt of commercial credit, and the amount of notes is regulated by the amount of gold against it. Mr. H ill . 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 Chairman . I do not think, Mr. Hill, that any intimation of that nature has been suggested by the committee. Mr. H ill . N o ; 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, “ W e 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 Chairm an . You think that a redundant currency would retire gold or cause gold to go in hiding ? Mr. H il 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. 271 The Ch airm an . Y ou thought that the Yreeland-Aldrich bill would make a redundant currency, did you not ? Mr. H il l . And I voted against it— 1 of 16. The Ch airm an . Can you tell me how much redundant currency there would be under that bill? Mr. H il 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 Chairm an . That would have been impossible. Mr. H il l . Absolutely impossible. Senator H itchcock . D o you not propose to have the banks go into partnership ? Mr. H ill . 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 pass as a result of a Republican caucus. There never was a Repub lican 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 agamst the Vreeland-Aldrich bill. The Chairm an . Will you not sit down and let me ask you a few questions ? Mr. H ill . Certainly. I thought you were through with me and wanted to let these other gentlemen take my place. The Chairm an . N o ; I want to ask you a few questions, if you will permit me to do so. Mr. H ill . I would be glad to. The Ch airm an . 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 ill . Yes, sir. The Chairm an . 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 ill . Yes, sir; as a war measure. Senator N elson . Oh, no. Mr. H il l . I differ with you. Senator N elson . That was the case at first, and then, afterwards, it was given as a peace measure. Mr. H il 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 Ch airm an . 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 tiffs record from you. Mr. H ill . I will answer that, so far as the German bank is con cerned, it is organized in no such way as this is. The Ch airm an . That is not the question. Do they issue legaltender notes ? 272 BANKING AND CUBRENCY. Mr. H ill . They have the right to issue legal-tender notes. The Chairman . Does the Bank of France ? Mr. H ill . Yes, sir. The Chairman . I s not that true, then, of the Bank of England and Germany and France? Mr. H ill . Yes, sir. The Chairman . That is the point I wished to have in the record. Mr. H ill . 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 Chairman . I am not speaking of the right, I am speaking of the fact. Mr. H ill . Somebody will raise the question of right before this matter is finished. The Chairman . 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 ill . N o, 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 Chairman . W hat is reserve money ? Mr. H ill . Reserve money, under the law, for a national-bank note, is a greenback. In fact, it is now gold, silver, and greenbacks. The Chairman . Then you have answered my question affirma tively ? Mr. H ill . 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 Chairman. I am trying to elicit certain facts from you, as a witness. Mr. H ill. Yes, sir. The Chairman. 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 ill. I said that as a matter of memory. The Chairman. That is near enough to serve the purpose of my inquiry. Mr. H ill. I think it was 28 millions destroyed and retired. The Chairman. So that, out of 600 millions, 28 millions were re deemed and canceled because mutilated ? Mr. H ill. Yes. The Chairman. That is less than 5 per cent, is it not ? Mr. H ill. 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 BANKING AND CURRENCY. 273 notes sent in by the Subtreasuries whose duty it is to select them out whenever they come into the Sub treasury; 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 Chairman. 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 ill . Some people disagree in regard to that. The Chairman. So that it does not go beyond that limit ? Mr. H ill . Oh, not at all. The Chairman . And when that commercial paper is retired, these notes can be returned to the Federal agent for retirement from circulation ? Mr. H ill . 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 elson. There is one thing that is not clear to my mind. Where are these Federal reserve banks to get the gold ? W hat provi sion is there for them to secure the gold ? Mr. H ill. That is their business. Do not shove it onto the United States Treasury. They have got to get it. Senator N elson. 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 ill . The gentleman from New Orleans will buy bills of 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 of 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 ? Senator N elson. How many of these reserve banks will be trading only in secondhand-------Mr. H ill (interrupting). Oh, they will trade in first hand, the principal banks. The reserve banks have it as a part of their business. Senator N elson. But they do not trade in these products they bring in from abroad ? Mr. H ill . They trade in the paper that represents the products, and in so doing practically trade in the products. Senator Crawford. W ill these notes have to be redeemed in gold when they are presented to the Treasury of the United States ? Mr. H ill . Absolutely, under the terms of this bill. Senator Crawford. Where is the United States to get it? Mr. H ill . That is where the machinery will break down. Senator Crawford. 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 ill . 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 BAN KIN G AND CURRENCY. Senator Crawford. Apparently that is a weak link or a missing link, in the bill. Mr. H ill . I think that in operation it would prove a breaking link. Senator N elson. W hat do you make out of this provision ? I will read it: Whenever the Federal reserve notes issued through one Federal reserve bank be received by another Federal reserve bank, they shall be ret' rned 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 elson. Without regard to the 5 per cent? Mr. H ill . 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 elson (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 ill . 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 elson. I should put it in another form: It is the note of the United States guaranteed by the original reserve bank. Mr. H ill . 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 Chairman. W hat 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 ill. 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 Chairman. Then, you assume that the Government would not be advised of the matter ? Mr. H ill . I assume it would be. The Chairman . They would not know it? BANKING AND CURRENCY. 275 Mr. H ill . 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 elson. H ow 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 ill . 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 elson. 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 ill . 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 payment. Senator H itchcock. 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 ill . It can not take out a note, and it could not discount it under those circumstances. Senator H itchcock. That is what I would like to understand. I would like to have any banker answer the question. Mr. H ill . 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 itchcock. W hat have you to say about that, Mr.— I was going to say the Senator from New Orleans, but he is not that yet. 1 will say the banker from New Orleans. Mr. W exler . I did not quite catch your question, Senator. Senator H itchcock. 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 in that region for the discounting of paper, and the reserve bank applies to the Treasury for $1,000,000 of Government notes------Mr. W exler . Government notes ? Senator H itchcock. 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 exler . It can not do it. Mr. F organ. It will have to get an authorized loan. Mr. W exler . 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 Chairman . That is another check on these notes ? Mr. W exler . An absolute check. The Chairman. And therefore the danger of redundancy is dimin ished by that provision ? Mr. H ill , 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 Chairman. 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 ill. 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 itchcock. 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 $500,000,000 of deposits and they will have $100,000,000 of reserve. Under those circumstances they will loan the cash that is there. Senator N elson. 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 wdth 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 itchcock. 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 organ. May I say a word on this point? The Chairman . Certainly, Mr. Forgan. 1 BANKING AND CURRENCY. 277 Mr. F organ. 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 exler . Mr. Roberts. Mr. F organ. 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 ill . Yes, but this law requires a deposit of 5 per cent reserve in the Treasury before notes.can be taken out, and the question sug gested an exhausted reserve. The Chairman . 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 Chairman . The committee will come to order. Senator Shafroth. I would like to ask Mr. Hill a question or two if I may. FURTHER S TA TE M E N T OF JAMES B. FORGAN, CHICAGO, ILL. Mr. F organ. Mr. Chairman, will you allow me to correct a state ment I made this morning for the record ? The Chairman . Certainly. Mr. F organ. 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, 41 per cent. Senator Shafroth. 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 organ. Not a contraction of the currency, but a contraction of credit in the banks. Senator Shafroth. Well, a contraction of credit in the banks, then. The Chairman . Y ou said you had a table in respect to that ? Mr. F organ. Yes, sir. The Chairman . W ill you have the table submitted to the stenog rapher to put it in the record ? 278 BANKING AND CURRENCY. Mr. F organ. I will give it that way. Senator Shafroth. Y ou may give it any way you wish. Mr. Forgan. I would prefer to make the statement and to give it with qualifications. Senator Shafroth. Y ou may proceed in any way you see fit. Mr. Forgan. 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 Mr. Reynolds’s figures is that he figures on the gross deposits and I figure on the net deposits. Senator N elson. W hat is the difference between gross and net? Mr. Forgan. 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 $900,000,000; 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 elson. Y ou mean inflated. Mr. F organ. Y es; 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 Chairman . Y ou are speaking of Charles G. Dawes ? Mr. F organ. 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 Chairman . H ow much gross do you figure; $1,800,000,000, according to your estimates ? Mr. F organ. 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 33J per cent cash reserve they are : 1J ‘ 1 ^Dtal demand liabilities would enable assumed total liabilities of $954,- 000, 000. Senator Crawford. Y ou can not extend credit to anyone except to the banks ? Mr. F organ. N o, sir; as I was saying, that would be $954,000,000, of which they would have already assumed liability for the reserve deposits, $213,000,000. Their net expansion capacity would there fore be $741,000,000, and this would De 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 $2,544,000,000, showing that their ability to rediscount 280 BANKING AND CURKENCY. 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 itchcock . That would be without their issuing any notes. They could do that from the cash which they received from deposits ? Mr. F organ . It would make no difference what form the credit took; it would not make any difference whether it was deposit liabilities or note liabilities. They might be all notes or all deposits. There would not be a particle of difference, as they keep a reserve on both. Senator H itchcock . Y ou figure, then, that there would actually be a contraction of $100,000,000 of actual bank credits of the country ? Mr. F organ . 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 liabilitiesh as 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 elson . Those Government deposits would be a checking account, would they not ? Mr. F organ . Yes. I do not wish to be misunderstood here, and I want you to understand my position. They say figures will not lie. The Chairm an . Figures lie and then they prove it, as they say. Mr. F organ . 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 CUBEENCY. 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 SI 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 12£ 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 33 J per cent money reserve against their total liabilities. They are therefore restricted in their credit expansion to S3 of credit against $1 of money, while the national banks have been doing business on a 12£ per cent money basis, or S8 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 Shafroth . 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 organ . That is on the assumption that they have any more to deposit. I think they have deposited most of it now. Senator S hafroth . Well, a part of the money is held in savings deposit vaults? Mr. F organ . But I think it is comparatively a small part. Senator Shafroth . I s 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 organ . 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 Crawford . Well, would it be safe banking to have $12 credit against $1 money? Mr. F organ Well, it would not, under the present circumstances, Certainly, because it would affect our reserves. 282 BANKING AND CURRENCY. Senator Craw ford . Well, under what circumstances would it be safe ? Mr. F organ . 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 Craw ford . 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 organ . N o, 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 elson . N ow , 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 organ . Yes. Senator N elson . 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 organ . Yes. Senator N elson . On one side you have $1,000 of deposits? Mr. F organ . Yes. Senator N elson . And on the other side you have my note as an offset against it ? Now, the bulk of your deposits in the large cities are of that character, are they not ? Mr. F organ . I should say yes, largely— or just the same thing when checks are deposited. Senator N elson . 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 organ . Yes. Senator N elson . Well, the notes given for your credit deposits would be an offset for that, would they not ? Mr. F organ . Well, you could consider them so. Senator N elson . So that, as to your credit deposits, which are the bulk of your deposits, to have, in addition to vour capital and surplus, you have in addition to that the notes of the depositors, the paper depositors? Mr. F organ . 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 dav. Senator N elson . 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 organ . Yes. But I do not distinguish, when you come to credit deposits; I do not see any distinction between the notes------Senator N elson (interposing). Well, is that not the reason? Mr. F organ . 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 elson . 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 organ . Yes. Senator N elson . S o that there you have a difference between country banks and large city banks in that respect. In the country bank it is cash that is deposited. With you it is simply a book deposit. Mr. F organ . 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 elson . I know you do not have to pay out the cash, as the country banks do. Mr. F organ . I mean that proportionally we do not pay out as much cash or take in as much cash as the country banks. Senator N elson . Y ou have the commercial paper, and they have the money, largely, and against that both you and they have the surplus and capital ? Mr. F organ . Y es; 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 elson . Yes. Mr. F organ . And that carries out your theory that the rest of it is represented by the capital. Senator N elson . And surplus of the banks? Mr. F organ . Yes. Senator W e ek s . Mr. Chairman, I w*ant 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 il l . I have in years gone by; I have not recently. This whole thing is a new proposition to me, during the last two weeks. Senator W eek s . Y ou have been looking up authorities, and all that sort of thing? Mr. H il l . Yes. Senator W e ek s . N ow , have you found any testimony or any authority which advocates issuing Treasury notes in preference to issuing bank notes? 284 BANKING AND CURRENCY. Mr. H il l . N o ; I have not. Senator W e e k s . Have you ever heard of any? Mr. H il 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 elson . W e 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 il l . Because they are secured, dollar for dollar, by Govern ment obligations. Senator N elson . 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 ill . 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 “ lawful m o n e y red em p tio n . 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 2\ per cent which the reserve falls, the bank is taxed on that decrease of reserve, until it gets down to 33$ per cent, the normal ratio of the pending bill. So that, in either case, I think the notes are abundantly protected. Senator N elson . Y ou would have that reserve in gold ? Mr. H ill . 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), wo might consider some other proposition. But the demand for gold is bound to be greater in the future against this countrv 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 elson . 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 il l . W hy should that not be done ? W hy 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. W hy should not these reserve banks, whether they consist of but 1 or 12, take upon BANKING AND CURRENCY. 285 themselves the burden of furnishing the gold supply, as they do in every competing country in the world ? Senator M cL e a n . Mr. Chairman, I would like to ask Mr. Hill a question. The Ch airm an . The Senator from Connecticut will proceed. Senator M cL e a n . W e have got $1,000,000,000 in gold which is represented by certificates. Mr. H ill . I do not think we have, Senator. I will tell you that there are------Senator Shafroth (interposing). $1,100,000,000. Mr. H ill . I do not think we have. Senator Shafroth . 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 ill . Exactly. Senator M cL ean . 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 ill . 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 ill . 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 cL e a n . A s a matter of fact you do see the gold certifi cates abroad ? You do find them abroad ? Mr. H ill . 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 Shafroth . 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 ill . 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 hafroth . N ow , then, you would have a great central bank—-—• Mr. H ill . I would have a central reserve bank, or a reserve asso ciation, or whatever you choose to call it. My general idea of this whole proposition is this: There is this great good that is going to come out of this legislation, and I con gratulate this committee upon being the parties who will bring it about, that the one thing to be secured is the massing of the reserves. 286 BANKING AND CUBRENCY. 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 home 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. W e must have the massing of the reserves for mutual support by ail 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 ready when you want it. And in my judgment— I do not quite say------The Chairm an . Pardon me, I do not think you have answered the question proper. Mr. H ill . W hat is that, Mr. Chairman ? The Chairm an . It does not specifically answer the question of Senator Shafroth. Mr. H ill . In my judgment, it is a mistake to attempt to go beyond that point. Let it grow by an evolution beyond that point. Senator Shafroth . Would you have the central bank issue all of the currency? Mr. H il l . Absolutely. Senator Shafroth . W hat limitation would you put upon the cen tral bank ? Mr. H ill . None but the requirements of the business of the country. W ith prompt redemption, after it has done its first work. Senator Shafroth . Would you leave that to the board of directors ? Air. H ill . W ith the limitations of a gold reserve and the security of commercial paper. Senator Shafroth . W hat percentage of gold reserve would you have ? Air. H ill . 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 Shafroth . Would the board of directors have the power to retire the currency at any time they wanted to do so ? Air. H ill . It would retire itself. Senator Shafroth . Well, but would they, in fact, have that power under your plan ? Air. H ill . W hat difference would it make whether they retired it themselves------- BANKING AND CURBENCY. 287 Mr. W exler (interposing). They could not retire it themselves. Senator Shafroth . 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 ower to issue notes or not. The power to issue notes is a mere bugaoo. There is no difference between the expansive power of a prop erly secured note circulation and that expansion put upon the books of the bank as a credit except in the form which the credit takes. Senator N elson (interposing). Mr. Chairman, I would be glad to hear Mr. Forgan, Mr. Wexler, and Mr. Reynolds on this question of 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 om erene . Well, it is half past 5 o’clock now, and that would take a long time. The Ch airm an . 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 ill . Would you like to have me stay over until to-morrow, Mr. Chairman ? The Ch a irm an . N o ; 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 il l . Yes, sir. The Ch airm an . Because, in reality, it means Government control of individual credit ? Mr. H ill . Yes, sir. The Ch a irm an . Right “ down to the crossroads” ? Mr. H il l . I think it does. The Chairm an , 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 Ch airm an . W hy ? Mr. H ill . N o; 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 the national banks come into the system. The Chairm an . I merely wanted to get your point of view, Mr. Hill. E (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 , S E P T E M B E R 6, 19 1 3 . Committee B anking and Currency , U nited States Sen a te , 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 Chairm an . Mr. Forgan, I understand that you wish Mr. Reynolds to take the stand and answer questions by members of the committee ? Mr. F organ . Mr. Reynolds and Mr. Wexler are both here Mr. Chairman. The Chairm an . All right. Mr. Reynolds, will you proceed now. Senator Shafroth . 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 Chairman . I have no objections, if it is agreeable to the com mittee. Senator H itchcock . If he desires simply to ask one or two ques tions, I have no objection. on , ADDITIONAL STA TE M EN T OF GEORGE CHICAGO, ILL. M. REYNOLDS, OF Mr. M il lik en . I would like to ask Mr. Reynolds about the Euro pean test of solvency, as compared to the American test of solvency. Mr. R eynolds . Can you not put all of that in one question? Mr. M illiken . I have got it on one sheet of paper here, Mr. Rey nolds. 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 eynolds . Y es; 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. Mr. M illik en . The second question is: To illustrate, let me sup pose there are two banks reporting under this test, one of which we will call bank A and the other bank B, and their portfolios should be as follows: The portfolios of both banks and the ratios thereof to their deposits and otner 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. BANKING AND CURKENCY. 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 maturing 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 Jaank 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 eynolds . I would say yes. Mr. M illik en . 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 eynolds . Y es; 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 il lik en . The managers of the bank ? Mr. R eynolds . Yes. Mr. M illiken . N ow , what other country is there which requires a legal gold test but ours ? Mr. R eynolds . I do not know of any, offhand. Mr. M illik en . There is not a country in the w'orld; 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 eynolds . 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 maturing 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 il lik en . Yes. Mr. R eynolds . I certainly agree with you. Senator N elson . 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 illik en . Yes. Senator N elson . And theirs is mostly in bills or drafts. Mr. M illik en . Yes, sir. Senator N elson . With the indorsers and acceptors on it? Mr. R eynolds . 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? Mr. M illiken . I believe we could have a better discount bank. 290 BANKING AND CURRENCY. Mr. R eynolds . Well, I am only trying to illustrate the point. Mr. M illiken . Yes. But at present the banks have got no place at which to rediscount their commercial paper? Mr. R eynolds . 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 -to 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. Mr. M il lik en . Certainly. Mr. R eynolds . 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. Mr. M illik en . The shortest time paper? Mr. R eynolds . 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. Mr. M il lik en . Yes. Mr. R eynolds . That is the real test of it. Senator N elson . Then, they have in these countries what they call “ accepting houses” ? Mr. R eynolds . Yes, sir. Senator N elson . That makes a business of accepting bills of exchange ? Mr. R eynolds . Yes, sir. The Ch airm an . Mr. Reynolds, we have examined the pending measure at considerable length, in showing what the objections to it are. W hat features of the pending measure do you regard as of value ? Mr. R eynolds . W ell, 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 Chairm an . 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 eynolds . 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 CURRENCY. 291 ability they would have for doing business, and the greater the contraction of general business would be. The Ch airm an . 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 eynolds . 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. W e can now run, in the reserve cities, on tne 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 33$ per cent, because it re quires a larger amount of money against those balances. The Ch a irm an . Upon that assumption, that is true. Mr. R eynolds . Yes, sir. Senator S hafroth . Have you finished your question, Mr. Chair man? The Ch airm an . Yes, Senator Shafroth. Senator S hafroth . 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 eynolds . N o, sir; I do not think they should be made legal tender. Senator Shafroth . W hy? What objection is there to making them legal tender? Mr. R eynolds . 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 Shafroth . But these notes are notes of the United States, are they not ? Mr. R eynolds . Yes. They are the joint obligations of Federal reserve banks and the Government. Senator S hafroth . 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 eynolds . 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 CUBRENCY. 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 Ch airm an . D o you think, then, that the principle in use by the Bank of England is unsound ? Mr. R eynolds . I did not understand that, Mr. Chairman. The Ch airm an . D o you think the principle in use by the Bank of England is unsound; it makes its notes legal tender? Senator S hafroth . And so does the Bank of PYance. Mr. R eynolds . 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 Ch airm an . But the Government’s promise to pay is also the basis of their notes, is it not ? Senator Shafroth . T o the extent of $90,000,000. Mr. R eynolds . Well, that is to the extent of the amount of bonds which they have back of those notes. The Chairm an . 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 eynolds . Well, I do not know that I could give a satisfactory answer to that question offhand. Senator N elson . 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 hafroth . Yes. Senator N elson . 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 eynolds . N o. Senator S hafroth . There is a reserve of about 60 per cent in the Bank of England. Mr. R eynolds . The larger you make your reserve the more you minimize the danger against the issuing of those notes. Mr. M il lik en . Mr. Chairman, will you permit me to make a statement ? The Chairm an . If the committee has no objection. Senator H itchcock . 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 Chairm an . Then, you may make your statement later, Mr. Milliken. Senator Shafroth . D o you regard the legal-tender character of the United States greenback notes as being a detriment or a benefit ? Mr. R eynolds . Well, it is a benefit in that it can be kept in circu lation better; but it is a detriment in ever^ 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 Shafroth . Well, if they were made a legal tender, they would have to carry a still larger reserve, would they not ? Mr. R eynolds . I think they would, then. BANKING AND CURRENCY. 293 Senator Shafroth . 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 eynolds . 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 Ch airm an . Well, for that very reason------Mr. R eynolds (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 hafroth . 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 oi 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 hafroth . 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 eynolds . 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 think 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 SI,437,000 against a requirement of 5 per cent of $450,000, 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 hafroth . And use that lawful money for reserves? Mr. R eynolds . 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 CURBENCY. Senator Shafroth . Well, you think that if the present bank notes were made legal tender, that it would create an expansion of credit ? Mr. R eynolds . Y es; I think it would, to some extent. Senator S hafroth . In the same way as if this Treasury note was made so ? Mr. R eynolds . Yes, sir; I do. Senator S hafroth . 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 eynolds . Yes, sir. I think the better policy is not to make either of them legal tender, but to go ahead and 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 hafroth . 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 eynolds . 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 elson . Then there is another consideration, Mr. Rey nolds, that in the European country they have only one bank of issue. Mr. R eynolds . Yes. Senator N elson . And at present we have in the national system of this country over 7,000? Mr. R eynolds . Y es; 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. W e 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 to 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 nis 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. W e 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 Shafroth . In actual cash Mr. R eynolds . 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 in 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 hafroth . 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 eynolds . Absolutely. Senator Shafroth . And that is the only objection you see to it? Mr. R eynolds . Well, from that point of view; yes. The Ch airm an . D o you mean to say ‘ ‘inflate” the credit or ‘ ‘enlarge ” the credit ? Mr. R eynolds . Well, either one. The Ch airm an . Well, one is in a harmful degree and tbe other is not necessarily harmful. Mr. R eynolds . 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 Ch airm an . But I was speaking of credits, not notes. Mr. R eynolds . Yes, sir. Senator S hafroth (interposing). Will you estimate the extent of inflation that would be brought about by the making of these notes legal tender? Mr. R eynolds . 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 Chairman . I s it the general practice of the banks to send these national-bank notes in for redemption when they come into their hands ? Mr. R eynolds . 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 I I 296 BANKING AND CURRENCY. that would be bank notes, and they would pass those notes without any criticism. Mr. F organ . Well, they took the percentage into consideration. Mr. R eynolds . They pretended to take the percentage; but they did not count it literally. Mr. F organ . N o . Mr. R eynolds . But they now require us to separate and segregate the different kinds of money, and our records show every night what kind of money we have; and in that way we are every day forwarding them to the Treasury Department at Washington as the only basis upon which we can get legal money against those notes. As I say, we have $987,000 tied up at this moment. Senator S hafroth . D o you send those notes to the Treasury Department by express ? Mr. R eynolds . By 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 Chairman . If that money was legal tender, it would not be sent in for redemption, would it ? Mr. R eynolds . It would not be sent in for redemption; no. The Chairman . That would at least be an economic advantage in that particular, would it not ? Mr. R eynolds . Well, you might save a quarter at one end and lose a dollar on the other end. The Chairm an . 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 Chairm an . 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 Chairm an . 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 organ . 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 eynolds . 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 Chairman . 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 eynolds . N o ; I would not say that. Mr. S prague . Mr. Chairman, might I be permitted to make a state ment at this tme? The Chairman . Yes. Gentlemen, this is Prof. Sprague, of Har vard University. BANKING AND CURRENCY. STA TE M EN T OF PROF. 0 . M. W . SPRAGUE, OF U N IVER SITY , CAMBRIDGE, MASS. 297 HARVARD Prof. Sprag ue . 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 Shafroth . That was considered, then, the strengthening feature to the currency, was it not? Prof. Sprague . Y es; but not for banking purposes at all. Senator S hafroth . Yes; purely as a national currency? Prof. S prague . Yes. Senator B ristow . I understand you, Mr. Reynolds, from your remarks, to object to the greenback as a currency? Mr. R eynolds . Yes, sir. Senator B ristow . W hat is your objection to it? Mr. R eynolds . Well, the objection to it is that it is an inflation through the creation of fictitious credits. Senator B ristow . W hat is the difference in principle between the national bank notes and the greenbacks ? Mr. R eynolds . Just the difference that one is absolutely securedby specific deposit of specific collateral in one form or another, while the other has nothing but a general promise to pay back of it. Senator B ristow . Well, that is a Government obligation in both cases ? Mr. R eynolds . It is a Government obligation in both cases; yes, sir. Senator B ristow . S o that in principle it is the same, is it not ? Mr. R eynolds . 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 issuo its notes without any collateral deposit, they would be the same. Senator B ristow . 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 hairman . Senator Reed, did you desire to ask some ques tions ? 298 BANKING AND CUBBENCY. Senator R eed . 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 eynolds . 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 eed . N o w , referring to this bill, there would be 33$ 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 eynolds (interposing). There could not be, under the law. Senator R eed (continuing). And, second, there would be 100 per cent of notes of customers; and those notes wmuld 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 eynolds . N o, sir. Senator R eed . They would only be indorsed by the bank that wanted to obtain the money ? Mr. R eynolds . They would be indorsed by the bank that would rediscount the paper with the Federal reserve bank. Senator R eed . 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 $100,000 of currency. Is that correct? Mr. R eynolds . Yes, sir. But it might be received by them, Senator Reed, through another process. Of course, in the natural transactions of business between banks, the Oklahoma bank might secure credits— I mean by that checks or drafts upon other member banks— which it could deposit with the Federal reserve bank, thereby increasing its balance with that bank to an amount greater than its required reserve, and whatever amount they would have to their credit in excess of the amount which they would be required to carry with that bank as a part of their reserve, they could get in banK notes by issuing their check upon the Federal reserve bank. Senator N elson . May I put a question right there, in connection with that, Senator Reed ? Senator R eed . Certainly, Senator Nelson. Senator N elson . N ow , the bank deposits its commercial paper and takes the currency of the regional bank, which supplies the reserve of 33$ per cent. Is that supplied by the bank asking for the cur rency, or is it supplied by the regional bank ? Mr. R eynolds . It is supplied by the regional bank. Senator R eed . N ow , where does the regional bank get its gold? Mr. R eynolds . The currency ? Senator R eed . The gold. Mr. R eynolds . 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 eed . T o u would be required to send up gold, would you not? Mr. R eynolds . W e 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 eed . 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 eynolds . Yes, sir. Senator R eed . 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 eynolds . Yes, it is. Mr. W e x i .e r . It comes nearer to being money than anything we have got. Senator R eed . N o w , about the first thing the banks would begin to do under this system would be to lay aside all the gold certificates they could get, would it not ? ’Mr. R eynolds . 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 eynolds . Well, they might, or they might not. Senator R eed . 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 eynolds . I do not honestly believe that, Senator Reed. Senator R eed . D o you not think it is very likely ? Mr. R eynolds . 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 eed . 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 eynolds . Not more than the legal reserve requirements would make it necessary. U32S°— S. Doc. 232, 63-1—vol 1----- 20 300 BANKING AND CURRENCY. Senator R eed . But the legal requirement would be 33J 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 eynolds . Well, but we need but little more money 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 eed . N ow , you have to keep 33J per cent of your deposits------Mr. R eynolds (interposing). I beg your pardon? Senator R eed . Y ou have to keep now 33 £ of your deposits------Mr. R eynolds (interposing). You are speaking of Federal reserve banks ? Senator R eed . Y es; I am speaking now of this plan— this scheme that is outlined in this bill. Mr. R eynolds . Yes, sir. Senator R eed . N ow , what are the aggregate deposits of all the national banks to-day ? Mr. R eynolds . $7,100,000,000. Senator R eed . Well, it is proposed to take into this bill— at least it has been advocated here— State banks and trust companies ? Mr. R eynolds . Yes, sir. Senator R eed . Very well. How much free gold, about, Mr. Rey nolds, is there now in the banks available for gold reserves ? Mr. R eynolds . I have not that at the end of my tongue, but there is somewhere around 1500,000,000 and $600,000,000, I should say. Senator R eed . $500,000,000 or $600,000,000 ? Mr. R eynolds . Y es; I should say that. The report will show. Senator R eed . 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 kind, amounts to $7,000,000,000, in round numbers. You must have 33$ 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 eynolds . Well, Senator Reed, you were not here yesterday, I believe ? Senator R eed . N o ; i unfortunately could not be here. Mr. R eynolds . 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 Chairm an . Senator Reed, do you desire to continue your questions ? BANKING AND CURRENCY. 301 Senator R eed . 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 eynolds . W e have not $7,000,000,000 of circulation out; we have $7,000,000,000 of deposits. Senator R eed . I meant to say $7,000,000,000 of deposits, with 33$ per cent back of it, unless you have over $2,000,000,000 of gold in your reserve. Mr. R eynolds . W e do not expect to have that in this bill. It does not provide for that, Senator Reed. Senator R eed . Y ou do not expect to have what? Mr. R eynolds . $7,000,000,000, secured by $2,000,000,000 of gold. As a matter of fact, Senator, if 1 am correct—-— Senator R eed (interposing). Oh, I am confusing two different things; I see the difference now. Mr. R eynolds . I think you are confusing credits and notes. Senator R eed . 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 eynolds . Well, it would be not a great deal more than we have outstanding now. Senator R eed . Y es; how much? Mr. R eynolds . I should say $700,000,000. Senator R eed . $700,000,000. Now, you say that a greenback is not good money------Mr. R eyno ld s (interposing). No; I do not want to say that it is not good money. The question of the security of it makes for its good ness or badness, in my opinion. And I want to say now, with the cash reserves— gold reserves— of 40 per cent, which is carried against greenbacks, we do regard that as good money. Senator R eed . Well, do you not think that the Government of the United States back of a note is a little higher security than the promise to pay the same amount by some individuals? Mr. R eynolds . Well, I think that of the two promises to pay, the promises of the Government would be stronger, but I do not care so much for their promises to pay as I do for my belief in their ability to pay on demand. Senator R eed . Well, if the Government of the United States has a gold reserve of 33$ per cent, and then issues its note, back of which is (he 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 the same gold reserve and nothing else back of it except the capital of the bank and the notes of private individuals ? Mr. R eynolds . Yes; I do. I think a Treasury note with 33$ 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 eed . Well, I am not talking about the question of whether they serve the purpose, because as a matter of fact, the green back, without any reserve at all back of it for many years circulated 302 BANKING AND CURRENCY. generally and was accepted generally by the people, and in that sense served the purpose as a gold certificate. Mr. R eynolds . Well, there came a time when it did not do that, Senator. Senator R eed . Well, it has not come since we remonetized gold. Mr. R eynolds . N o. Senator R eed . I mean since we demonetized silver. Mr. R eynolds . We did not have much to do with it. Senator R eed . N ow , 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 eynolds . I think it would; yes, sir. Senator R eed . It would be what you call safe money, would it not ? Mr. R eynolds . Yes; I should say it would. Senator R eed . N ow , 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 eynolds . 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 eed . They circulate regularly, do they, through these channels ? Mr. R eynolds . Y es; I think they would, Senator. You wmuld 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 eed . 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 eynolds . N o. Senator R eed . If you do, I should have to revise my opinion of the banks. Mr. R eynolds . 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 eople. How are you going to get those notes surrendered that are ela in the pockets and the hands of people individually? Senator R eed . D o not they all come into the banks, or substantially all of them, every week in the year? Mr. R eynolds . 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 eed . Y ou bankers want the Government to remodel this T 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 E BANKING AND CURRENCY. 303 correct me— he 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 retaining 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 eynolds . In so far as they would have an ability. Senator S hafroth . Let me explain it just a little further. Mr. R eynolds . Yes. Senator S hafroth . 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 organ . Does the Government retire the bonds ? Senator S hafroth . Yes. The Government pays to the banks the 2 per cent bonds in full at par. Mr. W e x l e r . D o they provide redemption facilities for the notes? Senator Shafroth . 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 hafroth . 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 oi 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 eynolds . II ow do you provide that you are to maintain this 50 per cent to start with ? Senator R eed . In the first place, we put it in the vaults and keep it there, and we do not issue any more money— that is, under this plan— than 2 for 1. I am not advocating this plan; I am asking for information. * “ 304 BANKING AND CURRENCY. Mr. R eynolds . W e understand your attitude, I think, Senator, thoroughly. Senator R eed . 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 ICO per cent reserve. W e 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 eynolds . I think it would, and I think, frankly, that you could work it out so that it could be done, if you want to put the Government into the banking business and have it assume that responsibility. Senator R eed . That is another question, whether we want to put it into the banking business. Coming to the question of inflation on account of emergencies, the getting of more money when you banks need it— — Mr. F organ . Let me make a suggestion in regard to what you have been talking about. Senator R eed . Yes. Mr. F organ . Y ou have whatever amount you have out of these notes secured by 50 per cent gold. You have got, of course, to cal culate upon redemption; you can not have the amount fixed. You may call it the “ staple circulation” and “ rigid circulation,” but the redemption will go on. You reduce it to a small amount. Suppose the Government had $2,000,000 of such notes out, secured by a reserve of $1,000,000. It would only require $1,000,000 to be pre sented to use up the whole $1,000,000 of gold, and you have got $1,000,000 out without any gold reserve behind it. Senator R eed . I understand that. Let us apply that to the bank. The reserve bank has got $2,000,000 of paper out and $1,000,000 of gold. A gentleman walks up some morning with $1,000,000 of this paper and says, “ I want the gold,” and you pav it to him, and you are in just the same fix the Government would be, that far in the transaction. Mr. F organ . Except-----Senator R eed . “ Except.” Now, you have got, in addition to that, certain resources. You have notes. Mr. W e x l e r . Capital. Senator R eed . And you have some capital. But I want to knowr if you think the gold reserve in the hands of the Government would be raided any more than it would be in the hands of the banks ? Mr. F organ . The Government is not protected as the banks are in this way, because of the regular operation that takes place in the banks. While what you say would be profitable, the banks are pro T tected in that, in that when they pay out notes they get something for them; they get either gold or they get good commercial paper or bills of exchange. These are being all the time converted, as it matured into redemption money. The Government has no such process, and it would resolve itself down to this, that what actually takes place in the banks is that when notes are presented to the banks—when they are paid out by the banks, it is generally against a BANKING AND CURRENCY. 305 deposit, and the deposit liability is changed into a note liability, and when they come back again they come in the deposit. Senator R e e d . In other words, there is a stream of money coming into the bank all the time? Mr. R eynolds . All the time; yes, sir. Senator R eed . I s there not a stream of money coming into the Federal Treasury all the time ? Mr. R eynolds . N o. Senator R eed . I think there is. You shake your head, but I think there is. Mr. W e x l e r . There is a stream of money coming into the Treasury, but the stream that is going out by appropriations is as great as the stream coming in. Senator R eed . And part of that money must be gold just the same as part of the money coming to the bank is gold ? Mr. F organ . Not for that purpose. Senator R e e d . If we wanted to do it, we could make a percentage of our dues and customs actually paid in gold. I do not know how wise that would be, for it seems to me that would attack the value of the currency or the stability of it. Mr. F organ . This would require that the Government could keep its revenues as it receives them, in its own hands, and not go in any regional banks, as is proposed. Senator R e e d . If it went into the regional banks under this plan, the regional bank would have to be ready to respond to the Govern ment in the case of demands for gold being too heavy, of course, if you let it out. I am going to get your mind directed to this, be cause— Senator B ristow . Let me inquire, if the Senator will excuse me, why is not all the gold that is behind the greenbacks taken out ? Mr. R eynolds . It is. Mr. F organ . There is no actual redemption takes place. Senator B ristow . W e keep money there to do it, if the demand comes. Mr. F organ . The greenbacks are being used for the subsidiary currency. They are all small notes and mostly in the hands of the people and hands of the banks for the purpose of paying out. Senator R eed . Could we not have some small notes that would be in the hands of the people under this plan ? Mr. R eynolds . W hat would be the mode of protecting your re serves, except through the levying of taxes on the one hand or selling bonds on the other ? Senator R eed . I do not know that there would be any other except this, that unless the gold had been absolutely frightened out of the country, that it would naturally flow into the Treasury, just as it would naturally flow into these banks. I want to say to you, gentle men, with all candor, that I have not made up my mind about a single letter, line, or syllable of this bill. Mr. R eynolds . W e are very glad to know that. Senator R eed . But I want to know what there is about a bank that enables it to get gold when a Government that is collecting $2,000,000,000 a year-------Mr. R eynolds . It has many things. Senator R eed (continuing). Can not get some gold. 306 BANKING AND CURRENCY. Mr. R eynolds . It has many things. First of all, it has assets maturing every day as we go forward in the transaction of our busi ness. It has bills of exchange which are salable immediately; it has commercial paper maturing every day; it has an ability, through the exercise of the raising of the rate of interest, to protect its gold, whereas the Government would not. On the other hand—-—Senator R eed . Let Us take one thing at a time. You are an ex pert on this, and I am a farmer on it. Mr. R eynolds . W e are all farmers. Senator R eed . Sometimes I think when I hear great financiers talking and seeing how they differ, I conclude we are all in the realm of speculation to some extent, although I think you men who have been in the business ought to be able to draw pretty accurate con clusions. The first proposition is, you say you can get gold, because there is money flowing into the banks; but that money which comes into the banks is not necessarily gold ? Mr. R eynolds . N o ; I said because we have assets which we can readily turn into------Senator R eed . Into what ? Mr. R eynolds . Cash. Senator R eed . That is it, into cash; but you can not readily turn them into gold. Mr. R eynolds . The sentiment of the public will determine how readily this can be turned into gold. Senator R eed . That is true of you, and that would be true of the Government. The sentiment of the public is an important thing in all this, is it not? As long as everybody has implicit confidence in the banks of the country, nearly everybody that has got any sense puts his money into the bank, and when confidence becomes very greatly shaken a great many people with sense pull their money out. Mr. F organ . Lack of it. Senator R eed . And some from lack of it. [Laughter.] And yet I heard the other day a banker say that you bankers among your selves, when there was a shiver in the financial market, proceeded to pull your money out of the centers just like the ordinary farmer does. Mr. W e x l e r . Exactly. We all do that, but the law makes us do it; that is the trouble. Senator R eed . I think I will not pursue that further. Mr. F organ . I would like to say this, that I think it has not been brought out sufficiently clearly. One thing that the banks have is that they are handling all the exportations of merchandise to foreign countries, and they get bills for that payable in gold. They get gold balances in all the countries with which they deal, and they draw gold from practically the whole mass of gold in the world, which the Government has no possibility of doing, except by selling bonds in foreign countries, which is a new obligation. Senator R eed . That is true; and that is a thing that is very obnoxious, I know, except in emergency. (Prof. Sprague arose.) Senator R eed . Did you desire to say something? The Chairm an . W e will hear Prof. Sprague, of Harvard. Prof. S prague . There is a certain amount of money that is always required in any country, for pocket purposes for use outside the banks, I BANKING AND CURRENCY. 307 which will never be presented for redemption. That amount of money a Government can issue with such a reserve only as may be needed to inspire confidence. W hat amount that may be one can not say offhand. There are at the present time something like $1,500,000,000 of money in circulation outside the banks, and about the same amount in the banks. With changes in the activity of trade there are changes in the amount of money that is used outside of the banks. If such a change takes place, tending to lessen the amount of money that is being used, a certain amount of money will be presented for redemption. W e can, however, be absolutely cer tain that if in normal times $1,500,000,000 is used outside the banks, that it will never happen that so little as 1,000 million will not be wanted. I say “ 1,000 millions” will always be wanted. It will never be presented for redemption; and so we find in fact that the greenbacks and silver certificates are not presented for redemption. The Government can perfectly well establish a reserve for the amount of money which is certain to be wanted in every conceivable circumstance; but for the variable part of the circulating medium the Government is not in such good position as the banks, because its only resource when contraction naturally comes about is the sale of bonds. Banks can contract their loans; banks can raise the rates of discount; banks can borrow abroad on short-time obligations; and for these reasons the fluctuating portion of the circulating medium can be far more handily managed by banks than by the Government. In this particular proposal regarding gold certificates and the national bank notes, if the total issue under this plan would not amount to any more than we are quite certain would always be required within the country, then it is a perfectly safe proposition. If this total should be $100,000,000 or $200,000,000 more than might be needed outside the banks, then it is not quite so safe a proposition; or at any rate it is a proposition which would involve the Government from time to time in sales of bonds to strengthen its reserves. It is a simple ques tion to determine how much money in this country will in all circum stances be reauired for conducting everyday transactions, no matter how depressed business may be. Senator S hafrotii. Let me read this bill— it is short— so that the exact features of it may be known. Senator R e e d . I wish you would let me ask a question here, Sen ator. Senator Shafroth . All right. Senator R e e d . I suppose, Prof. Sprague, that this money that you say will always stay out in the hands of the people, will do it as well for the Government as for the banks ? Prof. S prague . Yes. Senator R e e d . Credit, the confidence of the people in the circula tion, has something to do with the ability to float it ? Prof. S prague . Somewhat; yes. Senator R e e d . Has it not a great deal to do with it? Prof. Sprague . If you should assume a government in which the people had no confidence whatever------Senator R e e d . I am not speaking about governments. I say the confidence of the people in a circulating medium, no matter whether issued by a bank or by the Government, has a great deal to do with 308 BANKING AND CURRENCY. the ability to float it, has it not, either by banks or by the Govern ment ? Prof. Sprague . Yes. Senator R e e d . D o you think the people of the United States have not got more confidence in their own Government than they have in all the banks in Christendom------Prof. Sprague (interposing). W hy------Senator R eed (continuing). An ultimate paymaster, a Govern ment with 100,000,000 of people and the right to tax them, a Gov ernment that stands in a position that is regarded by every man in the world as impregnable, so far as the ability to defend itself, and a Government that has never repudiated its promise in 130 years? Prof. Sprag ue . Yes; but the causes for redemption are sometimes other than lack of confidence— inactive business, for example. Senator R e e d . I am just speaking, Professor, of the matter of con fidence. Prof. Sprague . Yes, so far as that element goes, there is sufficient confidence. Senator R eed . I did not mean to interrupt your answer, if you had something else that you wanted to say about that. Prof. Sprague . Assuming complete confidence in the currency issued by a Government, then it still is true that for the fluctuating portion of the circulating medium, banks can handle it better than the Government, because they are engaged in short-time operations. Senator R e e d . That is a question of facilities ? Prof. Sprag ue . Yes. Senator R e e d . I want to trace the rest of your answer of a moment ago just a step further. You say that the banks could get money to make up their reserve by buying gold in Europe on short-time obli gations. Do you know of any reason why the Government of the United States can not issue a short-time obligation as well as a long time obligation, if it saw fit ? Prof. Sprague . If the Government does that, it does not lessen in the slightest degree the lending powers of the banks. They may go on lending under those circumstances, causing prices to continue to advance or not to go down, so that no check will be imposed on gold exports. Senator R eed . Then you think that it is necessary to put into the hands of the banks the power to control prices, in order that we may have a safe currencv ? Prof. Sprague . They will not control prices; they will be con trolled by price movements. If prices advance unduly because of the excessive expansion of credit, gold exports are pretty certain to take place and the banks in self-defense are required to contract credits; whereas the Government is entirely responsible for the cir culating medium and can not and does not control the banks. Senator R eed . Does not control credits ? Prof. S prague . Does not control credits. Its sale of bonds abroad will simply add to the lending power of the banks by bringing back to the country the gold which natural forces had caused to be exported. Senator R eed . I want to get this matter clear in my mind. The real basis of safety, then, in a currency system controlled by the banks is that the banks have the ability to control the tides of com BANKING AND CURRENCY. 309 merce— the prices— and therefore they ought to have and must have that power, for that is the power that makes them safe. Prof. Sprague . I should put it the other way: The currents of commerce control banks, except for short periods of time. Banks may borrow for a few months abroad, and so stave off gold exports, but if the currents of trade and the level of prices is such that we are upon a foundation which is not solid, banks can not possibly maintain that position indefinitely. For a short period of time banks are able to influence the movements of gold between countries, but fundamentally their operations are determined by commercial con ditions. Senator N elson . Senator Reed, will you allow me to just make one suggestion in there, to help this along ? Senator R eed . Yes. Senator N elson . I want to call your attention, as an illustration of how gold is imported by the banks: During the panic of 1907, we imported over $90,000,000 through the banks here upon commercial bills, based upon cotton, wheat, and flour, and got over $90,000,000 in that way through that source, based upon trade and commerce. They were not financed bills, but what they call commercial bills. Am I not correct? Mr. W e x l e r . Y ou are perfectly correct, sir. Senator R eed . I want to go back now to the question of inflation. The Government finds its gold reserve is getting low, and issues $100,000,000 of bonds, short or long— I do not care anything about that— and it gets $100,000,000 of gold in Europe and brings it here. You say that does not help the situation any, Decause trade goes on just the same? Prof. S prague . It may make the situation worse. Senator R eed . But banks issue $100,000,000 of their paper and send it over to Europe and bring in $100,000,000 of gold. What is the difference? Prof. S prague . The difference is this: The banks have utilized $100,000,000 of their lending power; they are less able to further expand credit in this assumed undesirable condition of affairs than they were before, whereas if you should sell $100,000,000 of bonds and get the same amount of gold, the banks’ lending power is not diminished one iota. Mr. W e x l e r . Senator, what guaranty have you------Senator R e e d . Don’t you ask me questions until I get through with this, because I will get a mile and a half off of the subject I am trying to follow. Mr. W e x l e r . It is pertinent to your question about selling the $100,000,000 of bonds. W e have got to find a purchaser before we can sell them. Senator R e e d . The difference between the bank selling them and the Government is that there is an actual check upon the bank, that when it has exhausted $100,000,000 of its debt-making ability in that way it has to begin to put the brakes on ? Mr. W e x l e r . It may help some little. Senator R eed . That is the tendency. I do not mean at $100,000,000 it would stop, but when they got out a certain amount, they have to stop because of exhaustion ? Mr. W e x l e r . Yes, sir. 310 BANKING AND CURRENCY. Senator R eed . Suppose the Government stops because of com mon sense, and just did not stop because it had to, but because the Secretary of the Treasury said: We have gone about as far as we are going to go on this and we will not go any further. Prof. Sprague . When the Secretary of the Treasury does that, he must sooner or later refuse to redeem these notes in gold. When the banks adopt this policy you suggest they simply begin to con tract credit, which we have assumed was overexpanded, and was the occasion of this redemption. Senator R eed . What is to hinder the Government, when it gets this $100,000,000 of gold, to use it actually to retire its obligations. It will do that, will it not ? Prof. S prague . It will do that. Senator R eed . Just coming down to the plain, ordinary, common sense of a situation, getting both your head and mine clear out of the air, getting away from books and theories, do you not think if the Government of the United States issued a reasonable amount of money, backed by a 50 per cent gold reserve and the faith and credit of the United States, that in the absence of some great inter national war— I will put that in for the present— would there ever be any danger of a raid upon the Treasury? Prof. S prague . The “ reasonable amount of money” to which you refer is in my mind the permanently required amount of money. If by “ reasonable amount of money” you mean to include that variable amount which is required in varying conditions of trade activity, then I do not agree with you. Senator R eed . When I said “ reasonble amount of money ” I meant just what I said. A thing is “ reasonable” when, taking into consideration all the facts and circumstances and conditions, you proceed with that judgment which an ordinarily prudent man, skilled in the business, would exercise under the same or similar circumstances. That is what I mean by “ reasonable.” Prof. Sp r a g u e . That, to my mind, would mean the permanently needed circulation of the country, and no more. Senator R e e d . I come to the next question— and I thank you, Professor— which I wanted to ask Mr. Reynolds. Taking the bank notes that we have out now— the greenbacks and the gold certifi cates— Mr. W e x l e r . And the silver. Senator R eed . And the silver; that would be a reasonable amount, would it not? Mr. W e x l e r . I think it would. Senator R eed . For ordinary times? Mr. W e x l e r . And if it were not “ reasonable” this year it would certainly be reasonable within five years, because of the growth and population and trade of the country. senator R e e d . I wanted to ask Mr. Reynolds a question, and then I am going to yield. Mr. Reynolds, it seems to be conceded that 33J per cent is a pretty fairly safe gold reserve to be held by the banks or to be held anywnere. W e have been talking about a 50 per cent gold reserve. Suppose, now, that the Government starts with the policy of ordinarily maintaining a 50 per cent gold reserve, BANKING AND CUBBENCY. 311 but there comes a crop-moving time or emergency period, and suppose that they were then to issue enough money so that their reserves would go down to 40 per cent or even 33 per cent, temporarily— issuing this money in some way to provide for its speedy retirement, do you think that would be a just operation? Mr. R eynolds . I rather think it would, Senator, for the reason that if the bank were to follow that practice the public would under stand that just in proportion as its reserve would go down it would receive an asset on the other side. Senator R eed . The Government must receive an asset. For instance, the Government has out in circulation to-day approximately $700,000,000. Senator Shafroth . In bank notes. Mr. F organ . $700,000,000 in bank notes alone. The circulation is a billion and a half. Senator Shafroth . There are $346,000,000 of greenbacks. Senator R eed . W hat is the circulation ? Mr. F organ . A billion and a half dollars. Senator R eed . That gets it into figures I can handle. I can think better than I can figure, and I do not know whether I do either one very well. But we have a billion and a half of money out now. Suppose that that billion and a half of money was one-half paper and one-half gold. Say that we have a 50 per cent gold reserve. There comes an emergency period. You bankers need some more money to handle the crops or any other purpose, and the Government then says: Well, bring us down $500,000,000 of gilt-edged securities, the best you have got, and we will then issue you $500,000,000 of paper. That of course reduces our reserves proportionately, but we have got the paper. Mr. R eynolds . I do not think that would disturb public confi dence. Senator R eed . It would not disturb it a bit ? Mr. R eynolds . I do not think it would. Senator R eed . I thank you. Senator S hafroth . Mr. Reynolds, I want to read this bill to you and ask your criticism. The object and purpose of this bill very largely was due to the fact that the original bill provided that the bank-note circulation should be retired; 3 per cent bonds should be substituted for 2 per cent bonds. That, I thought, was something that would not meet with my approbation, and I began to figure on this bill by reason of that. This is a bill entitled: A B IL L Providing for the retirement of the national-bank notes, the gold certificates, and the United States notes now outstanding b y the issuance of United States notes redeemable in gold, and for the establishment of a fifty per centum gold redemption fund. Be it enacted by the Senate and House of Representatives o f the United States of America m Congress assembled, That as gold certificates are received into the Treasury or any Subtreasury of the United States they shall be canceled and the gold represented by such certificates transferred to the reserve fund in the Division of the Redemption of the Treasury, and in lieu of such canceled gold certificates there shall be issued United States notes of like denominations, redeemable in gold coin at the Treasury or any Subtreasury or mint of the United States which may be designated by order of the Secretary of the Treasury, which notes shall be a legal tender in payment of all debts, public and private, within the United States and its possessions. And there shall also be issued at the same time a like amount of such United States notes for sub- 312 BANKING AND CURRENCY. stitution for all national-bank notes and for cancellation of the bonds of the United States securing the same until all said national-bank notes are retired. Mr. R eynolds . Excuse me, if I ask you questions as we go along for the clarification of my own mind, at least. You say as presented to the Subtreasury as the notes shall be canceled ? Senator Shafroth . Yes. Mr. R eynolds . H ow are you going to have anything presented at the Subtreasury received, except by payment of gold against those notes ? Senator S hafroth . The Government collects its customs duties and other duties. It is paid into the General Treasury and the object is that when those gold certificates come into the General Treasury they shall be canceled. Mr. R eynolds . You do not mean to apply that to a Subtreasury; you mean the General Treasury. Senator S hafroth . I will put it General Treasury. Mr. R eynolds . All right, that answers my purpose. Senator S hafroth (reading): S ec . 2. That upon the request of any national bank the Secretary of the Treasury is authorized, in his discretion, to assume the redemption of its national-bank notes, to pay to such national bank in cash the difference between the amount due at that date on the United States bonds securing said notes, and to cancel said bonds. When i ational-bank notes, assumed as aforesaid, shall be received into the Treasury or any Subtreasury of the United States, they shall be canceled and retired, and in lieu thereof, United States notes authorized by this act to the same amount, and like de nominations shall be issued, paid out, and kept in circulation. S ec . 3. That as the United States notes heretofore issued are received into the Treasury or any Subtreasury the Secretary of the Treasury is directed to cancel same and issue in lieu thereof United States notes authorized by this act------ That takes up the greenbacks. And to transfer to the redemption fund herein created a proper proportion of the one hundred and fifty million dollars of gold now held to redeem same. S ec . 4. That a gold reserve of fifty per centum of all United States notes issued and put in circulation under the provisions of this act shall be maintained in the reserve fund of the Division of Redemption of the Treasury— That is a long name, but that is the name used in the statute. Senator N elson . What do you do with the silver certificates? Senator S hafroth . We do not pass upon the silver certificates; they stand upon their own base. Mr. W e x l e r . Redeemable in gold. Senator S hafroth . They may be redeemable in gold, but never theless they stand as they stand now [continuing reading]: for the purpose of redeeming the same, and the Secretary of the Treasury is authorized for that purpose to purchase gold and exercise all of the powers granted to him by sec tion two of the act of Congress entitled “ An act to define and fix the standard of values, to maintain the parity of all forms of money issued or coined by the United States, to refund the public debt, and for other purposes,” approved March fourteenth, nine teen hundred, and he is further authorized by general orders to require all national banks to keep in their vaults as their lawful reserve such kinds of United States money as he may deem to the best interest of the Government. Mr. R eynolds . N ow , Senator------Senator R eed . I am greatly interested in that answer, but we have to go to the Senate. Senator S hafroth . Suppose you wait. I wish you would look at this. I would like to know what defects are in it. (At this point the committee took a recess for 10 minutes, at the conclusion of which the following proceedings were held:) BANKING AND CURRENCY. 313 Senator Shafroth . Mr. Reynolds, have you looked at the bill that I read to you, or do you remember its terms as I read it to you ? Mr. R eynolds . I think the inherent weakness of your bill is the fact that you do not provide that the reserves of banks must be in gold coin and not in lawful money. I think the fact that you stipulate that they must carry them as their reserves is the weakness of the whole situation. If you will eliminate that and substitute gold requirements for the reserves of the banks and redemption facilities, then I do not think there is any criticism that I should make. Senator Shafroth . I thought your objection to the bank currency was very largely due to the fact that you have got to bundle up $1,000,000 or $2,000,000 every once in a while and send it down to Washington and lose by transmission. Mr. R eynolds . I am not objecting to that. W e believe in that redemption, and the free redemption, and we think one of the greatest difficulties with the bank note is the fact that there has not been redemption of it. Senator S hafroth . Y ou, by preference, use the United States note, commonly called the “ greenback,” now in your reserve? Mr. R eynolds . T o gold ? Senator Shafroth . In preference to gold. Mr. R eynolds . N o ; we do not use it in preference to gold. W e prefer the gold certificates, because they are the nearest substitute tor gold— in the most convenient form to handle. Senator Shafroth . W hat is the reserve composed of now, do you remember ? Mr. R eynolds . It is composed of gold coin and gold certificates. W e have no silver. Senator Shafroth . In what proportion are those moneys ? Mr. R eynolds . I can not tell you offhand, but the majority por tion of it is gold and gold certificates. Senator Shafroth . I s much of it gold coin ? Mr. R eynolds . Well, yes; to a considerable extent. Perhaps I can make that a little more clear to you bv saying that in Chicago, for the purposes of convenience between banks, we have a large deposit of gold in our clearing-house association. W e have$21,000,000 at the present, so that our clearing-house debits, which are pay able in gold, can be traded in in certificates for convenience, and at the same time leave the proper ownership of the gold with which ever bank it belongs to, as the result of our transactions, without having to cart gold through the streets. This is against our reserve of $100,000,000 of the national banks. W e have one-fourth of that in gold coin there. In addition thereto, every national bank in Chicago will carry a large percentage of its reserve in gold certificates, and we will have some silver, and we will have some legal tenders, but not many; they do not circulate freely. Senator Shafroth . Your principal objection to the bill is, however, you say, that it requires these United States notes issued under this act to be the legal reserve of the bank ? Mr. R eynolds . Yes. Senator S hafroth . That is not required. Mr. R eynolds . I so understood it. Senator Shafroth . N o ; it says that the Secretary of the Treasury may do that. 314 BANKING AND CURRENCY. Mr. R eynolds . I misunderstood. I thought it was required. I thought that would be enforced circulation. Senator Shafroth . The object of this was this, that in the event that there were raids upon the Treasury outside of the legitimate de mands for exports for foreign countres (which I think practically is the only legitimate demand upon the United States Treasury for gold), that in that event if there came a shortage for that purpose the Secretary of the Treasury may require these United States notes, legal tenders redeemable in gold, to be a part of the reserve, not all but a certain proportion of them, it giving him the discretion en tirely; and that would force into the United States Treasury gold without any expense whatever to the Government. Mr. R eynolds . It would not necessarily force it there; might it not force it any other place as well ? Senator S hafroth . It would put gold certificates or gold out in circulation, and a certain portion of it would unquestionably be paid in customs duties and internal-revenue duties and other taxes to the Government. Mr. R eynolds . What I fear is that the adoption of that bill would result in your being unable to get hold of all these gold certificates. There is a great percentage of them out in the hands of the people. Banks do not control that. It is not a question of whether or not banks themselves would handle them, but the public. Senator Shafroth . Of course it is possible that they might be, and yet we know now that quite a large quantity of gold certificates come into the Treasury. You can take the Treasury report at any time and find that a very large proportion of it is gold certificates. Mr. R eynolds . I appreciate that. Senator Shafroth . And the United States Government, owning and controlling the certificates, have got a right to draw the gold upon them and got a right to put that gold then to any use they deem proper, and if it makes gold reserve it becomes proper action. Mr. R eynolds . They have the same right for those notes’ re demption that I have or anybody else. Senator S hafroth . The United States Government could not pos sess the power to compel you to send in those gold certificates; it is purely voluntary. Mr. R eynolds . I think the whole discussion of your bill, Senator, resolves itself into a question of the discussion of money or currency rather than the discussion of banking. Senator S hafroth . I think so, too. Mr. R eynolds . W e gentlemen who have appeared here before you appear more in the attitude of bankers than we do in the attitude of experts from the standpoint of currency or of money. Senator S hafroth . Mr. Reynolds, I want to ask you, in your judg ment, whether the national banks want to retire their 2 per cents ? Mr. R eynolds . I think they would. Senator Shafroth . Y ou think that they would come in and pre sent to the Treasury for redemption, then, a good deal of their circu lation gradually ? Mr. R eynolds . I think on any system of that kind that they could feel would be workable they would be only too glad to do it. Senator S hafroth . S o that if it were left voluntary, the question arose in m y mind whether or not if the Secretary of the Treasury BANKING AND CURRENCY. 315 would call for these notes— that is, should make a call for certain of these notes that perhaps are falling due------Mr. R eynolds . Y ou mean “ bonds” ? Senator S hafroth . I mean bonds; yes. But I felt without an inducement to the bankers to cash their 2 per cent bonds it would not justify them in presenting them all at once. I believe it would take a series of years to substitute this currency, but I believe it would, when it was substituted, relieve the banks of a good deal of trouble. Mr. R eynolds . A s I said before, if you make it obligatory upon the banks to carry their legal reserve in money and coin in their vaults in gold, I do not see any reason in the world why your plan could not be worked out. Senator Shafroth . N ow , what would you think of the Secretary of the Treasury issuing an order— only in the event and in case there was plenty of gold they would rather for him to carry gold— if there is a raid made upon the Treasury, why could he not keep 25 per cent of his reserve in United States notes, and would not tliat very demand for that money on the part of the bank naturally gravitate toward the United States Treasury the gold coin ? Mr. W e x l e r . I think that as soon as you promulgate that order gold would go to a premium the moment you gave notice that there was not sufficient gold for redemption of your notes; then that very moment gold would go to a premium just as it went to a premium in 1907 in New York, when we had to pay 4 per cent premium on gold. Senator Shafroth . Oh, yes; you had an enormous amount issued, and they had been issued during war times, and the stability of the Government was then questioned— a good many reasons. Mr. W e x l e r . Senator, that can happen again. W hat has hap pened can happen; and, Senator, a Government note, however strong the Government may be, and however confident the public may be that the note will ultimately be paid, it is not as good as a bank note. W hy? Because the holder of the note wants to know, not that the man is good and can ultimately pay, but that he can pay upon demand; that is the fundamental thing. Senator R eed . Have not banks utterly failed to do that a good many times in our history ? Mr. W e x l e r . Not their notes— their deposits. Senator R eed . They not only failed to pay their notes, but they failed to pay us back our own money. Mr. W e x l e r . They never failed to pay their notes. Senator R eed . Y ou failed to pay your notes when you failed to pay your obligations. Mr. W e x l e r . N o , Senator; you are wrong. Senator R eed . W e could not even get our own money back that the bank had, and I do not say that criticizing the banks. It seems to me that is a good deal worse than saying “ W e will not exchange this foi old.” * W e x l e r . W e are asking you to give us machinery by which . we can convert this bank credit which we were unable to put out at that time into another instrument of credit which we can pay out; that is all we are asking. 9328°— s. Doc. 232, 63-1—vol 1----- 21 316 BANKING AND CURRENCY. Senator R eed . In other words, you want national clearing-house certificates; that is pretty nearly it— like you issued in 1907? Mr. W e x l e r . Y ou might call it that, only in a simple form where it can be followed up in the ordinary course of business instead of in emergency, and thereby attracting the attention of the country and the whole world to your weakened condition at that time. Senator, if you require that— if the act should require that the national banks and State banks, if it could cover the latter, which would be advisa ble, but the law would not reach them— their reserves should be car ries in gold, then you are going to create a competition between the banks of the country and the Treasury Department for this reserve gold; if you do not provide that they shall carry their reserves in gold, then you are creating an unsound reserve for the banks, you are superimposing a reserve, based upon 50 per cent upon 100, which in itself is only an obligation and does not consist of an article of ultimate redemption. For instance, let me illustrate. Suppose to-day I had the note of the Standard Oil Co. indorsed by the Rothschilds and the Rockefellers. You can not conceive of the manufacture of a better note than that. It is absolutely good. Senator R eed . Not unless you had the note of the bank? Senator Shafroth . Or the note of the Government. Mr. W e x l e r . I do not think the Government would be any better than the other. That would be like “ gilding the lily” ; it would be absolutely a good note. Do you think it right to count such a note as the reserve of the bank ? Senator S hafroth . Of course, you can not by law establish such a standard as that. Mr. W'e x l e r . Would you, in your opinion, approve of the power of Congress to enact any kind of an arbitrary law that would make such a note the reserve of a national bank. Would you think that a note of the Rothschilds and Rockefeller sound reserve for a bank? I know you do not. If you do not then the note of a Government that is no better than that note is not a good reserve. Senator Shafroth . Your objection in the first place, is that imme diately if the Government should promulgate an order of that kind, gold would go to a premium ? Mr. W e x l e r . Yes, sir. Senator S hafroth . Because in effect it would be a denial of the ability to payment of gold for the note ? Mr. W e x l e r . Yes. Senator Shafroth . A s a matter of fact, you know that notes are presented continually at the Bank of France and they refuse to pay out gold, and vet their paper does not go to a discount. They will sav, “ Very well, we will pay silver to you.” Mr. W e x l e r . It does go to a discount. Senator S hafroth . N o ; it does not go to a discount. Mr. W e x l e r . The Bank of France has paid higher rates for gold during the past eight months than it paid during the previous five years, consequently gold was at a premium— it was not the public, it was the Bank of France which had to pay a premium. Senator S hafroth . Perhaps for a certain quantity of work or goods. You are assuming that that would go to a discount. BANKING AND CURRENCY. 317 What would you do with this provision here, that the Secretary of the Treasury is authorized, for that purpose at least, namely, maintenance of the gold standard, and for that purpose to purchase gold and exerieise all of the powers granted to him by section two of the act of Congress entitled “ An act to define and fix the standard of values, to maintain the parity of all forms of money issued or coined by the United States, to refund the public debt, and for other purposes,” approved March fourteenth, nineteen hundred, * * * Mr. W e x l e k . Purchase gold with what? Senator Shafroth . It could buy it at a premium, if necessary under that. Mr. W e x l e r . Buy it with what? Senator Shafroth . It could issue bonds for it. Mr. W e x l e r . All right. Senator Shafroth . It could take any of its surplus in the Treas ury and do it. Mr. W e x l e r . It has already got that; it is using that. Senator Shafroth . They have always got a workable surplus of $250,000,000. Mr. W e x l e r . They have used that and you still need more. ^ Senator S hafroth . Y ou must remember that when the gold goes out something equivalent comes back. Mr. W e x l e r . All right. Senator Shafroth . If the note comes back you can hold the note and say, “ we can hold that,” and consequently there is that much less notes to redeem; or you could issue it again in the course of trade and you could get its equivalent when you issued it. Mr. W e x l e r . W e are presuming now, that you want to carry out ^ and put into it a provision under which the Secretary of the Treas ury is required to maintain the gold standard and to purchase gold in the open market and the argument which has just been used by Senator Reed that the Government should issue $100,000,000 of bonds and sell them in Europe and bring the gold over. Senator Shafroth . The conditions with relation to those $346,000,000 are going on right now. WT do not have any difficulty with e it. W e have $150,000,000 gold reserve there. They are not selling any bonds now. It is only when there is a foreign demand for gold that we have to resort to a measure of that kind, and even then it is questionable whether it is necessary. It is a question whether or not there was not a deficiency in the Treasury that required that, instead of the fact that gold could not be gotten in any other way. I believe that any little obstacle that would be thrown in the way, such as onefourth of 1 per cent, something of that kind, would have a tendency to make people say, “ I would prefer this other money,” and therefore they would not make any run on the Treasury. Mr. W e x l e r . That would immediately put your gold to a premium or the other note to a discount. Senator S hafroth . I do not think it would. That is just a sugges tion. The proposition here is that the Treasurer is clothed with unlimited power to maintain this parity, just like he now maintains the parity between greenbacks and gold. Gold is not flowing out of the Treasury; it is flowing into the Treasury. 318 BANKING AND CUBBENCY. Mr. W e x l e r . Y ou can have all the power granted to you by law that you want, but when it comes to the exercise of that power the man you put the exercising of it upon has got something to say. Suppose that you had been required to sell $100,000,000 of bonds in the last six months for the purpose of bringing gold into this country. You could not have sold them in any civilized country in the world, except at a tremendous discount, because all of the commercial nations of the world were begging each other for gold. You are conceding all kinds of conditions under which this is going to work just like it was greased. Senator S hafroth . The United States notes and greenbacks are working with perfect accord. Mr. W e xl e r . I have here, in my pocket, a $10 note, that was issued to the people, and which at the time it was issued was good for $10 and for a year after it was issued it was good for $10. It is a Con federate note. During the same period that this was good for $10 the greenback was not worth over 60 or 70 cents on the dollar, the first year or two they were in circulation, when the fortunes of the war were running against the North. Senator Shafroth . Making the note worthless, of course, going to a discount. Mr. W e x l e r . This note became a depreciated note, and the green back gradually went up; though it did not go back to par. It is fundamentally unsound for the Government to issue a circulating medium. You have got to go back, Senator, to the A, B, C of finance, I know. Senator R eed . Will you allow me to enter the primer class at this point? Mr. W e x l e r . Y es; that is exactly right. Senator R eed . Y ou have seen fit to illustrate the badness of Gov ernment money by producing a $10 Confederate note, issued by the Government that never existed in the world. Mr. W e x l e r . It did exist. Senator R eed . It does illustrate that fact that there can be bad money issued by the Government. Do you think it is fair to use that as an illustration, any more fair than it would be if this committee would produce a $10 wildcat bank note, issued by banks, when they had laws passed to suit them and issued money? One would be just as fair as the other. Mr. W e x l e r . W e have used that illustration here, Senator, that you can issue just as bad a bank note as you can a Government note, and we have used that illustration here to prevent you from issuing a bad bank note just in the same manner tnat I am using this Con federate note to illustrate the proposition of issuing a bad Govern ment note. Senator R eed . It all comes down to the proposition that if we arc are going to consider either system, we ought to consider the condi tions as they now exist, governed in the future by rules that are dic tated by common sense, good judgment, and experience in both instances. Mr. W e x l e r . Yes, sir. Senator R eed . Then, we parallel the two on the same plan; but if you are going to put up a Confederate note before this com ittee, m illustrating what a Government note is, when, if they are not all gone BANKING AND CURRENCY. 319 to the paper mill, I could get cord after cord of bad bank notes, so I do not think we should use that kind of argument. I do not think it is fair. Mr. W e x l e r . For 15 years after the United States Government note was issued, the greenback, it did not sell at par; it fluctuated from time to time. Senator R eed . W e know that is true; we know that there are a multitude of reasons for that that would not necessarily exist now. Mr. W e x l e r . Not necessarily, but may. Not as long as 50 per cent was there. Senator R eed . If you can take that away from the Government, I simply want to know why you can not take it away from the banks. Mr. W e x l e r . W e have been very frank in this discussion, and I want to say to you that it is possible for a body of men, equipped with a knowledge of this subject, to sit down and work out a sound Government note. I think it is possible; but it is not nearly as economic, not nearly as advantageous to the country; it is not as elastic a note; you have not as good machinery for protecting a gold reserve through a Government note as you would have through a bank note. Therefore, taking the experience of all the civilized com mercial nations of the world as a guide, and— and we all form our opinions by experiences of ourselves and others— why should we per mit our minds to run in a channel that is fraught with more danger, greater trouble, more cumbersome, not as efficient, when we have in our hands a means of creating a bank note and credit system that will absolutely answer our purposes; that will receive the approval of the banks, the merchants, the students of political economy, such as the professor here and every one else ? Senator R eed . Mr. Wexler, of course, if I grant your premise, namely, that the bank notes are a better system, I have granted the whole question, for the premise involves the conclusion; hut what I am trying to get at are the reasons for your conclusion, because I might not be willing, so far as 1 am concerned, to surrender my judg ment to your conclusion, much as I respect it, or even to Prof. Sprague’s conclusion. Mr. W e x l e r . Senator, can you suggest a single individual outside of the Halls of Congress and the Senate— I ask you, is there one in Europe or America— who believes that a Government note is better for the purposes of the people than a bank note ? Senator R eed . A single individual ? Mr. W e x l e r . Yes. Senator R eed . My dear friend, I would like to make a wager, if we could test it, that if you submitted it to a vote of the American people to-morrow, that 90 per cent of them would vote for the Government note. Mr. S iiafroth . 99 per cent. Senator R eed . And take it every time. Mr. W e x l e r . They might. But let us exclude the proletariat, which is not posted on the subject, and let us confine ourselves to people whose training has been in the direction of finance, and take the political economists of this country, of Europe— the bankers of this country and of Europe; the larger merchants, who are in a position to understand this subject, and the larger manufacturers, 320 BANKING AND CURRENCY. and you will not find that sentiment. I have talked to any number of them. Senator R eed . Let us analyze that a minute. Mr. W e x l e r . Yes. Senator R eed . In the first place, let us exclude the banker, except that he can give a reason for the faith that is in him, because he is an interested party. W e will exclude the proletariat, which, of course, excludes Congress, because they all belong in that class. Mr. W e x l e r . Not necessarily. You have bankers in Congress. Senator R eed . I do not know just who would be left, but we would have the merchants who have to get their credits from the banks and allow the banks to do a good deal of their financial thinking. I am not so sure that we have any right in this Republic to exclude this proletariat. I have never done it. W e have got to make a system for them. I do not like to discuss it on that line. I would just like to discuss it along the lines of what the reasons are. Mr. W e x l e r . I would be glad to give them to you. Senator. Senator R eed . The reason I am arguing with you is that I do not propose to accept your conclusion. I want you to give me the reason. Your conclusion, however, would have due weight, as a conclusion. Senator Shafroth . Let me ask you this: Is it not a fact that the first United States notes issued by the Government maintained their parity with gold from the beginning to the end, because they were full legal tender for the payment of all debts, dues, and receipts coming to the Government? Were not $90,000,000 of those issued, and then did not they change the United States note so as to make it a full legal tender, except as to import duties and the payment of interest on the public debt, and then the United States notes went to a discount ? Mr. W e x l e r . Senator, you are correct, I believe. I have not those facts before me, but I think that statement is correct. I have not said at any time, nor do I say now, that it is not possible to work out a feasible Government note, Treasury note; it can be done, but it has to embrace many other thoughts than those that are in this bill. Senator Shafroth . Give us those facts; we want to put them in the record. Mr. W e x l e r . In the first place, it should provide that the reserves to be carried by all banks be gold, and tne power should not be given to the Secretary of the Treasury to provide any other money as temporary or permanent reserve. Senator Shafroth . N ow , why? Mr. W e x l e r . W hy should it? Senator Shafroth . Yes. Mr. W e x l e r . Because gold is the money of ultimate redemption, and because a note, however good, is not reserve money. Senator S hafroth . United States notes now are kept as part of reserves, are they not ? Mr. W e x l e r . Y es; and we have contended for many years that the United States note ought to be retired and paid off. Senator Shafroth . That is begging the whole question. Mr. W e x l e r . It is not begging the question at all. It is accepted because the Government permits us to accept it. If we had our BANKING AND CURRENCY. 321 own volition in the matter, we would say that the Government ought to say that this note ought not to count as reserve. I say it is fundamentally unsound that the note should count as reserve. Senator R eed . For the reason that it is a note, and not an item of redemption ? Mr. W e x l e r . Nothing but the obligation of the Government, with 43 per cent gold behind it, however good it might be. Senator R eed . Y ou say you do not approve of this present system, and that we ought to have gold in the banks as reserves and not Gov ernment notes ? Mr. W e x l e r . I think you ought to have gold in the banks as reserve. Senator R eed . Y ou say the banks want that? Mr. W e x l e r . I am not expressing the opinion of other banks. My own opinion is that our reserves would be sounder if they consisted entirely of gold than if they consisted of a note of a Government or anyone else, however good it may be. Senator R eed . Let us concede the soundness. I am asking you about the question which I think is suggested by your answer, that the banks have all along criticized the present system because it does not require gold reserve. Is that the case, that the banks have criticized this system because it does not require gold ? Mr. W e x l e r . Y ou are not stating my proposition. Senator R eed . I so understood you. Mr. W e xl e r . I say the banks— and I believe I am correct in so stating— do not believe the greenbacks are not a proper subject of reserve money. Let us put it that way. Senator R eed . The banks want what is proper ? Mr. W e x l e r . Yes. Senator R eed . Therefore, the banks want it made gold. Mr. W e x l e r . Gold. Senator R eed . Therefore, I take it the banks could change their reserves and pay gold without injury to the banks or else they would not want it ? Mr. W e xl e r . Y es; they could. Senator R eed . That is what I wanted to clear up and get your opinion on. W hy do you not do it ? What is to hinder you ? Mr. W e xl e r . There is not anything. Senator R eed . It is going to make you better; it is going to make you stronger; and the gold comes into your vaults, and you could lay it aside. W hy do you not do it if it is better ? Mr. W e x l e r . W e do it, as a matter of fact. Whenever we get hold of a gold note, we keep it and put out a greenback. That is the practice in our bank, and I believe it is in all other banks. Senator R eed . Do you get hold of them enough to amount to 25 per cent ? Mr. W exl er . The greenback is in small denominations, and it naturally goes out in order to serve the purposes of trade. Senator R eed . D o you get enough gold certificates so that you c o ',J ' ’’ -cent? Senator R eed . Could all the banks do that? Mr. W e x l e r . They all could if they had a banking system, a central reservoir of credit, through which it could compel these gold 322 BANKING AND CURRENCY. notes to remain in its own vaults instead of the pockets of the people who supply circulating medium in lieu of it. Senator R eed . If it could compel these gold notes to remain in its own vaults instead of in the pockets of the people, of course, it could do it. Mr. W e x l e r . Exactly. Senator R eed . But what is the system that would enable us to do it? Mr. W e x l e r . That is the weakness in our system to-day, that we can not keep the proper reserve money in our vaults, because we have nothing to substitute for it, and have to pay it out. Senator R eed . Mr. Wexler, what is the system by which we could compel it to come there and stay there ? Mr. W e x l e r . The system is this, to give us another note, a bank note, that we can give to the public, so that we can keep these notes and not have to pay them out. Senator R eed . Suppose the public prefers a legal tender or the gold they have, what are you going to do about it ? Mr. W e x l e r . I have absolutely no objection, and Senator------Senator R eed . What would you do ? Mr. W e x l e r . If the public all wanted it? Senator R eed . Not all of them. Mr. W e x l e r . Y ou just simply would not have any facilities for credit at all; if the public took all the gold in all of the banks and carried it around in their pockets and safes and till drawers, you would have no facilities for credit. Senator R eed . Suppose it went down below 25 per cent ? Mr. W e x l e r . If it went down below 25 per cent and we have no means of protecting our credit, our credit would be restricted just to the extent it falls below 25 per cent. Senator R eed . Does it not seem that you have just gone right around and came out the same hole that you went in, on that state ment? Air. W e x l e r . I did not. Senator R eed . You first say that the proper thing is to have 25 per cent of gold ? Mr. W e x l e r . Yes, sir. Senator R eed . Y ou say you could have that under a proper system ? Mr. W e x l e r . Yes, sir. Senator R eed . I asked you what the proper system was, and you say a system by which you can issue credit money. Mr. W e x l e r . Yes, sir. Senator R eed . And then I asked you, suppose that the people preferred the gold ? Mr. W e x l e r . Yes, sir. Senator R eed . Y ou then say we can not do it? Mr. W e x l e r . Exactly. Senator R e e d . That is just the inherent weakness of every one of these systems, is it not ? Mr. W e x l e r . N o. Senator R eed . I s the fact that here is one money bettor than another and it is limited in amount, and when you get into trouble the people all want the best money ? BANKING AND CURRENCY. 323 Mr. W e x l e r . N o, sir; that has not been the experience of any country in the world, and it will not be our experience here. Our clearing-house certificates, on the other hand, furnish a basis of credit; people take them. They were illegal, but used in the panic of 1907. Senator R eed . The people did not take them because of choice. Mr. W e x l e r . N o . Senator R eed . They took them like a man yields a pocketbook to a highwayman at the point of a pistol. Mr. F organ . That is very unfair; that is the most unfair state ment I have heard you make. Senator R eed . I did not say it unpleasantly. Mr. F organ . Y ou did not say it unpleasantly, nor almost any statement that you have made. Senator R eed . They charge me with that all the time. Mr. F organ . The banks were acting under compulsion of the laws created by Congress. Senator R eed . I am not criticizing the banks, but I am dealing solely with the question of why the people took them. They took them because they could not do anything else, and the banks gave them because they could not give anything else, and I have always said— that you will not think I am talking unpleasantly— that the banks did a very wise thing and a very proper thing when they issued those clearing-house certificates, although it was in the teeth of the law; but I am not dealing with that phase of the thought, I am dealing with the remark of Mr. Wexler that the clearing-house certificates were accepted by the people. Mr. W e x l e r . Yes. Senator R eed . W e all know why they were accepted. W e had to pay our grocery bills and we did not have anything else to pay them with. Mr. W e x l e r . And they answered the purpose. Senator R eed . And as far as I was concerned I was glad to take anything and glad to see the banks get through and open their doors in a short time and go to paying out any kind of money. Mr. W e x l e r . Senator, let us see if we can not get this thought directly in the minds of the committee: It is recognized that the gold is the standard of ultimate redemption and the yardstick of measure ment for the whole world. It is recognized that that is the best money. Senator R eed . Yes. Mr. W e x l e r . And it is the basis of credit. Senator R eed . Yes. Mr. W e xl e r . If it is the basis of credit, then credit can exist only so far as that gold rests in a certain mass in a certain place, sustaining that credit. Senator R eed . I s that correct ? Mr. W e x l e r . Yes, sir. Senator R eed . If by the establishment of a bank we can issue a circulating medium that will protect that gold stock instead of forcing us to pay it out to the people who have absolutely no use for it, then we accomplish the one great forward step toward the accomplishment of a great system credit in currency that will answer our purpose. 324 BANKING AND CURRENCY. Mr. W e x l e r . I had a telegram from our bank this week stating that the demand for currency was very great, and that they had had to order $500,000 in currency from New York, Chicago, and St. Louis. W hat was the effect of that operation? W e first had to ship out of our own vaults $500,000 of reserve money. For what purpose ? To pay the cotton pickers and the cane harvesters and the rice harvesters of the South, who would have been equally as well satisfied and whose interests would have been equally safeguarded if we had sent them an instrument of credit— a bank note— and kept that gold there as a basis of credit. W hat did we do next ? In order to replenish our reserve we had to wire Mr. Forgan’s bank and Mr. Reynolds’s bank and our three correspondents in New York, to take out of their reserve that $500,000 of gold to replenish the reserve. W e thereby diminished temporarily our own lending facilities to the extent of that $500,000— four times that on the basis of 25 per cent resei*ve; and subsequently we restored our credit facilities and attacked theirs to the same extent. That is the most uneconomic and expensive proposition for the people of this country that could possibly take place. Senator R eed . Y ou are getting away from the point we are talking about. Mr. W e x l e r . I am trying to illustrate, Senator, just as clearly as possible the reason why we must have a bank note instead of reserve money of any character to circulate among the people. Senator R eed . W hat is back of your bank note ? Mr. W e x l e r . In the first place, there is the capital of the bank which must be lost and exhausted before the note comes impaired; second, we have a gold reserve, as we have provided here, of 40 per cent; that is 40 cents on the dollar of every note outstanding will be there in gold. Then, 100 cents on the dollar of every note out standing will be there in a short time, liquid commercial obligation, resting upon an actual transaction. WRat does an actual transac tion mean? Senator R e e d . I know what you mean. You need not go into the details. You mean somebody has got some goods there in a store that he is going to sell you, and he gives you his note, and he takes that note and he pays his bill with it, etc. Mr. W e x l e r . Exactly; when he sells his goods, he pays us, and that is the process. Senator R eed . Yes. Mr. W e x l e r . These notes that I refer to maturing in 90 days, are coming every day, as they mature, and part of the notes that we have issued, when we have discounted them, must be brought in to pay the note. Senator R e e d . Yes. Mr. W e x l e r . That is going on all the time. There is no other way to get these notes out except by extending them from the book credit that has been created by discount of a note or by somebody bringing me in a whole lot of bullion and saying, “ W e do not want to be bothered with that; give me notes.” That takes place frequently as well, at least, in the Treasury. So you have a note protected by 40 cents on the dollar gold, and a note arising from commercial trans actions at 90 days, and you have a margin of safety against possible I BANKING AND CURRENCY. 325 loss of the capital of the bank. If you believe that note to be good— that is the only proposition in your mind— is it good ? Whether a Government note is better or not does not make any difference; you do not want anything better than what is absolutely good. If that is good and the Government has saved the expense and the respon sibility of maintaining that gold reserve, the cumbersome details of redemption, and these notes will come in, I do not think they will circulate more than five days, as in Canada. I can not see the neces sity of going beyond using your brains and experience in creating a system based upon that theory. Senator H e e d . I was asking you some questions and had a point in mind, and you have got me so far away from that territory that I have entirely forgotten what the point was. Senator H itchcock. While thinking of that, if you will allow me to ask Mr. Wexler some questions. Suppose yesterday, instead of telegraphing these banks for money, your officers had gone across the street to the Subtreasury of the United States, and presented proper and sufficient security, and obtained $500,000 in Treasury notes, upon which you would be charged while you had them out standing, say 4 per cent interest. Mr. W exler . That would be securing credit. I did not need credit; I needed currency. At that time we did not need any credit. We had money in New York. I needed circulating medium instead of credit. I had the money to my credit in New York. New York might have had to do that when I attacked its reserve. Senator H itchcock. What need would there have been for you to carry these great balances in New York, and what need would there be for you to be dependent on New York for meeting this ex traordinary demand, if it is possible for you to go across the street to the Subtreasury and secure the additional currency in the shape of United States notes ? Mr. W exler . I will explain that to you. Of course, under the present law, as you know, we are required to keep our reserve in New York, Chicago, and St. Louis— one-half of it, where we do now keep it; but the trend of our business makes almost every dollar of our money ultimately go to New York and Chicago. Principally to New York. For instance, the cities of Houston and Galveston sell us $200,000 or $300,000 worth of foreign exchange daily in the cottonmoving seasons. W e give the Houston bank credit for it in New Orleans, and supply that currency. What do we do with that for eign exchange after we get it? W e send it to England, if it is drawn on London, and take credit in London. The money we have paid out to Houston or Galveston has been transferred to London, and is to our credit in a London bank. I have got to get it back from London in order to buy more exchange, have I not ? How am I going to get it back from London ? There are two ways: I may telegraph to get gold. That takes too long and is too expensive; so I draw my check on that London bank, payable at sight, and I sell that check in the only large market in the country where foreign exchange can be sold, and that is New York. So I sell it to another banking house in New York, and I get credit for the proceeds of it in my bank in New York. I have now got the money back in this country, in New York. I have got to get it back I 326 BANKING AND CURRENCY. to New Orleans, and I get it back by this very process that I have just referred to, by having New York ship me the money by express or depositing it in the subtreasury at New York and transferring it through the subtreasury at New Orleans to me, which bookkeeping entry costs me 75 cents per $1,000, or $375 on $500,000. That is the present expensive, cumbersome method of doing that business. I can not prevent my money going to New York. If I could sell over my counter New York or London exchange for cash, by reason of our merchants importing foreign merchandise, I would not need then that New Yr ork operation; but we have not in other parts of the country this demand for foreign exchange as it exists in the city of New York. Therefore, no matter what regulation you may make with regard to the depositing of our reserves, a certain amount of my money will go anyhow to New York, and I will have New York depositing in my favor in the regional bank in New York— that will be the process under the new plan— and the regional bank will transmit it to me through the regional bank at New Orleans free. That will be the improve ment through the operation of this new bill. Senator H itchcock . Y ou see no objections to dealing with the subtreasury at New Orleans in this instance, except the trade conditions making it necessary for you to keep certain money in New York Mr. W e x l e r . It goes there; I can not keep it from it. Senator H itchcock . But, as a matter of fact, that is the only ob jection you can see to a plan under which you could secure additional currency direct, when you want it, from the subtreasury on the de posit of security ? Mr. W e x l e r . I could only get it on the deposit of security. Senator H itchcock . Yes. Mr. W e x l e r . But suppose I did not need the credit? Senator H itchcock . That is the only way under this bill or under the bill you propose that a bank can secure money, except by drawing on its own funds. Mr. W e x l e r . It has the money. I did not need credit. W hat I need is something the people can use to pay off. They want to ex change book credit they have with us for some notes. I tell them I have not got the notes. Senator H itchcock . That is a credit just as much as this is that you get from the Subtreasury. Mr. W e x l e r . I can not take that book credit off the books and take it over to the Subtreasury. This man has credit. I have got to give him my gold-reserve money to go out and spend among these darkies for cotton picking when they do not want it. W hy not give them something that answers the purpose just as well and leaves me with this reserve upon which I can continue to facilitate commerce to the extent of that $500,000 that you take away from me to go out in the country ? I have contracted by credit facilities $200,000,000. Senator H itchcock . Under my plan you would not, because you would still have that reserve in the bank. You would simply take some of your portfolio and deposit it with the Government and get the additional currency. Mr. F organ . He does not want to be at that expense. Senator H itchcock . He has just objected to the fact that he has been compelled to contract his reserve and thereby contract the money-lending power. BACKING AND CURRENCY. 327 Mr. W e x l e r . I have got the money in New York, my own money; all I want is to draw it. Senator H itchcock . Y ou have contracted your reserve by sending some of your ready cash into the country. Mr. W e x l e r . I see your point. Senator H itchcock . By the plan you propose you would not con tract your reserve at all. Mr. W e x l e r . The truth of the matter is, when I draw the $500,000 out of New York I restore my reserve, and I do not need any credit. New York would be the one then which needed the credit. Senator H itchcock . Y ou contract the reserve of New York. Mr. W e x l e r . I contract the reserve of New York. I only con tracted my own credit for a day, until I could get mine from New York. New York is in that condition. Senator H itchcock . I s not that a part of the evil the country is suffering from, the fact that 20,000 banks have got the power to contract the reserves in New York at any time, and that to pro duce a stringency, and would it not be better if the banks were not compelled to draw upon New York under those circumstances? Mr. W e x l e r . That would not be the remedy. The remedy would be to give New York somewhere to go and restore its reserves, when it becomes attacked; that is the remedy. Senator Shafroth . D o I understand if this bill goes through in its present form that you would rather for us to require all the banks to keep their reserves in bonds ? Mr. W e x l e r . N o, Senator. I would want all the banks—-—■ Senator S hafroth . Y ou think that the gold reserve, however, is the ideal reserve for banks? Mr. W e x l e r . I do. Senator S hafroth . And you would also want us to require the banks to keep their reserves in gold ? Mr. W e x l e r . It would almost have that effect— I would want them to keep that part of their reserve which they keep in their vaults in gold or its equivalent, which, under present Treasury regula tions, includes silver notes; and the reserves of the regional reserve bank or any other reserve agents also would be required to keep it in gold. . Senator S hafroth . Would you want us to limit your reserves to gold, right now, in this bill ? Mr. W e x l e r . A t this moment? Senator S hafroth . Not my bill, but in the bill? Mr. W e x l e r . I would not. Senator S hafroth . If my bill took effect, you want that limited to gold ? Mr. W e x l e r . Yes, I would; because you are going to have only 50 per cent redemption feature in it. Senator S hafroth . These reserve notes that you have been issuing have not got but 33 J, and we only recommend 40. Mr. W e x Le r . W e do not propose to count them as reserves. Senator Shafroth . The greenback has got a reserve of only 43 per cent, and you count that reserve. Mr. W e x l e r . W e count that reserve. Senator S h a f r o t h . The silver in the silver dollar is worth 45 cents, and you count that as a reserve. 328 BANKING AND CURRENCY. Mr. W e x l e r . That is part of the money we know the people are go ing to carry. You have somewhat confused lawful money and reserve. I say I see no objection to making these bank notes lawful money. If you sell me some real estate for $10,000 I see no reason why you should not be compelled to take these notes in payment. You might make the transaction, and say, “ I will sell you this property for this much money, but I want gold.” I could take you over to the bank with the $10,000 and get you the gold. So, they can be made lawful money without any harm, but do not permit a note, however good, to be bank reserve. Senator Shafroth . Not even the greenback now ? Mr. W e x l e r . Not even the greenback now. The greenback ought to go out of business. Senator S hafroth . D o you think silver ought to go out of busi ness ? Mr. W e x l e r . Silver ought to be a subsidiary coin. If you have this bank note your silver certificates would not be necessary at all. This bank note can supply the place of the silver certificate and of the greenback, and then you have nothing but gold, the ultimate money of redemption, and that would be ideal. Senator H itchcock . D o not all banks of Europe except the central bank count notes reserve ? Mr. W e x l e r . Notes of the Bank of England, and such notes as that ? Senator H itchcock . Yes. Mr. W e x l e r . They have no reserve requirements. Senator H itchcock . Whatever reserve they have is more in notes than in gold. Mr. W e x l e r . Of late, the banks of England have built up quite a lar^e gold reserve; it has been increased from 3 to 10 per cent, realiz ing they were skating on thin ice by depending entirely upon the gold reserve of the Bank of England for their reserve. Senator H itchcock . They take in England notes of the Bank of England in gold just as in France they take notes of the Bank of France in gold. Mr. W e x l e r . They take them over to the Bank of England and get credit for them. Senator H itchcock . Y ou object to something in this bill which, as a matter of fact, is used on the other side. Mr. W e x l e r . N o ; it is not used on the other side. They have no mandatory reserve provision. Now, if you wipe out of here entirely the mandatory gold provision, we will carry the class of reserves which our business requires, and which we believe to be safe. You do not need all this provision with regard to reserve as Senator Nelson wisely said. Senator H ithcock . I s it best to require banks to carry their re serves all in gold? Mr. W e x l e r . If they carry any. The Ch airm an . The committee will stand adjourned until half past 2------Senator B r isto w . Mr. Chairman, I have been waiting several days to ask some of these gentlemen some questions. Mr. R eynolds . Mr. Wexler, who is going to remain here, can answer these questions as well or better than any of the rest of us, / BANKING AND CURRENCY. 329 and Mr. Forgan and myself have postponed our departure for three consecutive days, and I feel I ought to get away. Mr. F organ . Mr. Wexler will be here Monday. Senator B ristow . Can you gentlemen come back later ? Mr. R eynolds . Y es; we will come back later. There are several lines of inquiry I want to make, and I have not had the slightest opportunity, and I want the opportunity to do it. The Chairm an . We will not postpone these hearings in that way. Senator B ristow . Let us have the committee decide whether or not we will do that. The Ch airm an . It will be decided by the committee, but we will not postpone our hearing. W e will be compelled to ask you gentle men to remain to give the Senator from Kansas (Mr. Bristow) an opportunity to cross-examine you. Mr. R eynolds . I s there any appeal from the decision of the chairman ? The Ch airm an . Y es; to the committee and to the Senate itself. (Thereupon, at 1.25 p. m., the committee adjourned to meet at 2.30 p. m.) AFTER RECESS. The Ch airm an . The committee wdll come to order. Mr. Wexler, Senator Bristow, of Kansas, wanted to ask you some questions. Senator B ristow . Mr. Chairman, I of course would be very glad to get the views of Mr. Wexler on a few matters that I wanted to bring up, and I should also be glad to have the opportunity, if it can be had, of interrogating Mr. Reynolds and Mr. Forgan upon the same matters. Mr. W e x l e r . Mr. Chairman, Mr. Reynolds and Mr. Forgan asked me to state that they were compelled to return, and 'that they would be very glad to answer any questions that any member of the com mittee wanted to put to them, by wire or by letter, or to return at any time that the committee desires them to. Senator B ristow . Interrogatories by wire or by letter could not be satisfactory in matters of this kind, in my judgment. I simply want to state that I wished an opportunity to interrogate Mr. Reyn olds or Mr. Forgan upon a general line of inquiry such as I expected to this morning if the time had not been all taken up with other matters. I simply wanted to explain that, Mr. Chairman, because a good many of the questions that I wanted to ask were brought out by state ments made by Mr. Reynolds. I asked Mr. Wade, I think it was, that if it were determined that a general revision of the currency law could not be made at this session, what changes he would suggest in the present Vreeland-Aldrich bill in order to make it serve the purpose of giving elasticity to currency. I will ask you the same question, Mr. Wexler. Mr. W e x l e r . Senator, I have not read the Aldrich-Vreeland bill over since it was made a law, but my recollection of the bill was that it was enacted at that tune because the party in power then realized they could not get out a currency measure, and they thought that I 330 BANKING AND CURRENCY. something of that kind ought to be passed or they might not be very much blamed, and they brought out this Aldrich-Vreeland bill and printed all this circulation. This circulation required that it be secured by a certain class of collateral and that it pay interest at the rate of 5 per cent for certain papers and 6 and 7 per cent for others, and it goes on up to a prohibitive rate. Just to take the currency as it is and make it answer the purpose, is your question, is it not ? Senator N e l s o n . It provided first for the formation of a currency association. Mr. W e x l e r . Yes; it contained first the provision that before a bank could get any money it would have to go before this currency association and expose its condition. It should have the right to go there to the proper authority stipulated in the bill and obtain these notes by depositing the classes of security which the Government requires. If the security is of the character that the bank could not comply with, then it would have to be amended so as to enable the banks to take out this circulation. Then the rate of interest would have to be materially reduced because it would only be used in an extreme emergency. It is a fact that any bill that provides only the means of relief in emergency is a bad bill, because it attracts the attention of the whole country and the whole world to your con dition, and that accentuates it. In order to have it really effective, you must be able to put it into force all the time, without any jar or any friction, so as to call the attention of nobody to the condition. W e have such a large population and have so many banks, and fear spreads so rapidly, that everything possible should be done to avoid exposing any condition requiring assistance, and the assistance should be made so readily available that if the security is sound it can be had upon very short notice without any complicated red tape which is incident to most Government transactions. Senator B ristow . A s I understand you, then, if provision were made whereby the bank could go direct to the source without incur ring any publicity, and the interest rate were reduced, it would provide a currency that could be used for emergencies ? Mr. W e x l e r . Yes, sir. Senator B ristow'. Satisfactorily ? Mr. W e x l e r . Well, not ideal by any means, but workable. Senator B ristowl That would be a currency, then, based upon assets for temporary use ? Mr. W e x l e r . Yes, sir. Senator B ristow . T o relieve a stringency ? Mr. W e x l e r . Yes, sir; it would be a loan. It would have to have a fixed maturity; otherwise it w ’ould have to have a gold reserve behind it. If you simply issued it without any fixed maturity or without any reserve, it would not no; it would be a disastrous inflation. Senator B ristow . Y es; I understand. It would be in the nature of a loan. Senator H itchcock . A s I understand, the principal complaint against the present currency system is its inelasticity. What you want is a currency that is more elastic, that will contract and expand with more ease and greater facility? Mr. W e x l e r . Yes, sir. BANKING AND CUBBENCY. 331 Senator B ristow . Such a currency as you have suggested would relieve the weakness of our present system, would it not? Mr. W e x l e r . Such a currency as the Aldrich-Vreeland bill, you mean? Senator B ristow . Modified as you suggested. Mr. W e x l e r . N o , sir; I do not think it would. Senator B ristow . W hat is the difference between that currency and the currency that you propose on these assets ? Mr. W e x l e r . The difference is this, that the currency that I pro pose to be issued by the bank would, in the first place, be secured by a gold reserve. In the second place, it would be put out only for the rediscounting of paper, not for loans direct to a bank. The bank would have to have a particular class of paper. Senator B ristow . If you will excuse me just a moment right there. That goes to the stability of the currency that is in existence. You spoke of a gold reserve. Now, there is no complaint as to the sta bility of the currency which we have now, as I understand it; it is good enough. Mr. W e x l e r . It is good. Senator B ristow . This currency which you suggest would be no better currency than what we already have; but what you want is not a better currency, but a currency that is more elastic in its use ? Mr. W e x l e r . Yes, sir; one the quantity of which in circulation adapts itself exactly to the requirements of commerce, and which is so organized that no power is strong enough to keep it in circulation one minute longer than the trade requires. Senator B ristow . That is the point. That is, you want to give it elasticity. This currency which would be issued under the VreelandAldrich Act, as you suggest, would meet that requirement, would it not ? Would it not give elasticity ? Mr. W e x l e r . Not at all. Senator B ristow . W h y would it not? Mr. W e x l e r . Because it is not, from my standpoint, currency at all. Senator N elson . It is a bond-secured currency. Mr. W e x l e r . It is nothing but a bond or note secured loan, at a rate of interest sufficiently high to make it unprofitable for the bank to keep it any longer than is absolutely necessary. It is not a cur rency. Senator B ristow . I understood you to say that you wanted a cur rency that would only be in existence— afloat, if I may use that term— so long as it would be of use. It would be automatically retired------Mr. W e x l e r . I do not mean actually needed by the banks, but by the people of the country. W e are merely the instruments of disseminating credit. W e are dealers in credit. But I mean a cur rency that will meet the requirements of the whole people, that no bank, however powerful, no aggregation of banks, however powerful, can keep one minute longer than the commerce of the country requires it. It must have that inherent quality in itself to contract itself. Senator H e e d . H o w do you get that inherent quality? Mr. W e x l e r . Y ou get that inherent quality by the fact that when the condition that caused the emission of that note passes by, the note itself comes in of its own accord. 9328°— s. Doc. 232, 63-1— vol 1----- 22 332 BANKING AND CURRENCY. The Ch airm an . W hat you mean is that the cotton pickers, when they demand money for picking cotton, will put those notes back into the merchant’s till in exchange for their merchandise, and then the merchant will retire it? Mr. W e x l e r . Certainly. Senator R eed . Suppose you have some issue done by the Treasury Department, done at the Government Printing Office instead of a private printing office, and it came back in here, would you not retire it in the same way? Mr. W e x l e r . N o , sir; you have no means for retiring it. Senator R eed . Y ou have the same means exactly that you have in the other. Here is a note that comes out of this corner of the room and here is one that comes out of that corner of the room. Your business is to retire either one of them. You retire them because they come into your bank through the trade and commerce. The same streams run through on the same level and in obedience to the same law. Mr. W e x l e r . There is no doubt in the world, and there can be no argument, but what the Government is in a position to establish a bank it if wants to do it that will be a central bank in effect, and it ought to have the same kind of machinery for emission and retirement of credit notes and the same method of lending money. It is just a question of whether you want to put the Government in that fine of business or leave it to the banks. You have the power to do it. Senator R eed . Y ou get away from the question by dissertation. Mr. W e x l e r . N o , I think not. Senator R eed . I am dealing with one thing, just one thing. You said a moment ago, as I understood you, that you could issue the money through the banks, and it went out in response to the demands of commerce. Then it came back in, and you could retire it, and you considered that as an advantage of the bank issue over the Gov ernment issue. Now suppose that the bank goes to the Government and gets the same amount of money. It pays it out over its counter in tfie same way and for the same purpose, and when the cotton planter has harvested his crop and got his money he comes and puts it into the same till in your bank and it goes to the same man. W hy are not the two systems, as far as that is concerned, parallel ? Mr. W e x l e r . 1 have told you it can be done; if you provide the machinery for doing it, you can do it. Senator R eed . All the machinery that is to be provided is the method by which you get the money from the Government and the method by which you pay the Government off. Mr. W e x l e r . Exactly; and that must be by the establishment of various branches all over the United States, wherever that may be necessary— not to have to run up to Washington to do it. Senator R eed . I understand that. Mr. W e x l e r . If you give them the same machinery for passing upon credit, for issuing notes, for retiring notes, the same availability to the general commerce of the country, there is nothing to prevent the Government doing it, if it wants to go into that line of business. There is nothing to prevent the Government going into any line of business, if it wants to. Senator B ristow . A s I understand the method that you gentlemen have suggested, it is that when the bank needs currency, because of BANKING AND CURRENCY. 333 some pressing condition with a branch bank, or with a central bank system, or a regional bank system, that bank goes to the regional bank or the central bank and gets the currency by hypothecating some of its notes or its assets— commercial paper ? Mr. W e x l e r . When it gets credit it goes to the bank and hypothe cates some of its commercial paper, and gets credit. That is entirely distinguished from when it needs circulation. Do you catch me up to that point? Senator B ristow . Yes. Well, we will take credit. Mr. W e x l e r . W e get credit. Senator B ristow . W hat is the nature of this credit which you get ? Mr. W e x l e r . I will give it to you. W e have loaned all the money we are permitted to loan under the law, by reason of the fact that our reserves do not admit of any further loans. Now, we need credit, and we go to the bank with our portfolio and we rediscount it. It gives us credit on its books for the note, the amount coming to us from this rediscount. We have restored our reserve by reason of the fact that we have a credit— the regional bank. Senator B ristow . Your reserve had not been disturbed, because you can not disturb it. You simply go to get money. Mr. W e x l e r . W e have a surplus reserve. Senator B ristow . This credit is in the form of bank notes? Mr. W e xl e r . It is in the form of the credit of that bank. Senator B ristow . W hat good does that do in paying your cotton pickers ? Mr. W e x l e r . I have got a credit in the bank either to check against or to send out to the cotton pickers. I go over to the bank, present my check, and they pay me out in the notes of the bank, just the same as my check calls for. Therefore I have done both things for which the bank is organized— I have used my credit and I have used the circulating medium. I have these notes and respond to the requests that are made upon me by my corresponding banks or by customers all over the surrounding country, and I ship these to-day by express or mail, as the case may be, or pay them over my counter. Senator B ristow . Y ou say you get credit that was in the form of bank notes? Mr. W e x l e r . Ultimately. It was not originally. It was in any form I wanted it in. Senator B ristow . Are the book credits of any account to the cotton pickers ? Mr. W e x l e r . Not to the cotton pickers, but they were to me. I might have to use part of them for cotton pickers. Senator B ristow . It was of use to you because you could get notes for it ? Mr. W e x l e r . Yes, sir. Senator B r isto w . Y ou are short on currency in your bank; you ought to have the circulating medium. Y o u have to get it in order to supply the demand, and you take a part of your surplus to the branch bank of any kind, to a regional bank, or whatever you want to call it, and that bank has authority, under the law, to issue n otes; and it issues the notes and gives them to you, and you leave with it your securities ? 334 BANKING AND CURRENCY. Mr. W e x l e r . Yes, sir. Senator B ristow . A s a guaranty for the payment of these notes, which ultimately is returned ? Mr. W e x l e r . Yes, sir. Senator B ristow . And that relieves the stringency; and that is what you call elasticity, is it not ? Mr. W e x l e r . Y ou are confounding the propositions, Senator, with------Senator B ristow . N o ; I do not think I am. Is not that what gives elasticity— your ability to get those notes to pay the cotton pickers ? Mr. W e x l e r . That does not give the elasticity. The ability to get the notes saves me from paying my reserve. It would destroy my lending ability. The Chairm an . W e will take a short recess for the purpose of a roll call. (At this point the committee thereupon took a recess for five minutes at the conclusion of which the following proceedings were held:) Senator B ristow . Mr. Wexler, I was suggesting, as I remember, when the roll call occurred, that this currency which you secured from the bank in an emergency was that which was necessary in order to make our present system more elastic ? Mr. W e x l e r . That is entirely wrong, Senator. I have not taken that money out in an emergency. Let me see if I can get the idea straight to you. I might have a requirement for currency without the slightest requirement for credit. In other words, I might have to my credit in the regional bank, on deposit with the regional bank, a million dollars. That is, on their books our bank would stand in credit $1,000,000. But I do not want any more credit; I have got enough. I need notes to send out into the country, so I simply go over there, draw, mv check against my deposit and get the notes, you understand, and send those notes out into the country. Senator B ristow . W hy can you not do that now? Mr. W e x l e r . Because the notes that I send out now— I do do that now. If I get a demand, now, for currency, I go into my vault and take reserve money out. Senator B ristow . If you have this million dollars credit, why do you not check against it ? Mr. W e x l e r . They can not pick cotton on checks. I have to send the money. Senator B ristow . The trouble is, Mr. Wexler, that instead of my confusing this matter, if you will pardon the expression, I think you are confusing it. Mr. W e x l e r . Well, perhaps I am, Senator. Senator B ristow . Y ou say that you do not need credit because you have credit; what you want is currency ? Mr. W e x l e r . Yes. Senator B ristow . And having credit on a reserve bank, you draw your check on that bank and ask for currency. That bank sends it to you. That is what you do now ? Mr. W e x l e r . That is what I do now. BANKING AND CUBRENCY. 335 Senator B ristow . If you can do that now, then wherein should there be an embarrassment because of the inelasticity of the currency ? Mr. W e x l e r . I am glad you asked that. The withdrawal of that money by my check on my correspondent has taken that much of his reserve money away and reduced------Senator B r isto w . H ow has it taken that much of his money ? Mr. W e x l e r . It is his reserve. This gold that he is sending out, or its equivalent------Senator B r isto w . I am not discussing the proposition from the standpoint of breaking into your reserve. This is not a reserve ques tion. It is a question of elasticity. Now, if you want a less reserve or no reserve, that is a different question. Suppose you do not have any reserve. Mr. W e x l e r . Let us get around to the elasticity, then. The notes that you now circulate have no elasticity. Our bank notes are based upon bonds, and when they come back to us we give them out just as soon as we can, because when we have them on our hands they do not count as reserves, so we try to get the people to take them. There is no means of their retirement except by taking them down to Washington and selling your bonds. Senator B ristow . That does not answer the proposition. Mr. W e x l e r . S o that the present note issue is inelastic. Senator B ristow . It is stationary; that is true. Mr. W e x l e r . The new note that we propose to have issued will bo a note that will go out when it is sent; it will be redeposited in a bank. When it gets back to whatever bank it may get to, that bank will redeposit it with the regional bank, and the moment it does it has gone out of business, it is canceled, it is done, it is finished. Just as much so as if you owed a man $1,000 and you paid him and you cancel your signature on that note, that note is finished. The Chairman . I think I can perhaps clear the matter for the Senator. When you draw your check on a New York correspondent, and they send you currency for the cotton pickers, although it can not take their reserve, it will take their amount above the reserve and bring it down to the reserve point; and the moment they get to the reserve point they can not respond to your check without im pairing the credit system. Senator B ristow . I understand. W e will get to that. That is another step. The currency we have is rigid. That is the complaint ? Mr. W e x l e r . Yes, sir. Senator B ristow . Y ou want a currency that you can swell at cer tain periods of the year because of business demands, etc. ? Mr. W e x l e r . That the people can swell. W e are simply the instruments— their intermediaries. Senator B ristow . Of course I understand that. You want this currency to be issued when it is demanded, and that currency, v hen it is no longer demanded, automatically retired ? Air. W e x l e r . Yes, sir. Senator B ristow . Congress has provided a law by which that can be done, but you say that it has certain requirements that make it impracticable of use ? Mr. W e x l e r . Yes, sir. Senator B ristow . I asked what changes were necessary in that law in order to make it practicable so that that currency which is now in 336 BANKING AND CURRENCY. existence could be used for the purpose when the business of the country demanded it, and you say it can not be done, but that if a bank was organized and the bank could take exactly the same security which you propose and give you the additional currency on those securities, and you could use that currency from the bank to relieve this stringency, as soon as the stringency was over it would auto matically retire. W hat I asked was, W hy should not the currency which we now have be used in the same way and what amendments to the present law would be necessary in order to make it available ? You do not seem to think that any amendments should be made. Mr. W e x l e r . Oh, yes; I said all the time that it is possible for the Government to go into the banking business and to establish a bank if it desires to. Senator B ristow . N ow , just a moment. W e do not propose to put the Government in the banking business at all. Mr. W e x l e r . It will stop with these notes— just with these Aldrich-Vreeland notes. Senator B ristow . This is a currency question, directed to giving elasticity to the currency. Mr. W e x l e r . Yes, sir; I see your point. Senator B ristow . W hy could not that currency be used for that purpose; and what amendments in the present law are necessary in order to meet that requirement without breaking up the present currency system which we now have ? Mr. W e x l e r . I say it could be amended in this way: In the first place you would state that no one should get these notes who did not give in lieu of them commercial paper maturing not beyond 90 days. In the second place you would have to put behind them a reasonable gold reserve, say of 40 per cent, so that if any of the notes were presented for redemption in gold you would be prepared to redeem them in gold. In the next place, you have to establish all over the United States agencies for the carrying on of this business, with a competent man to pass upon the value of this paper and who would also furnish at the same time and at the same place redemption facilities where the notes could be turned back. If you amended it in those three instances and eliminated this interest-bearing feature that you have here, you would have an elastic note that would flow out according to the requirements of credit and would flow back as the demand for credit receded or expired. Senator B ristow . I am very much obliged to you. Mr. W e x l e r . Then you are establishing a central bank with branches all over the country when you have done that. That is the effect of it. You can not get away from it. It would be by the Government instead of stockholders. Senator H itchcock . It is not receiving any deposits. Mr. W e xl e r . N o. Senator H itchcock . Y ou are simply making currency available for the banks ? Mr. W exl er . Therefore, the gold that you require against the notes— the reserve— you have got to get from some other channel. Under the bank scheme one reserve is provided by the deposits that are made by the banks. If you do not do that, then you nave a cen tral bank that will have to provide the gold by some other means, either by taxation or appropriation or by selling bonds; so that in I BANKING AND CURRENCY. 337 effect you have a central bank providing a gold reserve simply from other channels than from the much easier and more economical chan nel of concentrating reserve for that purpose. Senator B ristow . Y ou say 1 eliminating this interest-bearing pro 1 vision.” Do you think that they would retire automatically if the interest-bearing provision was stricken out ? Mr. W e x l e r . With the amendments that I have suggested, ab solutely— just as freely as they were in the bank. Senator B ristow . Y ou think they would? Mr. W e x l e r . Yes, sir. Senator B ristow . Y ou think there would be no danger of inflation ? Mr. W e x l e r . Absolutely none, as long as you make the gold re serve and the character of paper that could be discounted. There is not the slightest chance of inflation, except one, and that is if you should discover in this country an enormous gold mine or a number of them that would produce a vast additional quantity of gold, or if the balance of trade would be enormously increased for a number of years and much gold would come from abroad. Then you could have inflation, because you have so much more free gold available. But you would need inflation then because the country would be so prosperous. Senator R eed . D o you know any way by which that free avail ability of gold could be encouraged ? Mr. W e x l e r . No. Senator B ristow . I would like very much to see that myself. Mr. W e x l e r . It has been going on for the last 50 years. Senator B ristow . That is exactly what I wanted to get at. You believe that with this amendment that you have suggested in the Vreeland-Aldrich bill the individual banks would deal direct with the governmental agency ? Mr. W e x l e r . Yes, sir. Senator B ristow . And secure from the Government the currency that was necessary ? Mr. W e x l e r . Yes, sir. Senator N elson . Upon commercial paper. Mr. W e x l e r . Upon commercial paper. The Government would do everything, then, except receive deposits that it has pro vided that this central bank or these regional banks may do— perform every function except the receiving of deposits. If you had the receiving of deposits to-day you would make it still better and you would have a very good institution. Senator R eed . Mr. Wexler, will you be kind enough to put on a piece of paper the suggestions as to the things necessary to be done to make the present Aldrich-Vreeland Act workable far the purposes we have in mind; that is, furnishing currency in times when there is a demand for it, not simply emergency, but demands ? I would like to have that in that form if I could have it. Mr. W e x l e r . I will have to have a copy of the bill to do that. Senator R eed . I will get that for you. Mr. W e x l e r . It would be very much better to write it all over new than it would be to amend the bill. W hy this strong attach ment for the Aldrich-Vreeland bill? Senator R eed . It is the system now in existence. •* 338 BANKING AND CURRENCY. Mr. W e x l e r . But it has never been used. It is simply an emer gency measure by a party not in power to-day. They admitted it. They wanted to have an excuse------Senator R eed . I wanted to give you a text to keep you at it. I am afraid you might get off onto some of these theories------Mr. W e x l e r . Oh, no; I would go right along in the line of a bank. I am perfectly willing to undertake it, to the best of my ability. Senator B r isto w . It has been refeired to here that commercial paper was 60-day paper, or 90-day paper, and I think the bill pro vides for 45-day paper, or it did as originally introduced. W hy is it necessary to confine securities to 60 or 90 days ? Mr. W e x l e r . Because the commercial transactions of the country are usually based upon paper running not beyond 90 days. It is strictly a commercial transaction. I mean to say, where a man ex changes his credit for the credit of the bank for his temporary re quirements, and then, as you are using bank notes, giving a credit which may be taken out in bank notes, you should have something that is very liquid, and that you can calculate upon coming bacK within a reasonable length of time, a short tim e; by which means you could, if business is going to quicken, contract if you desire. The average length of time of these notes that are going to be discounted in a bank of that character, whether owned by the Government or by the banks, will be probably very much less than 90 days. Every bank will naturally discount the greatest number of notes coming due within the shortest time that it has in its portfolio, because it would be more profitable. Senator B ristow . But you have in mind, now, the sale— I use terms that I am more familiar with, not being a banker— the sale of quickly maturing paper that, theoretically, could be collected. Mr. W e x l e r . Yes, sir. Senator B ristow . S o as to discharge the debt ? Mr. W e x l e r . Yes, sir. Senator B ristow . If this currency is to be automatically retired when its use is no longer demanded, why should the basis of security upon which it is issued mature before it is retired, or within 30 or 90 days ? W hy would not a bond of the State or of the Government, or a farm mortgage or any first-class paper, serve the same purpose? Mr. W e x l e r . For the raison that the paper maturing within 90 days the maker of the paper must meet himself. If you give me your note for $ 1,000, due in 90 days, I rediscount that note with the regional bank; I indorse it; I do not pay the note, only in case of your default. You pay the note. If you come to me with a bond maturing in 50 years of a State or of a county or of a school board, or anything of that kind, the maturity of it is so long off that, in the ordinary operation of the bank, it would be worked out in the ulti mate. The note would stay out just as long as the obligation would stay out; or if the note was presented sooner than the obligation was presented, you would only have 40 per cent of gold to pay it with, and you would soon have all that gold taken out. Senator R eed . If you went to the bank and borrowed money on Government bonds.as collateral, when your obligation matured you would have to take part of the money to pay it. Mr. W e x l e r . Yes, sir. BANKING AND CURRENCY. 339 Senator R eed . But if you had short-time paper, before it became due the short-time paper would be paid and you would not have to pay it ? Mr. W e x l e r . That is the idea. I will make it a little clearer. Suppose all the paper that the central or the regional bank dis counted was due in five years. Say it was $10,000,000, due in five years. It issued its notes when it discounted that paper, and those notes circulated around among the people, and through their transac tions got back to the window of the bank. W hat has the bank got to do it with ? Forty cents on the dollar in gold and 100 per cent of the paper maturing in five years ? So you have got to sacrifice this other paper to meet the remaining 60 per cent. There would not be anybody to go to to get it. Then you have to rediscount it or sell the security or default. Senator B ristow . That is theoretically very sound. Mr. W e x l e r . Y es; and I believe that would work out. Senator B ristow . But as a matter of fact in the practical business of the country— I do not know" how it is in the large cities— the 6,000 of the 7,000 national banks do not expect their 90-day paper to be paid when it is due. They carry it on from 90-day periods for years, sometimes. Mr. Wte x l e r . But they expect a sufficient percentage of it to be paid to meet the natural demand that they are going to have for money. If they did not, they would be broke. You will find that the average bank that breaks has got 90 per cent of uncollectible paper, and perhaps every dollar of it is good ultimately. Senator B ristow . D o you think that with this other class of securities hypothecated to this currency there would be any loss of the short-time paper taken up in the bank than if that was the paper that was hypothecated? Mr. W e x l e r . I do not exactly get that. Senator B ristow . Suppose that the bank gets $100,000 worth of these notes and puts up, instead of 90-day paper, farm mortgages? Mr. W e x l e r . The bank puts them up with whom? Senator B ristow . With the Government or with the regional reserve bank, or with the central bank, whichever system you might adopt. Mr. W e x l e r . Farm mortgages due when? Senator B ristow . Oh, anv time within a year to five years. Mr. W e x l e r . They would not be allowed to take it. Senator B ristow . Suppose they are allowed ? Mr. W e x l e r . Well, suppose they were. Senator B ristow . I know they are not now. The fact that that bank had the farm mortgages paid which were as valuable to it as any other securities, instead of 90-day paper, that would not result in less 90-day paper being paid when due than if it did not have the farm mortgages. The paper would be paid whether it was hypothe cated or not ? Mr. W e x l e r . Yes, sir; if it was due, I presume. Senator B r isto w . If the Government should issue this currency under an act similar to the Vreeland-Aldrich Act, would it not be more convenient for the Government to require bonds or long-time paper or permit long-time paper and short-time paper ? 340 BANKING AND CURRENCY. Mr. W e x l e r . It would be more convenient for the Government in the fact that it would save investigation by the credit system that it would have to have in order to pass upon notes, but it would not have a sound circulating medium. The Government might bo in the same position that the bank would be in if it would have a vast amount of long-time paper outstanding against a vast amount of notes due on demand and only 40 cents on the dollar, of gold, to take it up with. How would the Government provide for the other 60 per cent when these notes came back ? Senator B ristow . That is upon the theory that the demand of the short-time paper can always be realized upon ? Mr. W e x l e r . Yes, sir. Senator B ristow . Of course, with your wide experience you know that it can not be realized upon during close times, because the men that make the notes can not pay them when they are due. Mr. W e x l e r . Experience showed that during the panic of 1907 nearly every dollar of the short-time commercial paper paid out through note brokers, which amounted in the aggregate to millions of dollars of the class of paper which is used by a great many banks as a secondary reserve— that is, they know it is going to be paid— was paid at that time. The Federal reserve bank, the central bank, would get its money in any event, because the bank discounting it, having indorsed the paper, even though it had to renew the note of John Smith which had matured in 90 days and was not paid, it would go over to the central or regional bank and take up that note. In a week afterwards it might come and bring John Smith’s new 90day note and rediscount it. But in the meantime the Government, if you have a Government bank, or the central reserve bank, or the regional bank, would have its money, and there would be nothing to prevent its getting its money. Senator B ristow . Take the panic of 1907. The Armour Packing Co. had a large quantity of this commercial paper— that is what you call it, is it not ? Mr. W e x l e r . Yes, sir. Senator B ristow (continuing). Scattered all over the country. They were seeking a market for it. I think John Wanamaker had a great deal of it. Country banks were being solicited to take it. That is what is called commercial paper ? Mr. W e x l e r . Yes, sir. Senator B ristow . WT hen that is due it is paid, and the money to pay it is paid out for more paper just like it ? Mr. W e x l e r . N o ; I will have to differ with you on that. Of course there are some firms in connection with which that may be true; but let me tell you that for the last six months there has been a liquidation of notes and also of commercial paper, without the ability to float a new paper in lieu of it. That paper has been retired. I know one city where there has been considerable discrimination on the part of the bankers all over the country against the paper on account of the tariff and the fear of the effect it might have upon that section. They have been unable to rediscount this paper dur ing the progress of the tariff bill, and they had to retire it themselves, and they have retired it. They had to pay it off. And that is what the solvent merchant can do when he has "to do it. He may have to I BANKING AND CURRENCY. 341 make sacrifices, he may have to sell commodities or securities, or whatever he may have, but he meets it, because his whole future and commercial standing depends upon his meeting it. He does not know who holds his note or whom to go to to get extension. Senator B ristow . I s not the very purpose of securing this elasticity to give him relief under circumstances of that kind, so that he will not be forced to meet an abligation which he can not meet without serious sacrifice ? Mr. W e x l e r . Yes, sir. Senator B r isto w . That is what we want elasticity for. Mr. W e x l e r . That is what we want a credit institution for. Senator B ristow . Of course, I have always had in mind taxing this surplus currency so that it would be forced to take up part of this taxa tion. If there were a tax put on notes of that kind, then as soon as the merchant or the business man of whatever nature could get the money and get out from under the burden of this additional interest he would do it, and it would then retire as soon as the financial condition was so that it could be done without a great sacrifice. Mr. W e x l e r . In a sense the tax would be paid, but it would be better accomplished by the rate of interest that the Government or bank would ciiarge upon the discount. That would in one sense be a tax. Senator B ristow . It would be the same thing, only getting at it in a different way. Mr. W e x l e r . It would be getting at it in a more sensible, business like way. Senator B ristow . I have had in mind that, without discriminating against long-time paper in favor of the short-time commercial paper, that the same object could be met and that these notes would be retired and the obligations would be met by the sale or the contracting of the line of business that the men are m, in order to get the cash without too great sacrifice. Mr. W e x l e r . My testimony, I think, would show the very great danger of taking long-time paper against demand obligations. Senator B r isto w . I have heard that. Mr. W e x l e r . I think that is quite conclusive. Let me call this thought to your mind, which I know you have considered. You fear that a great number of people throughout the country who were not in a position to furnish short-time paper might not have facilities. Is not that your idea ? Senator B r isto w . Yes. Mr. W e x l e r . Tho answer to that is this, that the remainder of tho resources of tho banks throughout the country would be available for longer maturing paper, in which all banks are willing to invest a certain amount. The trust companies, savings banks, and national banks would take care of a reasonable demand of that sort, as much as there ought to bo a demand of that sort. There should not be too much of it. The ovolution of it is this: That section of territory south of tho Ohio River and west of the Mississippi is in a period of groat development. Tho section is more or less m a crude state. If we had an mstrument of credit, such as this bank which we are endeavoring to have established, where every man knew that he could got the money that he needed for his growing business require ments, he would invest his surplus money and his profits in that 342 BANKING AND CURRENCY. development of his own section; he would feel safe in doing so, because he would know that the money he needed to carry on his growing business would always be available to him by reason of this immense reservoir of credit. If that was used for that particular purpose, and not for the purpose of long-time investment, it would be a most desirable condition. In other words, suppose I am a merchant in business, and this year I have made a considerable amount of money. I have a certain amount of credit. If I knew that I was certain to have people to go to to get that credit that I am entitled to, I could afford to invest that surplus profit in a fixed investment which would assist in the upbuilding of my section. But without such a reservoir of credit I must keep this money on hand to take care of the pos sibility of my not being able to get the credit when I want it. Such is the fear that the business man of the United States labors under to-day, because he can not predict with any degree of certainty what the financial conditions are going to be for six months ahead. Senator B ristow . I will give you my impressions, so that you may correct them if they are wrong. It seems to me that legislation such as you suggest is in the interest of the concerns that float short-time paper, like the Armour Packing Co., John Wanamaker, Woodward & Lothrop, down here in Washington, and other big concerns of that kind, that put it out on the public in order to get the money that they need, and they sell it wherever they can find customers, through brokers, etc. The business man in a small way, out in the country, deals in a different kind of security. He has no reputation or a reserve so that he can borrow money from anybody. He goes to his bank and he borrows the money, or he gets it in various ways. He may mortgage his building, or his farm for money that he needs. That security is as good as any security. It will be paid. Behind a farm mortgage is the real estate itself, and if the mortgage is conservatively made there is never any better from the point o f security. A State bond, where the finances of the State are properly managed, a county bond or a city bond, where the finances are properly managed, have a fixed value as much as any other kind of property that we nave. If means are provided so that these additional notes are to automatically retire because it is not profitable to keep them out in dull times, when there is plenty of money, why is not that security, as the basis of ultimate payment, a sound security, instead of this that floats about in the hands of brokers? Senator N elson . Will you let me, in that connection, make one suggestion ? There are a class of bonds that are listed on the stock exchange, railroad bonds, utility bonds, and, I think, city and county bonds, that there is always a market for. There is a public market where you can always dispose of those securities, and we have no such stock exchange where we can always market a farm mortgage, no matter how good it is. If we had such a stock exchange as that, the case would be a clear one. Then it could always be converted into money. I merely suggest that. Mr. W e x l e r . Even then the paper that would be taken, secured by that class of stock, if the demand note is going to be issued against it, and no matter what the short period— because you should alwavs bear in mind that you have a demand obligation against it, with only 40 per cent to pay for it— the demand obligation must be of a liquid BANKING AND CURRENCY. 343 character. You might take a 90-day note secured bv the bond of the city of New York, which is listed, and that would be quite as convertible as a piece of convertible paper, but you do not want to use the machinery of a bank of issue for investments in fixed securities. Senator B ristow . But you are speaking of a permanent currency, it seems to me, or a permanent condition, instead of a temporary condition. This inflation is to meet an important demand, and if you press the short-time paper for immediate payment when it is due you do not relieve the stringency at all, you merely accelerate it. Mr. W e x l e r . Senator, that is not a fact. You do not press the short-time paper for payment. The short-time paper— this com mercial paper—-pays itself. Everybody meets that hind of paper. That is the kind of paper that is put out for such purposes as that. A merchant goes to New York to buy his goods. He brings them to his local town. By discounting his bills he can make 2 per cent more than he could borrow the money at. He goes to his bank and discounts his note for $3,000, buys his exchange, and pays his bill. Constructively, he is hypothecating or pledging that $3,000 of mer chandise he bought with that bank. He does not actually do it; he constructively follows the operation. The Ch airm an . And he gets the money out of the pockets of the people. Mr. W e x l e r . He gets the money out of the deposits, which are the people’s money. Senator N elson . He gets it from the sale of the goods. The Chairm an . The people really pay his bills in the goods they buy from him. Mr. W e x l e r . That is the next operation. Now, he proceeds to sell, and by the end of 90 days he has sold to the people $3,000 of this merchandise. He takes those bills and meets that obligation. That is a current trade transaction. That is the kind of business that you want to encourage in this country, so that every merchant in the United States who conducts his business properly can feel that he can always obtain his reasonable credit requirements. Senator B ristow . I do not want to carry this to an unreasonable length at all, but I realize the force of what you say as to a local merchant when he goes and discounts the 2 per cent for cash. It is profitable to him to take that discount, because his discounts in the course of a year will amount to a great deal more than the interest that he will pay to local banks. Mr. W e x l e r . Exactly. Senator B ristow . And he makes the note and discounts it. That is the way they all do. But the practical truth is, in our section of the State, that nine-tenths of the merchants use that money that they borrow as capital; that is, they continue to discount over and over, and they renew their notes until they have given enough to take up those notes, and that they will probably enlarge the business and make some more. Mr. W e x l e r . I realize there is a good deal of that. Senator B ristow . My contention is that while theoretically it is 90-day paper, as a matter of fact they can not pay that at all unless they foreclose-— Mr. W exler (interrupting). But there is always a sufficient num ber of them who do both. They do not all pay them. W e have the 344 BANKING AND CURRENCY. same condition. Our loans amount to about $15,000,000. W e have a great many people who constantly renew their notes. While we do not like it, we do it. But there are a great many who meet their obligations promptly, and our notes paid off are frequently more than our new loans. There is nothing inherently wrong in that, so you need not worry about that. Senator B ristow . One more question. The chairman of the com mittee wants to interrogate another gentleman who is present. But I think it was Mr. Reynolds or Mr. Forgan, 1 do not remember which, or it might have been yourself, this forenoon, that said this currency, these bank notes which you are advocating, might be used as legal tender for the payment of debts, the purchase of property, land, etc. Mr. W e x l e r . I said that. Senator B ristow . The remark was that the law could make a man take them for the purchase of a piece of land. Mr. W e x l e r . Yes, sir. Senator B ristow . D o you think the Government would be justified in making a citizen take a note as payment for any kind of property that the Government itself would not guarantee to be good ? Mr. W e x l e r . I think that the Government has a perfect right to make these notes legal tender, and that does not prevent two indi viduals who are tradmg together from making their own transactions. You may be selling me a piece of land. You say: Though these notes are a legal tender, I will sell you this land, but you may pay me in gold or silver or corn or any other thing. A great many bonds are payable in gold of the present weight and fineness. Nearly all of them are. But there can be no legal objection to the Government making these notes, if they so desire, legal tender. Suppose that the transaction was not made with gold behind it, and the notes are legal tender, and when you come in to sign the act the man will say, “ I want gold.” You say, All right; come over to the bank with me. and give you gold. I will convert these notes into gold There will be no difficulty about that. There will be no hard ship upon anybody if the notes are made legal tender, so long as they do not become reserve. Senator B ristow . D o I understand you to advocate that the Government authorize a bank to issue notes------Mr. W e xl e r . The regional bank. Senator B ristow . Yes. And that the Government does not guarantee those notes at all ? Mr. W e x l e r . I think it would be simply painting the lily. Senator B ristow . And still the Government says to the citizen: You have got to take that note for your property when it is tendered. Mr. W e x l e r . Unless you want something else. Senator S hafroth . In the absence of a specific contract to the contrary. Mr. W e x l e r . Unless in the absence of a specific contract to the contrary the Government simply declares that its notes are tenderable for all general business purposes. Senator B ristow . I would not agree to any such proposition as that. W e have $346,000,000 of greenbacks, theoretically, that are BANKING AND CURRENCY. 345 outstanding, and we have $150,000,000 in gold that is a redemption fund to maintain their parity. Mr. W e x l e r . Yes, sir. Senator B ristow . H ow much of that $346,000,000 do you think is in existence ? Mr. W e x l e r . D o you mean that has been burned up or destroyed? Senator B ristow . That has not been lost. Mr. W e x l e r . It would be a pure guess. Your own ideas on that subject would be just as accurate as mine. Senator H itchcock . About half of them are in the bank now as part of the reserve ? Mr. W e x l e r . Yes. The other half, I do not know where they are. If I was running this Government, the first thing I would do would be to put enough gold behind these greenbacks and wipe them out of existence. Senator Shafroth . That would contract the currency, would it not— the difference between $346,000,000 and $150,000,000? Mr. W exler That is what it would do; but I have in mind that you are going to pass some sort of an instrument of credit that is going to take the place of it. Senator B ristow . Have you ever kept any record to determine how much or what per cent of your national-bank notes were lost in the course of a year? Mr. W e x l e r . N o, sir. Senator B ristow . Suppose you issued $100,000 of national-bank notes and they were out a year. What per cent of them would return ? Mr. W e x l e r . W e have absolutely no means of knowing, Senator. Senator B ristow . N o way of determining? Mr. W e x l e r . N o way of determining. All we can tell is how many come in; but we can not tell how many are in existence. You find occasionally an old note circulating in the bank that has been out of existence for 16 years. It has never happened to get into the Treasury for redemption. The money is there to pay it with, of course, but it never happened to have gone there. Senator B ristow . When a bank goes out of existence, and has been out of existence for 15 years, presumably there are very few of its notes that are out? Mr. W e x l e r . Very few. Senator B r isto w . Has there ever been to your knowledge any ientage of national bank notes d it estimated. The Govern ment has quite a large fund. I should judge that any estimate that might be made would be pure guesswork. I can not conceive how anyone could make an estimate of how many notes have been burned up and destroyed in 40 years. Senator B ristow . W e have out about a billion and 80 millions of gold certificates. Mr. W e x l e r . About that— a billion 100 million. Senator B ristow . Of course you have no idea how much or what quantity of these certificates have been destroyed, lost, burned up or gone down in the ocean, etc. ? Mr. W e x l e r . Absolutely none. 346 BANKING AND CUBEENCY. Senator N elson . Or how many there are in Europe. Mr. W e x l e k . N o ; I can not tell that. Senator B ristow . Whatever amount is lost, that gold is there, then, as a part of the Government asset ? Mr. W e x l e r . Yes, sir. Senator B ristow . If the suggestions that you make were in effect and in operation that gold would belong to the banks instead of the Government ? Mr. W e x l e r . N o, sir. That gold would belong to the Govern ment just the same, because the bank could never get hold of the note to withdraw the gold if the note is destroyed. In other words, you w ill never get that gold without presenting the note. T Senator B ristow . Suppose that the banks themselves issue the notes and get the gold reserves ? Mr. W e x l e r . Yes, sir. Senator B ristow . The profits that would come from the losses would be the bank’s deposits instead of the Government’s, would they T not? Mr. W e x l e r . Y ou mean that if the new banks should issue bills of credit that would never come back for redemption it would be a profit to the bank ? Senator B ristow . Yes. Mr. W e x l e r . I am inclined to think that it would. It would be an obligation that it had even though it had never been presented. W e have in our bank about $35,000 of deposits wdiich have been there for years and have never been called for; we can not locate the indi viduals or the individuals have died or gone away; yet the deposit remains there for the rest of time. W e can not use it. Of course, it is earning interest by loaning it out, but it is there and belongs to them. The same objection would arise in the bank. Senator B ristow . The objection would be a similar objection, would it not? You have the gold and would issue a note; the note is T lost; it never turns up, so that you never have to pay the note? Mr. W e x l e r . Y ou simply continue to have the liability. It would be a constant liability which we would have no means of paying. Senator B ristow . But still it is only a liability in theory and not one in fact? Mr. W e x l e r . They sometimes turn up when you least expect them. Take a case which happened recently. Some time ago a party died in Mexico, and they had in an old trunk $5,000 of Louisi ana State bonds, perfectly good, of an issue of some 25 years ago. The money was there to the credit of that $5,000 in bonds, and they came in. It is a liability. Senator B ristowl Y ou have, then, no way of estimating, you say, the percentage of what is lost per annum ? Mr. W e x l e r . I think it is a comparatively small amount. It is very small. If a note is torn into small pieces there are experts here in the department in Washington who are perfectly remarkable in their ability to decipher them and pay them. Senator N elson . That is, if you can identify the note? Mr. W e x l e r . If you can identify the note by any means you get your money out of it. Senator N elson . And I imagine that in the case of a gold cer tificate, if the holder of it could give satisfactory proof that the cer- / BANKING AND CURRENCY. 347 tificate was burned and would give the Government an indemnity bond, as they do in the case of individuals, he would get his gold ? Mr. W e x l e r . He might; yes, sir. Senator H itchcock . There are two propositions involved in this legislation; one banking, and the other currency. As a practical banker you would have two methods of sec u rin g additional cur rency, should the bill, or should your bill become a law. You would either draw upon your own funcls in your own vault, or you would draw upon the funds in the reserve bank, or on some other corre spondent, or you could call for currency which would be issued either by the banks or by the Treasury. Now, then, why can not those two functions be separate ? W hy can not the banking system of the United States be permitted to remain as it is now, so that you can still draw upon your correspondent— your reserve agents— for such credit as you have and apply to the Government instead of to a bank when you need the additional funds? Mr. W e x l e r . I have just stated that that can be done by the establishment of such a system. The Government is going to issue its own obligations. Senator H itchcock . The Government is going to issue its own obligations under this bill. Mr. W e x l e r . Under your bill it would not. You are going to issue obligations payable by the bank; consequently you will have a reserve against it. Taking the same class of collateral we are pro viding here you do not need to do any other business with banks except to provide that currency and extend that credit. If you were to separate it, how would we get the notes from you? You say you want to separate the currency from the bank notes. How would I get it from the Government unless I gave something in lieu of it ? Senator H itchcock . Well, suppose you exhaust the cash in your vaults down to the reserve limit ? Mr. W e x l e r . Yes. Senator H itchcock . And suppose you exhausted the deposits which you have with your correspondent’s bank down to the reserve limit ? Mr. W e x l e r . Yes. Senator H itchcock . Then you could apply to the Subtreasurer in New Orleans to make your deposits of security and get your United States notes. Mr. W e x l e r . Then I have to sepaiate the bank from currency. Senator H itchcock . Y ou then have two strings to your bow. If you are not able to get what you want from your bank correspondent or reserves, you can apply to the note-issuing power of the United States, which is the Government. W hat is the objection to that? Mr. W e x l e r . Well, now, you are coming back to the original proposition, and that is that you have gone into the banking business. You have gone into the lending of your credit in exchange for the credit of the public. Senator H itchcock . I am asking you what, in your opinion, would be the effect if the banks of the country were permitted, either as individuals or as small clearing-house associations, to apply direct to the Treasury when additional currency is needed by the business demands of the country ? 9328°— S. Doc. 232, G3-1— vol 1------23 I 348 BANKING AND CURRENCY. Mr. W e x l e r . A s clearing-house associations I think it would be fatal. Senator H itchcock . Suppose we could make the proper conditions to do that ? Mr. W e x l e r . I do not think it is possible. No man is going to do that unless on the very threshold of panic or failure. Senator H itchcock . Let us see about that. You are running a national bank. Is there any particular reason why you should not apply to the Government when you desire additional currency when you would apply to another bank under the same circumstances? You certainly would not expose your condition to another bank in preference to the Treasury, would you ? Mr. W e x l e r . I have said that if you would allow me to go direct to the Treasury it can be worked out. . I do not think it would be feasible if you were to make me go to a clearing house. No bank is going to put itself into that position unless they absolutely must do so. Of course when about to fail they do do that now. Senator H itchcock . Your answer would be, that it would be feasible for individual banks to go direct to the Treasury, but it would not be feasible to have the banks go to an association ? Mr. W e x l e r . Yes, sir. Senator H itchcock . I s it not a fact that at times the banks do that very thing— that they have clearing-house meetings and expose their real conditions there ? And they help them. And is it not a fact that the clearing houses have examiners who examine those banks? Therefore, do you not have substantially that condition now ? Mr. W e x l e r . But they do not give them all the details of their business. Senator H itchcock . It would not be necessary to know the details if you supplied the clearing house in your town or the national association with a statement of good paper. Your statement would be just to the effect that the paper was good, and it seems to me that any request for more particular information would not be allowable. Mr. W e x l e r . Of course it would be none of their business; I would not give them the information. We do have clearing-house examiners. There is one employed in New Orleans who examines all the banks, but he is not allowed to make anv report except to state the results of his examination of such an<J such a bank has nothing to be criticized. To do what you want us to do— it is done occasionally— all the other banks would have to be identically in the same situation. When they are all in the same boat, like in 1907, they are all willing to throw down the bars and assist each other, but there is not any one bank that is going to a clearing house by itself and expose its condition. The information would leak out in spite of everything that could be done to prevent it, and the next morning there would be a run on that bank. The scheme is impracticable. Senator H itchcock . I s it not generally true that the banks in a region are in substantially the same condition as the season’s demand for money comes in. When the time comes for them to pay out money, as in the case of the cotton crop down South, the banks all BANKING AND CURRENCY. 349 find the same demands for money, and would they not all cooperate with each other under those circumstances to overcome the difficulty ? Mr. W e xl e r . Not at all. In our city there are a number of banks that do no country banking business at all. They do not care for that business at all. Their demand for currency is insignificant compared with ours. W e supply practically as much currency for moving the crops as two-tnirds of the rest of the banks of that sec tion. Consequently our demands are very much greater. Other banks there do different classes of business. No two banks do iden tically the same class of business in a given city. Senator H itchcock . Y ou make this distinction then, if I under stand you correctly: That you would be willing to adopt that sys tem and believe it would work satisfactorily provided the individual bank could go direct to the Treasury instead of to a reserve bank ? Mr. W e x l e r . I am not saying I would adopt that system. There are too many systems which I would prefer to that. I was saying, and reiterate what I have said, that the Government could formulate a system by which it could furnish the country with a flexible cur rency, coupled with credit, provided it established the proper ma chinery and placed behind the notes the proper resources and dis counted only the same class of paper, made properly safe against the demand obligations. The Government can do it as well from a practical standpoint, owning all the stocks, as if the banks owned all the stock. In other respects, Senator, the banks would have to have great similarity. Senator H itchcock . Every three or four months the Government sends an expert who goes over your books, does it not ? Mr. W e x l e r . Yes, sir. Senator H itchcock . He examines your commercial paper and he reports to the Treasury Department whether the paper is good or bad? Mr. W e x l e r . He does not report that, because he does not know whether the paper is good or bad. He reports upon any excess of loans. Senator H itchcock . If he finds paper in your bank and finds it duplicated in other banks, ho calls attention to that fact, and he says, “ John Smith is borrowing in too many different banks.” Mr. W e x l e r . Oh, no. Senator H itchcock . I have known of cases of that sort, and a good examiner does that very thing. Mr. W e x l e r . He might report, ‘ ‘I find John Smith’s paper in these two banks,” but he could not do anything further. Senator H itchcock . Therefore the Government already has its experts employed who examine commercial paper in the national banks, and there would be no difficulty in having the expert of New Orleans pass upon any paper submitted to him ? Mr. W e x l e r . Not at all. The Government can hire experts as well as the individual. Senator H itchcock . And you could procure currency to a reason able extent from the Subtreasury in New Orleans just as well as from a central bank or regional bank ? Mr. W e x l e r . Unquestionably so. 350 BANKING AND CURRENCY. Senator H itchcock . And that could be done without the creation of all this new machinery and without this tremendous centralizing of paper? Mr. W e xl e r . By adopting your plan you just centralize that much more. You centralize in the Government. Senator H itchcock . N o ; you leave the currency-issuing power with the Government and banking business with the bankers. Mr. W e x l e r . N o ; you do not. You are taking the banking busi ness when you discount the paper the bank brings to you. You are performing their function, centralizing the banking and centralizing the deposits. Senator H itchcock . Well, as I view this thing, it is a new propo sition, and instead of adding it to the functions of the bank I want to keep it away from the banks so as to avoid centralization. Mr. W e x l e r . Then you would make this a Government bank. Senator H itchcock . My position is that we are in danger of entering upon a scheme of centralization. You bankers impress me as wanting the most centralized scheme possible. wSenator Owen and Mr. Glass have drawn a bill not so centralized, but which I still think has features of centralization; and I am asking you whether it would not be possible to avoid that danger by avoiding incorporating the currency-providing power to this system, which it is proposed to create, and allowing that to remain with the Government ? Mr. W e xl e r . That is perfectly practicable, Senator; but you are forgetting that when you do that you are also incorporating with it the discounting privilege and all the functions that we propose for this bank except the depositing of the reserves. The Chairm an . Y ou mean the Government will have to discount these notes ? Mr. W e xl e r . If we ask them for $100,000 of Government notes, they are going to ask for something in exchange for them. The Ch airm an . W hat will you give? Mr. W e x l e r . My customers’ notes. The Chairm an . Then the Government would discount those notes and give you currency for them ? Mr. W e xl e r . Absolutely. The Chairm an . And that is what you regard as banking, except receiving deposits ? Mr. W e xl e r . Y es; I would regard that as banking, except receiv ing the deposits. W hy should not they receive deposits if they go that far? W hy inaugurate the system and then not receive the deposits ? W hy stop there ? W hy not go right on ? The Chairm an . Y ou mean that this gold would be deposited in the reserve banks ? Mr. W e x l e r . Exactly. The Ch airm an . And in that way the banks would furnish the gold necessary to carry on this scheme ? Mr. W e xl e r . Yes. You will have in every respect the same kind of a bank that we would have, except the stock will be owned ex clusively by the Government instead of by the bank. There are certain fundamentals in this proposition which are just like the law of gravity. You can not get away from that. Senator N elson . Mr. \v exler, is it not true that under present conditions the Government has only one or two ways of getting an I BAN KIN G AND CURRENCY. 351 income of money— one by taxation and the other by sale of its obligations ? Mr. W e x l e r . That is all. Senator N elson . This Government in paying out money— the only way the Government pays out any of its money it pays out for run ning expenses, its liabilities, and its interest, whether in greenbacks or anything else. In no other way can the Government put its money into circulation, can it ? Mr. W e x l e r . None that I know of. Senator N elson . If the Government wants to issue its money and get its money out into circulation, beyond what is necessary to pay its current expenses, it can only be done by allowing borrowers to deposit their commercial paper with the Government. Mr. W e x l e r . Y es; ana get currency for it. Senator N elson . And the moment they do that has the Govern ment not gone into the banking business ? Mr. W e x l e r . Absolutely. Senator N elson . And you can not get the Government’s money into circulation any other way? Mr. W e x l e r . N o, sir; none in the world. Senator N elson . I s it not also true that the Government can issue any amount of legal paper money, but the question will always arise, How are you going to get that money into circulation ? Mr. W e x l e r . Yes, sir. Senator N elson . And the only way the Government can legiti mately put its money into circulation is by the payment of its current expenses, of its running expenses and obligations; if anything more is aid out by the Government it has to be done by a system of credits, y banking. I can go to the Government and get my salary paid every month— that money goes into circulation— so can every other employee of the Government; so does the bondholder get his interest. But if any more Government money is wanted in circulation it can only come by application of the borrower to get that currency, and he must put up some security for it. Mr. W e x l e r . It can be done in no other way. Senator N elson . Because it stands to reason that the Government would not issue its currency without some consideration; and the moment it does that— the moment the Government does that— it would perform one of the functions that is implied in this regional reserve bill. Mr. W e x l e r . Absolutely. Senator S hafroth . Y ou do not deny, however, that legal-tender money could be taken by the Government and substituted for nationalbank notes ? Senator N elson . That is foreign to the question; you might sub stitute and thereby get it into circulation. Senator Shafroth . When the national-bank note goes into circu lation for commercial purposes you substitute United States notes for it, do you not ? Senator N elson . That is true; but the only inflow of the Govern ment is in the shape of taxes, outside of its bonds, of course; and the only outflow is paying its obligations. Senator S hafroth . But its inflow consists of these bank notes now in existence, and there is a very large percentage of them. E I I 352 BANKING AND CURRENCY. Senator N elson . Y es; but how are the holders going to get their money from the Government ? The Ch airm an . A s I understand it, gentlemen, you are not in conflict at all. W hat you are both saying is true. Mr. W e x l e r . It is true that if the Government wants to issue a lot of greenbacks, as it did in 1861, and say, “ Our note is just as good as our bond /’ and say to the bankers, “ You have 86,000,000 2 per cent bonds; we will give you $6,000,000 of our noninterest-bearing notes; will you take it ?” It is true that we gave you our bonds and you gave us your notes. Senator S hafroth . And that gets into circulation, but you have only changed the form of it. Mr. W e x l e r . Y ou have put out $700,000,000 of this fiat money and taken back your bonds and retired $700,000,000 bank-note circu lation. The next question is, W hat kind of a note have you given me; how are you going to meet it; when are you going to meet it; are you going to pay it in gold; will we get it when we want it; if you will say what you are to pay for it, can you pay it ? You have to provide all that kind of machinery. Senator S hafroth . But you will have 50 per cent reserve and $128,000,000 of gold in addition. Senator H itchcock . N ow , I would just like to ask you a few questions on that same line. Suppose we say that the Government arranges to issue a possible $500,000,000 of notes, which it will lend to the bankers as they require it from season to season. W e have a Subtreasury in New Orleans and 40 or 50 subtreasuries throughout the United States where they come into contact with the banks. Mr. W e x l e r . W ith or without security? Senator H itchcock . With security. The banks put up security with the Subtreasury. Of course, we presume the banks will give their obligations promptly. In order to make this issue of $500,000,000 safe tne Government issues a gold reserve of 40 per cent, which vmuld require the issuing of $240,000,000 in bonds. The interest on these bonds at 3 per cent would be $8,200,000 a year. Therefore, at an annual expense of $8,200,000 a year we would provide a possible $500,000,000 of Government notes to loan the bankers. Let us suppose that the notes are only out a third of the year, but while they are out the Government is deriving an income from the banks of 4 per cent upon the notes. Senator Shafroth . Let me understand you; the Government gets 4 per cent ? Senator H itchcock . Y es; the Government gets 4 per cent. Senator S hafroth . For what ? Senator H itchcock . For the notes which it loans to the banks. Mr. W exl er . And they rediscount the paper. Senator H itchcock . The Government is loaning me money on the security of the paper deposits. Senator S hafroth . I supposed 2 per cent was what they were getting. Senator H itchcock. I am proposing that the Government shall advance this currency to the banks and charge them for the privilege of using it, and that the charge shall be 4 per cent. If only out four months it would amount to $7,000,000, and that is almost what the Government would pay for the whole year. The banks in that way, BANKING AND CURRENCY. 353 by paying for the use of the notes during part of the year, would pay to the Government more than the Government has paid in interest on the bonds. We have a gold redemption fund in the Treasury ready to meet the notes as they come in, and the banks are paying the whole expense of the operation. You say that would provide an elastic fund. Mr. W e x l e r . I think it would be perfectly feasible. That is, a central bank owned by the Government. Senator H itchcock . There would be no expense to it, and there would be an elastic borrowing fund provided. Mr. W e x l e r . Yes; for all of them. Senator H itchcock . There would be no machinery? Mr. W e x l e r . Y es; there would be a lot of machinery. Senator H itchcock . Well, what would you have to have? Mr. W e x l e r . Y ou will have to have a central agency and not less than 50 branches. Senator H itchcock . Well, we have nine subtreasuries now, and we have experts, and it seems to me that we can have other experts whose only duty would be passing on the paper. Mr. W e x l e r . Y ou will be organizing a central bank owned by the Government practically along the provisions we have suggested. Senator H itchcock . All of the money-lending business of the country would be done by the banks, would it not ? Mr. W e x l e r . Yes. Senator H itchcock . And all of the depositing business would be done by the banks of the country; and all of the exchange business of the country would be done by the banks, and all the Government would have to do would be to furnish to the banks an elastic currency for which it would charge them enough to cover all the expense. Mr. W e x l e r . Senator, if that is good— and we say it is— if the Government owns the bank, I do not know that it makes a lot of difference. If that is good, why not go on a step further and take the deposits ? What do you want to go to the expense of selling all these bonds and incurring these obligations when we have the gold in our own vaults as reserves against our deposits, and deposited all over the United States in the various reserve agencies? W hy not put a large proportion of it into the Government banks ? Senator H itchcock . Because nothing would be gained by that, would it ? Mr. W e x l e r . Y es; it would be much more economic. You would not have to incur the Government obligation at all. Senator H itchcock . I do not agree with you there. Mr. W e x l e r . Well, I think after you consider that a while you will see that with that exception you are establishing a Government bank. You might just as well go the whole way; it will be much more economical. You will have a reservoir of credit which is what we want, instead of having our reserves in these little piles all over the United States. Senator H itchcock . But your reserves would not be necessary if you could go to the Treasury for this additional currency. You would not be forced to deplete your reserves in New York, Chicago, and St. Louis. Mr. W e x l e r . Not a bit; it could be done; but I think if you went the whole way you would have a better institution. 354 BANKING AND CURRENCY. Senator H itchcock . Then, at times when there was not much de mand for this money, the gold reserves could be used to buy in these 3 per cent bonds and thus keep them at par. Would not that be possible ? Mr. W e x l e r . Yes, sir. Senator H itchcock . D o you not think that would keep the 3 per cents at par ? Mr. W e x l e r . Y es; the Government could buy them in and put them out again if it could always find purchasers when the man came for credit, and that demand might come at any time. Senator H itchcock . But there would always be a margin because the Government would be charging the bank a higher rate of interest. Senator N elson . Here is one thing you overlooked: We had a lesson in respect to that during the last session of the Cleveland administration. Whenever the value of gold— whenever it is profit able or whenever they need the gold in France or Germanv, they send to this country and buy it. All a man has to do here if lie needs his gold, as the brokers did in New York, is to take a bundle of the Treasury notes of the Government and go down there and say, “ I want the gold.” Then he can ship it to Europe at profit. That was done time and time again during the last year of Cleveland’s adminis tration, and that was one of the reasons why he had to go out and sell the bonds of the Government for what he could get for them. Mr. W e x l e r . That is the main objection, Senator, to a Government bank instead of a bank like that which we suggest. A Government bank is constantly liable to attack by having the gold taken away from it, in which event you would have to do just like Mr. Cleveland did— sell the bonds for what you can get for them. I would let the banks do that; they have the machinery to do it with. Senator N elson . And the banks can always replenish their gold reserve by the purchase of bills of exchange drawn upon the necessa ries of life like wheat, cotton, or flour. Europe has to have those commodities and the banks can always get the gold for them when the balance of trade is in our favor. In the case of the Government it can only get the gold by selling its bonds, unless you extend its banking powers— unless you allow the Government to deal in com mercial bills of exchange, you can not get the gold. Am I not right? Mr. W e x l e r . Yes. Senator H itchcock . I s it not true that that power to take gold out of the Treasury exists at the present time ? Mr. W e x l e r . For your greenbacks, yes. Senator H itchcock . And for the gold certificates? Mr. W e x l e r . Y es; for the gold certificates. Senator H itchcock . W e have $1,000,000,000 of gold certificates outstanding and the people are at perfect liberty to go to the Treasury and demand gold for them, are they not? Mr. W e x l e r . Yes. Senator H itchcock . Then, that does not change the situation. Mr. W e x l e r . That is true. It puts you to trouble. Senator H itchcock . It always will exist. Mr. W e x l e r . W hy do you want to keep on incurring that trouble ? Here is another thing that might occur— I do not say that it will occur, but I simply want to call it to your attention: Suppose five or six of the very large national banks in New York, Chicago, or New BANKING AND CURRENCY. 355 Orleans should make up their minds that they wanted to embarrass the Government. They come to your agency in New York and dis count with you an aggregate of $50,000,000 of paper. That is good and accepted and under the provisions of your organization you would be perfectly willing to discount that paper. The next day they turn around, take those notes and present them at you window, and ask for the whole $50,000,000 in gold. You could not refuse payment. Senator H itchcock . They can do that now. Mr. W e x l e r . Y ou would have to pay the whole $50,000,000. Senator H itchcock . They can do that now. Mr. W e x l e r . But you are giving them the instrumentality. Senator H itchcock . Well, the banks of the country have already got more than half of the gold-demand paper. Mr. W e x l e r . They could not do that with the gold certificates, however; the only instrument they could do that with is the green backs. Senator H itchcock . The banks of the country already hold $190,000,000 of United States notes, and they could simply present those at the Treasury at any time and demand gold, but they do not do it because they are always good for the gold. Mr. W e x l e r . They do not do it because everything is serene. I am showing that you are giving them the power. It probably never would happen, but, Senator, I wish I had the power of speech to impress upon you the futility and the danger of the Government going into the banking business. W hy go contrary to the experience of every other country? In olden times the governments undertook to do all these things. They went so far in Spain as to gild silver dollars. It is fundamentally wrong and unsafe. You should coin money, but you should not issue obligations payable on demand. Senator H itchcock . W e are already departing from European precedents in this bill. Mr. W e x l e r . N o. Senator H itchcock . I s there a single central bank in Europe or in Germany, France, or England that is owned by the banks? Mr. W e x l e r . No. Senator H itchcock . Y ou propose a central bank which is owned by the banks ? Mr. W e x l e r . Yes. Senator H itchcock . And that is contrary to every European ex perience. It makes a much more centralized paper than exists any where in Europe. Mr. W e x l e r . But they are not under Government supervision. I am not saying that we can adopt the system of any European Gov ernment any more than we have adopted the system in England for the purpose of doing business in this country, but I say we can take the principles of their system and study them and adapt them to our selves, taking the best of them. Senator H itchcock . Let me draw your attention to the fact that in England, for instance, there are several banks larger than the Bank of England, so that the centralization of power there is comparatively insignificant. They have several banks that have more deposits than the Bank of England has. * That is true in France; it is true * in Germany. Those banks have no interest in the Bank of England at all. They carry on their business independent entirely of the 356 BANKING AND CURRENCY. Bank of England, but here everything is proposed to be tied up in one organization. Mr. W e x l e r . Senator, if you can prevent the banks from dealing direct with the public I have not any objection to the public owning the stock. The only fear that I have from the public owning the stock is that the public will turn around and say, “ We are the stock holders in the bank; we want to do business with the bank in which we have stock,” with the result that you are creating an enormous monopoly, actually putting all the banks out of business and having one great big bank monopoly, and it might ultimately result in ail this stock coming into the hands of half a dozen men, and you would then have the banking business in the hands of a few men, which you do not want. Senator H itchcock . Suppose you provide that no man should own over a certain percentage of the stock ? Mr. W e x l e r . It might be feasible; but I see no objection to the banks owning the stocks, because what are the banks ? The banks are aggregations of individuals who have associated themselves to gether for the purpose of organizing a bank. Senator H itchcock . Y ou see no objection to it; but you can find no precedent for it in any European experience. Senator N elson . Gentlemen, will you permit me to interrupt you? I do it in a Christian spirit, you understand. W e are handicapped in one respect, and that is that we have 7,300 banks of issue— all issuing paper money. That is a condition that is not present in Europe. The question is whether we should freeze out these banks and drive them out of business or not. I suppose this plan of mak ing them stockholders is to give them a chance to live and do business. Mr. W e x l e r . That is the idea. Senator N elson . And to carry on the everyday banking business of the country and ultimately, if this plan succeeds, to have but one currency, and that is the currency of the regional banks, but to do it gradually. Mr. W e x l e r . That is the idea. Senator N elson . That is, the regional banks will supply the cur rency and create a credit reservoir for the Country, leaving all these little banks free to do the business. I do not want to freeze them out. Mr. W e x l e r . That is the point. If you offer the stock to the country, whom do you suppose would take it? Would not the people take it, who now own the stock of the 25,000 banks of the United States? They have their stock ownership in the banks in which they are now interested. W e have in our bank 540 stock holders with $2,500,000 capital. Who owns that bank? Five hun dred and forty individuals own it. The bank is nothing but a corpo ration owned by individuals, and as a matter of fact all of the owner ship is in the individuals. Senator H itchcock . One of the objections to this plan as I see it is that it adds nothing to the bank capital of the United States. Mr. W e x l e r . It adds more than anything you can possibly do. Senator H itchcock . I am speaking of bank capital. If you allow the outside world to subscribe yoirbring in additional capital. Mr. W e x l e r . This is additional capital. This $1,000,000,000 we put into this bank is additional capital. In addition to that, take BAN KIN G AND CURRENCY. 357 these reserves which now might just as well be buried in the bowels of the earth for all the good they are doing. You make them a basis of credit. If I buy $250,000 of this stock I do not reduce my capital. Senator H itchcock . But you will duplicate your capital. Mr. W e x l e r . I have contributed $250,000 of my general assets; not my capital. Senator H itchcock . But you have not added anything to the bank capital of the United States, whereas if you permit the public to subscribe to the stock of these banks, and the public should sub scribe, that would come from other sources and would come into the bank reserves of the United Stages. Mr. W e x l e r . It would simply be drawn right out of the banks. The Ch airm an . It would be taken out of the deposits of the banks ? Mr. W e x l e r . Y es; it would be taken out of the deposits of the banks. The Chairm an . That is where you get it? Mr. W e x l e r . Y es; and it is not needed. If you will let the banks put this $105,000,000 in, do you know what they will do? They will look over their investments and say “ Here is $100,000 worth of bonds; we will sell these and invest the proceeds in this stock. W e are now permitted to make an investment which we were forbidden to make under the national-bank law.” W e are frequently called upon to take stock in banks started around our country now. W e can not do it under the law; but we have a trust company which is not forbidden to do that under the State law and the trust company takes $1,000 or $2,000 of this stock. Senator H itchcock . W ell, it impresses me that there is some powerful reason why the banks of the country want to own this Mr. W e x l e r . The only reason is because they believe that they are the proper people to own it. They believe they are the proper people to manage it. Senator H itchcock . Certainly they can not be attracted by the 5 or 6 per cent interest. Mr. W e x l e r . N o. The only thing that attracts them is the sense of safety in having a central reservoir of credit. The Chairman . Y ou mean giving stability to the banking sys tem? Mr. W e x l e r . Yes. I want to say this to you: That the banking business of to-day is one of the hardest, most trying businesses that a man can be en gaged in, for the reason that the banker has a tremendous demand liability with absolutely nothing to meet it with except 25 cents on the dollar. All that the banker wants is the opportunity, the priv ilege of being able to go somewhere with these time obligations he has and rediscount them so that he can meet the demand obligations when the public wants their money. Senator N elson . He wants a reservoir of credit to go to? Mr. W exler . That is all we ask. Senator H itchcock . But he does not want to go to the Treasury ? Mr. W e x l e r . W e do not care; but why don’t you go into the meat packing business or the farming business. It would be just as legiti mate as going into the banking business. 358 BANKING AND CURRENCY. Senator N elson . Allow me to make another suggestion to you right there. You bankers are nothing but middlemen; you do not add anything to the capital of the country. All additions to the capital of the country come from the farmers, who produce the crops, and from the manufacturers, who take the raw' products, the material, and increase its value. That is the only way in which capital is increased, and you are simply the instrument to place that capital. Mr. W e x l e r . W e are merchants; dealers in credit. Senator N elson . It is the farmers and manufacturers who make the capital of the country, who add to it, and increase it. The bankers themselves do not add a single dollar to the capital. Mr. W e x l e r . That is true; the more saving and thrifty our people are the more they add to the capital. The more extravagant they are the less they add to the capital. It is a plain proposition. ADDITIONAL STA TE M E N T OF PROF. 0. M. W . SPRAGUE, OF HARVARD U N IVER SITY , CAMBRIDGE, MASS. The Ch a irm an . Prof. Sprague, we would like to hear from you now. W e would be glad to have you give a sketch of this proposi tion, your view of the operation of this bill, and such notes as nave occurred to you from your examination of the questions. Prof. Spr ag u e . This bill is dasigned to meet certain very serious defects in our existing banking system. These defects are, first, the more or less complete breakdown of the machinery for exchanging checks between different sections of the country in periods of emer gency, coupled with partial suspension of payments by the banks; second, difficulties in meeting reasonable requirements for carrying business in the autumn; third, a preference for collateral rather than commercial loans because of their greater real or apparent liquidness, which gives them a lower rate, and finally no means of checking the unwise extension of credit on the part of our 20,000 or more banks. Some of these defects in our system could be met by means of a Government issue of paper properly secured, subject, of course, to a discount charge. It would be perfectly possible, by means of a Government institution, to meet seasonal requirements for cash. It would also probably be possible by means of such an institution to escape the suspension of cash payments by banks in emergencies, though this is less certain. The Government institution, however, which confines itself to the issuing of notes in exchange for securities deposited by the banks w'ould have no relation, no connection, w'ith the checking machinery of the country. It would not be in position to make certain that the domestic exchanges betwr een different parts of the country would be alw'ays kept open. Something like 90 per cent of the business of the country is carried on w'ith checks rather than wnth money or currency. The working of this medium of payment depends altogether upon the maintenance of continuous exchanges between banks. If a bank in New England receives a check drawm upon a bank in Indiana, in ordinary course it will be exchanged in Boston or New York against other checks probably drawn on New England which have been deposited in In diana. When, however, this machinery breaks down, the Indiana check deposited in New England becomes wffiolly unsatisfactory' as a medium of payment. The bank in Newr England can only take it I BANKING AND CURRENCY. 359 for collection, and payment has been in various crises indefinitely postponed. When this happens we endeavor to conduct our business by means of currency, and naturally there is a dearth of currency, because sud denly we attempt to do not 5 or 10 per cent of the business of the country with currency, but pretty nearly all of the business of the country with currency. W e need an institution in this country which is in close touch with the banks in position to make absolutely certain that in no circum stances whatever shall this check machinery break down. This can only be accomplished in case the banks very generally have depos ited balances with some single or group of institutions. Transfers of balances between the banks will then become the means of settling checks drawn on banks in one part of the country and deposited in banks in other parts of the country. The reserve bank or banks through which this business is done will always be in position to insist that such settlement be made regularly because if a bank delays unrea sonably in making such settlements it can be properly threatened with deprivation of its rediscount rights. Senator H itchcock . D o you care to be interrupted? Prof. S prague . I do not mind it at all. Senator H itchcock . Y ou spoke of the possibility of the redis count bank disciplining another bank. That involves the loss of some independence that banks now enjoy? Prof. S prague . Yes. If it is done for a perfectly definite reason— to insure that the bank shall meet its immediate obligations— I can not see that that is depriving the bank of any independence which it ought to exercise. Senator H itchcock . It is the creation of a new power in the bank ing world by which one institution can discipline the other, however. Prof. S prague . They would be disciplined for that single purpose. Senator H itchcock . H ow can you limit the purpose? Prof. S prague . That will be in the statutes of the bank, I should suppose. I will come to that later on. This disciplinary power seems to me absolutely necessary if we are to have any sort of central institution or institutions. Senator H itchcock . That is really what a central institution means, does it not? Prof. S prague . I should prefer to have that one power to all power of issuing notes. I would prefer to run the institution with that power rather than with the power to issue notes, if I had to make the choice. Senator H itchcock . That is the power to dictate to the ndividual banks ? Prof. S prague . T o dictate to the individual banks regarding making settlements on checks Mr. W e x l e r . I will tell you how that works: W e sometimes send checks to a country bank for collection. It may be the only bank in the town. They keep those checks for a week; we do not hear from them and sometimes they write that thev have been lost in the mail, and then there are a few more delays. iBut eventually we get after them pretty strong and they remit, but they will remit with bills of exchange on the most remote city in which they have money on deposit. Then we try to collect through the express agent in that 360 BANKING AND CURRENCY. town; then the bank pays the express agent in silver, all silver, which costs $3 or $4 to get down. That is the kind of abuse that the pro fessor thinks we ought to have the right to correct. Prof. S prague . That is an abuse in normal times; but I regard as of far more importance the breakdown more or less complete of ar rangements for settlement in emergencies. This is my first reason for believing that a Government institution must, if it is to really improve our banking system, engage not only in the issuing of notes but also in deposit banking; it must act whether a private institution, a Government controlled mstitution, or a Gov ernment institution, as the clearing center between banks. This is the arrangement in England. Settlements between banks are entirely made by transfers on the books on the Bank of England and involve no movement of money whatever. An enormous economy of cash is thus secured. I think one result with us would be that in all probability these regional banks would find that during most of the year they would not have any occasion to issue notes. Senator H itchcock . I s not the situation in England entirely dif ferent, because of the fact that instead of having 25,000 banks you only have about 20 banks there with from 200 to 400 branches ? Prof. S prague . Well, perhaps 65 would be more nearly the number. Senator H itchcock . Well, I do not remember the number. Prof. S prague . The most essential difference between banking in this country and all other countries is our large number of banks, due to the prohibition of branch banking, a prohibition in which I heartily believe. It does make it more difficult to build up anv central insti tution, rediscounting institution, or institutions. It will make it a more delicate matter to arrange for clearing balances; but I see no reason to believe that it is not entirely possible in the course of time. In this connection, perhaps, I might sav a word about the provision in the bill regarding exchanging and taking of checks at par. I hope that we shall reach that point sometime; but I think that to place the burden at the very outset upon these Federal reserve banks of setting up the necessary machinery for handling all checks may prove alto gether too much for the management. I believe that some latitude ought to be allowed them. I am rather inclined to favor changing “ m ust” in that paragraph to “ may,” leaving it to the management of the various Federal boards and to the banks in their districts to develop gradually the necessary arrangements. There is another reason why a Government institution must enter regularly and steadily in the banking business if it is going to remove serious defects in our banking system. I included at the beginning of m y statement among the defects in our banking system the ab sence of anv means of checking overexpansion of credit. This is a country ricn in natural resources, with almost innumerable oppor tunities for development, in which, consequently, enterprise and the speculative spirit is stimulated. There are comparatively few men in business or in the banks who err on the side of caution. Cautious management of 20,000 banks is far less likely than cautious manage ment of 50 or 100 banks. Enterprising management is one of the advantages that we have through our admirable system of local banks, but I think our experience shows that in every period of active business in this country our banks in general have loaned all of the credit which their reserves would support. BANKING AND CURRENCY. 361 If you set up an institution with large powers of further expanding credit in form both of deposits and notes, there will be an enormous pressure upon that institution in periods of active business to loosen up, to make discounts freely when there is no emergency whatever. Plenty of people in the first part of 1907 argued that if banks would only grant more credit or if the banks had only been in position to grant more credit and had granted it, no trouble would have de veloped. That, I am convinced, is far from being the case. We were in many directions overexpanded, and further additions to credit at that time would have made the conditions worse rather than better. If we are to have an institution or institutions in this country always in position to come to the assistance of banks, those insti tutions ought to be in position to exercise a certain amount of re straint upon the other banks in the conduct of their business. This is accomplished in the European countries very largely through the discount rate, but that is not always sufficient. When that does not prove to be sufficient, when the rates of the other banks do not follow the rates of the central institution, the central institution takes money off the market, reduces the lending power of the other banks chiefly by the sale of Government securities in the open market, all of these institutions having supplios of such securi ties available. By such means as these the central institutions are not only there ready to come to the assistance of the business and the banking communities in real emergencies— they also exercise a very considerable restraining influence over the other banks. This can only be accomplished in two ways, either the banks in general must be dependent— steadily dependent upon the central institution or the rediscounting institutions, or the central institution must manipulate its holdings of gilt-edged securities. In London it frequently happens that the banks are to no extent whatever currently dependent upon the Bank of England. Then the Bank of England is unable simply by raising its discount rate to restrain the other banks from extendmg credit. Then it is apt to resort to the devico of selling consols, payment for which in checks on the other banks lessens the resources of those banks. In Germany the banks are in general rather more dependent upon the loans at the Reichsbank, and by simply reducing its rediscounts it may lessen the lending power of the other banks, though even in Berlin it sometimes happens that the Reichsbank reduces the lend ing power of the other banks by the sale of German Imperial Gov ernment securities. I see no way in which a Government institution simply engaged in paying out notes could exercise this restraint on the other banks. I should expect that the other banks would rely to an altogether undesirable extent upon their ability to go to the Treasury and get the necessary amount of notes. Accommodation withoftt any restraining power seems to me most hazardous. Senator H itchcock . Suppose, now, Professor, that implies that this central power might be greatly abused. For instance, it might be used for contraction at one time and thus reduce prices; at another time it might be used for inflation and thus increase prices. It might, in short, control the market. Prof. S prague . That raises a very important point, which I might otherwise have overlooked. I do not think that the importance of 362 BANKING AND CUBBENCY. ublicity in the of is E the bankers affairshavean institution of this sort therealized either y who urged representation on board or by those who insist that the board must be entirely a governmental board. There is publicity and publicity. Effective publicity is the publicity that interests the public. There is no institution in the world the operations of which are watched and studied and criticized to the extent that is true of the Bank of England. The business community is interested in every move made by the bank. Its policy is carefully considered in the financial and even in the general press. Everybody who has anything to do with business keeps an eye upon the Bank of England. The same will be the case in this country. I do not care particularly what sort of a central board we have. I believe that the board could not go very far wrong working in the extreme publicity which will surround its every move, and so I do not believe that the power this institution may have over the other banks is in any danger of being abused. Senator H itchcock . Y ou say it is not in any danger of being abused. There might at one time be a very strong party, a strong element in favor of higher prices, an element which favored progress and prosperity and urged an inflation of the currency, and the board might be subject to that influence. Prof. S pbagu e . I fear that very much more than I do anything else, because that is a policy which would probably prove for the time to be popular with the community in general, and I would add that the members of the boards of these banks and of the central board should be chosen primarily with reference to their bumps of caution. They must be exceedingly conservative, because they will have to oppose a very general desire for more credit than it is at all desirable that they should grant. It will be years, I should suppose, before the management of this institution, or any similar institution, can tell exactly what it can do with perfect wisdom and safety and what it can not do. Precedents will in the course of time be established. After the institution has been going 10 or 15 years it will almost run itself. Senator H itchcock . On the other hand, Professor, the board might for the time being be composed of those who, without any ulterior motive, or disgraceful motive, might be influenced by the thought that prices were too high, the cost of living too great, and they might be of the opinion that by depressing things and contracting credits seriously they would remedy that fault, and they might use that power for that purpose. Prof. S pbagu e . The danger I see is to my mind just the opposite. Suppose these institutions had been established four years ago. If properly handled I do not believe that they would have issued any appreciable amount of notes or would have made any large amount of rediscounts up to the present time. During nearly all of the last four years the country has had an entirely adequate supply of credit. During some of this period I am convinced the business community has secured more credit than it was properly entitled to, and a good deal of the proceeds of short-time loans went into bricks and mortar, equipment of all sorts, and this period of contraction of this year has to my mind enormously strengthened the business and the banking situation. It is enforcing a certain amount of liquidation. If we had had an institution such as is proposed there is the possi bility that several hundred million dollars more of credits might have I BANKING AND CURRENCY. 363 been available than was available throughout the winter and spring. I do not believe that that would have made the present situation stronger than it now is. These are some of the factors that must be taken into consideration in the management of a rediscounting institution, and they are to my mind those which could not be properly judged if we set up an arrangement of Government issues of notes through an institution which would not be steadily in close touch with the banking and business community. These are my reasons for believing, then, that a bank rather than a quasi bank owned and operated by the Government will serve the purpose more satisfactoiily. I wish now to discuss the first of the modifications which I think it desirable to make in the bill. It refers to the issue of notes. Senator B ristow . Professor, will you just pardon me a moment. Prof. Sprague . Y es; certainly. Senator B ristow . As I understand you so far, you prefer the cen tral bank idea to any other ? Prof. S prague . The central or regional bank. I have made no distinction between the two so far. Senator B ristow . D o you think that the s}r stem suggested in the bill is as desirable from your point of view as the central bank system ? Prof. Sprague . With some few modifications, I do. Senator B ristow . The principle underlying the two you regard as quite similar ? Prof. S prague . I think the principle is very similar, but my reason is rather a practical one and it is this: I do not believe that it would be possible to secure the passage of a central bank measure which did not include a very dangerous provision found in the bill of the National Monetary Commission, namely, that the institution must lend at a uniform rate throughout the entire country. Conditions are not suf ficiently similar throughout this country to make it advisable for an institution of this sort to lend at a uniform rate. It would be the case of the tail wagging the dog with a vengeance, and that is my reason for preferring a number of regional banks to a central institution. Senator B ristow . Y ou would prefer the central institution, if I interpret your views properly, if that central institution had dis cretionary power to fix different rates of discount for different centers of the country ? Prof. Sprague . I am inclined to think so, although I do not feel very strongly about it one way or the other. Senator B ristow . That power might be conferred upon the regional banks; that is, a number of these regional banks, so that the rate of discount for one bank would not be the same as that for another bank ? Prof. Sprague . Quite so. Senator B ristow . And in that respect you think that this would be more desirable than the monetary commission’s idea ? Prof. Sprague . Very much more so, but you can see that it is hardly a matter of principle, and in 25 or more years it might be perfectly feasible to lend at uniform rates throughout the country. Mr. W e x l e r . W hy would you not do so now, Professor? Prof. Sprague . Rates for loans are now very different in different parts of the country. The banks in certain sections of the country have already rather more funds than they can lend locally. If you m ake a uniform rate which would be entirely reasonable, in view of 9328°— S. Doc. 232.03-1— vol 1------ 24 364 BANKING AND CURRENCY. the general level of rates for loans in your section of the country, the South, no loans could be made in New England or the Middle Atlantic States in ordinary times. I believe that the bulk of the business of an institution such as was proposed by the monetary commission would be in the West and Southwest. Mr. W e x l e r . W hy should not the minimum rate that it might be desirable to loan apply to the entire country ? Prof. Sprague . In order to secure any business in New England you might have to rediscount at 3 per cent or 4, and you are offering the same rate to Oklahoma banks which I believe frequently secure 8 per cent on satisfactory security. Mr. W e x l e r . But they furnish the same class of security. I see no reason why the people of Oklahoma should not enjoy the same facilities as the people of New England if the people of New England do not need the money. If they did not like the security they would not have to make the loans. Prof. Sprague . But a rate of rediscount which is so wide a spread as that does not seem to me to be a healthy arrangement at all. It might lower the rates slightly in Oklahoma, but it is not to be pre sumed that the resources of an institution such as was proposed by the National Monetary Commission would be sufficiently great to permit it to grant enough credit to the Oklahoma banks to reduce their rates to anything like the New England rates. Moreover, it would not be desirable. It is never desirable or safe to largely and rapidly increase the credit facilities enjoyed in any community. Increase of credit facilities should be paralleled by an increase in the permanent wealth of the community, m improved lands, buildings, actories, etc. Mr. W e x l e r . Professor, suppose a rate were made for New Eng land of 3 per cent and a rate for Oklahoma of 5 per cent, would not the natural trend of rediscounts of Oklahoma be toward New Eng land, and thereby by paying them per cent they would get a profit of per cent by its operation? The money would naturally seek the lowest money market of the United States. I do not want to interfere with your argument in any way, but I am of the opinion that for the same class of paper the same rate should prevail through out the United States. Prof. Sprague . But it does not. Mr. W e x l e r . Then it should not be taken. Prof. S prague . Each regional board, knowing its own conditions, having its own funds, and just what its own local situation is seems to me would be a more satisfactory arrangement than a single insti tution forced to loan at a flat rate throughout this entire country. Senator B ristow . Professor, you spoke of the disciplinary power of the central bank. Do you think that that should be conferred upon the regional banks ? Prof. S prague . Oh, yes. It is nothing more than a refusal to make rediscounts. Inasmuch as all of these banks must have balances if they are going to secure the rediscounts, it would be a perfectly simple matter for the Federal reserve banks to deduct the amount of checks from the balance of the banks, and this is doubtless the way it will ultimately be done, just as is the case very largely in New York at the present time under what is known as the No. 1 account. Senator B ristow . The regional bank could refuse to discount the paper of a member bank ? I BANKING AND CTJRBENCY. 365 Prof. Sprague . For such a cause as I have mentioned; yes. Senator B ristow . In refusing to do that what would the member bank do ? Would it have any recourse ? Prof. S prague . I do not think, for the reasons that I have men tioned, that it should have any recourse. I should think that a pro vision of the kind I have mentioned would be inserted in the by-laws of those institutions. It might very well be inserted into the statutes, but that might make it a little too rigid and not altogether desirable. Senator B ristow . I do not know whether I fully understand you or not. To what extent would this power of discipline be vested in the regional banks ? Prof. Sprague . Simply with regard to the making of immediate remittances on checks drawn upon member banks. That would be to my mind a proper ground for declining to grant rediscount. That should be perfectly well understood and well known. Senator B ristow . Would you have any other power given to this regional bank to refuse these rediscounts for any other reasons ? Prof. S prague . Only that which comes in passing upon the paper which is presented for rediscount. Of course such a power goes without saying. I do not know any other ground for refusing or withdrawing redis counting privileges, except this most important one, of continuing remittances. And there will be no trouble about it. The reason that remittances have been discontinued in the past is that each bank fears that the other bank will not continue remittances. Now, in New England, in 1907, under the workings of the country check department of the Boston Clearing House, remittances con tinued throughout the panic. There was no doubt at that time that a check received by one New England bank on another would be settled at once, in tne ordinary course of business. And just because each bank knew the others were doing it, there was no trouble whatever. But, just as soon as any moderate number of banks begin to delay and refuse remittances it spreads like wildfire, the domestic ex changes break down, and it becomes exceedingly difficult to move goods. The Chairm an . Well, Prof. Sprague, in the panics of 1893 and 1884, did not the exchanges break to 50 per cent of their previous volume ? Prof. S prague . Yes, sir. The Chairm an . That is a fact, is it not ? Prof. S prague . They were broken also in 1907. In 1873 and in 1893 the exchanges broke, but not in 1884. Mr. W e x l e r . In 1907 you could not get money out of Pittsburgh or St. Louis at $10 a thousand. The Ch airm an . And that made a shrinkage of probably $1,500,000,000 of current exchange, did it not ? Prof. Sprague . Yes, sir. The Chairman . What I was about to bring out, was that if this regional reserve bank refused to discount the paper of a bank, for whatever reason it might assign— it might say tne paper was not satisfactory, or anything like that— what would that bank do ? It would be in a difficult position, would it not ? I 366 BANKING AND CURRENCY. Prof. Sprague . Yes. The borrower may be confronted by such a situation. So, he also might be if bis paper was passed upon by a Treasury board; and I should think that a Treasury board would set up somewhat more rigid requirements than a group of men in a Federal reserve bank conversant with the banking business. They would be able to form a judgment on paper that might be just slightly doubtful, where the Treasury board would hardly be in position to gauge exactly. Senator B ristow . Well, now, Professor, why should not the security upon which this additional currency could be had be defined in the law, so that it would not be left to the judgment or the incli nation of a regional bank as to whether or not credit should be extended ? Prof. Sprague . Y ou can not formulate exact legal rules regarding proper security for bank loans or for rediscounts, and if you attempt it you will exclude very much more than would be excluded by any wrong exercise of judgment or of power by the board of a Federal reserve bank that is at all likely to occur. Senator N elson . Senator Bristow, can you not see how difficult it would be to lay down a hard and fast rule to determine whether the notes of all tne gentlemen in this room were equally good ? It is a personal matter that you have to consider in each case; and you can not lay down any hard and fast rule of the law to govern all cases. Senator B ristow . N o . That is the objection I have to the shorttime paper only being used. I think you can describe long-time securities with sufficient accuracy------Senator N elson (interposing). Real estate securitv and------Senator B ristow . Or bonds, or things of that kind. Prof. S prague . That could be done; but in that case one of the purposes of this legislation would be entirely frustrated. Commer cial paper would then not be the most liquid asset that banks could hold. Call loans and bonds would continue to be the best and most available asset for the banks. Now, I believe that the primary function of the bank is to facilitate current short-term operations— to move goods, and to provide funds for goods in process of manufacture and transportation, and so on. Senator B ristow . Well, but that is a small part of the functions which the banks are now performing, is it not ? Prof. S prague . Y es; but it is a part which occasions variations in the demand for currency and very largely the variations in business activity. I do not see how you can relate the need for currency to bonds as security, whereas the requirements for currency and credit should be, in my opinion, related to those needs in connection with which credit and currency are used. Now, credit and currency are, in fact, used in moving the crops, and in connection with the various processes of manufacture and sale of products. Variations in the volume of goods entering into consumption or the processes of manufacture naturally call for variations in the volume of credit and currency. If the two things are related, you have a proper connection. Otherwise it is a matter, it seems to me, of guesswork. Senator B ristow . N ow , referring to the suggestion which Senator Nelson made, that it would be impossible for a bank board to pass BANKING AND CURRENCY. 367 upon the value of the security of the notes that are given to any bank; I realize that is true. The notes of a b a n k - the value of them is known chiefly to the officers of the bank which takes the notes. Now, the regional bank would have no information as to the value of that security presented, except the knowledge which it has of the methods of business of that bank, would it ? Prof. S prague . N o . Senator B ristow . Whether or not a note given by John Smith, or Samuel Jones, at Faribault, Minn., is good, the regional reserve bank at Kansas City, or at St. Louis, would know more about it------Prof. Sprague (interposing). Quite so. Senator B ristow (continuing). Would know more about it than a Government officer, or Treasury establishment somewhere, would it not? Prof. Sprague . Oh, it would know, on the whole, very much more about the condition of the banks and the conditions in the locality. That is one of the great advantages of the regional board. It is analogous to the system of our independent local banks. If the whole institution is run by a central body, there is grave danger that it will be found necessary to subject managers of branches to exceed ingly rigid rides, as is the case in the Dominion of Canada, where the managers of branches have to refer pretty nearly everything that requires any exercise of judgment to the head office. This is an advantage of the regional bank, as it seems to me. Senator B ristow . Does not the national-bank examiner, if he is a competent official, know as much about the safety of a bank which he examines at proper periods as almost anybody else ? Prof. Sprague . I dislike to express an opinion on that point, Senator Bristow. But it is not merely the question of safety------Senator B ristow (interposing). Well, he ought to know as much, ought he not? P rof . Sprague . He ought to, perhaps, and, with sufficiently frequent examinations, he might. But it is not merely a question of safety; it is a question of policy. The question of rediscounts would have to be determined largely with reference to whether the board believed the amount of short-time credit to be used in Nebraska was excessive or not; whether the people were attempting to do too much development work on the basis of short-time loans; whether they ought not to go a little more slowly in the matter of short-time loans until they had accumulated a little more savings to put into permanent capital form. These are the kinds of problems that will have to be considered by the managers of the regional banks, and even more by the Federal board. They will not have to give so much attention to individual credits, and only a moderate amount of atten tion, I fancy, to the standing of the different banks. Senator II itchcock . Well, if the managers of the regional banks— say in any one of these western regions— come to the conclusion that they were going too fast in Nebraska, for example, that they were buying too many automobiles, that they were doing too much building in the cities, and that they were doing too much irrigation work, they would restrict the loans in that region, would they not? Prof. S prague . They would not grant additional loans. They would say to these people, “ You are going along rather too fast.” Or they might grant only a portion of the additional rediscounts desired. 368 BANKING AND CURRENCY. Senator H itchcock . So that it is contemplated creating a new force in the United States to exercise, not only a disciplinary in fluence on the individual banks, but a restraining influence on whole regions of country— in the judgment of the comptroller? Prof. Sprague . Oh, not exactly that if the banks in Nebraska, after this institution is established, will have just as much lending power as they have now in the absence of any rediscounts. Mr. W e x l e r . More. Prof. S prague . The rediscount will be practically an addition to the existing volume of credit. Now, that is why I contend that------Senator H itchcock (interposing). Well, that is only attained by reducing the reserve ? Prof. S prague . That is true. But the reserves will be reduced, taking the practical effect of this bill, as I see it. Senator H itchcock . Well, you may reduce the reserves by making the banks dependent upon the regional banks, and if the regional bank draws trie line you can not get what is provided to take the place of it. Prof. S prague . Well, that depends upon how you make the cal culations as to the contributions to the capital and the reserve------Senator H itchcock (interposing). Well, does it not amount to this, then, that instead of having it as it is now, so that where the banks in Nebraska decide, from their resources and the general situa tion in their locality, what shall be loaned, that power of deciding is transferred to some other town, some other region, where a board sits upon it, and in some secret manner passes upon it and decides it. Prof. Sprague . That would not be true unless all the lending power were taken away from the Nebraska bank, so that they would have no lending power except what they could get from this regional association. I have made an estimate, but I have not checked it up since the last changes made in the reserve provisions in the bill; but I reckoned that, perhaps, taking the country by and large, it would be necessary to rediscount about $150,000,000 in order to enable the banks to maintain their existing volume of loans and credits. The changes that have been made since I made up that estimate reduces that amount of rediscounts materially. From my point of view it is altogether desirable that these institutions should use at the outset a moderate amount of lending power without making any net addi tion to the total volume of credit available in this country. These institutions need to do regulaily a certain amount of business; then they will have something that they can use as a means of contraction when the business situation makes it desirable to contract. Or, to put it in a way that is probably more accurate, it puts them in a position to lessen the increase in credits, which would probably other wise have taken place. If you intend to establish an institution of vast lending power with no restraining influence, then I think you would simply be passing a measure of inflation. You may decide that you do not wish to set up any restraining influence of any kind, governmental or otherwise, but if you so decide, you ought not, in my opinion, to provide an institu tion capable of largely adding to the existing volume of credit upon the existing cash reserves. BANKING AND CURRENCY. 369 Senator S hafroth . Prof. Sprague, Mr. Forgan, of Chicago, indi cated that he thought that the operation of this bill would produce a contraction of credit. Do you accord with his view ? Prof. S prague . On the assumption that the banks continue to maintain the same ratio of cash to deposits, I in part agree. He failed, however, in his calculation, to take into account the provision regarding savings deposits, of which I think we would find there would be very considerably more than SI,000,000,000. For you should take into account not only the figures in the comptroller’s report of deposits in savings departments in national banks amounting to $700,000,000 or $800,000,000, but also a very large amount of deposits against which the banks have issued time certificates. W ith those included in the savings department, as I expect they would be, I do not think that setting up this arrangement would involve anything like the contraction indicated by Mr. Forgan’s figures. Senator Shafroth . D o you not believe that the relation of credits to reserves would be very much increased after these regional banks are established and the right of discount prevailing? Prof. Sprague . There would be, I think, a lower ratio of reserves to credit liabilities of the banks. But the thing I am concerned about is the amount of short-time credits that is being used in con nection with the business operations of this country. And consider ing the scale of those operations, and the amount of fixed capital employed, and so on, I think that an altogether sufficient amount of short time credit is now being utilized. Take the particular instance of the last few years: The railroads and other corporations found it difficult to place long-time securities at satisfactory rates, and most of them have been putting out short-term notes, the proceeds of which have gone into fixed investments, and banks have to a very considerable extent taken those short-term notes. The maturity of the notes is comparatively short, but the proceeds of this short-time credit have gone into permanent form. The Chairman . That is it. Senator Shafroth . Prof. Sprague, Mr. Dawes, former Comptroller of the Currency, announced in Chicago the directly opposite view, namely, that if this bill were enacted there would be a great expan sion of credit ? Prof. S prague . Well, he was referring— well, both of those gentle men were referring to exactly the same thing, and not to any increase in the amount of credit. Ordinarily, when one speaks of an inflation of credit, I think one has in mind an increase in the total amount of credit. That is what I understand by that expression. Apparently Mr. Dawes meant simply that the existing volume of credit would be supported upon a smaller foundation of cash. The Chairman . And therefore would be inflationary in character but not in amount ? Prof. S prague . Yes, sir. Senator S hafroth . N ow , Prof. Sprague, you mentioned awhile ago, while we had under discussion the bill I introduced, that the legal-tender character of the paper which it was proposed that the Go'v ernment should issue would be proper, provided a certain quan tity only were issued; and if there was a reasonable taking care of the credit by that kind of a currency there would be nothing out of the way— no tendency toward excessive discounts and no runs upon the Treasury or the gold reserves. 370 BANKING AND CURRENCY. Prof. S prague . I did not intend to include in my statement quite so much as that. I intended to say that the Government could, with perfect safety, and, in my opinion, with propriety, issue that amount of currency which experience shows, at all times, will be needed for use outside of banks tor pocket-money purposes. But I do not believe that, for the varying requirements of the people for currency, those which fluctuate with the seasons and those which vary as between periods of business expansion and periods of business depression— I did not say that those requirements could be well met by a Government issue. Senator S hafroth . N ow , Prof. Sprague, what objection is there to the issuing of full legal-tender money— for instance, in this very case, as to these very notes ? Prof. Sprague . Limited in the amount? Senator S hafroth . Oh, yes; limited in amount. Prof. Sprague . N o objection whatever; none whatever. Senator S hafroth . Well, in the case of the bill which I introduced, which provides for the issuance of full legal tender to take up the gold certificates and also to take up the national-bank notes, would you consider that that would be an excessive amount to issue as full legaltender money ? Prof. Sprague . Practically you would have to take into considera tion the existence of the silver dollars and the silver certificates. Senator S hafroth . Take into consideration what ? Prof. S prague . The silver dollars and the silver certificates make up a part of that portion of the money supply which is constantly in use outside the banks. There are $500,000,000 or $600,000,000 of it. Then there are $700,000,000 of bank notes, and the three hundredodd million of greenbacks; and then the gold certificates, part of which you would secure— making a total of something over two billions of dollars. That is a larger amount of money than is now out in circulation, or will probably be out in circulation at any time during the next 10 years. Senator Shafroth . Well, that is the amount of money just now that the Government is issuing in some form or another, is it not, whether it is out in circulation or not ? Prof. S prague . Well, but I restricted my statement to that which is in circulation outside the banks. Senator Shafroth . Yes. Prof. Sprague . The reason I did that is that whenever there are large requirements for gold— and they are usually for export— the old is not secured in driblets from the people; it is secured from the anks. It is not secured by taking notes to the banks and asking them for gold; it is secured through drawing against the balances with the banks of those who happen to be engaged in the gold export ing business. Senator S hafroth . The amount of gold, however, that has been imported into this country, while it has varied somewhat, there some times being more exports than imports, there has been a net import into this country, ever since 1878, of over $5,000,000 a year. Prof. Sprague . Yes, sir. Senator S hafroth . N ow , it does not seem to me that with the flow of gold through long periods of time being in our favor, there would be much of a demand made upon these notes to be redeemed in gold. f BANKING AND CURRENCY. 371 Prof. Sprague . W ell, very likely that might prove to be the case, but------Senator Shafroth (interposing). Now, the reason why the Gov ernment can not now— or at least, it does not seem to be practicable for it to do so— redeem the silver dollars or the silver certificates, is on account of the fact that the Government would go into a loss right there. If it attempted to issue full legal tender money, redeemable in gold, and melt up the silver, there would be a loss to the Govern ment of $250,000,000 to $300,000,000. And on that account, I have not noticed any suggestion made by anybody, because all of the nations of the world are still using silver money. So that it seems to me that it would not be fair to count that as money. That had to be substituted by full legal tender money. But really, the $346,000,000 of greenbacks are now upon a gold standard. Prof. S prague . Yes, sir. Senator Shafroth . And upon a less redemption fund, or reserve, than is proposed in this bill, namely, it is 43 per cent, whereas this bill proposes 50 per cent. Prof. Sprague . Yes, sir. Senator Shafroth . S o that is eliminated to a certain extent? Prof. Sprague . Yes, sir. Senator S hafroth . And really the only two features that are met in the bill are the substitutions for gold certificates of this full legaltender money, redeemable in gold, and also to take up the bank notes. And they are being used in commerce as money------Prof. Sprague (interposing). Well, after the process had been car ried through— if it were carried through in its entirety, the reserves of the banks would be practically altogether in this new issue of notes. Then whenever there was an occasion for exporting gold, notes would be taken to the Treasury and exchanged for gold. Now, the Treasury could undertake that function. Senator Shafroth . Well, now, if it took----- Prof. Sprague (interposing). And that is my reason for saying that it is a very much simpler operation for a government to issue simply that amount of notes which experience shows is always required in general circulation. An instance of that is provided by the Bank of England. When the present system was established in 1844, an estimate was made of the amount of bank notes which, in all circumstances, the people of Great Britain would be using. And that amount of note issue was secured by Government securities. The remainder was secured by gold. They argued, and rightly, that at least this 14 millions— it was then "the amount, although it has been since in creased— that this 14 millions would always be wanted for making ordinary payments to individuals and could never in any circum stances give any trouble whatever. Senator S hafroth . Well, have you made an estimate of what the amount of that demand in the United States would be ? Prof. Sprague . That demand would probably amount to some where between $1,200,000,000 and $1,500,000,000. 1 should say that it certainly would be as much as $1,200,000,000 and probably more. Senator N elson . Do you mean by that it would be constantly in circulation among the people outside the banks ? Prof. S p r a g u e . Y e s ; although that estimate is made a little un certain because our estimates of the total amount of different kinds 372 Ba n k in g and currency . of money in the country are not exact. Paper money gets destroyed and gold coin is melted for commercial uses and sometimes we do not get any records of it. Our Government estimates of the total amount of money outside the banks are too large, and it may be that my esti mate of $1,200,000,000 ought to be dropped by a couple of hundred of millions. I should feel quite certain that there must be 1,000 millions. Senator S hafroth . Well, in view of that demand which the people would have for circulation, the banks are bound to have reserves, and inasmuch as these gold certificates would have been taken up by the legal-tender money and inasmuch as the bank notes would be taken up there would be nothing but gold coin or these notes to act as a reserve ? Prof. Sprague . Yes, sir. Senator S hafroth . And there would be created a demand for an enormous amount, which would------Prof. S prague (interposing). Oh, that is perfectly true. There is the banking demand which absorbs all over and above this $1,200,000,000, that I have mentioned. Senator Shafroth . Yes. Prof. S prague . This is simply a question of whether we wish to have bank reserves made up very largely as gold, so that any foreign drain of gold will come upon the banks, or whether we wish it to be made up chiefly of these proposed United States notes, in which case the demand for gold would be directed toward the Treasury. Senator S hafroth . Well, in the event that this same amount of gold remains in the Treasury which is now represented as deposits for the certificates— gold certificates— there would not be such a great quantity of gold in the country to go into the banks, would there, and consequently they would have to use to a certain extent some of these full lesral-tender notes ? Prof. S prague . Yes. I think most of their reserves, if the thing were carried through, would be in the form of notes and— unless they declined to present gold certificates for exchange, as they, of course, might do. Senator S hafroth . W ei1 do you think that the circulation medium , as it is now, consisting of the silver and silver certificates and gold and gold certificates, and the bank notes, and the United States notes of $346,000,000, is too large a circulation medium for the United States ? Prof. Sprague . N o . Senator S hafroth . Do you think it is ample ? Prof. Sprague . Yes. Senator S hafroth . D o you think it is sufficient ? Prof. S prague . I think it is sufficient, except for seasonal and extraordinary requirements. Senator S hafroth . Yes. Then, if all of that currency were taken up and replaced by a full legal-tender money woidd there be any inflation ? Prof. S prague . Oh, it might happen that what is sufficient now would be rather more than sufficient next year. Senator Shafroth . Yes; but that might occur also under the pres ent state of the currency ? Prof. S prague Y es; but under the present state— or under the pro posed bill— banks are responsible for providing the gold: wher as to the other case the responsibility would be transferred to the Treasury. I BANKING AND CURRENCY. 873 I do not regard your proposal as a matter of fundamental impor tance. I think it could be done; but our banking system would be no stronger. Our banking machinery would be just as likely to break down in the next period of emergency, with suspension of payments, the breaking down of the domestic exchanges, and all the rest of it. Senator Siiafroth . D o you not think that the 50 per cent reserve, with the powers vested in the Secretary of the Treasury, directing him to purchase gold, if necessary, and to issue bonds, if necessary, in order to maintain the parity— do you not think that that would make a currency that would never go to a discount ? Prof. Sprag ue . I think that is perfectly true. But is does not improve or change appreciably the banking situation. Senator Siiafroth . Yes. Prof. Sprag ue . It is purely a monetary change. Mr. W e x l e r . And has no special value. Prof. S prague . It is nothing more than that. Mr. W e x l e r . Mr. Chairman, I would like to get something into the record which the committee of bankers designated for me to take care of. It will not take over five minutes, if the committee will permit me to do it. The Ch a ir m an . D o any of the members of the committee desire to ask any further questions at this time ? Senator Siiafroth . No, Mr. Chairman; I have none. Senator B r isto w . I have some questions which I should like to ask Prof. Sprague. Will he be here Monday or some other day? Prof. S prague . I can be here Monday, if the committee desires my presence. Senator Siiafroth . W e would be glad to hear you further. The Ch a irm an . Well, on Monday the committee will be very glad to have you continue your remarks; they are very interesting. Senator S hafrotii . Y es; they are. The Ch a ir m an . There arc many things that I should like to ask you in regard to this matter, Prof. Sprague, and with regard to the principles which are involved in this; and if it will suit your con venience (it is now nearly 6 o’clock), the committee will hear you further on Monday. Will it be the pleasure of the committee to meet at 10 o’clock on Monday mornirg? Senator S iiafroth . I think it will be better to meet at 10 o’clock. The Ch airm an . On Monday we will meet across the hall, where we met the first few days; but this room will be subject to our use later on. ADDITIONAL STA TE M EN T OF SOL. W E X L E R , VICE PR ESIDENT OF THE W H IT N E Y CENTRAL NATIONAL BANK, OF N E W ORLEANS, LA. Mr. W e x l e r . Mr. Chairman, there is one of the suggestions made by the conference of bankers at Chicago, which I was designated to call to the attention of this committee, which I have not had an opportunity to present. That suggestion relates to the manner of giving the Federal reserve board the right to designate any city as a reserve city or a central reserve city, or to change any city from a reserve city or central reserve city, and designate any bank in any such city as a country bank or a reserve bank, as the case may be. 374 BANKING AND CURRENCY. And the findings of our committee at Chicago were to the effect that the present law is entirely adequate, in that it provides that three-fourths of the banks in a city which may desire to become a reserve or central reserve city may do so with the consent of the Comptroller of the Currency and the Secretary of the Treasury. Now the Federal reserve board should take the same privileges that the Comptroller and the Secretary of the Treasury now have; but the cities themselves should certainly have some voice as to whether or not they should be made reserve or central reserve cities, or as to whether or not that privilege should be taken away from them. It would give to the Federal reserve board, as the bill is written now, a tremendous power to favor its friends and punish its enemies, in indi vidual cases of banks. Senator S hafroth . Mr. Wexler, are you going to be here next week ? Mr. W e xl e r . I will be here all day Monday. I will be engaged upon other matters in the forenoon of that day; but I will be here in the afternoon. The Senator from South Dakota was very particular in inquiring whether, if a small country bank went into the system, it would make more or less money. I have that worked out for him. The Chairman . Y ou can put any exhibits into the record that you desire upon the subject, Mr. Wexler. Mr. W e x l e r . All right, Mr. Chairman, Thank you very much. The Senator from South Dakota took particular interest in the re sult, from the standpoint of profit, of the country banks coming into the system under the proposed bill. A careful calculation shows that there would be no difference in the net profit of such a bank under the proposed bill from what it is at the present time; the calculation based upon a bank with a capital of $25,000 and deposits of $100,000. In reserve cities, based upon a capital of $1,000,000 and deposits of $5,000,000, such a bank would earn $6,500 more, or about 0.6 of 1 per cent on its capital than it earns at the present time. From both of which calculations it is evident that, from a profit standpoint, there is neither any special inducement to come into the system, nor any particular reason to remain out of it. The American Bankers’ Association, by which this committee was appointed, is composed of 14,000 members in every State in the Union; and it is believed that the suggestions made by the com mittee directly represent the sentiment of practically all of these banks. They represent a total capital investment of $15,000,000,000, and certainly can be recognized as a powerful and influential factor in the general business of the country; and their experience and standing should be taken into account in the consideration of the suggestions that have been made. The management of the association is under an executive council, composed of 1 member for each 200 banks, selected by each of the States, and is therefore thoroughly representative of every State and every section of every State in the Union. (Thereupon, at 6 o’clock p. m., the committee adjourned until Mon day, September 8, 1913, at 10 o’clock a. m.) BANKING AND CURRENCY. 375 M O N D A Y , S E P T E M B E R 8, 19 13 . Committee B anking and Currency , U nited States S e n a te , Washington, D. C. The committee assembled at 10.30 o’clock a. m. Present: Senators Owen (chairman), Reed, and Shafroth. The Ch a ir m a n . Mr. Allen, the committee will hear you now. on STA TE M EN T OF W ILLIAM H. ALLEN, OF BROOKLYN, N. Y. Mr. A llen . Mr. Chairman and gentlemen of the committee, I am here to offer a few remarks upon the subject of this bill, and to ask that there be a further investigation into the subject. A t the last meeting of this committee the remark was made that this currency question was a subject on which bankers and students of finance only could be expected to have a knowledge and that the proletariat could hardly be expected to know much about it. Well, that may be true as regards some features of it. And then there are other features, not the least important of which one may with zeal and industry acquire a knowledge, even though he may belong to the humbler portion of the proletariat— that humbler portion of which it has sometimes been said that it takes nine of them to make a man. The particular object I wish to speak of is in regard to the concen tration of money in New York. You are all aware that that is the main subject. Some think that it ought to be circulated all over the country. Some think it is a good thing to have it concentrated in New York. Well, I think it ought not to be concentrated in New York—-not so much. I think it ought to be scattered all over the country. However, I am not here to state of— — Senator S hafroth . Mr. Allen, where do you live? Mr. A lle n . Brooklyn, N. Y . Senator S hafroth . W hat is your occupation ? Mr. A lle n . I come from the land of Gaynor. Senator S hafroth . W hat is that ? Mr. A lle n . I live in the same town as Mayor Gaynor. Senator S hafroth . Well, I say what is your business, please. Mr. A lle n . Well, I was in the clothing business for a number of years. Senator S hafroth . And have you lived in New York all of that time ? Mr. A lle n . Well, most all the time. Now, I have only half an hour to speak here and can not enter into family history. The subject which I propose to speak on is the fact in regard to the concentration of money in New York. The Aldrich plan, and the plan of the American Bankers’ Association, is founded upon a certain theory of this concentration of this money in New York. It assumes that after the harvest is moved country bankers have a surplus of monev which they send to New York to invest in 2 per cent call loans, and then in the following fall of the year about $200,000,000 has to be recalled to move the harvest, and they assert that it is the recall of this money which causes high rates for money, upsets business, and 376 B A N K IN G A N D C U R R E N C Y . produces panics. It is alleged that it was the recall of about $200,000,000 in 1907 that caused the panic of that year. That theory seems to be universally accepted, not only by the advocates of the Aldrich bill, but also by those who advocate any other system of currency reform. Well, the point is, have you looked into it? Has any man ever come before this committee and proved to you satisfactorily that if money rates— that the $600,000,000 sent here in New York, where it is loaned at 2 per cent, has been sent on from the far W est and the South, where the rates are 6 per cent ? And who has shown you that it takes $200,000,000 from New York in August and September ber to move the harvest ? Has anyone here shown it ? This $200,000,000 is supposed to be sent to New York in the first two months, when the harvests are heaviest in average years, and it is about $18,000,000 a week. Around the first week in September the movement is supposed to be the heaviest. I have here last week’s New York Tribune, of September 6. It is an announcement of the movement between New Tork and the interior. It says: A loss in cash of $1,500,000 by the New York banks is indicated by the reported movement of currency this week. The banks received from the interior $11,632,000 and shipped to that point $9,763,000, which included $2,784,000 national bank notes sent to Washington for redemption. Well, I do not understand that “ bank notes sent to Washington for redemption” ------Senator S hafroth (interposing). They are not redeemed; they are just sent in and full legal-tender money is sent to the banks to be put in their reserves, and this currency------Mr. A llen (interposing). Well, I am taking the movement as indicated here. Mr. W e x l e r . It goes back all over the country, When it comes to Washington, it is sent to the bank whose name it bears. Senator S hafroth . Oh, yes. Mr. A lle n . Well, this money is announced here as sent to Wash ington for redemption, and whether it comes back to New York or not I am simply saying it is not sent from New York to the West. It is sent to Washington for redemption. Senator S hafroth . Yes. Mr. A lle n . N ow , even with that it shows that m place of losing $18,000,000 a week the past week New York actually gained on the interior. Furthermore, New York has actually gained in every one of the last six weeks, right in the harvest season, when the advocates of this Aldrich theory assert that it was the other w ’ay. Now, furthermore, last year the banks of New York in those two harvesting months actually gained $20,000,000 on the interior. In 1911 it was almost the same; they gained $24,000,000. They also gained in each of the next three months —for October, November, and December. So you see the theory is ridiculously false to begin with. The whole theory of the Aldrich plan is based on the assumption that New York loses $200,000,000 in currency in August and September. The report of the monetary commission shows that— we have allowed $200,000,000 for the natural expansion of currency for seasonal or crop-moving demands. I B A N K IN G AND CU RRENCY. 377 Mr. Vreeland estimated the amount sent from New York as be tween $200,000,000 and $300,000,000. That is his figure. And it is supposed to be sent out in August and September. The Aldrich plan, you might say, is based on the theory that the panic of 1907 resulted from the loss of $200,000,000 to the interior banks in August and September. On this point Lyman J. Gage says— Such a crisis was reached in the early autumn of 1907; it was precipitated by calls from the interior to remove the crops. Responses to those calls weakened the foun dations of the reserves of the New York banks. There could be no misunderstanding about that. To the same effect is Hon. William B. Ridgley, Comptroller of the Currency, in his report to Congress, December, 1907. He says: Is it any wonder, then, that the demand in the fall for about $200,000,000 in cur rency to move the crops always causes a disturbance? It was directly and immedi ately due to this that the crisis of October, 1907, assumed the phase of a bank panic, and spread all over the country. Well, now the reports of the movement of money here indicated show that in August and September New York only lost $8,700,000. That is, including the bank notes sent to Washington for redemption. After you deduct that, as I think you should, New York actually gained a little over $1,000,000. Senator Shafroth . Well, but you know the United States Gov ernment immediately sent back to New York the quantity of bank notes they sent down here, but sent it in legal-tender money. Mr. A lle n . Well, I understand that part, my dear sir. Senator Shafroth . Well, then, I want------Mr. A llen (interposing). But I simply say it was not sent West. Senator Shafroth . Yes. Mr. A lle n . It was not sent West. If it was sent to Washington for redemption, it was not sent to the West to move the harvest ? Senator Shafroth . That is right. Mr. A lle n . Then, there is no dispute about that. Well, Prof. Sprague------Senator Shafroth (interposing). For that reason I did not think that any factor of a redemption of notes should be taken into consider ation by you at all in determining the flow of money from W est to East. Mr. A lle n . Well, but I am simply reporting the things as they are. Mr. W e x l e r . Have you taken into consideration subtreasury transfers from New York? Mr. A lle n . Well, I am taking into consideration the figures as I see them. If you can show other figures, all right. Prof. Sprague in his History of 1907 shows that there was no serious monetary shortage in New York during August and September, and the banks in August, 1907, were in slightly better shape than in August, 1906. The surplus reserve was larger in August, 1907, and although there was a slight loss, it was increased somewhat in the two months before the beginning of the panic. Such testimonv, along with the figures of the currency movement, is of itself enough to show that this whole theory of the cost of our financial illness in August, 1907, and later years is wholly false. Now, in relation to inelastic currency, the theory that harvest movements are the cause of our financial illness forms the basis for 378 BANKING AND CURRENCY. all the talk about inelastic currency. says: On this point, Mr. Vreeland Agricultural crops of this country average about seven or eight billions a year They are harvested in the late summer and fall. This means tnat we need a very much larger amount of money in the fall than in the spring. This is why we need several hundreds of millions more in the harvesting season. There is where we need elasticity in our currency system. Another authority, Mr. A. B. Hepburn, speaking of an inelastic currency, says: Currency must be provided to move the products of the farm and the factory to the markets of the world in order that the return prices may meet and extinguish local demands. Mr. Hepburn leads us to assume that if we issue, say, $200,000,000 extra currency to move the harvests, after the harvests are moved, the markets of the world return prices will meet and extinguish local demands, and the $200,000,000 will be redeemed. It is a very plausible argument, but it has this fatal defect : After we have shipped our goods to the markets of the world, we do not receive the cash in return. There are no return prices, as Mr. Hep burn very well knows. Last year we exported— our excess of ex ports amounted to $581,000,000. Did we receive that amount of cash ? No, we did not, and have not for a good many vears. On the contrary, right at the end of the year we began to ship gold to the other side; and if you include the silver, as it ought to be—although some will not admit this— if you include silver exports, we have actually lost more in the last 15 years than we have gained from Europe. Senator S hafroth . Well, do you not account for that by the expenditures of tourists over there in Europe, and also the payment of interest charges due to the other side ? Mr. A llen . Yes. Well, if you will allow me, I am coming right to that point. Here is a great secret that is halfway held back in our argument for currency reform: They never argue that point that you have mentioned. You never hear it in arguments about currency reform. Now, I want to explain my idea of it, and that is one reason why I am here. I am not offering a theory; I am simply furnishing you some facts and showing the need of further investigation. As between the Aldrich plan, or the American bankers plan, and the plan that is favored by this committee, I favor their plan, the plan that is favored by this committee. But, still I think we ought to have the facts in the case. My argument is, that the reason we did not receive any cash in 'return was that these debts for interest, dues, expenditures of Ameri can tourists abroad, and immigrants’ remittances, the cost of ocean freights, and other items, offset our debts; offset them, I claim, by over $500,000,000. The debts are estimated now at between— well, estimate them as low as $653,000.000, or about that. Others esti mate them at $1,000,000,000; oth es estimate them at $1,500,000,000. Senator Shafroth . Y ou mean the debts which Americans owe Europe ? Mr. A llen . Y es; all the debts for all these items every year. Mr. W exler . Y ou mean the debts that they owe us? BANKING AND CURRENCY. 379 Senator S iiafroth . N o ; which we owe them. Mr. W e xl e r . The debts which we owe them? Senator S iiafroth . Yes. Mr. A lle n . They do not owe us anything for tourist expenses or interest dues or immigrant remittances. There are no American immigrants on the other side. Well, I claim that the debts are at least over SI,000,000,000. The money in settlement of these debts, the immigrant remittances, tourist expenses, and the like, comes to New York from all parts of the country and finds its way into the foreign banks in New York; or the international banks that are controlled by Morgan, Kuhn, Locb & Co. and other international houses Here is an item from the Wall Street Journal that helps to ex plain it: Exchange with New York is fairly strong, and at most places is at the point which calls for the shipment of currency to New York. A considerable part of the inquiry for remittances in the foreign exchange market comes from the interior cities, and cash has to be sent here for the purpose of exchange. This money, as I say, goes into the private foreign banks and the national banks with foreign connections, such as the National City Bank, the First National Bank, and the Chase National Bank. They do not ship the gold to Europe. If they did, we would have a panic every year. They reinvest it, or, rather, they borrow on the other side, to avert the shipment of gold to Europe. They reinvest part of it in our securities permanently, and if they can not invest enough permanently, why, they buy short-time notes on the other side. I do not profess to understand all the technique of this matter; but that is the substance of it. W e borrow abroad to avert exports of gold. Some times, they say, we borrow it to carry on circulation But the first original cause of it is that we borrow to avert the export of the gold to Europe. If we exported half of what we owe in Europe in a year, we would have panic, and it would hurt the big borrowers more than anybody else. So they seek to avert the export of gold for their own interest. I have numerous extracts to that effect, which I can show you if necessary; but it would occupy too much of your time to read it out. Now, part of this money that is held in NewYork is reinvested in loans, loaned out in Wall Street, and in loans to other banks. And I say that, that is the money that is concentrated in New York. Money that belongs to foreign bankers, and the West and the South never owned SI of it. There are the $600,000,000 a year. They say, the theory is, you know— that they send it on to New York, after the harvest is over— that is the theory which you hear exploited in the bankers’ conventions and everywhere else. It is not sent to New York after the harvests are moved, to be recalled when the harvest has to be moved again. But, somehow or other, it remains in New York all the year around. There is no recall of it. There has not been a recall of any such sum as even $100,000,000 for the Inst 13 years. And according to the facts, as I understand them, the movement out from New York is less every year. W hy, even the reports of the Government admit that much, and if they catch on to anything, why, other people ought to do so 0328°— S. Doc. 232, G3-1— vol 1----- 25 380 BANKING AND CURRENCY. So far as I see------Mr. W exler (interposing). Do you contend that our net debt to Europe is over one billion dollars ? Mr. A lle n . Yes. Mr. W e x l e r . The records do not show it. The balance of trade is in our favor. WT hat becomes of all of our cotton, and wheat, and corn that we export to them ? What becomes of the money paid for that ? Mr. A llen . When you were speaking here last week I allowed you to proceed without interruption. Mr. W e x l e r . I beg your pardon; I merely wanted to get light as to your views on the subject. Mr. A llen . And I ask the same courtesy from you. The Chairm an . All right, Mr. Allen. Mr. Wexler thought it would be better to ask you a question on that point while you were discussing it. Senator Siiafroth . Yes; Mr. Wexler doubtless thought it would bo agreeable to you. Mr. W e x l e r . Yes; I had no intention of being discourteous; I thought it would be agreeable to Mr. Allen. Mr. A llen . When my statement is over, I will be willing to argue the point with you. The Chairm an . Mr. Allen, the committee will permit you to sub mit any notes or memoranda that you want to, in case you desire to supplement anything that you have said. Mr. A lle n . Well, if I can not convinco you by what 1 say that the subject ought to be investigated, 1 do not know that it would be worth while for me to submit anything more. Now, in relation to this 8600,000,000, we are all aware that in the last seven months there has been a considerable stringency through out the country. Some time in April the Secretary of the Treasury went so far as to lend 88,000,000 or 810,000,000 to the banks, and offered to put into operation tho emergency currency law. Can you make head or tail out of that ? At the time that the Gov ernment loaned this 88,000,000 or 810,000,000 to the banks, they made the first reported effort to see that it should not find its way into Wall Street to be used for speculation; and for that purpose he put it in the banks of the West and South, and it had hardly got out of his fingers before it made a bee line to New York; and the first thing we read of was that it was used to make money easier in Wall Street. Afterwards it was reported that some of it was shipped to Europe. It is hard to believe that any western farmer or any western banker was sending his money on to New York under the conditions that have existed all over the West and South in the last six months, and yet in this last five weeks or the last six weeks, right in the midst of the harvest season, we find that New York has actually gained in theory about 830,000,000; that is to say, in place of receiving over 8100.000. 000 from New York, the West has actually shipped 830.000. 000 to New York. I do not think that is consistent with the Aldrich or the Vreeland theory, whichever you call it; and that is only consistent with the fact that this money comes on here in the settlement of these foreign debts. I think that that is the only reasonable explanation, and it is these foreign debts, the absorption of currency in settlement of these debts, that is the main cause of our financial stringencies and the panic of 1907. BANKING AND CURRENCY. 381 I do not want to take up much more of your time. And lie also announced that, if necessary, he would deposit $50,000,000; and all this time, mind you, New York is supposed to have $600,000,000 belonging to the farmers of the West. It is always supposed to be really the farmers’ money, you know, as distinguished from money that comes from the banks of the West. This money has remained here in New York when rates here were as low as 2 per cent, and I have seen that when rates were as low as 1 per cent, while they were 6 per cent in Chicago and higher still further west. A t the conference in Washington here, where the delegates from the American Bankers’ Association were conferring with the Govern ment officials in relation to the loan of $50,000,000, a suggestion was made that the western banks ought to be made to recall the loans that they had in New York, and a number of the bankers at the conference said that if such a rule was enforced they would have to give up to outside banks some $600,000,000. Well, now, consider the absurdity of that. If they get $600,000,000 in New York, why should they be asking the Government to lend them $50,000,000 ? Where is the sense in it ? W hy should we lend it to them ? W hy should we not insist that they take at least $50,000,000 from New York? About the same time Senator Tillman accused the New York banks of refusing to loan money to the South, and the New York banks replied to the effect that they were lending, that they had been lending all along, and that they were lending more than that at that time; and yet at that same moment, according to the bankers’ theory, the South has a part of the hundreds of millions loaned in New York. The Chairm an . The bell has just rung for a vote, Mr. Allen, and you have a little more than 30 minutes now. Mr. A lle n . All right. In an address to the New York Credit Men’s Association last January Mr. J. R. Forgan, of Chicago, said that in the last 60 days the banks of the country had passed through a season of the tightest money since 1907, and if anything had happened to cause things to blow up we would have had another panic like that of 1907. In this period of 60 days there was not a national bank in the country that kept up to its full legal reserve. Later on the situation was so serious the Government was forced to lend some $8,000,000 or $10,000,000 to various banks in the West and South to avert a panic. It is now generally conceded that the money situation of the past nine months, which almost terminated in a disastrous panic, was chiefly due to the exports of gold at a time when we should have been importing the metal for our exports of merchandise. This gold went abroad in settlement of these foreign debts, and these debts are the chief cause of the concentration of money at New York and the resulting financial ills. It has been shown that the panic of 1907 was not due to the recall of interior loans. It remains to be shown that it was due to the absorption of cash and gold exports in settlement of these foreign debts. For years prior to 1907 we had been selling and pledging securities abroad to avert export of gold on this account. In May, 1906, the London Economist estimated that we then owed Europe alone about 382 BANKING AND CURRENCY. $500,000,000. In October of the same }mar the financial editor of the New York Times estimated all foreign borrowing at $750,000,000. A t the beginning of 1907 the Paris correspondent of the Evening Post claims that we owed about $600,000,000. A t the same time the banks of Canada reported having $82,000,000 invested in call loans at New York, and the Bank of Japan had $60,000,000 loaned. So that our total borrowings footed up to $740,000,000, or about the same as the financial editor of the Times had estimated them at two months before. In an article in the North American Review, Mr. C. A . Conant stated that in 1907 the monetary system broke down and our banks suspended currency payments because the gold reserve of the coun try, amounting to $701,000,000, was so hopelessly subdivided among the banks as to be utterly useless. This is an argument for a central bank, to hold all the reserves of the country. It aims to show that the panic resulted from the failure to have this $701,000,000 concentrated in one bank. Well, in opposition to this view, I hold that every dollar of this old really belonged to foreign bankers. It was our gold which they ad received in settlement of these foreign debts, and we had bor rowed it back. It was this foreign grip on our gold stock which resulted from these foreign debts that finally caused the panic. In concluding this argument I would suggest to the committee the necessity of further investigation of this matter in order to obtain more definite information regarding these foreign debts, temporary and permanent. The London Economist puts our English investments in this coun try at $9,000,000,000, the yearly interest on which is $450,000,000. Other foreign investments here are placed at $3,000,000,000, the yearly interest on which is $150,000,000. Our cost of ocean freights is $150,000,000; total yearly indebtedness, $1,200,000,000. This would make these debts $200,000,000 more than the amount esti mated by James T. Talbert, vice president of the National ( ity Bank of New York. I would also suggest the need of locating the real ownership of the amounts held in New York banks which they report as being “ due other banks.” Advocates of the bankers’ plan of currency claim that the $600,000,000 now in New York banks belongs to interior or country banks, while I hold that it belongs to foreign banks. They received it in settlement of these foreign debts. It is this drain that is the main cause of financial disturbances in the United States. I thank the committee for hearing me. f LETTER TO THE CHAIRMAN OF THE COMMITTEE FROM J. H. DAVIS, OF RICHMOND, VA. A ugusta , A r k ., September 5, 1913. Hon. R obert L. O w e n , Washington, D. C. D ear Si r : Your message has just reached me here in Arkansas inviting me to a hearing before your Finance Committee. The time named is now so far spent I can not reach Washington, but thanking you for your kind invitation I write you this letter giving my views. BANKING AND CURRENCY. 383 If it reaches you in time I shall feel grateful if you will read same to your committee with my respects. The hope of civilization, permanent peace, and progress depends on issuing currency on the productive industry and not the debts. To issue on the debts gives the creditor class a double deal in the business world, sets a premium on debt, distress, and decay. This currency issued on the debts of the people in their collective capacity, Government, State, county, city, and the corporation bonds and other commercial debts held against the people going to the creditor class at cost, organized as banks, they reloan to the people, thereby drawing double interest, and also have power to control all enter prise, all employment, all progress, because they control the money— its life blood. This is not only un-Democratic but is unscientific, unsound, and a perversion of every law of justice, and a surrender of governmental sovereginty to private greed. When a government issues its currency upon debts, either govern mental or commercial, to increase the volume of currency, they must increase the volume of debt. Thus, like the “ bottled caterpillar,” they devour themselves. Consult Jefferson, Jackson, Calhoun. Issue at least half our currency to the States, counties, and solvent cities for internal improvements, and on productive industry and agriculture. Two-thirds of our people have no assets to coin into currency. They do all our labor and conduct most of our business; they man the ship of state from pilot house to coal bins in the bottom, but do not own it. The owners are in a palace on shore. To issue all money to these owners, is not only injustice but un mitigated outrage. God’s “ decree of title to property” was based upon production. The well belonged to Jacob because “ Jacob digged it.” But the places to “ dig” are now all chartered, foreclosed, and shut out from humanity by law, and the privileged few have plastered the earth with ruinous and enslaving debt, control all money, all avenues of industry and progress, limited only by that cupidity and avarice which finally make an intolerable t y r a n y over the masses. W e get our rights from God and not from governments. “ Govern ments are instituted among m en” to secure these rights and not to destroy them. It is an undisputed truth that whoever controls the money of a country controls its destiny. This is fundamental. If this is a people’s Government the people should control the money. It will be fatal for the Democratic Party to deny or evade this fact. Jefferson contended that public debt was a public calamity; a curse giving aristocracy a power to absorb the labor and wealth of the masses and enslave posterity by a legal debt made to consume their labor before they were born. Hamilton said: Public debt was a public blessing affording a basis for banks, and an ailment for business to feed on. Thus the great issue was joined. If public debt is a public calamity, then to issue the currency to the debt holders is to double the cruelty of that calamity. The conviction is settled in America that there is “ a money power” which, in league with other great corporations, has formed an in 384 BANKING AND CURRENCY. visible but irresistible tyranny of wealth; that it tramples on law, custom, decency, and honesty without scruple; and has created a system of quiet alluring and seductive methods by which it sways and controls our Government. The Democratic Party and patriots of all parties have charged this from 10,000 rostrums. Printers have put it on millions of pages of our current history. Recent revelations have confirmed its truth. The average Democrat was taught to believe and believes now that this mighty and malignant power is the founder and father of the whole scheme of asset currency. And when they hurled from power Aldrich, Cannon, and the Republican Party they felt they were free ing themselves from the entire “ Aldrich asset currency crowd.” I look in vain for some pledge, platform, or speech by one of our leaders that commits the party to the asset plan of currency. I find 10,000 invectives against it by Democrats and not one suggestive sentence in its favor, and as a plain, common citizen I make bold to ask your committee to point to some pledge or platform that commits our party to this system. Now, Senator, some of your committee may consider this message as the fulminating fumes of a foul mind, the diatribe of a demagogue. If so, let me quote from one of the grandest of the sons of earth. Thomas Jefferson, in writing to Madison, said: Public debt is a ruinous system, which has armed despots with a means to enslave and plunder their fellow man. In writing to William B. Giles, speaking of Hamilton’s money sys tem and its devotees, he said: A government of an aristocracy founded on banking institutions and moneyed in corporations riding and ruling over the plundered plowman and beggared yeoman. Can it be considered by candid men— Democrats— that when our fathers forbid the sovereign States from emitting bills, issuing cur rency, that they expected their posterity to create a lot of commercial corporations and give them power to emit bills— issue and control our currency. If so, listen to the following language spoken by Jefferson, the founder of civil liberty, to Washington soon after Hamilton had “ steam rolled” his first bank and bank bill through Congress. My wish was to see Congress cleansed of all persons interested in banks and public stocks and a pure legislature given us. Again in writing to R. II. Lee, then in Congress, the great Jefferson said: Certainly no nation before ever abandoned to the avarice and jugglings of private individuals to regulate according to their own interests the quantum of circulating medium for the nation. * * * yet this is what has been done and will continue to be done unless stayed by the protecting hand of our legislature. The evil has been produced by this ruinous machinery of banks, and justice, wisdom, duty, all require that Congress interpose and arrest it before the schemes of plunder and spolia tion desolate our country * * * Without this interdiction we shall have the same ebbs and flows of medium and the same revolutions of property (panics) to go through with every 20 or 30 years. Now Senator, supported and nerved by these quotations and a thousand more I might give from Jefferson, Jackson, Calhoun, Benton, Clay and scores of our grandest men, I want to talk freely. If the present Owen-Glass bill had been published before election as the Democratic position on the money question we would never have carried a Western State— Roosevelt would now be President. BANKING AND CURRENCY. 385 Our whole system is inherently wrong and you are building a pyramid with the little end down. It is doomed to fall at recurring periods causing untold distress. You are giving the creditor class through the banks control over the dearest interests of our people— the money. You throw the gold of our country into idle vaults, and then turn and coin the misery and misfortunes of our people into paper money for their creditor masters. A campaign for increased and inflated debts of every character will follow the passage of your bill, and bonds for every conceivable enter prise^— by States, counties, cities, school districts, road districts, irriga tion districts, reclamation districts— will pile into billions, and thou sands of corporations will come up like Jonah’s gourds, in a night’s time, to issue bonds and stocks to be used as “ prime paper” as a basis for asset currency. The inherent wrong of an asset currency would be greatly relieved and the measure as a whole would be a vast improvement on present conditions if you will divide your total issue into, say, four volumes— giving the creditor and commercial class one-fourth on their assets, the States, counties, and solvent cities one-fourth on their bonds for internal improvements; the agricultural class one-fourth on storage certificates; the farm and home builders one-fourth on land and home mortgages— all at the same cost. It would put all our real progress beyond the control of avarice and sordid speculation and would see millions invested every year for public internal advancement and not for private gain and corporate greed. The much-maligned Henry amendriients lay down a correct prin ciple and point you in the right direction, to which should be added a home and farm loan system for rural farm homes. Not a mortgageplaster skin game, to send them to the banks, to pay usury to the creditor class; but recognizing that the independent home is the surest foundation of a free people and that civilization begins and ends with the plow; make a companion bill enlarging the Agricultural Department wdth a bureau through which the home builder could get this money at the same rate the banks get it, by mortgage on a speci fied quantity of land with a specified pattern of a house and home on it, after the manner of building and loan associations. Banks are public institutions created for public good and not for private greed. The people who run them being public agents, it is absurd to say that the Government has no right to control them in their relation to the public by such laws as will best prevent par tiality, plunder, and extortion. The money power has run riot over our country long enough; they have plunged us in panics and made millions out of our misfortunes. They have bound us to a golden chariot in which they ride and rule in roval splendor. They smudged, burned, and destroyed 600 mil lions of greenback dollars, the money that saved the Union and crushed the Confederacy, and issued bonds to take its place as a basis for bank currency, and had the shameless audacity to label this act of perfidy under the libelous term, “ An act to strengthen the public credit.’ * Having burned our greenbacks like pirates burn a ship they then funded all our national debt, which the patriotic Lincoln had written payable in “ lawful money, ” into a coin debt; then to cajole the people and conceal their crimes they called this act of treachery “ specie 386 BANKING AND CURRENCY. resumption.” So fearful were they that they might be overtaken in this act of infamy they specified that the bonds should be paid in coin of the then standard weight and fineness, which meant a gold dollar with 25.8 grains and a silver dollar with 412^ grains. Still longing for more power to plunder they then came forward in a cold-blooded conspiracy and struck down, demonetized, and killed the silver dollar and refunded the debt into a gold contract. This last act of spoliation they misnamed “ an honest money system.” Yet after welding this chain of cruel conditions round us, and breeding and bringing on panics and business bankruptcy to the common man at regular intervals, bringing us through this serpentine route of swindle and fraud, telling us all the time that they were the “ Lord’s annointed saints” and rulers, the guardian angels of our financial system, the defenders of public credit and public honor, and the sanctified apostles of “ honest money,” sound banking systems, and safe and sane currency laws, and that all who opposed them were visionary dreamers representing inflation, repudiation, and dishonor, they came forward five years ago with an imperative demand to corn the untold millions of debts they held against the States, counties, cities, corporations, institutions, and individuals of our country into currency— at the people’s mint. This climax in their career of crooked conduct they in then- pragmatic and pusillanimous effrontery called “ An act to reform our currency.” I can not believe— I shudder at the thought of believing— that the Democratic Party can be made to turn the picture of Jefferson, Jackson, Calhoun, and Benton to the wall, and take up where Aldrich left off and carry out his scheme. Senator, millions of our people hold no assets except willing hearts, willing minds, and willing hands to work, and the product of these is their assets. An asset currency will give them but scant relief and will finally intensify their distress. These people have looked to the Democratic Party as their friends. If they have looked in vain, then the party will look in vain for their support in recurring elections. Let me plead with you people, Democrats, to “ remember thy creator,” the common people. Kevise your measure along funda mental lines as outlined by Henry and his friends, and add a farm and home provision, and you will leave your names enshrined in honor and esteem to hand down to a grateful posterity as having brought to life again the Democracy of Jefferson and Jackson on the money question. Take the Henry amendments as a basis with a farm and home builders’ addition. A home was God’s first gift to man— a home and some portion of the earth from which to produce comforts, and where we can rest from toil; a home, around which hangs a halo of endearment to every human being; a home, the absence of which tends to make man an alien to his God, an alien to his country, and an outcast. A home is so essential to human happiness that the downfall of society, the decay of liberty, and the wreck of civilization in every country have been measured by the homeless numbers within her borders. The love of money is the root of all evil, and the money question is the vital point in every country. A money system founded in BANKING AND CURRENCY. 387 usury, based upon debt, and conducted through a barricade of toll gates erected by law between the people and their mints, and often kept by a lot of licensed looters and franchised freebooters who look at everything through the curves of a dollar mark, and waylay every important business transaction, and forbid its passage unless they can have a rake-off, is the blighting curse and crime of our country now. Your pending measure complicates, augments, and aggravates that situation. We must not consider society as now existing, the normal or natural status. W e have been vitiated, bound down by ages of oppression and plunder and never allowed to develop the good, the sublime in our race. We must change our money system so as to invest at least half for public good and not for private gain. This will mark the way to a glorious advancement, peace, and prosperity. Mankind is a creature of environment; his conscience is a pupil in the school of contact, subject to the evil as well as the good in fluences, and money is the most absorbing thought in the human race, and a just and righteous system of currency will do more to tone and elevate life than all else statesmen may do. But our present system is a relic of barbarism coming down from feudal times, and our country is now filled with Shylocks who still demand their pound of flesh. When the men who made our Federal Constitution had finished their work, in the address they sent out to the people they named five great questions of sovereignty that had been taken from the States and vested solely in the Federal Government and “ made supreme. ” These powers were “ to make war, conclude peace, form treaties, coin money, and regulate commerce.” They said these questions— and the correspondent executive and judicial authorities should be fully and effec tually vested in the General Government. W e have just as much right to farm out to banks and corporations the power to declare war and conclude peace and make treaties as we have to farm out the power to coin money and regulate com merce, and would be equally as safe in so doing; yet we have vacated our sovereignty over our coinage and currency and the regulation of commerce to a pitiless horde of conscienceless corporations, which have become cannibals in commerce and merciless maurauders in our monetary affairs. And led on by inordinate greed are now demanding that the great majority of our people, the bone and sinew of our country, the toilers in our industrial world, and the tillers of our soil, the great debtor class, over whom they have held sway for a lifetime, shall now be shackled and bound by law, through an asset currency as sheep to be sheared by them, for another gen eration. May God intervene through the clarified conscience of an honest democracy and prevent this spoliation. I do not claim to be an expert in financial matters. A lot of the most consummate freebooters that ever filched humanity have been called by themselves and their lionizing flunkies as experts. 388 BANKING AND CUBRENCY. I am just a common man in the common walks of life. I have spoken in the language that intense earnestness gives to one who has spent a large part of his life for the freedom of the masses from the shackles of the classes. With much respect, I have the honor to be, Yours, in best wishes, J. H. D avis . (The following brief was filed with the chairman of the committee, with the request that it be printed as a part of the hearings:) BRIEF OF AN DREW L. RUTTER, OF ENFIELD, N. H. Before entering upon this vital subject it may not be out of place to state that this paper was prepared nearly or quite four years ago, and which, from the knowledge of present conditions, appears to have been forecasted by recent events in the New York Stock Exchange inquiry, and only serves to give added force to the suggestions here faintly outlined. 11 is hoped that these statements 'will be received with that respectful and serious attention that the gravity and importance of this all-absorbing subject de mands. Even if the suggestions may be crude and disjointed, yet it is believed you may be able to glean an idea or two that may present additional facts not already touched upon by others, and it may interest you to know also that no mere theory or Utopian scheme is indulged in but reference is made to actual facts patent to anyone sincerely disposed to make use of them in order to fully substantiate and make clear the purpose for which the facts, and facts alone, are presented with which to con struct a practical and plain common-sense system of banking so much needed at thi.time, and for all time for that matter. In calling attention to the growing necessity for a more satisfactory and thorough reorganization of the country’s present financial system and in dealing with the contemplated change it may not be out of place to refer to the comments made in relation thereto by the Secretary of the Treasury in his annual report for 1909, which are at this time unnecessary to quote. But if nothing better can be arrived at than resulted in the act to amend the national banking laws, approved March 30, 1908, w hich, taken altogether, is nothing but a miserable makeshift that can serve no other purpose than to still further complicate the already too complicated and complex con dition of our currency system, in adding still further to these futile efforts to properly and safely adjust our currency, your attention is called to the extremely unwise act passed by the previous Congress giving the Secretary of the Treasury authority to ssue emergency currency based solely on the Government’s credit without the means being provided for its redemption. Now, why should there be occasion for the issue of irredeemable currency at any time? Has not this always been our great trouble this patchwork legislation, this Micawber-like system of finance, the results of which have always proved disastrous to our national credit, adding still further to the spirit of speculation the country over and fostered for that very purpose by the big, the Wall Street, interests? In further confirmation of what is here stated let us call to mind the conditions that were vital factors which resulted in producing the great panic of 1873, one of wluch was not so much the destruction of capital by war, as cited by Mr. Charles A. Conant in his Century article, as diverting it into speculative channels, and really the four milliards poured into the lap of Germany in the shape of France’s promises to pay money and after the war of 1870, also like promises of Austria after Padowa. and coupled with our own abundant promises, not money but promises to pay money at about the same period representing in the grand aggregate the startling sum of $9,000,000,000 of promises to pay. These combined flotations speedily found their outlet in the wildest speculation, both in Europe and America. The failure of Jay Cooke & Co. was simply the one factor which shook this paper house of cards to its very founda tions, thus leading, as it always does, to universal disaster. It is simply piling Pelion upon Ossa in attempting to construct our financial edifice out of paper prom ises, which this present bill contemplates, and the results of which from the very nature of their creation out of airy nothings of which dreams are made and not any more substantial, can not be otherwise than the source of still further trouble. The effort must now be made to change the current and break away from our mental bias, which leads us only too easily to rely alone and solely upon the credit of the Federal Gov ernment. A word also in relation to reserve centers for the storage of currency to meet possible emergencies arising from the movement of our agricultural and other products during BANKING AND CURRENCY. 389 the spring and fall. The proposed plan which will be treated further on in this paper will, it is believed, entirely do away with such a provision, which can only open the door for opportunity such as already exists in the case of New York City banks and other large money centers. It may be stated in the first instance that almost the entire circulation is based on the credit of the Government as is evidenced by the use of its liabilities in the form of interest-bearing bonds which on October 31, 1909, as appears from the report of the Comptroller of the Currency, were deposited with the Treasurer of the United States together with lawful money, $679,545,740; notes, $25,595,703, which represents the amount of national-bank note circulation, $705,141,443 at that date; legal-tender Treasury notes of 1890, $351,000,000; total paper currency, $1,056,141,443. Against this amount of currency but $150,000,000 in gold has been set aside for the redemption of legal tender notes only, leaving over $900,000,000 unprovided for which can only be redeemed by the sale of the Government bonds as aforementioned which in any case does not involve the use of either gold or silver coin and are redeemable in legal tenders. All are fully aware that the precious metals constitute the very foundation of all financial and commercial transactions throughout the entire business world, and in cases of sudden monetary panics which so frequently occur to unsettle business, destroy confidence and credit, prove that gold and silver coin are the only panacea for their cure. Again, we are obliged to acknowledge that since the adoption of the national banking system in 1863 and 1864 and up to the present time, its success has been wonderful notwithstanding its serious defects. Its growth has been phenomenal, starting with 1,513 banks in 1865 with a capital of $393,137,206, and individual de posits of $500,000,000 and to October 31, 1909, increased to 7,025 banks with capital of $964,621,000 and individual deposits of $6,956,502,690, all in 44 years. The very fact of the tremendous strides thus made during the past 44 years to 1909, chiefly upon credit, is itself a menace and an encouragement to still further stretch that credit beyond the bounds justified by sound business methods. To give you a clearer and more comprehensive view of the tremendous business transacted mainly on credit of the banks of the United States of all classes, including national banks, 1 beg to invite your attention to a few figures which in the aggregate are simply startling in their amount, the assets of said banks being made up of loans and discounts, overdrafts, bonds, stocks, domestic and foreign securities, real estate, mortgages, furniture, and fixtures, together with specie, United States notes, legal tenders, notes, and a lot of miscellaneous items which total the immense sum of $21,095,054,420. Of this vast sum there is represented as available in gold and silver and subsidiary coin but $1,044,661,913; the balance of $20,000,000,000 represents credit in its various forms as above recited—bonds, mortgages, realty, etc. These figures may be found on page 31 of the Report of the Comptroller of the Currency for 1909 and are approximately correct as per reports also of 22,491 banks, national and State, received and tabulated by the United States Monetary Commission to April 28, 1909. To still further exhibit the great amount of business transacted on credit through the bank clearing-house system, which aggregate 123 associations located in the large business centers of the country, the aggregate exchanges during the year to Sep tember 30, 1909. were $158,559,487,000. On these vast transactions only 4.22 per cent was paid in money, as reported to the Comptroller of the Currency by Manager William Sherer of the New York clearing house (see p. 9 of his report, 1909). It would be use less to still further startle you with figures running up into the billions of individual checks and checks of business houses all over the land drawn against their bank accounts. W hat has already been shown will abundantly serve the purpose in demon 7 strating to us all the necessity for speedily inaugurating a radical change for the bet terment of our finances by placing our circulating medium on a sound specie basis and at the same time insuring the absolute safety of bank deposits as is already done in the case of the bill holder, and there can be offered no valid reason why the depositor should not share in such protection, which, by this means, would add to the confidence of the public in the banking system as is in contemplation and as will appear in the suggestions which will be followed in due sequence. A former governor of the great State of New York, and at present sitting on the bench of the Supreme Court of the United States, in a speech at that time, and cer tainly having in mind his recent experience as an investigator of the big insurance companies in New York City, stated that there was no reason why the depositor should be made secure, as Tom, Dick, and Harry were not personally interested in looking after the deposits of their neighbors. Did he not know and had he quite overlooked or forgotten the fact that the very essence of insurance was the fact that Tom, Dick, and 390 BANKING AND C U R R E N C Y . Harry jointly assured the safety of each other in the payment of the premium on the amount for which they were insured, thus making it possible to secure the safety of the policy of each and all thus associated? As a brief retrospective view of conditions that have grown out of past experiences in our efforts both by individual States, the General Government, and by the business community, I may here be permitted to hastily refer to Alexander Hamilton, pre eminent as a constructive and successful organizer, as instanced in his able work in the establishment of the system that has been in operation in the United States Treas ury for over a century, and also his able work in the constitutional convention and as a statesman whose labors before and after the adoption of the Constitution and in Washington’s Cabinet as one of his chief advisers, have marked him as one of the grand est figures in our history, and time only adds to the luster of his acknowledged genius. He drew order out of the chaotic condition in which he found the finances of the coun try, reconciling the serious differences between the several young States growing out of the extraordinary expenses for fitting the volunteers furnished by them during the Revolution, and also Hamilton and those working in harmony with him saw the neces sity for the establishment of a bank under the indirect control of the Treasury to serve as an aid in giving some measure of stability to the somewhat chaotic and imperfect financial condition at that time. Such a bank was incorporated by act of Congress in 1791 for 20 years, the Government taking stock in it to the amount of $2,000,000 by deposits of 6 per cent bonds to that amount, the bank being capitalized at $10,000,000. In the case of this bank no report of its condition is available until 1809 and 1811. A statement of its assests and liabilities is appended, and in the case of the second United States Bank, chartered by Congress in 1816 for 20 years, a statement of its condition from 1817 to 1840 is given and may be found in Tables X X and X X I I , pages 432 and 434, Annual Report of the Comptroller of the Currency for 1908. Upon an examina tion of these brief citations the conclusion may safely be drawn that if the United States Bank had been permitted to continue, with our growing knowledge and experience in bank management, it would have proved quite as successful as the Bank of Eng land, and, with branches throughout the country as population and business in creased, would have greatly assisted in developing commercial enterprise, at the same time have to a great extent prevented the exotic growth of hundreds of irresponsible and mismanaged State banks built up on fictitious capital and which culminated in financial disaster in 1837 and also in 1857, 20 years thereafter. At this late date we may be permitted to refer to the violent and unreasoning oppo sition against continuing the United States bank by many of the people at that tune, and even well-known business men were ignorant of a practical knowledge of the banking business at that time, and because of that lack of knowledge were strongly prejudiced against the system. They were mere children and yet to be schooled by that relentless teacher, experience, which as aforenamed was taught them by the financial disasters of 1837 and 1857; and thus ignorance, prejudice, and politics made it a party cry of the then democracy. President Jackson, equally unprepared, for like reasons, and fearing its monopolistic tendencies felt called upon to oppose it in his characteristic and strenuous way. With all due respect to the hero of the Battle of New Orleans and the vigorous opponent of nullification, he was not equipped to intelligently oppose the financial policv then in existence, but was obliged to appeal to ignorance and strong party prejudice in order to make his opposition to the further extension of the charter of the second United States bank successful. The Whig Party, with Clay in the leadership, was not able to cope with the formidable array of the party that advocated for the first time in our history the Jacksonian doctrine, that to the victor belonged the spoils, and the advocates of a United States bank sank beneath the blow. With our present knowledge we feel that the work of the Jackson administration in this particular was a fatal blunder. The question is thus briefly referred to at this time for the reason that the proposed reorganization contemplates making the Government one of the principal stockholders, if not the principal stockholder, in the contemplated central national bank. We must not permit unreasoning prejudice to stand in the way of looking squarely at the facts that at the present time confront us at every hand, as we can not fail to observe that the National Government has been compelled to assume direct control of many vital interests that without such control would prove permanently disastrous to the best interests of the people as a whole. The Interstate Commerce Commission, the Department of Commerce and Labor, the Agricultural Department, Post Office Department, with parcel post and savings adjuncts, the conservation of our land and water, and many other noteworthy objects, in fact, our entire governmental ma chinery constitutes one grand gigantic trust. Why should we fear to still intrust the I BANKING AND CURRENCY. 391 great, and commanding interests involved in the direct management of our country’s finances, which present economic conditions really compel us to do? With our pres ent knowledge there appears to be no other safe course. Another feature that should be borne in mind, should the General Government become an active member in the proposed plan, is that the money in the several Subtreasuries could be used not only as a working balance as at present, but form part of the common fund for daily use, and thus actively utilize what has been held these many years past as idle and dead capital, serving no good purpose whatever. There are other vitalizing influences that will naturally enter as important factors in the plan suggested by the active employment of idle capital in hundreds, nay thousands, of banks in our large cities and commercial centers that our present banking laws prevent them from doing, where the central bank directorate could find use for it. It is well to bear in mind that not all of the coin and currency as noted in Treasury circular issued from the office Loans and Currency Division, in the Treasury Department, is available, is not in cur rent use, as much of it is held by the banks, loan and trust companies as reserves. In the plan proposed every dollar of coin currency can be put into active circulation in view of the enormous deposits that will be at the disposal of the central and allied banks, and can be at all times at the disposal of the central directorate for transmis sion to any and all points where it may be required. As before stated, no special reserve will be needed. That feature alone will serve as an efficient means to pre vent threatened panics. The Secretary of the Treasury through the Comptroller of the Currency already has general supervision, for nearly 50 years, granted by the national bank act and its amendments, over the entire national banking system. In order to give additional stability and character to it, the Government should take an active and practical interest in its management, taking cognizance of its loans and discounts and the kind of security that may be accepted, and vital matters relating to the circulating medium, seeing to it that it is sufficiently elastic to meet all contingencies arising from current business conditions. This does not mean that individual banks should not be under the direct control of the banks’ officers— the president, cashier, and directors— but that the directorate of the central bank, which this plan contemplates, should be careful to see that the general and specific requirements of the bank act should be strictly adhered to and carried out in every detail. Direct Government control, say, through its officers, who should be in the directorate, namely, the Secretary of the Treasury, Comptroller of the Currency, and the Treasurer of the United States, or their duly authorized representatives, will demand that not only the interest arising from its large stock investment, but the magnitude of the transactions of the bank which will inevitably be involved, will require all time, talent, and energy at their command to see to it that nothing shall be left undone to secure safe and permanent success in all its departments. As the Government will have the chief interest in the central bank the matter of proper compensation of the directors and other officers commensurate with the work and responsibilities attaching thereto, will be the duty of Congress to fix, and especially so in the cases of the Secretary of the Treasury, Comptroller of the Currency, and Treasurer of the United States, whose salaries are already fixed for their present duties, and should be increased in proportion to the new duties and responsibilities to be assumed by them, governed to a great extent by the compensation received at present by the officers of the large banking institu tions in our large business centers. Referring to the important matter of security to the depositor as well as to the note holder it may be noted that several of the Western States, notably Oklahoma, have taken up the question in earnest and in that State all banks are required to set aside one-eighth of 1 per cent for that purpose. I know many people may think this action impracticable by reason of the tax upon bank profits. In defense of the proposition I beg leave to submit the following statement of the actual losses sustained by the failure of banks for the entire period of the banking system from 1864 to 1908, over 44 years, on page 391 of the Report of the Comptroller of the Currency for 1908, quite long enough to demonstrate its actual necessity at this time; that out of the yearly average of active national banks numbering 3,174, with individual deposits averaging $1,597,987,400 annually, the annual loss to those is*but 0.074 of 1 per cent, and for the 44 years, with aggregate deposits of $70,311,445,582, the loss is only as before stated, 0.074 of 1 per cent.1 You will see at once that the sum to be set aside annually in the interest of all of the depositors in the several national banks throughout the country for the purpose would be exceedingly small as compared with the average annual indi vidual deposits and will but slightly affect the annual profit, and this fact bein» clearly shown the gain in the confidence and credit of the system will far outweigh the cost, 1 Read from pages 6 and 7, Treasury Department Circular No. 62, July 1, 1908, as to profits on capital invested b y national banks, and also page ~4U, Report Comptroller of Currency for 1907. 392 BANKING AND CURRENCY. and also reduce to the minimum the danger of a monetary panic; in fact, make it almost, if not quite impossible. Is not the practical experience of half a century sufficient evidence for its adoption? The method to be adopted in bringing about the proposed change may be thus stated as briefly as possible: A central national bank with a capital in gold coin and bullion and silver coin and bullion to the amount o f................................................ $2, 000, 000, 000 The present active national banks to take stock severally in the total amount of the present capital of each bank which on Oct. 31, 1909, represented 7,025 banks and capital of........................................ The United States Government to the amount of its present outstand ing legal-tender and Treasury notes, 1896............................................. Outstanding......................................................................................... The public to subscribe for the remainder in sums of $50 and its mul tiple, deposit to be made in gold and silver coin to make up the dif ference after national banks and Government subscription paid in .. T o ta l..................................................................................................... 964, 621, 925 351, 000, 000 1,315,621,925 684, 378, 075 2,000, 000, 000 The coin certificates or coin notes should also have the legal-tender quality as the United States legal tenders have now, as they are based entirely on deposit of gold and silver for their redemption. For the amount of gold coin and bullion, about $225,000,000, now held in the Treas ury a like amount of legal tenders to be retired as rapidly as they come in and an equal amount of national coin gold bank notes to take their place in denominations of $500, $1,000, and $10,000, and for the coin held by the national banks about $225,000,000 gold, as shown by the report of the Comptroller of the Currency, January 30, 1911, and $29,000,000 silver, in same kind of notes as above described and in like denominations as may be required in current business. In the case of new subscribers to the stock of the central national bank and for the amount of gold and silver coin deposited a certificate of the fact should be issued by the Treasurer of the United States as custodian and director of bank, and in like manner certificates should issue to each individual bank for the total of its capital stock, at the same time stating character of said capital stock, and same shall be held as at present by the Treasurer of the United States as a guaranty for present currency circulation until such time as securities can be sold for gold or silver coin or their substitute in certificates, the latter to be used in place and stead of United States bonds now held for the purpose noted above; similar certificates to issue to each individual subscriber or stockholder. Now as to the measure of acquiring the amount of gold coin, bullion, and silver coin to cover the capital stock of the central national bank, there may be found on page 325 of the report of the Director of the Mint to June 30, 1909, the following: The estimated stock of gold at that date in the United States was___$1, 574, 906, 904 Silver coin ........................................................................................................ 727, 685, 265 Making a total o f.................................................................................. 2, 302, 592, 169 The present stock, June 30, 1911, of gold coin and bullion is............... Standard silver dollars and subsidiary silver coin ................................... 1, 753,196, 722 724, 640, 731 Making a total o f.................................................................................. 2. 477, 837, 453 An increase o f.................................................................................................. Of this sum the United States Government holds of its own, say (gold).................................................................. $236,000,000 And for depositors.................................... ............................. 15,000.000 National banks....................................................................... 224, 080, 000 Private banks and individuals.......................................... 375, 000. 000 175, 245, 284 Gold coin and bullion............................................. 1, 640, 080, 000 BANKING AND CURRENCY. Standard silver dollars held in Treasury for silver certificates........................................................................ National banks: Standard silver dollars................................................ Subsidiary c o i n . . . . . .................................................... Private banks and individuals, standard silver dollars. Private banks, subsidiary coin ......................................... 393 $477,717,324 12, 822, 408 16, 185, 383 59. 165, 492 116, 140, 415 682, 037, 022 $2, 322, 117, 022 Leaving for future investment, when required............................ 322,117, 022 Now, gentlemen, here are indisputable facts—solid facts—and with such facts no excuse can be found to avoid constructing a financial system unexampled in the world’s history. You have only to assemble these scattered units as is here shown to make the entire vast si m of gold and silver at once available. With this substantial evidence, the facts of which are beyond dispute, there can be no possible doubt as to the ability of the central national bank to secure the required amount of gold and silver in coin and bullion to furnish the aggregate amount of capital stock contemplated of, say, $2,000,000,000, or even $2,500,000,000, thus placing the new organization on a solid and permanent foundation instead of the use of the United States Government, State, county, and municipal bond liabilities as at present. It has been shown by the Comptroller of the Currency in his 1909 report (p. 17), that the profits accruing to the business of the national banks throughout the country to be slightly over 10 per cent of the capital invested. This fact well known, together with the knowledge that the General Government will have the principal manage ment, there can be no danger of there being more than enough national banks and individuals to take up the amount of stock required. Permit me here to refer to the proposition made b y the Hon. Nelson A. Aldrich, late chairman of the Senate Finance Committee, who also favors the idea of a central national bank, but with a capital of only $300,000,000. It can not fail to strike any of us that we can name 10 men who could, without reaching very deeply into their pockets, quietly control the majority of the stock and thus make it possible to use the central bank for their own special interest and that of their friends. As to the proposed use of silver as well as gold in the new organization, it should not excite surprise or alarm, as standard silver dollars have formed an important part of our circulation ever since the act of Congress of 1878, 32 years, providing for the purchase of silver bullion for coinage into United States dollars and which amounts to nearly $500,000,000 and their substitute silver certificates have become familiar to us all. We have also subsidiary silver coin in circulation to the amount of $160,000,000 (and, by the way, 8£ grains less than standard silver dollars), and both have been accepted without question in daily business at their present parity with gold; and this is as it should be, as under the Constitution Congress has seen fit at various times in the past to fix the value of the coins minted of both metals arbitrarily in the common interest and for the convenience of the public at large. At this point it may not be out of place to state that in the Annual Report of the New York Clearing House Association for the year ending September 30, 1911, the sum of $498,775,000 in silver certificates was used in the settlement of debit balances to the association, demonstrating their daily use in the current business of that conservative institution without at any time raising the question of bimetallism, as it was assumed that their possible redemption might be made in gold coin. The word “ arbitrarily” ? It is vitally important to impress upon your minds this undeniable fact, that all governments have arbitrarily done the same thing—that is, fixing the ratios of silver and eold—and the standard of value in the coin of any country does not always conform to the standard fixed by other countries. The chief factor that has governed in most cases is the value given to the precious metals by custom long established in the commercial world from the earliest times of which recorded history affords us any knowledge. The Chaldeans over 4,000 years ago fixed the parity between gold and silver as 12 to 1, and we have at this time changed it to 16 to 1, or nearly. In 1786 it was as 1 to 15.25, double standard at that; in 1792, as 1 to 15, with free coinage, and so on. For your further information I crave your indulgence by glancing as briefly as possible at some of the changes adopted by various nations as per report in Circular No. 62 of the Treasury Department July 1, 1908. In order to emphasize the fact that all changes in our monetary standards are made arbitrarily (I use the word advisedly), and at times I fear in the interests of the few instead of the many, you will at once perceive the impossibility of depending upon the daily market value of the bullion which without the official stamp of the mint is simply a 394 BANKING AND CURRENCY. commodity governed entirely by the law of supply and demand. Once the seal of the Government is placed upon either metal its value is thus fixed beyond question, and the responsibility for its redemption and acceptance rests entirely upon the Govern ment, and the public receives it because of that fact, and its validity for that reason can not be questioned. Referring again to the necessity for direct Government control, it will be necessary to repeal the act creating the Independent Treasury and the closing of the several subtreasuries, and also the act of May 31, 1878, prohibiting the redemption of legaltender notes, that all Government funds from all sources 6hall be deposited with the central national bank or any of the affiliated national banks, and all drafts and checks drawn by the Treasurer of the United States to be paid by said banks, accurate account being kept for that purpose, as the Government will have personal supervision, as before stated, through the Secretary, Comptroller of the Currency, and Treasurer of the United States on the board of directors. There can be no doubt but that the repeal of the act creating the Independent Treasury will result in greatly simplifying the work of the United States Treasurer’s Office, and result in reducing the cost in running it. In fact, the receipt and disburse ment of the public funds by the central national bank and its agencies can be made without any cost to the Government whatever. The safety of the public funds will be absolutely as secure as under present condi tions, and more so. The preparation of the currency and the redemption of the same when necessary will be continued in the same manner as at present, excepting that the National Bank Redemption Agency should form a permanent part of the United States Treasurer’s Office, as the currency, say in the course of five years at the furthest, will all be of the same character, resulting from the change of conditions as is in con templation. The question of bimetalism has not been raised in these remarks, but reference is made here to section 14 of the act approved March 14, 1900, which states that the provisions of this act are not intended to preclude the accomplishment of international bimetalism whenever conditions shall make it expedient and prac ticable, and secure the same by concurrent action of the leading commercial nations of the world, and that at a ratio which shall assure permanence of relative value between gold and silver. Your attention has already been called to the fact, several times repeated, that all ratios and parities are arbitraly and, as a rule, made in the interests of each nation. This being undeniably true, it would be entirely proper for us as the principal com mercial nation of the world to take the initiative and simply continue the use of the present metals (gold and silver) at present parity only authorizing the purchase in the open market of an amount of silver bullion for coinage into standard silver dollars and subsidiary coin as may be found necessary to meet the yearly increasing demand, keeping in mind that no greater sum shall be coined than will keep the difference in the circulation between the two metals as is the case at the present time, i. e., $1 in silver for $3 in gold. The cheaper metal, we are all aware, remains at home under present conditions, only gold will be exported as may be required abroad by pur chase for circulation or by the result of foreign business demands. In this connec tion it may be stated that a possible remedy can be provided to very greatly prevent the exportation of gold coin already minted by placing a prohibitive tax upon such exportation and permitting only pure bullion to be exported not already in the pos session of the mint for use by the Government as a basis for currency issues. Another suggestion will appear to be opportune, and that is the fact that the total of the pres ent coinage of gold and silver— of present denominations is meant—is amply sufficient for many years to come to supply current demands. In lieu thereof there could be minted of both metals, with the present percentage of alloy as 900 pure is to 100 alloy, there could be substituted ingots in such form as may be found most convenient in handling, varying in value, in gold from $500, $1,000, and $10,000, and for silver $50, $100, and $500. and ingot certificates could be issued for them, as is the case at pres ent for gold and silver deposits of coin, thus adding convenience of handling as well as saving the expense of coinage, and at the same time serve the purpose as security for the issue of national-bank notes as hereinbefore stated.1 For your information it may be stated that the Director of the Mint, in his report to the Secretary, page 324, estimates exports of gold abroad last year at about $61,000,000, and the net exports from 1870 to 1909 total $691,746,700. Our neighbor. Canada, held in its treasury December 31, 1908, $54,909,076 of our gold coin. What is the significance of these gold exports, if not for the self-evident purpose of the European nations to safeguard their credit with gold and silver coin? The gold production of all the mines in our States and Territories in 1908 was, in gold. $94,560,000; in silver. $28,050,000. coinage value. Of this sum there was consumed in the industrial arts $14,754,945; in new 1 See page 8, Report of D irector oi Mint or 1910, suggesting coinage of bars for coinage of coin. BANKING AND CUKRENCY. 395 material of the mines and in silver bullion, market value $3,000,000, or approximately that amount. It has also been recently stated by certain alarmists that the greatly increased production of gold in the United States and also throughout the world has a tendency to cheapen it and in consequence resulting in the increased cost of living. I have just this moment given the results of the production of our mines, and after deducting the amount used in the industrial arts there is but approximately $79,000,000 that can be utilized for coinage in gold coin and about $25,000,000 in silver. Now, we have a population of about 95,000,000 people, and the resultant increase is but a paltry dollar and a small fraction per capita. It hardly seems necessary to buttress this statement of fact b y the honestly and earnestly expressed views of others who have given perhaps more serious thought to the subject than myself; yet in view of the vital interest attaching to the influence which the production of gold in such vast quantities in recent years is supposed to have in regulating the price of commodities, I may refer briefly to an interesting article in the North American Review for July, current year, by Albert S. Bolkes, on this subject. He comes to the conclusion that instead of gold, or rather the precious metals, having any influence upon prices, speaking generally, that the trusts are mainly responsible. He quotes from the eminent French economist, Neymarck, who states: “ There is no denying the increase in the production of gold. It has kept up for 100, for 50, for 20, for 10 years, always progressing. And yet, during the interval in France and abroad, there have been crises caused b y the going down of prices— a fall in food products, in the price of land, in mineral products, coal, iron, etc. How did it happen that the gold production, which they say is the cause of the rise in prices nowadays, could not stop the fall in prices then?” David. Ricardo, one of Adam Smith’s brightest followers, refers to M. Say, another eminent French economist, and also to the Earl of Lauderdale concerning the laws which are supposed to govern the rise and fall of the prices of commodities, do not attribute it altogether to the abundance or scarcity of gold, but assign the cause mainly to the trusts, who are able to control them, because of the fact that they can create at will a demand b y withholding the output until the necessities of the people make it possible and then dictate the price. A t the same time they state that the precious metals, particularly gold, are liable to the least fluctuations as a medium of exchange. Prof. Fisher, of Yale, has suggested the annual adjustment of the value to be given to the precious metals, chiefly gold. Let us inquire. Has any nation—have any noted bankers anywhere made the attempt to perform what to me seems the impossible? It is not a matter possible of adjustment in any such way, as each nation has already fixed their value arbitrarily, for in no other way can this be effected. It is com mon knowledge that the value of any product is mainly affected by the law of supply and demand. Pure gold and silver bullion are placed in the same relation with other products. The Government fiat can alone definitely determine the value of our gold and silver coin as a medium of exchange, thus leaving pure bullion of the precious metals a merchantable article. Just at this point let it be stated in defense of the permanent use of the precious metals as the foundation for the proposed system, that in the matter of the purchase of gold and silver, and particularly the latter metal, the difference between the coin age value and the bullion value in the open market has always afforded a profit or seignorage to the Government and has been covered into the Treasury as a miscel laneous receipt, and millions of dollars have thus been added thereby. Now, it is vitally important that it be borne in mind that this gain or profit added to the coinage value will always, no matter what the condition of the bullion value in the open market may be, make or rather secure the Government at any and all times against loss. This fact does not always appear on the surface, but y et is a self-evident prop osition that should always be borne in mind that no loss is possible at any time to the Government and logically none to the people. I may be pardoned in this connection, as it relates to this all-important question of the intrinsic value of gold and its relation to other products and also as a measure of value. I have just cited several weighty authorities on the subject. You are now in vited to several statements in an article on “ Taxing the cost of living,” by David Starr Jordan, president of Leland Stanford University, which appears in Harper’s Weekly of August 23, 1913. He begins by stating that the high cost of living began about 1897 and is world-wide and greater in high-tariff countries. In general, the rise has been 50 per cent and the fall of the purchasing power of gold has also fallen about 50 per cent, and he quotes Sauerbeck, who states that an Englishman’s dollar of 1897 is worth 87 cents and an American dollar 70 cents, and in 1913 the American dollar is worth but 61 cents. Again, he states that the increase of the world’s 6tock of gold is from 9328°— S. Doc. 232, G3-1—vol 1-----26 396 BANKING AND CURRENCY. $7,500,000,000 to $11,000,000,000, and that this increase has now passed its climax. Now carefully mark what follows, as in the next breath he states: “ As the amount of gold at the best is very small for the credit resting on it. The bonded war debt of civilized countries, exceeding $60,000,000,000, it is believed the importance of the factor is greatly exaggerated.” After referring to the greatly increased means of gold jroduction by new processes, he says: “ Its influence is long since spent. It is not ikely that the gold market will soon be disturbed again by new discoveries of mines or by new processes.” Now, mark this last: “ So far as it goes it means an actual cheap ening of the value of gold.” In making this last statement, 't is presumed he refers to this metal, as an article of merchandise, or a commodity like all other commodities, and not as a safe measure of value as the nearest approach to a perfect standard. The point, the important point, in these rather grave statements of the learned president appears to have been overlooked, or has been deemed quite unimportant in his effort to establish the facts he is endeavoring to bring to notice, and that is the fixing an arbitrary standard for the purchase of all commodities, and, further, the very facts he cites only serve to prove that it is not the gold as a standard of value, but the astoundingly stupendous credits of the commercial nations in Europe and also America, approximating $60,000,000,000, are the chief cause, and not the aggregate sum of gold which by his own showing is wholly inadequate to safely buttress those promises to pay; that, indeed, as has been truly said, has mortgaged four coming generations. Students on the all-important subject of economics may and really do establish to their own satisfaction certain bases upon which the world’s products are measured. But not one of them has been able to satisfactorily designate a better, a safer, a surer substance drawn from the earth, air, or sea than the two metals, gold and silver, called by all nations the precious metals, and they have been shown over and over again to be subject to the least variation of anything that has ever been used as a reliable medium of exchange. It is therefore not the precious metals, but the use and abuse of the credits based upon them. Why have all commercial nations in the long past and also to-day founded their credit system on gold and silver, and why are tney strenuously piling them up in vast sums to-day? Simply for the sole purpose of establishing, as we should and must do, a permanent basis for a redeemable currency, and also for placing our credit system on an imperishable foundation. It cannot be too strongly impressed upon our minds the absolute necessity of at once getting our minds altogether removed from the impression that we must place our entire depend ence upon the credit of the Federal Government, as that credit can be impaired and has been impaired in times of stress in the not distant past. On the contrary, reliance must be placed on that basis that has been recognized as the only true and permanent one by all the commercial nations of theworldfrom time immemorial up to the present. Let us therefore build our financial edifice as is proposed so that neither time nor circumstance can ever change or destroy. The last meeting of a general monetary commission in which our Government took an active part, after long and wordy efforts discussing all sides of the question, returned to their respective countries, made a voluminous report, without in any practical way changing existing conditions at that time, nor has anything been done since, nor can anything be done only in the manner so frequently stated in this paper. If we are to successfully carry out the purpose to establish our currency system on the imperishable foundation of the precious metals, from the knowledge at hand of the possible output of our mines, it will prove a difficult matter to supply the annual demand for additional circulation that a constantly increasing population and cumu lative industrial needs will require. The present per capita stock of gold and silver in the United States is but .$18.45 in gold and $8.16 in silver; a total of $26.61. This sum, having in view the proposed change, is entirely inadequate. Viewing the matter as impartially as is possible under the circumstances, as ha? already been set forth, we can not safely arrive at any other conclusion that it is not possible that there can be a much greater output from the mines even with an increased demand, arising from a greater use of silver. Such demands will tend to bring a return of the value of silver bullion in the open market very near what it was in 1890, and thus avoid any necessity for changing the present parity as in all probability the chief commercial nations in Europe. Asia, and South America will be led, or rather compelled, to follow our example in order to keep in step with us. and to meet the new conditions their trade with us will require It may be a matter of surpr'se to you that the proposition is made that all the national banks of the country should at once become subscribers to the total amount of their individual capital, yet if the new organization is to be a perfect suecess, as many of the people as possible should become personally interested in it and in no other way could it be made speedily effective than through the tens of thousands of stockholders already directly associated in our present system, and it could fee brought about { BANKING AND CURRENCY. 397 without in the least creating any disturbance in our circulation, and thus permitting business to be carried on as usual. The $684,378,075 remaining to be taken by the people— now bear in mind these millions in gold and silver are actually in their possession—which, under the condi tions named, they would respond to with their usual alacrity when assured of Its su perior advantages as a profitable and permanent investment, which the direct super vision of the Government will give them abundant assurance. To make quite clear the difference between our present system and the one proposed it is only necessary to state that our banking business and the business of the country is done chiefly on credit, and in the case of the national banks on the liabilities of the Government in the form of bonds and notes as its assets. In the new system the na tional banks will have the circulation based entirely on the use of the precious metals, gold and silver, and the depositor absolutely secured in the amount of his depocits. The advantage in favor of the proposed new method is so far beyond the present as to challenge comparison, and no arguments are needed in support of the logic of in contestable facts so clear that anyone at all familiar with financial matters will not fail to be convinced. Another highly important, factor that will be embodied in the proposed change is the special supervision to be exercised over loans that may be made for speculative purposes where the opportunity will present itself for checking and to a great extent keeping such operations within legitimate bounds by limiting such loans and demand ing such security and its amount as to make them almost prohibitive. Large opera tions that are proven to be strictly legitimate and for promoting great enterprises, where their successful prosecution will find their opportunity in the known magnitude of the vast sums at their command through the medium of the central national bank where all business involving the use of large sums of money can readily be secured, should be under the sole control of the central bank. I desire to refer at this juncture to the danger that already menaces the country in permitting a few men now representing the gigantic financial interests now virtually controlling to also control the entire national banking system and particularly if the central national bank with a nominal capital and with only such supervisory control by the Government as is now the case it will be quite within the bounds of possibility for the interests to dictate for their own selfish purposes just what sums shall be loaned for what object and to whom. In the November, 1908, issue of the Everybody’s Magazine on this subject I may be permitted to give a few figures, both startling in their amount and the multiplicity of their far-reaching influences and world-wide connections, lh a t a small coterie headed by the men who successfully organized the great steel and other trusts can dictate to the financial business jest what shall and shall not be done. I may as well state what the magazine authoritatively published that the grand total aggre gates the sum of $10,268,582,000, made up as follows: Morgan’s own banks....................................................................................... $1, 000, 000, 000 Morgan’s banking interests........................................................................... 6.133, 487, 000 Morgan’s affiliated companies...................................................................... 2, 635, 095, 000 Morgan’s partners........................................................................................... 500, 000, 000 Total.............................................................................................. .. 10,268,582,000 With such evidence as these figures present, is it any wonder that immediate steps should be taken by Congress to thwart the gigantic financial monster by at once passing a national banking act such as has been briefly outlined in this paper b y giving the Government the direct control of the national currency and its finances? In the face of these stupendous facts and figures here referred to and also in view of the fact that this monumental accumulation of capital in a few hands in a few short years, we can not but admit the economical necessity which the development of our vast commercial and industrial resources have made absolutely imperative for the requirement of large enterprises, and without such concentrated capital would be quite impossible. No argument appears to be needed to convince us that such accumulated capital should be placed in impartial hands to serve in promoting large and legitimate enterprises and irrespective of sections or of particular individuals. No prophetic vision of the near future is claimed. Common observation as seen from present industrial conditions and constantly increasing demands for the means for promoting their development point unerringly to still greater concentration of capital as to make the figures named look grotesquely small in comparison, adding still further, if any other incentive is required, almost and in fact altogether compelling the Federal Government for the interests of all to assume directive control and thus insure its impartial disposition, that no set of individuals shall gain any special 398 BANKING AND CURBENCY. advantages as compared with the business requirements of the business public at large. It will be seen at a glance that not less than two billions should be the least sum with which to capitalize the new organization, with the provision that the capital shall be increased from time to time as rapidly as the increased business of the country may demand and placing the control of the contemplated system under the direct supervision of the General Government, as before stated, is imperatively necessary in order to fully conserve the business interests of the whole country, giving, as it will, the smaller banks outside of such financial centers as New York and Chicago and other large cities where capital is already gathered an opportunity to meet the demand of local interests without dictation of pressure from New York or any other point and at the same time share in the advantages that will inevitably grow out of their connection with the central bank as the result, and the necessity for reserve dis tricts in a large measure can thus be avoided. Another feature of the contemplated change will b the practicability of establishing branches in all the principal business centers in Europe, Asia, Africa, and South ana Central America, which has been the crying need of our people doing business in foreign countries and has been and is now a serious drawback in their money trans actions. Another feature which looms up largely with railway and all large cor porative interests is the fact that they have already borrowed abroad money to the amount of $6,500,000,000, on which $250,000,000 in gold is drawn annually in interest, making a continuous drain on our resources. This could be largely prevented when it will be quite possible to borrow large sums from the central bank and thus keep the interest as well as principal of such loans at home to add to the cumulative assets of the country. It may be well to invite your attention to the fact that these large loans made abroad by our railroads and other corporate interests could not be secured at home at the time when required, as our capitalistic interests were widely scattered and it was only possible to secure large sums by turning to the Rothschilds whose great and concen trated holdings I have no doubt proved an object lesson to the late Mr. Morgan and his associates, and which has but lately, in the past 10 years, say, grown to such large proportions. I have only to cite a single instance, where the Morgan interests took over the entire municipal loan of New York City of $170,000,000 at the handsome figure of 96|, which was quite impossible a few years ago, because of our present sys tem. That there was or is any graft in the transaction we may not say, but we can have certain mental reservations as to the probability of it. This lesson is only a mere bagatelle that can be practically realized by the contemplated central national bank for the promotion of big ligitimate enterprises that will inevitably spring up in the development of our numerous and growing industries. Now, let it be stated at this point that if present financial conditions are permitted to prevail, still larger aggregations of capital will be concentrated in the hands of a few big operators, which naturally follows, will be done in their own individual interests as in the case of Rothschilds and Morgan, with not the slightest consideration for the public welfare and only that profits may accrue to themselves alone. Knowing these facts as we should, what other possible course is advisable or possible to stem the rapidly and inevitably swelling tide of concentrated wealth unless the General Government is authorized to step in and take active and advisory control in this way to prevent our stored-up capital becoming misdirected and taken from its legitimate channels of usefulness for the good of the whole people. To more emphatically emphasize the necessity for extending the proposed banking facilities in foreign countries, reference may profitably be made to the strong state ment uttered by the Hon. John Barrett, Director General of the Pan American Union, who states that there is not one banking institution south of the Isthmus of Panama which is in any way controlled by United States capital. Having in view the strik ing fact that our trade with the South American Republics, of exports and imports, amounts to the vast sum of $640,000,000, a like statement will also apply to our large foreign trade in Europe, Asia, Africa, and the islands, only with greater force, as our commerce in all the countries named runs into the billions. In the proposed reorganization proper legislation should be enacted that will enable the central bank to establish agencies in every large city which our foreign trade may require. It is quite obvious that such agencies once established throughout the com mercial world will familiarize our coin-redeemable currency, with its absolute and permanent value, that in time will be accepted everywhere as our present gold cer tificates are to-day, as an always reliable medium of exchange the world over. At this time we can hardly realize the inestimable value that will attach to the knowledge that we will thus be enabled to lead the world in our commercial trade facilities in having a currency that can offer every advantage in facilitating business transactions with the least friction. BANKING AND CURRENCY. 399 Another feature suggests itself in relation to foreign loans to Governments as well as to individuals, and that is all such loans, with their character and agreements and contracts, should be reported in detail to the State Department when occasions may arise in cases of failure to fulfill their conditions, that proper action can at once be taken as the Government will be a party in interest and can thus greatly limit the danger of loss. What will also have an important bearing in the successful and safe operation of the central bank will be the organization of a double system of bank examination, one as a check against the other, without the possibility of collusion, and doing away entirely with local bank examiners as permanent residents of the State. A division of the cen tral bank having control and directing them at its discretion to such points as will be deemed safest and best for the work in hand, and no examiner should be permitted to visit any bank but once in any given year, and then to continue all in like manner, so that the danger of collusion with the officers of the bank will be reduced to the minimum. For the realization of placing these suggestions, which may or may not be deemed practical, much depends— in fact, it altogether depends—upon Congress as a body that may be safely depended upon to grasp the magnitude of the financial demand of the entire county as a whole and its stupendous growth in population and wealth, placing the benefits of all against the greed of the few. Again, in alluding to the suggestion that all the national banks at present organized should at once unite and merge their entire capital, not only a part, but their entire capital, in the stock of the proposed central national bank, it has been asked with some show of reason what benefits will accrue therefrom. In reply it may be safely stated that it at once assures permanency in the entire system, the chief factor in all success ful monetary transactions, with the element of uncertainty almost if not entirely elimi nated, and again you are at the same time and at once placed upon the solid and enduring foundation based upon the use of the precious metals for our currency circu lation, which is at present in a very precarious condition, dependent alone upon the credit of the Federal Government, and also the fact that the Government, being the principal stockholder, the individual banks will share in its credit and without in the least affecting their individual interests, and at the same time it will add materially to their efficiency in the confidence every depositor will possess that their general super vision by the central bank will serve to secure the safe, conservative management, and thus the general welfare of all the people, directly and indirectly, will be subserved, ully illustrating that the benefit of the many will also accrue to the few. Above and beyond all personal and combined money interests our public spirit, our patriotic pride and nationalism for the common weal, should impel us to rise above our selfish desires and unite to use all reasonable means in the effort to justify the hope that we should generously sacrifice self in some measure for the good of the whole, which in the final analysis includes the individual as well. As a final word, it can only be said in defense of these earnest and sincere suggestions in this paper that many things may have been left unstated, as all human effort in any direction is lame and lamentably incomplete, yet taken as a whole it is an immense step to take for the betterment of our present wholly unsatisfactory monetary condi tion. What follows has been suggested by the Aldrich and other plans as reported by the United States Monetary Commission, and also is a result of later information growing out of present conditions. Since this paper was prepared over three years have elapsed, and in the meantime the present chairman of the United States Monetary Commission, after several years of very careful study of our financial condition, has presented two reports to the com mission for its consideration. In neither report has any special provision been made or suggested for the actual redemption in gold or silver coin of the notes of national banks, merely stating that 50 per cent of its demand liabilities shall be covered by gold or other lawful money; also that one-third in gold or other lawful money shall be provided for the redemption of the issues of currency, which in no way changes iresent conditions, thus leaving entirely out of the question the basic principle so requently stated in this paper, that no notes or currency whatever shall be issued without an equal sum in gold or silver coin shall be at all times on deposit for their redemption. The omission is too glaring not to excite alarm, as the proposed legisla tion as suggested by the honorable gentleman places our whole financial system in a much worse muddle than ever before in our financial history. If any change is made at all, it should be the main purpose to so simplify our bank ing system that no opportunity shall ever again occur to complicate or disturb the business of the country by an undue use of our credit in times of possible financial distress. { 400 BANKING AND CURRENCY. The suggestions of the honorable gentleman, from my point of view, make confusion worse confounded. Again, why should the Government take money from one pocket only to place it in another, with an added expense of 1 per cent as will be the case in disposing of the $730,000,000—new 3 per cent bonds in exchange for the twos now held by the national banks. Is it not quite practicable for the banks to dispose of their present holdings in the open market for gold and silver coin, which can easily be obtained, so that the question of bonds to secure circulation will be entirely eliminated and thus avoid any further trouble? It can not too frequently be iterated and reiterated as to the absolute necessity once and for all time to come as long as our great Government has an existence among the nations of the earth, that our monetary system shall be permanently established on a specie basis. T^he credit of our Government and of the entire business community will have quite enough to do without making it possi ble to repeat the experience of the panics of 1837, 1857, 1873, and 1893, and indeed as late as 1907. The people must have short memories, indeed, not to sadly recall at least three of such fatal catastrophes. For the future I claim they can and must be avoided, and itison ly a question of willingness on the part of Congress, moved by an unselfish and patriotic purpose to enact such legislation as will place us financially beyond the possibility of repeating the follies just referred to. If the Government is to actively participate in the manage met of the central bank and indirectly in the affiliated banks, no tax should be required but for the purpose of guaranteeing the safety of the funds of all depositors in all of the national banks as has been clearly indicated previously in this paper. As the Government is to share in the profits in proportion to the amount of capital invested therein no other tax could in justice be collected. State banks, trust com)anies, and private banks should be prohibited from issuing currency as is now the aw. Concerning the election of the directorate for the central bank as outlined by the report of the chairman of the commission, there can be no objection to choosing them from financial districts as already outlined in the annual report, page 101, of the Treasurer of the United States by dividing the country into six national bank districts, such districts to be finally in such number as may best serve the common interest. Such a number of directors to be chosen as will cover the entire country, say as many as there are States in the Union, and from that number should be chosen the nine members to constitute the executive board, including those to permanently represent the Government upon it, namely, the Secretary of the Treasury, the Comptroller of the Currency, and the Treasurer of the United States or their authorized representa tives, and it does not appear for any valid reason why the Secretary of Commerce and Labor should be a member of the executive board, as the interest of the entire country must be considered, which logically embraces the interest of Commerce and Labor and therefore not entitled to special recognition any more than others of the numerous interests that might just as reasonably receive special recognition. Again there should be but one permanent president of the executive board, and the Secre tary of the Treasury should be that person, as it is proposed that the Government interest shall at all times be paramount and in that case should always hold the largest share of the stock in order also to prevent any undue influence in serving any special interest or section. In regard to reserving certain authority by the whole board of directors not granted to the executive board it should be limited almost entirely to fixing the policy and methods of business from time to time as exigencies may arise demanding the atten tion of the entire body. In any event, there should be specified dates fixed for the meeting of the entire directorate, when matters pertaining to the general interest of all the national banks could be considered and acted upon. A number of suggestions have bee* made as to the fairest method of choosing directors in order as much as possible to avoid favoring any particular section or special interest, and it is almost impossible to effect any arrangement that will not create more or less friction. It does not appear to be altogether fair to the banks to choose any person not directly connected with the banks as stockholders and directors, as it can not be thought that the banking .nterests in any section or community will not at all times consult the welfare of the business public in so far as furnishing funds for legitimate private and public enter prises. From a strictly business point of view no better plan could well be devised than to authorize the directors of all the national banks in each section to choose from their number those required by that section. In that manner they will fairly rep resent the business public, as it is reasonably certain men well and favorably known and of acknowledged ability and integrity will be chosen. The entire board of directors should be divided into three groups, the first to serve 3 years, the second 6 years, and the third 10 years, all removable for cause. At the expiration of their J Ba n k i n g and currency. 401 respective terms the members found to be equipped for the duties of the 3-year group shall be eligible for election to the 6-year term and those of the second, or 6-year group, shall in like manner be eligible for election to the 10-year group. By this means the entire directorate will at all times be composed of men whose abilities have had the practical test of experience to fit them for the satisfactory performance of the various duties that will devolve upon them. As the Government will have the chief interest in the control of the central bank, the matter of proper compensation of the directors and other officers, as hereinbefore stated, commensurate with the work and respon sibilities attaching thereto will be the duty of Congress to fix, and especially so in the cases of the Secretary of the Treasury, Comptroller of the Currency, and Treasurer of the United States, whose salaries are already fixed for their present duties and should be increased in proportion to the new duties and responsibilities to be assumed by them, governed to a great extent by the compensation received at present by the officers of our large banking institutions in our large business centers. In view of the fact that it is contemplated that the depositor as well as the bill holder shall be absolutely secure, it does not appear why any special provision should be made as to the reserves to be held by the banks for any other purpose than that of supplying local business demands. That important matter should be left to the judgment of the executive board, which should be duly advised of such- deposits m the chief financial centers of the country in order that the control and disposition of such deposits shall not serve the purpose of any special interest or locality without the knowledge of the executive board. The question of emergency currency will thus be entirely avoided and its elasticity made possible by constantly shifting it to the different points of the country where required by current business demands, which as a rule, as at present, is done by calling upon the Treasurer of the United States for special transfer to be used for the movement of the crops and other interests—a custom that has prevailed for the past 40 years or more to my personal knowledge— $50,000,000 to $150,000,000 covered into the Treasury yearly. It may be again important to call attention to the powers and authority that should be delegated to the executive board of the directorate. They ought not to be limited in cases where the vital financial interests of the country demand instant action in cases of possible crises which may be imminent and requiring instant atten tion where it would not be possible to secure the authority of the entire board. In short, full plenary powers should be vested in the executive board, for without them such a board would be practically useless, as the real purpose should be to conserve the best interests of the entire country with a view to checking the constant assaults of special interests, which, as we all are aware, are at all times working to secure special advantages. There are a number of possible contingencies that will arise from time to time which will demand the constant and watchful care of the executive, who should at all times be prepared to meet them successfully. This duty will appear to be the chief concern of the board to so u6e the deposits at their disposal as will serve the best interests of the country as a whole, seeing to it that such funds may be placed from time to time in the sections where the exigencies of business require them. An elastic currency will thus settle itself by the wise supervision of the executive board and the proper disposition of currency where and when required. Too much can not be said in relation to vesting such general powers in the entire directorate and also to the executive board as will permit their going into such details in management as may from time to time arise without awaiting a specific grant of the Congress. Again, all authority for the suspension of a bank for cause should be vested in the executive board alone, in order to avoid possible local antagonisms or jealousies. The act that bank examinations, which will be conducted as hereinbefore mentioned, should alone determine the necessity for closing the bank for such cause as the law and regulations growing out of them make it imperative and as the facts shall be re ported to the executive board by the examiners. If any bank should be closed for cause the entire settlement of its affairs should at once be assumed by the central bank and such bank should again be permitted to resume upon a proper reoiganization satisfactory to the central board and when it is found that local conditions re quire it. In relation to the admission of State banks and trust companies as suggested in the Aldrich plan, they should be permitted to come into the system only by complying with requirements demanded by all of the membership subject also to the careful inspection of their assets and liabilities, as will be done in the case of all national 402 BANKING AND CURRENCY. banka coming into the organization. Such institutions would cease to be other than national banks. The suggestion that savings institutions may be attached to the national banking system under certain regulations is manifestly unwise, as it would prove to be the means through which tranasctions not contemplated in the proposed reorganization of our monetary system and would inevitably lead to complications and temptations to irregular and unlawful operations favoring special interests that it is proposed to entirely avoid in the future. The Government has already adopted a plan now in operation to encourage a class of our citizens in small savings. I refer to the postal deposit system, which could be very readily utilized by the central national bank to promote the rapidly increasing business of the country. Such being the case, it can not be seen why any further steps should be taken in that direction. Some objection may reasonably be offered in failing to treat the matter of reorgan ization more in detail and also as to penalties to be enforced for failure in the proper and legitimate performances of the duties devolving upon the officers of the central national bank and those of the affiliated banks. The reason for the omission is that it is impossible to reach such a result only after the main features of the proposed legisla tion are in a fair way of adoption by your committee. In any event the present national bank act will enable the committee to formulate such details as the proposed legislation will require aided by the personal assistance of the Comptroller of the Cur rency, whose practical experience will go far toward correcting any defects which might affect the successful working of the act after its passage and approval. The all important question of loans by the national and central banks with the character of collateral to be required has called forth comment even by prominent Wall Street operators, one of whom prefers the system mainly in daily use by European bankers of commercial paper arising out of the normal movement of goods from pro ducers to consumers. The practice is altogether right as compared with the use of stock exchange collateral in this country. Yet other factors will enter into the busi ness of loaning money when we consider the immense volume that the complex affairs call forth, the transactions of which embrace not only our own but other countries do ing business with us, will compel the use of other securities, particularly when the ques tion of extended periods of time forms the chief factor. In such cases, and there are and will be tens of thousands of them covering the multifarious business of the entire country, the safeguarding of loans is a vital factor in conducting the vastly increased business of the new system, and for that reason the character of the collateral must be determined by the conditions requiring such loans. In this connection the interest of 6,000,000 farmers whose annual production reaches $8,000,000,000 should b y no means be overlooked, and, as has just been noted, provision should be made not alone in their special interest to make it possible to borrow from local national banks on longer time than is permitted in ordinary current commercial transactions and on such securities as farm realty and its products can safely furnish. The question of guarding the interest of all depositors both great and small has already been discussed in this paper, and the plan suggested will effectually dispose of the danger of loss in case of a possible financial panic, so that the working man and woman as well as the capitalist will rest secure without the fear pressing upon them of the loss of their means. The plan if adopted will be in the nature of an insurance for the safety of all de posits, as the depositor will have the positive assurance that proper and practical pro vision will be made to guard such funds beyond the peradventure of a doubt, as the danger of a panic will appear to be quite impossible under the new plan, as such a possibility can be in a large measure anticipated. Gentlemen, we are come to the parting of the ways, and it devolves upon us which it shall be, whether to continue in the road that we have trav led during the past 100 years, meeting with many pitfalls on the way by overreaching our credit far beyond the boundary line of safety and continually struggling under the incubus of a mixed and irredeemable currency with but slight provision for its final redemp tion and constantly menaced with almost the daily prospect of a financial panic, needing but the slightest unforeseen cause to bring dire disaster upon the entire country, destroying confidence and credit and involving the industries of every description, thus bringing distress and suffering to the doors of millions of innocent people and carrying its blighting influence far beyond the borders of our own country. We surely ought to be in a condition at this time to profit by the sad experiences of the recent past and wisely and courageously take the road that invitingly points to assured safety that has been outlined in this paper, weak as the effort may be and lacking in many respects perhaps the lucidity of language that should make the b a n k in g and currency. 403 subject clear to tbe commonest understanding; yet, notwithstanding its many defects, it is to be hoped enough has been said to enable us to fully grasp its purpose and thus lead us on the solid ground upon which to establish an enduring foundation and upon which to build a permanent financial structure that will at all times and , under every trying condition withstand the assaults of every monetary crisis that rash and unscrupulous operators may attempt to create for their own selfish ends. The work thus briefly touched upon and outlined should be taken up at the earliest moment, because of its vital importance to the entire country, involving as it does its manifold interests, industrial and commercial, present and future. Then why should not the present Congress take up the work with a full knowledge of its great responsibilities involving as it does the welfare of not only this, but of future generations. As you are doubtless already familiar with them it is hardly necessary to invite your attention to hundreds of prominent business men regardless of party affiliations all over the country and in the leading industries, and commerce, and noted students of finance, who are strongly urging Congress to take up and perfect a monetary system that shall endure and stand the test of time and experience and thus avoid the danger of possible monetary panics in the future. Just here let me call your attention to certain statements made recently in the public prints and particularly the press of New York City, to the effect that over half a million of dollars have been subscribed by the banks there and elsewhere for the education of the public in spreading broadcast certain financial literature. We can not fail to draw the inference that the motive is not so much for the better under standing of the proposed legislation to conserve the interests of the public at large as to prejudice our minds in favor of a scheme that will still further bind 11s to the jug gernaut car of special interests. As a rule such, apparently, marvelous generosity does not emanate from the men of big business, without an unseen selfish purpose lying behind it. We should beware of the Greeks bringing gifts. Why delay the good work or wait for another financial cataclysm before being thus compelled to take active steps looking to the creation of a permanent currency system that will withstand the assaults of time and circumstance, but earnestly and manfully let the present Congress assume the duties and responsibilities confronting you and to whom the people of the country are looking hopefully and with confidence for prompt action in taking up this great work and giving to us a monetary system superior to any either in this or any other country, and that will excite the admiration of the world and that the lisping millions in their mothers’ arms and generations yet to come, may rise up and call you blest? M o n e y in circu la tion in U n ited S ta tes coin . Nov. 1, 1909, gold coin ................................................................................... Standard silver dollars............................................................................ Subsidiary silver...................................................................................... Gold certificates........................................................................................ ................................. ....................................................... Silver............... _ Gold coin held in Treasury for redemption of L. F. notes............... $598, 773,175 74,383,857 142,324,038 795,205, 489 481,794,889 150,000,000 Silver.......................................................................................................... 2,242,481,448 G old............................................................................................................ 698,502,784 1,543,978, 664 See page 60, Secretary’ s Annual Report for 1909. C ircu la tion M a r . 1, 1 9 0 9 . I Form 1028. Division of Loans and Currency: Gold coin and silver................................................................................ Gold certificates........................................................................................ Standard silver dollars............................................................................ Silver certificates...................................................................................... Held for redemption L. T. notes........................................................... $609, 988, 359 812, 642,179 72,158, 899 471,411,392 150, 000, 000 Total........................................................................................................ 2,246,967,969 Silver coin................................................................................................... 674, 337, 431 Gold coin .................................................................................................... 1,572,630,538 Fluctuation in 4, reduction in circulation................................................... 24,165,353 404 BANKING AND CURRENCY. Amount available for investment in stock of Central National Bank on specie basis. M o n e y in circu la tion i n U n ited S ta tes M a r. 1 , 1 9 1 0 . COIN. Gold coin and bullion in Treasury................................................................ Gold certificates................................................................................................ Standard silver dollars.................................................................................... Silver certificates.............................................................................................. Subsidiary silver coin ...................................................................................... Held for redemption of L. T. notes, gold coin............................................. $597, 798,938 817, 628, 579 72, 801, 345 479, 237,073 142, 426, 878 150,000,000 2,259,892,813 S to c k o j g o ld co in a n d b u llio n in U n ited S ta tes as p er repor U n ited S ta tes, J u n e SO, 1911 o f the 7 reasu rtr of die Estimated........................................................... ................ ............................ $1 753,196,722 Silver coin, standard silver dollars and subsidiary coin......................... 724 640, 731 Total gold and s ilv e r ......................................................................... Held as follows: In Treasury— Gold bullion..................................................................................... Gold coin.......................................................................................... In circulation.......................................................................................... In Treasury— Standard silver dollars................................................................... Subsidiary silver............................................................................. In circulation— Standard silver dollars................................................................... Subsidiary coin ............................................................................... 2, 477.837,453 124,278.584 1.039.622,600 589, 295, 538 492, 587, 318 21,185,641 72. 446,049 138. 421, 723 Total.............................................................................................. 2.477,837,453 Total stock of currency in circulation June 30, 1911............................. Total of coin and bullion, June 30, 1911................................................... 1, 029, 927, 661 2, 477,837,453 Excess of coin and bullion over circulation.................................. 1, 447, 909, 792 Available for investment in stock of central national bank: Gain since Mar. 1, 1909 ........................................................................ 12, 924, 844 Production of gold, calendar year 1908, estimated at..................... New material used in industrial arts.................................................. 94, 560, 000 14, 754, 945 79, 805,055 Population, 87,496,000; about 90 cents per capita. about $1.10 per capita. Production of silver, $28,050,000, A m o u n t o f g o ld co in a n d b u llio n a n d silv er co in (standard silver dollars a n d su b sid ia ry). [Silver available for capitalization for the formation of a central national bank of the United States.! Gold coin and bullion................................................................................... $1, 415, 427, 517 Standard silver dollars................................................................................. 552,038, 418 Subsidiary silver............................................................................................. 142, 426. 878 Gold coin held in Treasury for redemption of legal-tender notes.......... 150, 000, 000 2,259,892,813 Add present national-bank circulation based on United States bonds held as security.......................................................................................... 6C0,089, 070 Amount capital stock to be authorized.................................................... 2,919,981, 883 3,000,000,000 b a n k in g and 405 cubbency. Production of gold from United States mines in calendar year 1909 . . Used.................................................................. $94,560,000 14, 754, 945 Available gold c o in ............................................................................ Available silver............................................................................................... 79, 805,055 20, 000,000 99,805,055 C o n s u m p t io n o f g o ld a n d silver bars in m a n u fa ctu re a n d in the arts, f r o m a n d in clu d in g 1 8 8 0 to include 1 9 0 8 ( 2 8 ye a rs). Total................................................................................................................... Deduct old material......................................................................................... $554,309,375 105, 786,494 Total new gold....................................................................................... Yearly average in new gold............................................................................ 448, 522, 881 16, 018, 674 Silver used as stated for same time: Total............................................................................................................ Deduct old material....................................................... ......................... 315,112,368 37, 590, 827 Yearly average in new silver ........................................................................................................................... 277, 521, 541 , 254,013 1 1 Consumption of world of gold and silver for year 1908: G old............................................................................................................ 113,996,000 Silver....................... . ......... . .................... ................................................ 49,122,542 World coinage from and including 1873 to include 1908: G o l d . . . . ..................................................................................................... 8,011,467,123 Silver.......................................................................................................... 5,177, 695,. 596 Production of gold and silver from mines of the United States, year 1908: G old........................................................................................................ Industrial arts (new mateiial)................................................................ 94,560,000 14, 754, 945 Silver.................................................................................................................. 79,805,055 28, 050, 000 (Thereupon, at 11.10 a. m., the committee adjournod to meet Tuesday, September 10, 1913, at 10 o’clock a. m.) T U E S D A Y , S E P T E M B E R 16, 1913. Committee on B anking and Currency , U nited States S enate , Washington, D. C. The committee assembled at 10 o ’clock a. m. Present: Senators Owen (chairman), Reed, Pomerene, Shafroth, and Bristow. The Chairman . Prof. Sprague, we will be glad to have you give your views with regard to this matter now. [Prof. Sprague appeared before the committee. His statement has been withheld and will be printed at a later date, at p. 497.] The Chairman . The committee will now take a recess until 2.30 o’clock p. m. (Thereupon, at 12.50 o’clock p. m., the committee took a recess until 2.30 o’clock p in.) 406 BANKING AND CURRENCY. AFTER RECESS. The C h a i r m a n . Mr. AIJing, while our committee is not fully repre sented at this time, we think we should avail ourselves of the time. Prof. Sprague, we would like to give Mr. Ailing an opportunity to be heard. This will not interfere with the examination oi yourself at all, because the record will be kept straight. Mr. Ailing just had the opportunity to be here, and we would like to hear him in reference to the subject. Mr. Ailing, I wish you would give your full name and your banking connections to the stenographer. Mr. A l l i n g . My name is Newton D . Ailing, vice president of the National Nassau Bank, New York. STATEMENT OF NEWTON D. ALLINO, VICE PRESIDENT THE NATIONAL NASSAU BANK, NEW YORK CITY. OF Mr. A l l i n g . I particularly desire to speak regarding the method rovidcxl in this bill of carrying a reserve for the Federal reserve notes. consider it so vital that it seems to me that it overtops all other things in the bill that might be open to criticism. Senator I I e e d . What section are you referring to ? Mr. A l l i n g . Section 17. After providing for the issuing of Fed eral reserve notes, it says: f They shall be redeemed in gold or lawful money on demand at the Treasury Depart ment of the United States, in the city of Washington, D. C., or at any Federal reserve bank. Line 17, page 29, says: 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 33$ per cent of the reserve notes so paid out by it, such reserve to be used for the redemption of said reserve notes as presented. From my point of view, the reserve should be all gold. Besides that, the reserve should be a large quantity of gold and a certain quantity of notes issued against it, and the amount of notes to be increased and diminished as occasion demanded, but the quantity of the gold not to be increased or diminished excepting as conditions would allow us to have more gold. The C h a i r m a n . Have you your remarks in writing ? Mr. A l l i n g . I have, Senator. I put them in writing because I thought I could give the matter in more concise form. It will take me about 15 minutes to read it, instead of taking up more time as I would if I attempted to say what I have to say as I go along. The C h a i r m a n . All right. Bead it, Mr. Ailing. Mr. A l l i n g . In the controversy which has been carried on during the past few years bearing on our present banking and currency system, and its necessary reform to meet modern conditions, two expressions are used which convey a wrong impression to the lay man. They are the “ mobilization of reserves” and what a currency should be “ based on.” BANKING AND CURRENCY. 407 What is meant by the mobilization of reserves ? Literally, it should mean the massing of reserves of all banks in one, two, or more piles, to be used in places of danger, just as an army is used. But is that what is intended by those who use the term? Are not our bank reserves pretty well mobilized now in New York, Chicago, and St. Louis, and is not that a source of danger instead of strength ? What we want to mobilize is the power of gold. Gold is the corner stone of our credit, and we all know that there is not enough to go around if all, or even one-half, or a quarter of our people loose their confidence all at once. So what we want to do to strengthen our banking system, in simple terms, is to make SI of gold do the work of $5 or $10 if necessary. And, in order to accomplish that, all of the gold in the country must be brought into one reservoir and a currency properly issued against it, which currency may be increased or di minished, as occasion demands. This currency would, of course, go into the bank reserves, and through its ability to expand and contract, would relieve the banking situation of that stringency and surplusage which occur at different periods. Instead of a hard and fast issue like our gold certificates are, we should have a gold currency which had some “ give" to it. Hence, “ mobilization of our reserves” is some what of a misnomer. What we need is a quickening of our gold supply. The other term is what a proposed issue is “ based on.” A currency must be based on what it is redeemable in. No other suggestion is made than to make it redeemable in gold. The press announces that So-and-so proposed to base the currency on corn or wheat or what not. And that is a very misleading statement. A currency is based on what it is redeemable in, and in the case under consideration, that is gold. The reserve held is only a certain proportion of the issue, to be sure; but that reserve is held to redeem any part of the issue which may be presented. And that issue stays in circulation because of the credit of the institution or Government which issues it. The amount, over and above the reserve held, may be invested in discounted notes, or loans, or bonds, or stocks, or wheat, or corn, or cotton, and the fact that all of these things may be realized on is due to the management of the institution which contributes to its credit or good will. When a man deposits in a bank which makes a specialty of loaning on cotton drafts, he does not say that his money deposited is based on cotton, but on the general credit of the bank and its good management. I go thus at length into the use of these two terms because of the confusion which arises from their use. When a Congressman sug gests or introduces a bill authorizing banks of issue to loan on corn or potatoes, the term is used by the press that he wants to “ base the currency” on corn or on potatoes, and the proletariat take it as meaning that if they present such currency tor redemption they will get corn or potatoes. In the study of the subject of cuirencv reserves and an endeavor to formulate a plan whereby our present financial system may be made to more readily accommodate itself to varying needs, it is essential to keep in mind three underlying facts on which I think we all agree. First, that gold is the standard of value, and our credit instruments, whether currency or otherwise, are all based on it and. 408 BANKING AND CURRENCY. subject to ultimate redemption in it. Second, that the retention in the country of a substantial supply of gold at all times is necessary to support our credit. Third, that what gold is not needed or does not find employment will leave the country through the influence of a surplus money supply on interest and exchange rates. And the problem immediately presents itself, in view of the last statement, of how to so arrange our currency and banking system that we shall at all times have an adequate gold reserve. Such a svstem should be as nearly as possible automatic, and it can be made so through the regulation of the interest rate. A cuirency system must be devised wffiich will expand to meet the increased demand during certain seasons and during different periods of years. But it should always have a direct relation to its gold reserve, and whether the volume be large or small in propor tion to that reserve its tendency should be to conserve that reserve and not to dissipate it. I can only liken such a currency to a rubber band and the reserve to a bundle of papers wdthin that band. If necessity demand the stretching of the band, it may be done, but the papers remain the same and the increasing tendency of the band to return to its original size as it is stretched further may be likened to the pressure which may be exerted by an increasing interest rate to bring the currency back to its original volume. This currency should be so devised that it represents gold and does not take the place of gold. I think that it is a universally recognized fact that any issue which is given power to do what gold can do does not increase the country’s money supply, but simply liberates so much gold for export if there is not a sufficient demand for the increased issue. This is simply an application of Gresham’s law, that an inferior circulating medium will drive out a superior one. So notes will release gold by replacing it, and the more secure they are made by, for instance, having them guaranteed by the Govern ment the more readily the}r will accomplish that, because they will be more acceptable. Senator P o m e r e n e . That is, you would have these reserve notes guaranteed by the Government ? Mr. A l l i n g . N o . What I mean to say there is that these notes, whatever notes are issued, the better they are the more secure they are, the more acceptable they are to people by being guaranteed by the Government, or anvthing like that, the more readily they will displace gold, because the people wffil accept them in place of gold. Senator P o m e r e n e . D o I understand from your remark that you approve the guaranteeing of these notes by the Government ? Mr. A l l i n g . I am not stating right here whether I do or not. I do; but this is part of the------Senator P o m e r e n e . That answers the question. Mr. A l l i n g . This is part of the statement as to the facility with which acceptable currency will displace gold on account of its accept ability; and of course the guaranty of the Government makes it acceptable, unless it is so arranged and so connected with the gold reserve behind it that it represents gold instead of takes the place of gold. Senator P o m e r e n e . It is always encouraging to me when I see that bankers differ on these subjects. BANKING AND CUKKENCY. 409 Mr. A l l i n g . I had just completed the statement regarding gold being replaced by notes. So we should exercise the utmost care to be certain that any pro posed issue is going to represent gold instead of being a substitute for gold. I may illustrate this by the gold certificates which represent gold. Let us presume that a currency is started with the same amount of notes outstanding as there is gold reserve behind it, just as our gold certificates have. The volume of notes could gradually be increased until the reserve was only 80 or 70 or even 50 per cent, the actual amount of gold reserve remaining the same, and it would be per fectly safe and sound, provided the country’s business required that increase. This brings us to the currency requirements of any given country, our own in particular. In proportion to the business done a certain amount of the medium of exchange is needed; our citizens carry it in their pockets, business men in their tills, banks in their vaults, etc., and this amount, varying as it does in different seasons and years, is, of course, outstanding. Take the smallest amount which is outstand ing at any one time over a period of years and it is safe to say that amount will always be in circulation. This is what the Germans in their Reichsbank call the “ Kontingent,” and it is considered as unnecessary to be covered by a coin reserve at any time; as, when the currency is reduced to that minimum volume, it will be at rock-bottom, for there would be such a scarcity of it for daily use and interest rates would be so high that none of it would be presented for redemption. Hence it is perfectly safe to count on this amount being uncov ered by coin and invested all the time. Taking the currency scheme which we considered a moment ago------Senator R e e d . What do you call that— the Kontingent ? Mr. A l l i n g . In the Reichsbank they call it the Kontingent. I think that this is figured about $2 per capita. It was in 1873 or along there when the Reichsbank law was passed. Taking the currency scheme which we considered a moment ago as an example, wherein the start was made with the same amount of currency outstanding as there was gold held in reserve, we have but to increase the amount of the currency, keeping the gold reserve the same until the amount of the excess currency over the reserve is equal to the amount of money which is always needed even at the lowest ebb, or the Kontingent; and we have the foundation of a scientific and sound currency. That is, supposing our contingent currency should be, say, 300 millions over and above the silver certificates that are out— those are practically always out-— that would make about $700,000,000. Senator R e e d . Y ou call them contingent? Mr. A l l i n g . I call them contingent. W e could issue a gold cur rency, taking— well, we have about a billion gold certificates. Taking a billion, which belong to the gold certificate holders, and if this is paid into the Federal reserve banks, they could hold that billion, and then issue notes against it up to SI,300,000,000, making 700 millions, which would make that contingent which I spoke of, of 700, added to the 490 millions of silver certificates. Of course, we 410 BANKING AND CUBEENCY. should disregard the silver certificates, because they have nothing to do with it. Senator P omerene . Your position is this: That with a given gold reserve you could issue practically an unlimited amount of currency, redeemable in gold, provided it was not in excess of the actual needs of the country ? Mr. A lling . I should say so; of course “ unlimited” means a whole lot. Senator P omerene . I am expressing an extreme. Mr. A lling . I mean in reasonable limits; yes. Senator R eed . In the figures that }r ou just gave I got confused. You state that we could take our present gold reserve------Mr. A l l in g . Well, gold certificates. Senator R eed . Wliich is something over $1,000,000,000; and we could issue, in addition to that the money which you call this con tingent; that is, the money that is in the pockets and the tills, and which you estimated to be at the present time— how much ? That is what I did not get. Mr. A lling . I hardly meant that as an estimate, Senator. I simply took the amount of the silver certificates which are outstand ing and which we must necessarily take, since they are used as part of our contingent, because they are money. I think they amount to about $490,000,000. We will say 500 millions. So that with adding 300 millions, it would be an excess issue of notes over the gold reserve, and it would make 800 millions as a contingent. That would be about $8 per capita, I think. Senator R eed . Then, if I get you rightly, you think that with this gold reserve of a billion dollars we could issue a currency based upon it of a billion 800 million and be safe ? Mr. A lling . Yes. You are including the gold certificates; yes. Senator R eed . Yes, including the gold certificates. Mr. A lling . Yes, sir. Senator Pom erene . Let me ask you in that connection this uestion: If I understood you correctly, this so-called Kontingent in the Reichsbank was $2 per capita? Mr. A lling . I understood that that was the figure in 1870 or 1872. I think that there are some gentlemen in the room who could say so if I am mistaken. I think it was $2 per capita at the time that the bill which authorized the Reichsbank was started. Senator P omerene . What is ihe per capita circulation in Ger many? Mr. A lling . I do not know that I could sav. Senator P omerene . The per capita circulation in America is about $34 now, is it not? Mr. A lling . It is. I do not think that in Germany it is that much. Senator P omerene . Assuming now that we had substantially this same financial system that they have in Germany, is there any reason why this contingent should be higher or lower than the con tingent in Germany? Mr. A lling . Well, I should say there was, because we use moro money; that is all. The per capita is larger. Prof. S prague . There is one very obvious reason that the Reichsbank was issuing no notes at that time under 100 marks. I think X . BANKING AND CURRENCY. 411 am right in the denomination. They were all large denomination notes. Consequently, the total that would constantly be required was comparatively small. Senator R eed . The ordinary Dutchman never would have that much money. Mr. A lling . The $2 per capita was the Kontingent of the Reichsbank currency. For instance, they had silver currency; how much I could not say; but they still have a silver currency there, and that would correspond to our silver certificates. So we add that on to $2. Senator P omerene . I s that a variable quantity? Mr. A lling . Y ou mean the silver issue ? Senator P omerene . Yes. Mr. A lling . I doubt it, because this paper naturally would stay in circulation. Senator Shafroth . I have the figures showing the notes in cir culation in Germany as 1,735,110,000 marks. A mark is 20 cents. Mr. A lling . That is, the Reichsbank and other banks as well. Senator S hafroth . Y es; this is the total circulation. I think the German Empire has about 50,000,000 people. That would be 37 marks per capita, or, divided into our money, it would make about $7. But I think it is more than that. I think it is $12. Senator Shafroth . H ow much is a mark ? Prof. Sprague . Twenty cents. There are 5 marks to a dollar. Senator P omerene . I was trying to figure out in my own mind how much of this so-called contingent currency might be issued as against our gold. Mr. A lling . I would not want to state that, because I do not think at the present time I could say offhand what it would be. It would have to be followed out. Senator Shafroth . D o you not think that the bank circulation in the United States— seven hundred and some odd millions of dollars—■ is all absorbed and necessary in order to comply with this contingent that you spoke of ? Mr. A lling . Yes, sir; I think it is. And, further, you must rec ollect, gentlemen, that the figures that I have been giving in answer to questions are more or less examples, to show what I meant; and the figures are not to be taken as accurate. The Chairman . W e understand that. Air. A lling . At the risk of repetition I wfiil read. It is only necessary to increase the volume of notes outstanding to meet the demand for more currency at different periods and accompany the increase with a slightly advancing interest rate, to have the most effective elastic currency possible, and always safe, because, as long as the country will absorb the increased issues and pay a stiffening i terest rate they will not be presented for redemp tion. As long as a note issue represents gold and does not take the place of gold, it will not drive gold out of the country. If a banking house wishes to export gold it will, of course, have to draw currency from its bank and present it for redemption for the gold. But the withdrawal of the currency from circulation, if in any volume, will naturally shorten all banks’ reserves and stiffen the interest rate, thus protecting the gold reserve of the currency from further depletion, as there will be no profit in further shipment. 9328°— S. Doc. 232, 63-1— vol 1-----27 412 BANKING AND CURRENCY. No more impressive example of the difference between a currency which represents gold and one vhich takes the place of gold could be cited than that of the Treasury notes which were issued under the so-called Sherman Act of July 14, I860. That act provided for the monthly purchase of 4,500.000 ounces of silver and the payment therefor in Treasury notes which w'ere redeemable in coin, either gold or silver. The bill remained in force three years, during which time $156,000,000 in notes were issued and $160,000,000 net in gold were exported from the country. W e now come to a comparison of such a currency issue as we have been considering with that authorized in the Federal reserve act. The currency issue to which I have drawn your attention is based in the beginning in a large proportionate reserve, and the volume of notes is increased and diminished as needed, without disturbing the reserve— like a rubber band will stretch out and return to its original size when released. The currency proposed by the reserve act is to have a set reserve of 3 to 1, which is to be found as the currency is issued. The ques tion at once arises, M here will it be when not needed, and from whence will it be obtained when needed ? W hat will be the differ ence between this method of carrying a reserve for your currency and the selfsame method which we have to-day for a reserve for our national-bank deposits which proves at times so impracticable ? lh a t is, if their deposits increase through loans they have to find an increased reserve, do they not? They always strike a period every so often when they can not do it. No cash or money is going to lie idle for long. After the Federal reserve banks are established for a time their funds are going to be all employed. If we have not sufficient use for them here, gold will gradually go abroad until an equilibrium is established between the demand for funds and the supply. W hen that point is reached one of the Federal reserve banks will apply for a rediscount or a loan from the Federal reserve board, which will be granted. The bank will probably be close to its reserve limit. Y here is its 33J per cent \ reserve coming from for this new issue of notes ? Still more, is it not an anomaly to make an institution which is borrowing funds carry a reserve against those funds ? The bill requires a reserve bank to carry this 33$ per cent reserve against notes issued in lawful money. I understood from the reports in the papers that it had been changed to gold; but I see in the last reprints that it is still “ lawful money.” I presume that is right. Senator S hafroth . I think it is “ lawful money.” The Chairman . That is, the last prints. Mr. A lling . And this, I might say, still further weakens the cur rency issue. It will be a currency which takes the place of gold instead of representing gold. Every time the notes are presented for redemption gold will be demanded for shipment to Europe and the less desirable or baser part of the reserve, as economists put it, will be left; and the currency based on that remaining reserve will circu late freely, with the credit of the United States behind it, and will take the place of so much gold. After this operation of sorting gold out has proceeded for a few years, how much gold will have been exported and how' much will be left ? The case will not be dissimilar B A N K IN G A N D C U R R E N C Y . 413 to that of the Sherman Act of 1890, as cited before, and I trust we will not be required to pass through a period similar to that which succeeded the passage ol that act. Therefore, let us impress upon you, gentlemen, with the utmost force the necessity of making this currency redeemable in one metal or coin. Unless we do so we run all the risks of the “ endless chain” of 1891, 1892, and 1893, when a note issue which was issuable for one metal and redeemable in another nearly brought this country to the verge of bankruptcy; and when you decide to make the reserve all gold, reverse the method proposed in this bill. That is, instead of finding your reserve as the notes are issued, start with the largest gold reserve you can accumulate with an equal amount of notes issued against it. Then you can increase the issue of notes without disturb ing or being disturbed about your reserve. I presume that these notes are to be counted as part of the lawful-money reserve which national banks are required to keep; but the bill does not so state. Am I right on that ? I do not believe that banks are to carry these excepting by implication ? Senator Shafroth . I think it is intended that they shall carry bank notes as lawful reserve. Mr. A lling . I presume these are to be considered lawful reserve. Senator S hafroth . I so understood it. I do not know that I can point to the exact section that describes that. The Chairman . These are the lawful reserves and it is not intended to include these notes. Mr. A lling . That is before the act is in full operation ? The Chairman . It is not intended that these notes shall be included in the reserves. Mr. A lling . It is not ? The Chairman . N o . I am speaking now of the original draft of the bill. Senator Shafroth . W hat section have you there ? Mr. A lling . I have bank reserves, under section 20: Five-twelfths of such reserves shall consist of money which national banks may under existing law count as legal reserve— That is regarding country banks. Senator S hafroth . Y ou think that it ought to be made so that it can act as reserve ? Mr. A lling . I should say so; yes. That is one method of making them effective. Senator S hafroth . By both country banks and national banks? Mr. A lling . I am not in favor of having national banks carry each other’s reserves; but these are an institution of the Government. Senator R eed . D o you think that the reserve should be either gold or issuance of paper, either one; or do you think that the reserve ought to be gold ? Mr. A lling . There are two kinds of reserves that I am talking about. One is the reserve which ordinary banks carry against their deposits. But this paper is not leveled at that. The Chairman . Mr. Ailing’s point is exemplified by the Bank of England, which has in its treasury department an absolute gold reserve outside of a limited amount against the notes, and in the banking department almost entirely the reserves are notes. 414 BANKING AND CURRENCY. Mr. A lling . Y es; the Bank of England carries its own notes. Senator P omerene . Y ou would have this reserve fund gold entirely ? Mr. A lling . Yes, sir; for the notes. Senator P omerene . Of what amount ? Mr. A lling . If you will permit me, I will just read a little further, Senator, and it will cover that. Senator S hafroth . The reserve you have been speaking of recently has been the reserve which is to be held and kept by the banks for their depositors % Mr. A lling . Yes, sir. I presume these notes are to be accounted as part of the lawful money reserve which the national banks will be required to keep, but the bill does not so state. Senator R eed . If you put in the words “ deposits reserve/’ it would make it clearer; and I suggest, as that will be printed, you just put it in. Mr. A lling . I have it “ national banks” here. Senator Shafroth . Reserves for their deposits. Mr. A lling . I have said here: Lawful money reserve which national banks are required to keep. Senator S hafroth . For their depositors. Mr. A lling . National banks as distinguished from Federal re serve banks. Senator Pom erene . Y ou mean with the member banks under this bill ? Mr. A lling . Yes, sir. Senator Pom erene . Would it not make it clearer if you would say “ member banks” ? Mr. A lling . Yes, sir; it would. The word “ member,” I think, has been put in the bill only recently. I notice quite a number of places where it is put in in place of some other term. Senator P om erene . W e will understand it, anyhow. It is more clear than what you have there. Mr. A lling . At any rate, they should be so authorized to be effec tive as an elastic currency, and also to offset the withdrawing of $550,000,000 from active use in national-bank reserves, which would be occasioned by their contributions to the capital stock of the Federal banks and their reserve deposits with such banks. It will be necessary for the banks to borrow this money back at once from the Federal reserve banks to prevent .a serious monetary stringency. Let me state here that this $550,000,000 which I have taken is from some statement which was supplied by some official in Washington, and I can not, right now, tell who. But the result is the same, whether it is $550,000,000 or $850,000,000. Supposing the reserve banks are all started inside of a week; $550,000,000 would be paid to them, provided all the national banks became member banks, and 5 per cent of their total individual deposits. It would bring it up to about 5 per cent. That would be in the neighborhood of $450,000,000. Of course, I am leaving out bank deposits, because we do not know just what the report of the national banks would show in the way of bank deposits, due to other national banks, after the bill is in effect. It will be necessary for the banks to borrow this money back at once from the Federal reserve banks to prevent a serious monetary stringency. You probably all realize what effect withdrawing half BANKING AND CURRENCY. 415 that sum from our circulation would have. Here also can be seen illustrated my contention regarding the method of carrying a reserve for the Federal reserve notes. The Federal reserve banks will have paid into them, capital, about $100,000,000; deposits, say, $450,000,000. It will be necessary for the national banks to borrow this back at once to prevent a serious stringency. But the Federal reserve banks must hold $150,000,000 reserve against their deposits which they can not loan back. Now, they apply for an issue of Federal reserve notes, but where are they going to get their reserve gold from ? They probably could at first exchange their reserve notos for gold with the national banks. But that could not be relied upon at all times. The scheme proposed by the committee of bankers would be a decided improvement over that in the bill. That is, 40 per cent reserve, with a sliding scale of an increasing interest rate down to 331 per cent reserve, as against a flat reserve of 33$ per cent in the act. But I do not believe that that would go far enough. The way to accomplish our purpose would be to make the pay ments on account of the capital stock of the Federal banks in gold, also the initial or first deposits of reserve money in gold, and this would give us the sum above mentioned, $550,000,000 in gold. A like amount of the reserve notes should be prepared in advance and immediately put in circulation by loaning them back to the banks, in order not to cause a monetary stringency. Then we would have the first condition required in our ideal or scientific currency pre viously described; that is, an equal amount of gold reserve and notes outstanding. Senator R e e d . Y ou seem to take the view that it is pretty good money if you have a gold dollar in your vault, and your vault locked, and a gold certificate out for it. That makes pretty good money? Mr. A lling . It makes excellent money ; but it is very inelastic. Senator R eed . Some of the bankers said that that was not money at all; it was warehouse certificates. Mr. A lling . That is a figure of speech. Senator R eed . I think so, too. Mr. A lling . I think they consider it money when they go out and look at it in the teller’s cage. Five hundred and fifty million dollars gold reserve and $550,000,000 in notes outstanding. The notes which I propose to issue against $550,000,000 may be held as reserve by the Federal reserve banks against their deposits, for they will require $150,000,000 for a 3-to-l reserve against their demand liabilities. A t this proposal most economists and students of finance are going to throw up their hands. But why not ? They will be equivalent to gold certificates, will they not? Senator R eed . D o you propose to keep that gold locked in those vaults ? Mr. A lling . As a reserve fund; yes, sir. Senator R eed . And redeem those notes ? Mr. A lling . Yes. Prof. Sprague . May I inquire about how the deposits of these banks will be protected if you use up the $550,000,000 which the banks deposit as reserve for $550,000,000 notes ? 416 i BANKING AND CTJBBENCY. Mr. A lling . Y ou would carry the reserve notes just as the Bank of England does. Prof. Sprague . Yes, but you have lent them to the banks, and you still owe the banks $550,000,000; and you have taken their reserve money and sequestrated it------Mr. A lling . I do not necessarily mean they would loan all that back, but what I meant was to loan enough back in order to correct the stringency which would occur, owing to the payment of this money by reserve banks. Perhaps if I go on in my paper it will make it a little clearer. Moreover, this plan contemplates a somewhat larger gold reserve against the notes than the act does, so that the ultimate result will be a larger average reserve for the notes and deposits. That is, the bill now orders them to carry 33 J per cent reserve against all demand liabilities, notes, and deposits. By this method we should have at this time, after issuing $550,000,000 reserve notes against $550,000,000 of gold, 100 per cent against our notes; and counting the $550,000,000 against the notes and deposits both you would have 50 per cent. Does that answer your question, Professor ? Prof. Sprague . N o ; because you have exactly the same amount without that provision in the law. The question narrows itself down to this: Is the management of the reserve bank going to fritter away all of its resources in ordinary times and go down to a 33J per cent basis so it will have nothing available for emergency, or is it not? And if it is going to do that, then the thing is mismanaged; and similarly, it would be the case if you put a 50 per cent requirement in the bill. If you assume that they are going to get down as our ordi nary profit-making banks do, in ordinary times, to the bare limits of the minimum requirement, they will have nothing left for emergen cies. I suppose it occurred to no one that these reserve banks would in ordinary times get down to this minimum. There is a similar arrangement in connection with the Reichsbank, and only once in 30 years have they come anywhere near the limit of 33J. Mr. A lling . They have never come very close to it, I think. Prof. Sprague . They did once, in 1906. Senator R eed . In this way at least you would accumulate $550,000,000 more of gold, and you would get it locked up, which which would not be a hard thing, would it ? Mr. A lling . Not to my mind. My method of looking at it, of course— and in judging a thing like that it depends a goocl deal on a man’s method of looking at it, on his point of view. It is a good deal like a picture. It depends a good deal on your imagination how much you can see in the picture and how much you do.not see. Different people’s imaginations lead them to see different things in different ways. I will continue my paper a little further. It still carries this question a little further, and I think makes the subject open to dif ferent comments anyway. The reserve for the notes should be kept entirely separate and distinct from the reserves held for the deposits in the Federal reserve banks. That is, it would make the reserve to be held against the notes always secure against whatever might happen to the Federal reserve banks. BANKING AND CURRENCY. 417 In fact, the note reserve should be held by the Federal reserve agent as an agent of the Federal reserve board, and ultimately of the Government, just as he is to hold the securities which are pledged with the Federal reserve board. This would make the reserve always secure against the vicissitudes of the Federal reserve banks. I have never believed that the responsibility for or issuing power of currency should rest with the same institution which accepts deposits, and especially reserve deposits from banks. The inherent weakness of such a plan, though it is generally preached to-day, is obvious to anyone who will contemplate quietly the effect which this dual responsibility will have on any bank. During a severe financial crisis a bank which issues notes and accepts reserve deposits from other banks is subject to a double strain. Its cash reserve being drawn upon by banks that are endeavoring to replenish their own reserves and perhaps demanding gold and at the same time notes may be presented and gold demanded for export. Mr. Conant, speaking of the Bank of England, and its experience during the panic of 1847, says: Both, sides in the discussion of the bill when it was pending in Parliament seemed to have made the incredible blunder of overlooking the fact that gold could be obtained by the presentation of checks. * * * The bank, therefore, saw its bullion decreasing on the one hand and its banking reserve decreasing on the other hand, while gold and notes poured out of the banking department. To return to our suggestion regarding the issuing of reserve notes: The point I wish to illustrate is that we would have $550,000,000 in notes outstanding, based on a 100 per cent gold reserve, an increase of $100,000,000 in the issue of notes would only reduce our gold reserve to 84 per cent, and by a judicious exchange of the Federal reserve notes for gold with the banks, provided the banks can carry the notes as reserve money, the Federal reserve banks can eventually have a gold fund of nearly one and a half billion dollars against which an issue of $2,000,000,000 in notes will provide an increase of $500,000,000 in circulating medium and a gold reserve at that extreme figure of 75 per cent. The United States notes should be included in this scheme and called in, and the gold reserves held against them added to the general pile. The national bank notes, according to the terms of the bill, could also be absorbed into the general issue if thought advisable, though I do not personally believe it should be done, as it would result in adding that much reserve money to our circulation, which would cause inflation. The bank note circulation should be limited to the present issue, or $750,000,000, and gradually converted into small denominations— ones, twos, and fives, thus giving national banks the opportunity to increase and diminish the supply of small bills, just as they please, which would be a tremendous advantage. This would eliminate the uncertainty about the United States bonds now owned by national banks and remove that much cause for alarm. Thus, with the silver certificates and bank notes, we would have about $1,200,000,000, which would always be in circulation. This is besides the gold. Senator Reed, I think, asked a question in reference to that when I was talking about the silver certificates outstanding. He men tioned the bank notes which were also outstanding. 418 BANKING AND CURKENCY. It is now only necessary to increase and diminish the volume of Federal reserve notes to meet the varying demands of business, starting with a very low rate for the first 100 million of reserve notes and raising the rates for every additional issue or raising it any time to prevent exports if the Federal reserve board deemed it necessary. Then we would have a scientific gold currency with sufficient elasticity to it to take up the most aggravated shock which our banking and commercial interests might experience, besides being always ready to accommodate itself to the rise and fall of our seasonal requirements. And why should we not have some such mechanism as this to increase and facilitate, with perfect safety, the usefulness of the stock of gold which circumstances allow us to accu mulate ? Gold is the measure of value in this country, and it meas ures values in a comparative way, depending upon the relation which its supply has to the demand for it as a circulating medium and as a basis for the vast credits of our country. W e all know that demand varies. Who believes that the gold stored away by nature and reclaimed by man possesses always that fine balance which would make the amount in hand always requisite for the work which it has to do ? Then it is our duty to devise a scheme of currency which shall represent gold with all its power and which shall possess the attri butes of enlarging and diminishing its scope whenever necessary. Senator R e e d . That embraces the point I thought to elaborate with another witness, and which perhaps is best expressed in the bill which Senator Shafroth introduced, independent of this general bill, which was to retire the gold certificates as fast as they come in and can be gathered up and issue in lieu of them $2 for each one of gold and to treat all other moneys, greenbacks and bank notes, in the same way, so that the Government would have a 50 per cent reserve— assuming the Government does this. And the question was asked then whether if 33 per cent would constitute a reasonably safe gold reserve and we had a 50 per cent reserve we could not increase the circulation of the country in times of necessity by issuing more money down to the point of 33 per cent. It embraces the same idea that you have; that is, of a fixed gold reserve. Mr. A lling . Yes, sir; a fixed gold reserve, but the circulation not fixed. Under that bill the circulation would be fixed 2 for 1. Senator R eed . I said to issue more money if necessary down to a point where the reserve would only be 33 per cent. It embraces the same idea that you have expressed, so far as that one feature is con cerned— the fixed reserve. Mr. A lling . Yes, sir. Senator R eed . N ow , I want to ask you if you deem such a plan as that practicable? Mr. A lling . I deem it practicable, if you will organize such a method of getting the increased currency into circulation in such a way that it will only go into circulation when needed and be retired when not needed. Senator R eed . Let me spend a minute with you on this. The outlines of this bill I will state as accurately as I can. The proposi tion was for the Government of the United States as rapidly as gold certificates came into the Treasury, to take that one certificate and issue $2 for $1 against it. BANKING AND CURRENCY. 419 Mr. A lling . That would make a United States note out of it, with a reserve. Senator R eed . Back of which would be a 50 per cent reserve, and to treat all the other moneys of the Government similarly, using whatever other gold we had to fortify this reserve, so that at the end of the work ing out of the plan we would have a currency back of which was a 50 per cent gold reserve; that then in the event more money was needed the banks could bring to the Government suitable securities—we will not stop to haggle about what they might be— and that the Government would then receive those securities and continue to use paper money having now back of the paper money the gold reserve and the securities, and that it w ’ould continue or might continue that process until they had reached a point where the gold reserve equaled one-third instead of 50 per cent. Would such a plan as that, in your judgment, be a workable plan? Mr. A lling . I think your reserve is too low, to start with. If you reduced it to 50 per cent first., as a permanent currency. Senator R eed . Well, let us assume that we would make it------Mr. A lling . Seventy-five per cent. Senator R eed . Say 75 per cent. Mr. A lling . After you pass 75 you only loan it to banks as they are willing to borrow it and pay a substantial interest rate for it ? Senator R eed . Yes. Mr. A lling . If such a mechanism should be devised it would be perfectly workable. It would not be an}7 different from a central bank loaning money, except that the Government would be doing it. Senator R eed . Except that the Government retains the complete and absolute control. That would be perfectly safe, in your judg ment ? Mr. A lling . I should say so. I do not see why not. That all depends, of course, on the detail as to the security that is taken; but we will leave that out of it. Senator R eed . W e will assume that the Government receives as good securities, as carefully safeguarded, as the banks would receive under a scheme whereby the banks perform this function. Mr. A lling . A s long as the control of the interest rate was held, as long as the interest rate was increased at the proper period, I do not see that it would be any different from a central bank. A Gov ernment bank, in simple terms, simply holds a large reserve and issues notes against it. Of course it has deposits on the side, but the issuing part of it is that it issues notes against the reserve and dimin ishes or increases the amount of the notes outstanding, and of course decreases the percentage of reserve at the same time. That is the foundation of a central bank, in my opinion. Senator R eed . This plan which you suggest differs radically from the provisions of the Aldrich-Vreeland bill, as I understand it? Mx. A lling . Oh, yes. Senator R eed . The Aldrich-Vreeland bill’s check upon the amount of currency to be issued is that the longer the currency is out the higher the interest mounts ? Mr. A lling . Yes. Senator R eed . Whereas, in this plan of yours, your first issue of currency, no matter how it would De issued, unlimited in time and r 420 BANKING AND CUBRENCY. at a low rate of interest, the second issue of currency would be un limited in time and at a higher charge to the banks, so that the inter est is fixed upon the volume of currency which is out rather than by the time that it is out. There is that radical difference. Do you think that is a better plan ? Mr. A lling . Yes, sir; that is, provided the hands of the central authority or reserve board are not tied too tight and they are allowed to increase the interest rate sooner, if they see fit. It has got to be left to some one’s judgment. Senator R eed . I understand. Mr. A lling . I do not know that it can be arbitrarily fixed. I do not think that they can. Senator R eed . But assuming it has a sensible management— I will not say the wisest or the most foolish, but an ordinary prudent man agement— do you think that would be a practicable scheme ? Mr. A lling . I should think it would. Senator R eed . I have got an indorsement for your bill now, Sen ator Shafroth. Senator S hafroth . I am glad to hear it. Senator R eed . I want to pursue this further. I am interested in your paper, Mr. Ailing. I want to get whatever additional light I can from it. You spoke about keeping the gold in the country. I do not know that I fully caught your thought on that. Of course we will assume, now, for the sake of illustration, that we have $1,000,000,000 of gold and we issue against it $2,000,000,000 of paper money, and that constitutes the currency. The $1,000,000,000 of gold is locked u p ; but of course every man having one of these paper dollars can come and demand it at any time. How are you going to prevent that ? How are you going to keep the banks ? Mr. A lling . If there is too much of such money in circulation, you could not prevent its being demanded and exported. Senator R eed . That is to sav, if there was $2,000,000,000 of cur rency out and $1,000,000,000 of reserve, and your $2,000,000,000 was too great an amount to be all employed in the business of the country, then the banks would take that money, of which there was a surplus; the banks would accumulate $1,000,000 of it. You would go down to the Treasurer and get $1,000,000 of gold, and because money was bringing a higher and better rate in England than it was here you would ship that gold over there. Is that the idea ? Mr. A lling . That is the idea. I only want to correct you in that the bank would not do that. The private banks would do the ship ping. Of course that is only a matter of custom. Senator R eed . Some kind of a money changer, whether he is a banker or a private individual. Mr. A lling . But the thing of it is, does the interest rate affect that in the end, ultimately ? Senator R eed . T o make this method practicable, then, this gold reserve would make the reserve higher. It would make the margin of danger less; and, second, when you issued money in excess of the gold, particularly if the banks came in with their securities and wanted an additional currency, you would make your rate so high that they could not afford to take that money at all unless they in turn were able to charge a rate high enough, so that they could do business ? BANKING AND CURRENCY. 421 Mr. A lling . Yes, sir. Senator R eed . D o you think that would be effective at all times ? Mr. A lling . W hy, through periods of years it would, yes; but it might not be effective at one particular time. There might be one particular time when money was so badly needed in Europe, when the demands of trade were so heavy that it would be necessary to export some gold; but through a long period of years and under general conditions the higher interest rate will protect the gold reserve. Senator R eed . But will it do it in the hour of emergency? That is the trouble with the present banking system that is in effect to-day. Mr. A lling . In the hour of emergency the interest rate is usually pretty high. Senator R eed . Y ou really think, if I get you rightly, that it would be better if we had this currency or money issued by some power other than the bank itself ? Mr. A lling . That is my belief; yes. Senator R eed . In other words, if I get you now------Mr. A lling . I am not speaking for the bankers generally, of course. Senator R eed . N o ; I want to get your own opinion. I have had some of these concrete opinions, and I do not know how much they represent the caucus and I do not know how much they represent the man’s own judgment. I want to get your judgment. I feel now that with my usual adroitness I have gotten the Senator from Kansas half on my side, just by saying “ caucus.” [.Laughter.] I take it— indeed, I think you made it very clear— that you think if a bank receives deposits, loans money, and does a general bank ing business, and does not do anything else, and an entirely separate instrumentality, whether it is governmental or banking, is charged with the duty of keeping a proper gold reserve and with the super vision of the issuance of the money, when the bank’s credit may become doubtful, that still does not under those circumstances affect the circulation of the currency at all? That is a somewhat involved question. Mr. A lling . Yes; but as I understand it you mean the circulation of currency issued by what ? Senator R eed . A separate institution. You did not quite catch what I said. Mr. A lling . N o. Senator R eed . If the Government issued all the money and was charged with maintaining the gold reserve, and did it rightly, all the banks in the country might go to smash and still the money would be good ? Mr. A lling . W hy, certainly. Senator R eed . Yes. But if you put the issuing of the money and the maintenance of the gold reserve in the banks, and with also the banking powers and privileges, and your belief in the banks became impaired, if credit became shaken in the country, if we had one of these financial chills, it would be likely to shake the faith of the people not only in the solvency of the banks, so far as paying out to their depositors is concerned, but it would shake the faith of the people in the money itself ? Mr. A lling . Well, under certain circumstances I should say it would shake the confidence of the board of governors of the bank. For instance, let us put it in a concrete form, and we can understand 422 BANKING AND CUBRENCY. it. If a bank is carrying 300 millions in reserve deposits of the banks of the country, and at the same time it has issued one billion in notes, and against that it is carrying one reserve as provided in this bill, and there comes a period Jike in 1907, when banks, in Indiana and everywhere else, and in New York State outside of the city limits, wanted to use some money in their own banks for two reasons— one, they preferred to have it because their community might want it and they wanted to take care of their depositors— and they began to draw their reserve money out of the bank: Supposing they drew 200 mil lions out of it. There is 200 millions of the gold reserve gone. Just as I cited the quotation there, the governors of the bank sit there and see their bank reserve going down and at the same time they see the reserve of their notes going down. Senator R e e d . S o you think that the reserve back of the notes ought to be kept over there under that book [indicating], which I will use for the sake of illustration, and the reserves that are back of the deposits ought to be kept over there under that book ? Mr. A l l in g . I do. Senator R eed . And the more completely separated those two places are, the better for both ? Mr. A lling . That is my belief. Senator R eed . Would it not be your judgment, when it comes to issuing money— to issuing this money and conserving this gold reserve— that the Government of the United States better establish an agency for that and let the banks go on and conduct the ordinary business of banking ? Mr. A lling . I should say so, if we could get the proper machinery for allowing the increased issue to go into circulation. By proper machinery I mean not only care as to the investments, but care as to issuing, so as not to issue too much. Senator R eed . Very well. Suppose that we go back a moment to this present plan, to get a starting point. Under the system that is proposed in this bill we have under consideration— if I do not weary you. Mr. A lling . Y ou are not wearying me, if it is in the plan of the committee. I understood that I was not to occupy too much time. Senator R eed . Y ou are an interesting sort of a fellow to me. I like a red-headed man, anyhow. I really mean that in a compli mentary way, even though my compliment is poorly stated. The proposed bill, if carried out, would cause 12 regional banks to be put in operation. Let us discuss one of them. Am I interfering with some plan that you have, Mr. Chairman ? The Chairm an . N o, sir. Senator R eed . W e are organizing one of those regional banks. The first thing we put in is an amount equal to 10 per cent of the capitalization of the member banks, and let us say that it amounts to $5,000,000. That much money we have got. The next step is 5 per cent of the deposits of the member banks. That is right, is it not ? Mr. A lling . Yes, sir. Senator R eed . The deposits of the member banks are to be capi talized at about 8 to 1. Is that correct, approximately ? Mr. A lling . I think it is. I do not know just what was stated. BAN-KING AND CURBENCY. 423 Senator Shafroth . That is the amount Mr. Forgan said. Mr. A lling . I guess it is right, then. Senator R e e d . S o that you will put into the member bank a sum equal to one-twentieth of the deposit— $5 on the $100? Mr. A lling . Yes, sir. Senator R eed . And the deposits are eight times as great as the capitalization. That is correct, I think. So that you have a re serve, now, carried into your central bank, which is in the aggregate only about 6 per cent of the total deposits with these member banks. That is about where you landed, is it not ? Mr. A lling . I do not know as I have figured it out just that way. You mean that the capital of the Federal reserve bank plus the reserve deposited with it will only be 6 per cent of the total deposits of that particular region of which it is a reserve bank? Senator R eed . Yes, sir. My figures may be wrong; I am just figuring here in my mind. Mr. A lling . I should say it would be a lot larger, but I never figured that out. I think it would be more than that. Senator R eed . H ow much more? Mr. A lling . Of course, we are taking an arbitrary statement of 8 to 1 that has no meaning in it whatever, any more than the fact that it may be so all over the United States. The total figures of all the national banks may be eight of deposits to one of capital; but it has no meaning; it only happens to be so; that is all. Senator R eed . But taking the average as it exists to-day, it is likely to be approximately the average for other times. There is about $8 of deposits for $1 of capital. W e take that $1 of capital, one-tenth, and we put it over here to make a new bank. Mr. A lling . Yes, sir. Senator R eed . And the relation of that capital to the other is 10 to 1. Then we have got deposits in these banks that are equal to 8 times the amount of the entire capital of the member banks ? Mr. A lling . That, we will say, is ?8. Senator R eed . That is $8. Now you take 5 per cent of that amount, and what per cent have you in your member bank of actual reserve ? Mr. A lling . One-sixteenth. I do not know just what percentage that will be. One-twentieth would be 5 per cent. One sixteenth would be larger than that. Senator B ristow . Between 6 and 7 per cent. Prof. S prague . Six and two-thirds. Senator R eed . W hat does it figure there, Professor? Prof. S prague . Between 6 and 7 per cent. Senator R eed . Now you have got the regional bank that has actually paid in in cash an amount which is equal to about 7 per cent of the total deposits of the banks hi that region, and that consists of all the resources that bank has, does it not ? Mr. A lling . The Federal reserve bank, yes. Senator R eed . Every member bank can, and if I understand your statement it would almost be forced, as soon as it had paid into this regional reserve bank the amount required to be paid in, to borrow it back? Mr. A lling . Oh, I did not mean to say that every bank would have to do that; but all of them taken together, that amount would 424 B A N K IN G A N D C U R R E N C Y . have to be turned back. Many banks would be in such a condition that they can put it in and they will not have to borrow it back. It would be another form of investment for them. But I do not see any difference between putting in this, say $50,000,000, in a Federal reserve bank and putting it into the United States Treasury, which they call locking it up, unless it is borrowed back. Senator R e e d . Exactly. So there will be no benefit whatever springing out of this system unless those reserves deposited with the regional bank are actually used. If they do not use them, you have got them locked up, and it is no good ? Mr. A lling . Y es; I should say so. Senator R eed . The amount of that is, then, as I understand it, that while you solemnly declare it to be the law that a bank shall set aside a certain per cent as a reserve, you add to that:. Provided, however, That it may deposit that over here with another bank and im mediately borrow it back and use it. That is about where we come out, is it not ? Mr. A lling . Very close to that. Senator R eed . In other words, we have dissipated, so far as the reserve is concerned, that part of the reserve, except that, of course, there is an added security in the fact that the regional bank represents a number of other banks ? Mr. A lling . Yes, sir. Senator R eed . We have absolutely taken out of the present reserve system that 5 per cent, so far as it is an actual real reserve on hand. That is right, is it not ? Mr. A lling . It is. Senator R eed . I am very glad to have one man who will just say “ yes” and “ no,” since I have been criticizing the Professor over there. What other resources is this regional bank going to have besides this money which can be put in and borrowed back and the capital stock? What other resources has it? Mr. A lling . It has none except this ability to borrow through the Federal reserves. Senator R eed . T o borrow from the Federal Government? Mr. A lling . There are Government deposits. Senator R eed . Oh, yes; but the Government deposit is some thing that Uncle Sam takes down there and contributes to the sta bility and utility of this bank, is it not? Mr. A lling . Yes, sir; if you wish to put it that way. Senator R eed . W hat else have you to rely on ? Mr. A lling . N o further deposits allowed. Senator R eed . But your final resource— 4 direct your attention to it by a leading question— in addition to all this is that you can take those notes which vou have on hand over to the Federal Treasury or over to the central reserve and get Government notes on it. That is right, is it not? Mr. A lling . That is right. Senator R eed . So that if I understand you correctly in this entire scheme which is now outlined in the bill that is before us there is not a single dollar of new money or a single dollar of new security that is added except— well, there is not a single dollar, because the 10 per B A N K IN G A N D C U R R E N C Y . 425 cent of its capital stock comes out of the other bank’s assets. It is not new money ? Mr. A lling . Yes, sir. Senator R eed . Y ou have not added a new dollar of actual capital from any source. Mr. A lling . I would not say capital. You are using the wrong term. I should say cash. Senator R eed . Actual cash ? Mr. A lling . Cash is simply transferred from the various member banks into the regional reserve banks to the extent of 7 per cent, we will say. Senator R eed . In other words, you take the shell from under one hat and transfer it to another. You just have one shell but you shift it. I do not mean to speak in any disrespectful sense. I am simply trying to illustrate my thought and I have to go back to my early experience to do that. But you have not added a dollar of capital to the entire banking system, have you? I mean real capital? Mr. A lling . N o real capital. Of course, there is a great difference between cash and capital to the banker which the average outsider does not realize. I think that everybody sees the point plain enough, but it does not occur to them frequently; that is all. Senator R eed . I wanted to keep to the common acceptation of the terms. But you do think, of course, I take it, that this system under this proposed bill would have a good deal of strength if the Government moneys were put in and the regional banks could distribute those moneys, and then if the Government would issue money upon such securities as the regional banks furnish, assuming, of course, that the business is properly managed. That would give these regional banks some considerable utility. Mr. A lling . Yes; you mean there with reserve notes— Govern ment notes ? Senator R eed . And when the Government money was deposited they could take it and use it. Mr. A lling . Yes. Senator R eed . That is what really breathes the breath of life into that system, is it not ? Mr. A lling . I should say that it was almost the whole bill in simple terms, excepting the ability of the Federal reserve banks to establish branches. I think that is part of it— to establish foreign agents. That is the only thing outside of what you have stated. Senator R eed . T o establish foreign agents. Of course, that power could be conferred upon member banks now if the Government saw fit to do it. Mr. A lling . Yes. The Chairm an . I would like to say that Mr. Marshall, of New York, is here and he will not be able to be here to-morrow. If we could give him an hour this evening he would appreciate it. Senator R eed . I do not want to interfere with the committee, of course, but I have become very much interested in Mr. Ailing’s state ment and I should like very much to ask him some further questions. Senator S iiafroth . H ow near through are you ? The Chairman . Mr. Alling has written a very excellent brochure, which I had printed and sent to the members of the committee. It is 426 BANKING AND CUBBENCY. on this line. W e have copies of it here now and I think it would be just as well to put it into the record. Senator S hafroth (T o Mr. Ailing). Is that the same as you have read? Mr. A lling . Y es; it is upon the same ideas, only that was written some time ago and it is quite divided up. The Chairm an . It is an interesting matter. Senator R eed . It is very interesting to me. Senator S hafroth . Are you going to be here to-morrow Mr Ailing ? Mr. A lling . N o ; I have to be in Richmond for a convention to morrow. Senator S hafroth . Will you come back this way ? Mr. A lling . I can do that. Senator R eed . Let me ask you just one or two more questions. Mr. A lling . I will be glad to make myself available at any time for the committee. Senator B ristow . I feel that we should not curtail our inquiry into this matter from such men as Mr. Alling. I am free to say tnat I am very much interested in everything he has said. I was also greatly interested in the booklet which he furnished the committee— more than anything I have read on that line. I think we ought to take what time is necessary to get at the bottom of these matters. The Chairman . Take for instance Mr. Berry. Mr. Berry is here and would like to be heard Wednesday. Prof. Sprague came down from Harvard a week or two ago and he stayed here several days. He did get to go on the stand but the gentlemen from Chicago took up so much time that he did not finish and he came back this morning to present his views to the committee. I should like to accommodate the gentlemen and let them get away if possible because they have all been invited here by me. Of course I only want to fit in the testi mony as well as I can. Senator B ristow . I am glad you have invited these gentlemen and I think we ought to hear them. Senator R eed . It is the old story of having to compel witnesses to wait until a long examination is concluded. (The statement by Mr. Ailing directed to be incorporated in the record is as follows:) R eserve and |By Newton C u r r e n c y P r o b l e m s —A S u b s t i t u t e for a Central B a n k . D. Ailing, ex-president of the American Institute of Banking and National Nassau Bank of New York.] vice president of the o v e r t u r e : is a c e n t r a l o r g o v e r n m e n t b a n k f e a s i b l e ? In offering to the interested public this little collection of papers on a subject re garding w h'ch so many different opinions are held to-day, over which there has been so much battling in the past, and doubtless for which the future holds an unlimited supply of nostrums yet unborn, the writer has a twofold purpose. One is to show where plain reasoning, without reference to past or present accepted premises may lead us to; and the other is to draw attention to the danger of perfecting a system at the expense of our ideals. Finance and credit have ever been at once the glory and power, as well as the curse and destruction of governments, as of men. The laws controlling, inevitable as they are, are so delicately poised and so difficult to comprehend that they have been the despair of philosophers and statesmen of the past, not to mention those of the present. What is supposed to be a correction of an evil, turns out to be a curse. What is laughed / BANKING AND CURRENCY. • 427 to scorn as a foolish nostrum in one age, is in another heralded as the greatest of bless ings. And who have usually been furthest from understanding the underlying laws of finance and credit in the past but the bankers themselves? It took Horner, an obscure member of Parliament, to tell the bankers of his day the economical relation between currency and specie, and they did not believe him.' But Parliament, which was not composed of bankers, was eventually convinced, passed the necessary legis lation, and England was saved from being drained of specie. It took John Sherman, who was no banker, to say that “ the way to resume is to resume” and thus restore our currency and save us from a long controversy between bankers, professors, and financial savants. It seems as though the study of financial laws and results is the Nemesis of those who stray into its uncertain precincts Those of our day who have ventured to ex plore its confines appear to the observer to be hopelessly enmeshed in the web of thenown logic. They primarily would give us relief from a stringency which occurs in the fall of the year—perfectly natural under the conditions—and they end by prom ising something which will save us from suffering the consequences of our own financial debauchery, of preventing rotten banks from being found out, and of stopping the plain people, who do not understand such things, from being scared when they think they are going to lose their money. Does any thoughtful man need more to convince him of the foregoing than a careful study of the latest offering, known as the Aldrich plan, will give him? Here we see a man of a very practical turn of mind, naturally direct, after two or three years of exploring the intricacies and winding ways of economic laws and currency and banking problems, finally advocating a system of reserve holding which is the reverse of direct, and hardly seems practical. And most of the students of finance, bankers and professors, are falling in line. The only ones who seem to see its weakness are those who have held aloof and refused to become absorbed in the fascinating study and thus drifting from their original moorings. First it was proposed just to change the basis of national bank currency so as to allow more elasticity. Then it was a sectional gold currency by national banks, as advo cated by Congressman Fowler, then a central bank, and now the complicated plan of Senator Aldrich and his committee. Can anyone imagine or measure the politics which would develop in such a system? Every ambitious banker would be laying his pipes to be first on the local board, then on the sectional board, and finally on the central board. Would there be a possibility of exchange of favors for votes? The plan would be a cross between a central bank and individual banks, with many of the inconveniences and drawbacks of both. To properly consider the subject let us first see what the trouble is. Through natural expansion and contraction of trade there is a shortage of currency and raising of interest rates at certain seasons. This is aside from speculation. The principal cause of this rise in interest rates is that out of town banks draw their reserves from central cities into their own vaults. That means that $1 drawn from a central reserve city ceases to do the work of $2 or $3 as reserve money and only does the work of $1. The abolition of the present reserve system would prevent these violent fluctuations and would necessitate the carrying of the full supply of reserve by all the banks all the time. Probably the answer to this is that there would not be reserve money enough to go around or else there would be a shrinkage in business to match it. So that eliminates such a move, and the suggestion is only offered to help fix the reader’s attention on the real issue. It will be noted that the reserves are what are short, hence it is more reserve money which is needed. We notice in the arguments of to-day reference to our scattered reserves. Does this mean that with a central bank the reserve requirements of our various banks are to be eliminated? Of the actual cash which our banks carry, less than half is gold or gold certificates. What is needed is to have the gold of the country so held that its efficiency may be increased in time of need. That means that currency based on gold should be increased in volume and in proportion to the gold held, and this currency should be held as reserve by the banks to be effective. For a fuller understanding of the meaning of this, the reader is commended to the two papers on that subject herewith. Violent panics, like that of 1907, may be caused by shortage in reserve and high interest rates or they may not. The writer thinks not necessarily. Shortage in reserve and high interest rates certainly accompany violent panics. A panic may be caused by a bank failing through internal disorders entirely. Then the people are scared and a currency panic follows naturally. Merchants may allow their credits to become too much extended; a shortage in bank reserves simply brings the trouble to a head and a panic follows. One of our public men has characterized credit as “ a state of mind ” ; then it follows that a panic is a violent state of mind. 9328°— S. Doc. 232, 63-1— vol 1----- 28 A 428 BANKING AND CURRENCY. We have, then, as the principal fault of our banking system, the periodic scarcity of reserve through currency being drawn from reserve centers and consequent high interest rates. What remedies are suggested? One is through this complicated Aldrich system to allow all national banks to issue currency against their pledged assests. The other is a central bank which would be allowed to issue currency against its credit. Of the two the central bank plan is far more direct and probably would correct the trouble mentioned, but here we are bound to ask if such an institution would not be productive of evils which would far outweigh its benefits. We are verging upon times when distrust of anything monopolistic spells its destruc tion. In fact, the whole body of the Nation is aroused against what it calls the Money Trust. Is Congress, then, through its representatives, going to vote this power into the control of one institution and of a few men? Let its charter be ever so carefully drawn and hedged about with ever so many safeguards it will still be the central arbiter of the delicate financial fife of the Nation and will appear to the average man as the moloch of our industrial life. To those of us who are not so prone to fear it as to see its benefits it will have its element of possible danger through a false move or through falling into evil or incompetent hands. So can we not say with certainty that a charter for such an institution will never be granted by Congress? The spirit which comes up to Washington from all sections of the country, fresh from constituencies full of distrust of the money power, is so imbued with ideas which are the antithesis of a central bank that we are forced to this conclusion. Then why should time be used in its discussion? Why not turn to some more favorable plan which will assuage the currency trouble and against which the foregoing arguments will not prevail? What other method or principle can we apply to this problem which will solve it and still comply with this latent command of the electorate? Why not let the Treasury do it? Let the people do it themselves. Let the profit revert to the National Gov ernment instead of flowing into private coffers and avoid the dangers that are evidenced by this almost universal fear that the money power is falling into the hands of a few. As an example of how slow all peoples are to grant absolute control of their finances to a small group of men it is only necessary to search the records of any country where any form of popular government exists. The granting of a charter to a central or Government bank is always attended with more or less opposition, except where absolutism holds. The two United States Banks were granted their charters only after considerable discussion, and both were refused an extension. The Bank of France, so recently as 1897, when its charter granted in 1857 expired, was granted a renewal only after prolonged debate. A bill was presented in 1889 and reported by a committee in the Chamber of Deputies in 1891 and was still before the chamber in 1893. The measure was returned with some modification in 1896 and finally became a law November 17, 1897. The bill only extends the charter to 1920 and reserved the right of the legislature to revoke it in the year 1912. At this time the Government bank of Holland, the Nederlandsche Bank, is suing for a renewal of its charter, and fears are expressed that it will not be granted. Thus we always find that people are loath to hand their financial well-being over to a few men on account of the attendant danger of being exploited, and is this an unreasonable position for them to take, no matter how beneficent may be the in tentions of their financial advisers? W hy should we endeavor, against such a sentiment, to establish an institution which is bound to be the subject of controversy during its existence and which will probably be refused a renewal of its charter, as its two predecessors have been? These conclusions run counter to the accepted doctrines of modern savants of finance. Their arguments are all for taking the power “ out of politics,” which means out of control of the representatives of the voters; but that is a policy which should not be carried too far if we wish to preserve our institutions. Proper safeguards can be thrown around the issuing of currency to protect it from abuse; in fact, to make it just as responsive to the demands of trade as though issued by a central bank, and it will be far more effective, because it can be made reserve money. Do not think, gentle reader, that this is a legal-tender or “ greenback” issue which is suggested; emphatically it is not. The writer does not believe in an unregulated issue of cur rency or money of any kind. He believes in an issue responsive to trade but not to speculation. He believes in an issue which is sound and based upon a coin or gold reserve and which will strengthen and conserve our banking system without destroy ing its independence or individuality; an issue which will encourage business, but not throttle or wreck it; an issue the profit on which will accrue to the National Gov ernment and not to private interests. BANKING AND CURRENCY. 429 All of this is emphasized because sound-money thinkers are prone to push a man over the line among the harebrains and nostrum doctors if he differs with them in the slightest. Also to prepare the reader for the three papers which follow, setting forth the writer’s views on the currency situation and the simple method of strengthening it in accord ance with the lines just laid down. The reader’s attention is called to the fact that these papers were written during 1907-8 and are published now without change. Therefore, many figures given are subject to alteration. Reference is also made to several currency plans which are more or less obsolete to-day because others have been substituted for them, all of which goes to show the development of the financial mind. BANK RESERVES: A THESIS ON THE SCIENCE AND RELATION OF CREDIT TO CASH. [Delivered before New York chapter of American Institute of Banking, November, 1907.] Owing to conditions prevailing for the past few years the idea has taken shape and spread that the banks, especially the national banks, should be allowed to carry less cash reserve than the law now prescribes, or that the law’s limitation should be re moved and the reserve left to the judgment of each individual banker. I believe that such a step would be unwise— in fact, a step toward national financial disaster. Rather do I believe that all institutions doing a banking business should be forced by law to carry a reserve equal to that of our national banks, or of our State banks at least. I also believe that within reasonable limits our country will have specie or gold reserve in its banks of such an amount as they are forced to carry and no more, taking an average over a considerable period of years. That is, if, for the past 40 years the national banks had been allowed to operate with only a 10 per cent reserve, we would have no more specie now in the country than that percentage required, whereas, if all banks had been required in the past to carry 20 per cent, we would have that now and would have accomplished as much commercially and on a firmer basis. This I think I can prove by an appeal to your reason without the use of figures. We must bear in mind first, that this country and practically all of the commercial countries of the world are upon a gold basis, that every credit instrument which passes in discharge of a debt is to all intents and purposes so many grains or ounces of gold whether it be a gold certificate, Government note, silver certificate, bank note, or a check, the creditor accepts it in perfect faith that if he presents it at the proper place it will be redeemed in that metal, the intrinsic value of which will be equal to the debt which he has canceled. From this foundation is credit built, and on this founda tion only can it be sustained. And while this foundation or condition holds the abovenamed different forms of demand credit are interchangeable and coequal in their use, both with each other, and with gold itself except when some specific law or depart ment or business rule intervenes. They are so interchangeable that Government paper will be used more than gold itself, or bank notes will be used more than either of them, or bank deposits and checks will be used more than any of the others, according to the needs, necessities, and conveniences of the different communities under obser vation. Having this well in mind and also the fact that gold is not only the standard of value, but always the ultimate basis of credit, and that it must be held somewhere in some proportion, we are equipped for the consideration of our subject. In its early stages trade was simply barter, or the exchange of one article for another without any medium, value for value. The next step was the use of some coin or metal or trinket which had an intrinsic value as a medium of exchange. The impor tant point is that this medium was supposed to always carry value with it. It was unnecessary to carry the transaction further in order to cash in. And substantially this rule may be said to have held that each transaction was made with coin of value or by actual barter. A promise to pay at some future time might be given, but that promise when it matured would be redeemed with coin, so it amounted to the same thing. What I am trying to impress upon you is that no form of credit money or demand credit was used to any extent. It remained for John Law to discover the great latent power which lay in demand credit. How it could take the place of coin. How, when it was readily accepted, it multiplied the actual coin in existence many times. In the United States this demand credit may take the form of the Government’s promise to pay on demand, which we call legal tender, or a bank’s promise when it is bank currency, or bank credits payable on demand, which are deposits. Of these is demand credit built up when the people are in the state of mind to accept them in lieu of gold or of anything of value. 430 BANKING AND CURRENCY. Please bear in mind that demand credit and time credit are two entirely different things. One is capital invested; the other is liquid capital and is used as currency or money, be it deposits or legal tender. Any use of the term credit hereafter please construe as demand. Now credit, which we have considered at such length, besides doing the work of gold, has done more. It has builded on to the skies a structure and a sphere of use fulness that metallic money could never accomplish. There is not enough, and its physical difficulties of weight and wear rule it out. But we must never lose sight of the fact that it is the foundation. Credit takes the form of either a government’s or a bank’s promise to pay, and the bank’s promise may be either currency or deposits. There is a legal distinction between the two, but I doubt if there is very much scientific difference between them as volumes of credit or their effect upon prices and interest rates. A word as to the growth of this credit and the tremendous volume which it may assume. I presume that our Government instead of only $350,000,000 notes or legal tender might have $1,000,000,000 outstanding if it were so minded; also the banks could increase their currency by as much, provided the country would absorb it all. I am simply giving an example of the growth of demand credit; of wealth, if you please, which does not exist. For no man can obtain them except for value, and he parts with them on the same terms, yet they are but a promise. I know that you have received my proposition to increase greenbacks and bank currency to such proportions not only as a fable but as a dangerous proposition, yet the very same thing has actually been accomplished by deposits in banks. There were by the last report of the comptroller 1 in the national banks of the country gross deposits of $6,000,000,000 and $4,300,000,000 of individual deposits. In State institutions there were $8,000,000,000, making a total of $14,000,000,000, which is subject to payment at any time, at least presumably so. I call your attention to these forms of credit to impress upon you the volume to which they may grow, and on what a slender foundation they may be built, and not because I am in any manner opposed to them or do not recognize their usefulness and necessity when properly controlled. How the first two may be increased— that is, the Grovernment credit or legals and bank currency—is simple and familiar to you all. But how deposits may be in creased is a little more intricate, and I will endeavor to show my view of it. Recollect, please, that I am speaking of the total deposits of all of the banks of the country and not of any one bank. I am not here as an expert on building up a bank’s business. The first and natural cause of increase is the profits of the business of the country, of the merchant, the manufacturer, and the farmer. The wage earner and man on salary and professional man all contribute whatever they have left over and above their expenses if deposited in bank. Then there is another form of increase to which the first is a bagatelle, namely, the increase which comes from loans and discounts, and I shall divide this latter form of deposit increase into two classes, namely, the commercial and the speculative. I don’t suppose it is necessary for me to explain that when a depositor gets a discount or a loan he increases the deposits of his or another bank by that much. The increase arising from this source when the loans are made to business men who need the proceeds in the regular course of their busi ness enterprise I call a commercial increase. A discount is an advance by a bank upon a deferred payment. The payment presumably will be made anyway at its maturity, and the bank is simply advancing the money to the payee and holding the promise of the payor as security. Just so with a loan to a business man for business purposes, even though a bond or bonds be put up as security. The proceeds will find their way into the regular channels of trade i f borrowed for a commercial enterrise, as we are presuming they are. and, moreover, the security is something which as existed for several years and which has been held by the borrower or another for a value equal to if not exceeding the loan. Now, the other form of increase in deposits arising from loans I call a speculative increase because the loan is made upon a new and perhaps presumptive value which did not exist before. For instance, a stock is selling at 50 on January 1, and a bank will loan, say, up to 40 per cent on its par value. On August 1 that stock may be sell ing at 150, and banks will loan 140 per cent on the same stock. In other words, the loans and deposits of all banks are increased b y 100 per cent of that particular stock. Of course, this is exaggerated. Banks do not loan much on one stock, but when it is mixed in several different loans the result is the same. Here is where the fault of maintaining a fixed margin on collateral loans lies. A banker decides to keep a 15 per cent margin, then if the general security market advances 50 per cent he will E BANKING AND CURRENCY. 431 loan just that much more on the same collateral. He is doing the very thing which aids a speculative boom. He is increasing credit currency by increasing his loans and deposits. This credit currency or deposit currency is just the same as money, or rather, has the same effect as long as it is accepted. If the same result were produced by printing more money it would be called inflation. Another form of speculative increase in deposits is the absorption by the banks into their loans of brand new securities. Digestion, I think one of our financiers terms it. These securities are issued by all manner of corporations, railroad, industrial, etc. We will take an example: A man owns a steel plant, we will say, for which he would take two or three millions if he could sell to an individual only. But no, he will capitalize it and sell it, and still own it, which is better. He will bond it and common stock it and preferred stock it to the extent of ten millions, which is modest. He has created seven or eight millions which did not exist before, and this extra is sold and finds its way into the banks as collateral, and what does it do? It swells the loans and deposits. In other words, it has increased our credit currency. But you say that property was worth what he sold it for on a 5 per cent basis. Suppose it was? Suppose it was worth $10,000,000 on a 10 or a 20 per cent basis? The argument is the same. Before it was owned by an individual or individuals. If it was mortgaged it was an old-fashioned bond and mortgage, and there it stopped. But now, by this operation it has been turned into securities and injected into our credit currency, which it swells by so much, and which it never affected before. This has been going on for the past 10 years, as you know, to a tremendous extent. Take the buying of a railroad for $40,000,000 and increasing its capitalization to $122,000,000, as was but recently confessed by a financier. Suppose most of these securities are hypothecated. The loans and deposits 9f all banks are that much larger. Created where they did not exist before. The deposits of the banks are increased by these new securities and the speculative price of these securities is bolstered up by that same increase in deposits. Is it any wonder that the deposits of all our banks have grown so much in the past 10 years that there is apparently not enough cash to afford an adequate reserve? Deposits made from loans on value that did not exist before and which may be merely speculative, and deposits created from loans which are on value which may have existed before but which was not in sufficiently liquid form to be used as collateral. This same argument applies to the produce of the country, which more and more finds its way to the banks as collateral, but in these articles there is some standard of value which may be correctly appraised, nor can the most astute financier make one bushel of wheat appear to be two bushels nor one bale of cotton two bales. Now we come to the question, do we want to lessen the cash reserves which are held by national banks to support these rapidly increasing deposits? These reserves are 25 per cent in central reserve cities, of which there are 3, 12£ per cent in 40 other cities, and 6 per cent in all other sections of the country. State banks are required to carry a reserve varying from, say, 5 to 15 per cent in different States and sections of a State. We must not be unmindful of the fact that Government credit figures in this reserve as cash. And let me call your attention to the great growth in the past few years of the deposits of trust companies who carry little or no cash reserve, but who depend upon a balance carried in a national bank to support their deposits. Also other classes of de mand deposit institutions, also the intricate system of national banks carrying each other’s reserve, which is no reserve at all in time of panic, when all banks are hustling for actual cash. We must bear in mind that when the pinch comes there are but two places where actual cash may be found in any quantity; one is in the vaults of reserve carrying banks and the other is in the United States Treasury. And the Treasury only has it at such times as it has a surplus income, which it did not have in 1890-1893, and we all know the result. During the prosperous times since 1896 a certain class of banking institutions have built up a tremendous volume of demand deposits while carrying little or no cash reserve, and I hesitate to predict what would happen if there should come a period of financial unrest when the Treasury did not have a surplus. What would be the effect of abolishing all restrictions upon reserves? Why, every banker would be thinking about dividends, of course; so he would loan all except what he actually needed or what the particular class of business of his bank demanded. We have but to study the reports of institutions doing business without a reserve requirement to realize this or to refresh our memories of the result of its absence during the early history of our country. In Canada, where there are no restrictions, the banks carry less than 8 per cent reserve. What would be the result? Why this increase in deposits from speculation would be carried just that much farther and when the pinch came the banks of New York would find themselves with only 8 instead of 25 per cent. I referred to Canada carrying 8 per cent, and I know some one is going to say, If they 432 BANKING AND CURRENCY. can get along with that why can’t we? Canada is nothing but a banking province of the United States. She uses our own denomination of currency. She actually uses our gold,1 having no gold mints of her own, and I have repeatedly maintained, and so state again, that if it were not for her proximity to a country which has kept a sub stantial cash reserve Canada could not for long have continued on so slender a basis. Only in the past year (October, 1906), when the Ontario Bank failed, $5,000,000 in gold were shipped from New York to Toronto for need. I submit, what would she have done if New York were not so handy? If reserve requirements are lowered or abolished, deposits may increase until a stringency is felt at the lower level of reserve. Or suppose that bankers having more liberty can not loan all their available funds and there is a little competition and interest rates go down. What is going to happen? Why, some of that reserve will be shipped away; gold will leave the country, and it will continue to go until the reserve gets down to what the average banker considers a working balance, and then when the squeeze comes where will we be? The question will arise here, What will the average banker consider a good percentage for reserves? I think that it would be pretty low for himself and high for others when the sailing was smooth and the reverse when it was rough. I think that my contention that gold would leave the country is sound, as all maintain that a plethora of loanable funds results in gold shipments. So we come ultimately to the proposi tion that the country will carry such a specie reserve as it is forced to, and no more. This brings us to the parting of the ways between individual gain and public policy. On one side we have those who argue that it is not right for the business prosperity to be interfered with by a set cash reserve, which results in a high interest rate when the limit is reached; on the other side we have those who contend that it is absolutely necessary that a certain stock of gold be kept in the country to support the credit of the banks and ultimately that of the Government; that this growing credit, which does the work of gold so much better than gold itself could do it, would gradually encroach upon it more and more until we would suddenly awake to the knowledge that our stock had been so depleted that it was impossible to retrieve without going through the throes of a most disastrous panic. We have but to look back a few months ago, while Mr. Shaw was Secretary, when New York banks were bidding in London against the Bank of England for the float ing gold in that market, to realize that this is true. Why were the New York banks so anxious to get that gold? It was because they were at the limit of their reserve allowed by law and they had to replenish it or cut down their loans and deposits. So there is gold now in the reserves of the country which would not be here if it were not for the reserve requirement. Can you imagine the result if the reserve require ment had suddenly been abolished at that time? Would not some of our gold have been possibly shipped abroad as the result of the bidding on the part of the Bank of England? And why was the Bank of England bidding for gold to replenish her reserve when it is subject to no reserve requirement? The answer is to explain the difference between the banking and financial situation in this country and in England and France and Germany. Whereas we have over 6,000 individual national banks and as many more State banks, each with the first motive to earn as large dividends as possible, in those countries there is one central bank, which is a quasi-Government institution and which is responsible for the reserve of the country. And their first motive is not the paying of dividends but the public weal and they have on their boards of directors the most accomplished and experinced bankers the realm, who are- continually feeling the pulse of their country’s business and who at the slightest sign of approaching danger prepare to meet it regardless of cost and dividends, not only for themselves, but for all bankers in their Kingdom. So they perform a sort of paternal office, and the carrying of a reserve is left to them without a hard and fast rule, but the result is the same, for they never hesitate to raise the interest rate if they want to stop gold from going out of the country or bring it in. With our 6,000 national banks we have to attain the same object, only with a fixed rule; that is, for the privilege of existence and of issuing circulation they are to carry the necessary reserve of the country. Panics as a phenomenon are the result of the growth of credit Without credit there would be no panics. I think that is a self-evident proposition. Any condition which will lead to a loss of confidence in ultimate payment will lead to a panic. The panic will be checked at once if all demands are promptly met and confidence restored. Secretary Sherman said at the time of resumption of specie payments that “ the way to resume is to resume.” And at once when that was done the Government’s promises went to par with gold.* * Canada has begun coining her own gold only since 1910. BANKING AND CURRENCY. 433 There is a great difference between the time when an individual bank is in difficul ties and when all the banks of the country are short of funds. I have heard a great many arguments in favor of a financial institution carrying some good bonds as a part of its reserve, and that is very sound if you contemplate a time when only one particular bank is short of funds, as the bank may readily sell or hypothecate them, and thereby strengthen its cash reserve at very short notice. But at a time when every bank is husbanding its cash reserve they can only be sold at a great sacrifice and probably not hypothecated at all, and in either case the proceeds must come from the vaults of another bank, so that the general situation is not helped at all. The same may be said for the proposition to carry reserve as a deposit in another bank. The suggestion to use clearing-house certificates at a time when interest rates are going up is simply fostering a bad condition. It is right to use clearing-house certificates if perfectly sound institutions find it impossible to meet their obligations otherwise. But it is wrong to use them before such a condition arrives. In other words, let us use any good method of stretching credit to help us out of a panic, but not to help us into one. It needs little imagination to see that the further credit is stretched the worse will be the break when it does come. Another thing which should be noted is that it may not serve one particular bank to maintain a very large cash reserve if all of its neighbors carry a small one, for at the time of need it may find its reserve melting away to appear in other vaults as the result of the calling of loans. Now a word as to interest rates. We hear a great deal of the fluctuation of interest rates in this country as compared with those of Europe. First, we must recollect that America is not Europe; that the conditions are different here. This is a new country and its development has been very rapid. We are building where there has never been any building before, whereas Europe has been populated for centu ries. Improvements there mean reconstruction, while here they mean new enter prises. This is all focused in New York, where the remarkable interest fluctuations occur, owing to the reserve system of the national banks. Then again, the great State banks of England and Europe, overseeing the banking business of their respective countries, as they do, in a paternal sort of way, are enabled to guard the reserve and steady the interest rate as we do not and can not. I have heard it stated and believe it to be true that the banks of England and France make a practice of borrowing money in the open market when rates are very low. These same funds they loan out again when the rate goes beyond what they consider a reasonable figure. The result is, of course, a steadying of the rate, but that is not altogether the reason for doing it. The ulterior object is two-fold: First, to discourage speculation; second, to protect their reserves by checking gold shipments, both of which are encouraged by a low interest rate. In this country a low rate may prevail for a considerable period; then when speculation is at high tide the rate goes up and checks it, and the rate goes up because the reserve limit has been reached. If our friends who propose abolishing a reserve requirement had their way the speculation would go on until there was comparatively no reserve, and then the rates would go up just the same. That our present reserve requirement is too rigid is not true, because it does not deny a bank the privilege of using its reserve, but does deny the privilege of making any new loans, though it may renew until its position is regained. That there is an element of weakness in carrying part of the reserve in another bank I w ill admit, and that is all the more reason why we should be very jealous of any proposition to lessen the actual cash reserve now required. Now, I have endeavored to prove that, with our banking system, deposits— and, so, credit currency—could go on increasing indefinitely through the loans made on the increasing values of securities and on new securities and values which were not previously available as collateral, unless there were some check, such as our reserve requirement; that without this requirement the speculative growth would proceed until the same predicament obtained only at a lower level of reserve, which would be fraught with great danger. I have endeavored to prove that it is to the interest of the country and the bank ing system as a whole, mind you, and not for an individual bank, and that we could not rely upon banks as individuals to maintain it on account of competition and dividends; that without this requirement speculation would go unchecked or gold would be exported—in either case the reserve would be lowered; that under present conditions a country will have such a reserve as it is forced to have, and no more. It is not necessary for me to prove that this is a great country, that it has seen an era of wonderful prosperity, and that the soundness of this amazing growth is beyond question. I firmly believe that one of the contributing causes which http://fraser.stlouisfed.org/ ■ Federal Reserve Bank of St. Louis 4 34 BANKING AND CURRENCY. has enabled us in the past 40 years to meet the most trying times without a serious setback was this same hard-and-fast rule which, though it may have caused us to slow up a bit at times, kept in the vault of every national bank, at least, throughout the country a reasonable amount of actual reserve. A SUBSTITUTE FOR A CENTRAL BAN K: HOW ELASTICITY IN OUR CURRENCY CAN BE OBTAINED WITHOUT SACRIFICING OUR INDEPENDENCE. [Address before New York Chapter, American Institute of Banking, March, 1908.] In the consideration of currency changes or any other proposals to alter the laws existent governing demand credit and its relation to the metal in which it is redeem able, or the business of the country in which it plays an important part by either increasing its volume or by altering its method of ’ ssue or granting new powers to the institutions which are authorized to issue it, there are certain laws generally recog nized and elemental which should ever be kept before the mind. One of the first and simplest of these which applies to coin alone and to credit and coin combined is that an inferior coin or money will always drive out a superior one. This rule extends itself into the realms of credit in that credit instruments and bank credits will dis* place coin if encouraged to do so by law because they are not so costly. For instance, banking institutions will as a general proposition endeavor to conduct their busi ness during good times on the lowest reserve that the law will allow down to a certain point. This means that all the natural expansion of trade is being accommo dated by credit instead of specie and if there is not enough expansion of business to use the credit, gold shipments are encouraged by a low rate of interest. The over issue of bank notes under our present bond-secured system has the same effect. The free coinage of silver at 16 to 1 would have had the same effect. This general rule may be summarized by the statement that our country will have such a coin reserve as it is forced to have and no more. This rule applies not alone to the relation which bank deposits bear to bank reserve, but far more does it apply to the relation which any currency issue may have to the specie reserve. By specie I, of course, mean gold coin. Any currency issued in great quantity which is not directly and solely redeemable in gold and the quantity of which is not in some way regulated by the volume of coin in hand is dangerous and will ultimately lead to trouble by displacing that coin. In other words, a sound currency in a country which only recognizes the gold standard, and that is what we are considering, is one which represents gold and not one that displaces gold or can be used instead of gold. A currency redeemable in lawful money instead of gold and whose volume is not regulated by a gold reserve the better secured it is and the more acceptable it is as money, will the more readily displace gold. Such a conclusion is arrived at by application of the before-mentioned axiom that an infe rior and cheaper form of money will always displace a superior and more expensive one if it is accepted. And the more secure it is made and hence the more accept able it is the more readily it will displace gold. This danger is at once eliminated if the currency is made the representative of gold and its volume regulated by the supply of gold reserve back of it. Thus the advocate of a bond-secured emergency currency is defeating his own ends. If he makes it redeemable in any lawful money the more secure it is and hence more accept able the more dangerous it is. It is not necessary that a currency should be issued dollar for dollar as our gold certificates are. It may be allowed to exceed the gold by such a percentage as the country will absorb and needs, but there' should be a limit, either fixed as in the case of the Bank of England, or with a heavy interest tax beyond a certain limit. In all the discussions which are heard in reference to currency plans we hear little relative to the gold redemption and the effect it will have upon our specie reserve and quantities of type have been used about the security which would be compara tively valueless if our gold is all encouraged to leave the country. At the risk of repetition we will review the accepted economic theory of the natural laws which govern a country’s medium of exchange or money and its relation to business. First, the proportion of money in circulation to the demand for it for the needs of commerce has its effect upon prices. If the volume of currency is increased prices go up; if decreased prices go down. The former causes what is popularly known as good times and the latter hard times. I do not mean to say that changes in the amount of currency are accountable for the whole of business prosperity or the reverse, but other things being equal a constant increase in the volume of currency will cause prices of all commodities to go up because the relative value of the currency is going down. Simply a question of supply and [ BANKING AND CURRENCY. 435 demand. It induces a false idea of prosperity, and all think they are getting rich. It is commonly called inflation. When the inflation is corrected the supply of currency is lessened, its value or pur chasing power increases, and prices of general commodities go down, and all complain of hard times. This accounts for the popularity of all schemes in the past for increas ing the currency supply, such as the State banking system of note issue, the greenback craze, and later, in our own times, the free coinage of silver. It really is curious, when one looks at it in this light, to see the very men who fought so valiantly 10 years ago against that latter proposition now lined up for a cure-all which is not so very much different. As I understand it, silver if coined at 16 to 1 was to be backed by the Government’s credit,and so is the proposed currency. Of course, the question of the standard came in the former, which we are not considering in this paper, although I am not so sure that it does not enter into the question. In considering this question of the increase of currency and its effect upon prices, let us decide what we shall call currency. The economists split a great many hairs over the words “ currency” and “ m oney,” but I do not intend to. 1 shall say anything in the form of demand credit which is used for the purchase of goods or the payment of debts affects prices of commodities in general as its volume increases or diminishes. Thus, we include all forms of so-called money, and bank deposits as well. I believe that a great many of our financial writers have allowed this to escape them, for while they have accepted the rule of increase and decrease in supply affecting prices as applied to money proper, they have failed to include bank deposits, but have set them over in a class by themselves. When we admit this proposition we have a ready explanation for the tremendous increase in prices all along the line in the past 10 years, for we have but to turn to the reports of the banking departments in this country to see a steady increase in the bank deposits in the same period. And in this rise in prices and increase in deposits we see some explanation for the overprosperity from which we have suffered. Now, as to this increase in deposits, has it been a legitimate growth or has it been too much fostered by our laws and therefore unnatural? 1 think that it is unnatural, because for one reason the banks of the country as a whole have not been required to carry a sufficient reserve against those deposits. Not every individual banking institution, but a great many of them, so that the average for the whole is too low. Please bear in mind my statement earlier in this paper that the whole country would have such a cash reserve as it was forced to carry and no more. So that if all the bank ing institutions had as a whole been required to carry a little more reserve one of two things would have come to pass either there would be more reserve in the country or the total of the deposits would have been smaller. I think that it would have been a little of each, just sufficient to have prevented the most acute phase of the panic of October last, which in the fewest words was a scramble on the part of institutions which had been carrying little or no reserve to get it and a counter scramble on the part of banks which had been carrying a fair reserve to keep what they had. In order to make my position clear let us analyze the reserve situation in this country as it is. In the national-banking system the banks in the three central reserve cities carry 25 per cent of their net deposits in cash. In 40 reserve cities the national banks carry 12£ per cent in cash and another 12£ per cent in central reserve cities. All national banks outside of those 43 cities carry 6 per cent in cash and 9 per cent in reserve cities. Naturally every country banker looks upon his funds in the reserve cities which go to make his 9 per cent so-called reserve as so much cash, and during good times goes the even tenor of his way and conducts his bank accordingly. But when the situation becomes uncertain and he finds that his depositors are uneasy and may draw their balances—and when they draw he knows that they will want cash and not a New York draft— what is more natural than for him to gradu ally reduce his 9 per cent in a distant city and increase his real reserve in his own vault. What banker is there in New York who would not do the same under similar conditions? The fault lies with the system and not with our country correspondents. The fault lies with the system, I say, of making a statutory reserve of something which is only a bank credit. It would be far better to require the country banks to carry only 10 per cent in cash and stop there. For aside from the psychological effect of a banker and the whole community resting in the assurance for years that something was cash which was not and suddenly waking up to the fact, the banks as individuals would be conducted different and would provide for contingencies instead of expect ing some other bank to do it for them. As far as each individual bank is concerned, what is the difference, as reserve, between a balance in another bank and a call loan with collateral margined up to 25 per cent? And if there are any odds, are they not 436 BAH KING AND CURRENCY. in favor of the latter? What else is responsible for the skyrocketing of interest rates in New York but this reserve system? When, on account of the crop movement or some other period of activity, 6,000 national banks in the country decide to convert some of their phantom reserve into real reserve in their own vaults, it certainly will cause a shortage if only 50 banks have to supply their wants. You can figure it for yourselves. If they draw only $1,000 each, it makes $6,000,000. Reversing this procedure, we readily see the effect of 6,000 banks suddenly returning their reserves to New York and causing an abundance of loanable funds and low interest rates, and probably gold shipments. The national banks are by no means alone responsible for this condition, as the same privileges are granted to State banks. Trust companies have been allowed to go with no reserve at all up to within two years ago in this State, and though I am not familiar with the laws in other States I understand that they are very liberal the wrong way. Right in New York City, State banks have been allowed to carry a balance in a trust company which carried less than 2 per cent cash reserve and call that balance a reserve. I am repeating all these facts to impress upon you the seriousness of this system of calling something a reserve by law which is not a reserve, and in order that you may see how gross deposits have been increased or our actual cash reserve diminished by too lenient laws and customs, and also to draw attention to the causes of some of our financial ills, which perhaps are not all traceable to a defective currency system. After this brief review of conditions we come to the salient questions in regard to any proposed currency plan. What power and what limitations should it have and what is the want which it is to supply? As to power, should it have legal-tender value? Should it be available as bank reserve? Should it be redeemable in gold alone with a certain gold reserve back of it or redeemable in any lawful money? As to the need for it, is it for bank reserve that it is really needed, or is it for hand-to-hand money? Many may think this last is a senseless question because a currency issued for the purpose of hand-to-hand money would release a certain amount of reserve money to be held by the banks, but I do not think it is so and therefore I shall answer that question first. I feel very strongly that we could not safely have much more nonreserve money in circulation than we have now in the form of our present bank circulation and if there is any increase it should be reserve money. The amount of such money in our circulation now is very noticeable even after the very slight increase of last fall and would impose a very heavy burden on our national banks which are forced to receive it for the credit of their depositors if the law requiring it to be thrown out of their reserve money was strictly enforced. What would be the condition now if 300 or 500 millions extra had been issued according to the terms of the Aldrich bill? The talk about “ hand-to-hand” money and the demand for it strikes me as illogical. What bank in the interior is going to pay expressage on any quantity of currency which will be charged up against its legal reserve in New York or Chicago and will be useless as reserve when it arrives in its own vaults? Suppose such so-called “ handto-hand ” money is paid out to the unsuspecting farmer and mechanic, it soon finds its way back to the banks and yet is useless as reserve. The need is for both ‘ ‘ hand-to-hand ” money and for reserve money. The periodical shortage of small bills— that is, tens and smaller bills—is recognized by all bankmen in this city and especially the paying tellers. I shall refer to that later. The necessity for more reserve money for the banks has also been pretty forcibly impressed upon bankers during the past autumn, and, in fact, is so demonstrated to a more or less degree every autumn. The importation of gold is by way of satisfying this demand. And let me say here, and impress upon you the care with which this phase of the sub ject should be approached: Would it be a sound proposition to issue a reserve money which would relieve the banks of the strain which comes upon them when their reserves are too low because of the growth of credit? This strain results in the importation of gold through the effect it has upon the rates of exchange, and any plan which is going to relieve us entirely of that necessity is going to result in our demand credit growing as the country grows, without the natural increase of specie reserve which should go with it. In other words, our demand credit as it grows will be more and more based upon a fictitious reserve until we go beyond the point of safety. I can only liken this situation in our country to a rapidly growing boy who is subject to growing pains, which are nature’s relays to resupply his reserve force on the road to new strength. Our country is a rapidly growing one. The system of banking, and hence of credit, is developed here in its highest and most potent form, but the growth can not go on forever without the reserve on which it is based growing in proportion. And the tightening of money rates is the signal that it is due. We are having our financial growing pains. And the person who would recommend any scheme which will entirely remove that very natural phenomenon I can only liken to the quack BANKING AND CURRENCY. 437 who would give that boy whisky for his troubles. He would probably forget the pains, but how about his reserve force? This is illustrated by the method of calculating how large a volume of emergency currency should be issued under the Aldrich bill. The total is taken of all the clear ing-house certificates recently issued, which is perhaps proper, but to this is added the total gold importations during October and November. Verily, do these people expect never to have any more gold importations, but to issue paper money instead? Gold importations are popularly supposed to represent the balance of trade, but exchange dealers and those who have studied the statistics of exports and imports will tell you they do not. It is the interest rate prevailing which does the business. Take the reports of the Secretary of the Treasury from 1896 to date. See the great increase of our gold holdings up to 1900. Then see them almost stand still from there on. What is the cause of the change? _ In 1900 a law went into effect allowing national banks of $25,000 capital to be organized, also allowing national banks to issue currency up to par of the bonds deposited. That was sufficient to give an impetus to the issue of national-bank notes. Since then, instead of adding to our gold reserve we have been adding to our bank circulation. And let me say here that though national banks can not figure bank notes in their reserve, I believe that it is done a great deal. Not inten tionally, but because it is a physical impossibility in the rush of business to sort differ ent bills of the same denomination. We hear it stated again and again that we do not make the full use of our gold. That is, that we hold entirely too much in proportion to the amount of credit which it supports. With this statement I take issue. If the total of gold coin held by the banks and Treasury is compared to the vast superstructure of credit reared upon it, consisting of bank deposits, bank notes, and the Government’s own credit instruments, I think it will be found that the percentage will compare very favorably or unfavora bly, rather, to that of European countries. The tendency seems to be, because of the excellent credit of our National Government, to look upon its promises to pay as good as gold, or rather, as the same as gold. If the Government will guarantee any bank circulation, or even deposits, the impression seems to be that that settles it There is no need to pursue the subject further. A cautious business man thinks many times before adding his name as guarantor to any obligation, no matter how remote the possibility of his ever being forced to pay. Why should our Government rush into any such tremendous liability as guaranteeing an asset currency, or, as some propose, bank deposits, which is ludicrous, both because of the possibility of the Government’s being forced into bankruptcy, and because such a guaranty would remove all care and safeguards which a depositor takes in selecting his bank, and therefore give the rogues in the business a free hand, and ultimately result in the wildest era of specula tion we have ever known. If the Government should assume any such tremendous obligation what would be the result if we had a period of heavy gold exportation, such as took place from 1889-1893, when the effort to support less than $100,000,000 of its own obligations in the form of Treasury coin notes snook its credit to the very founda tion? Paper is not gold. A promise is not gold, however high the credit of the prom isor; and until so-called economists realize this in considering any measures affect ing demand credit they are going astray. A currency to be sound should, if we are going to remain upon a gold basis, first, be based upon gold, redeemable in gold only, never allowed to go beyond a certain per centage without a heavy interest rate, which will either bring gold into the country or reduce the volume of the currency. The credit of the Government is only good so far as our belief in its ability to produce the gold to redeem the currency goes. And if through ill-advised legislation our country’s reserve is depleted and credit money sub stituted, we shall have to experience a similar, if not a worse, trial than that of 1893, and we shall not have the satisfaction of laying it to the free sil verites or tariff reformers. The sound currency of which I speak could, of course, most conveniently be issued by a central bank. Such currency would be redeemable in gold on demand, not less than 50 per cent of which should be held as a reserve against the issue of notes, but usually a much higher percentage. Such a currency should be carried as a reserve by other banks. It is easy to see how such a currency would protect its own reserve automatically. If gold is shipped abroad, the shipper must draw some of these central-bank notes from his own bank, in order to get the specie. This results at once in a lowering of the reserve of the bank from which he draws the notes, and a stiffening of the interest rate, which helps to check further shipments. The reverse is true of gold imports. This rule applies now, for we have much the same results from the Government’s gold certificates and legal tender only because of the diversity of our currency; other forms of money, especially national-bank notes, slide in and take the place of the gold certifi cates and the effect of its withdrawal from circulation is not so ap aient. Also, the 438 BANKING AND CURRENCY. alternate withdrawal and returning b y country banks of their reserve deposits in New York destroys the effect. The action, benefits, and arguments in favor of a central bank are diametrically opposed to those to be applied to a currency issue on the part of our present national banks. Yet, curiously enough, we hear all currency reformers start off as in favor of a central bank first, and next of an increased issue by our national banks. They cite the Government banks of England, France, and Germany in support of their argu ments; yet the currency issues of those banks bear no resemblance to the proposed issues in this country in their fundamental qualities First, it has been the unified policy of those countries to do away with all banks of issue but the one central bank, and that is practically an accomplished fact in all three countries. Here it is proposed to grant the privilege to 7,000 banks and as many more as come into existence. Sec ond, their issues are held as legal reserve b y all other banks. Here they are not to be. Third, those issues are made against a very large coin reserve, amounting sometimes to 80 per cent, are solely redeemable in coin, and are for large amounts only in Ger many and England. Here the partisans differ, a few wanting them redeemable in gold, most in money, and as to reserve some go so far as to want them to be held as such. Eourth, as to the emergency feature which is supposed to be copied after that of the Reichsbank of Germany; that is, turned upside aown. The Reichsbank is granted the privilege of issuing a certain volume of notes, the limit of which has never been reached. A certain percentage of the notes issued may be invested in Government funds or first-class bills; the remainder must be covered by coin. You will note that they reverse our method of making a reserve. We make the reserve a percentage of the total; they make the investment a percentage of the total. At first, one would think that would amount to the same thing, but it does not when it comes to the emergency issue. The emergency issue comes about in this way: If the percentage of the issue which is invested is greater than the law allows, that is an emergency issue. In other words, the emergency issue begins when the volume of notes falls below that amount of which the investments held would make just the legal per centage. The effect of this is that when the bank increases its coin reserve by importation the emergency issue disappears, although the volume of notes has not been lessened but increased, nor the amount of investments cut down. The further effect is to tax the bank for having a short reserve, a very cunning way of making the bank take good care of it. I will not carry the comparison further, but if anyone can find in any of the proposed emergency issues on this side of the water any semblance of a feature calculated to really protect our gold reserve instead of dissipate it, we want to hear it. A proper currency issue should therefore be based directly upon gold with a sub stantial coin reserve, and the relation between the volume of notes outstanding and the actual coin reserve held against it so regulated that a rise in the interest rate will increase the percentage of reserve either by decreasing the volume of notes or increas ing the coin holdings through importations. For instance, if we had $1,000,000,000 of such notes outstanding and $600,000,000 of coin reserve against them, which would be 60 per cent, and that percentage was considered too small a rise in the interest rates, would, through curtailing of loans, decrease the volume of notes or increase the coin reserve through importation. This can not be accomplished through the medium of 6,000 or 7,000 separate institutions. It can only be done by one central institution, and that may be either a central bank or the National Treasury. And as I recognize, along with other currency doctors, that the central bank, for political reasons, is not practical now, I advocate accomplishing the same result under slightly different auspices. Other currency doctors turn from the central bank to something radically different. They turn to the very system which they denounce as unsound, ill ad vised and a political expedient, and in the same breath tell us that with a slight change it will produce results directly opposite to those it has produced in the past. I turn to our National Treasury as a substitute for the central bank, and by a slight change in the present issues we can have a currency based upon gold slightly elastic or more so if desired, sound and stable, because guaranteed and regulated by our Government and a central authority. I would take our total issue of gold certificates, of which there are approximately $800,000,000,1 the issue of legal tender, of which there are approximately $350,000,000, and make them one issue, of which there would be $1,150,000,000. Against these I would hold the $800-,000,000 of gold coin represented b y the gold certificates or yellow backs and the $150,000,000 now held as reserve for the legal tender or greenbacks, giving $950,000,000 of actual gold reserve against $1,150,000,000 of notes issued, or a reserve of 0.826 per cent. We would here have a note issue based directly upon the 1In 1908. Gold certificates are now over $1,000,000,000, BANKING AND CURRENCY. 439 gold reserve redeemable only in gold, with a very slight margin of difference between the actual coin held and the issue outstanding. Suppose more money is needed in the country, we have but to increase the volume of notes $100,000,000, always under the proper restrictions, of course, and there you are. No noise, no red fire, no emer gency issue to frighten the timid, to sound the warning that our finances are rotten, no newspaper scare headlines. And that is a great argument against all proposed emergency issues, aside from their very bad economical features. This issue which I propose would all be uniform, both in its engraving and its life and its retirement. The first $100 bill would be the same as the last. They would all be Treasury notes, legal tender, available for bank reserve, which is the real thing needed, with no complications about their legal status, as such. Suppose this extra $100,000,000 is issued as previously suggested, and we still have 76 per cent reserve, another $100,000,000 and we have 70 per cent, and so on, though I should never be in favor of going much below the last figure. But if we did, owing to some extraordinary emergency, like last October, we could soon recoup by importations of gold or an early reduction of the issue. As to its practical operation: First, let a separate issue department be established in the Treasury as in the Bank of England. Let it be distinctly understood that this issuing of notes is never to be confused or entangled with the regular receipts and expenditures of the Government. Not a dollar of diis issue is to go out of the issue department except for gold, deposited or under such circumstances as I shall describe later. And let me say here that those notes are to be acceptable for all taxes, duties, and customs, and thus do away with that anomaly of a government refusing to accept its own promises for taxes or any other debt. In order to get the increase issues, when needed, into circulation, some scheme must be devised, such as loaning it to banks upon the deposit of approved collateral and charging not less than 5 per cent, or loaning to the banks without collateral and with the same charges and making the loan a prior lien upon the bank’s assets. Per sonally, I am in favor of the latter scheme. That is, taking no collateral ana making it a first lien. That gives the bank a freer hand to use the funds for the benefit of its depositors, and those funds will go to the merchant and business man instead of into the security market as in the case of a bond deposit being required. Moreover, the great danger of a favored security list and the wirepulling to get securities upon that list will be obviated. Many will make the point that it will not be fair to the depositors in the banks to make the Government a prior creditor, but I fail to see it. The Government only comes to the aid of the banks for the benefit of the depositors; why should it not be guaranteed against loss? As against a bond deposit a prior lien is no different. One is the same as the other, so far as the depositor is concerned. The examination of the banks could always be made with a view to their being possible borrowers, and it seems to me should eliminate any possibility of loss if properly conducted. What banker would not be relieved if his loans were all made to houses of which he or a deputy had made a personal examination? Another method which might be developed for putting the extra issue into circula tion when needed would be along the lines of James G. Cannon’s suggestion of loaning them to clearing houses where commercial paper would be used as the basis of the security, or a discount committee could be organized in various subtreasury cities which could buy commercial paper. Whatever method was used for accommodating the banking community in time of need if practicable would do. The essential thing, which is usually overlooked, is that the currency in the first instance should be based on a sound economic foundation. I said that I would make the interest charge to the banks for this extra accommoda tion 5 per cent, and in the discretion of the Secretary of the Treasury it should be gradually raised to 7 per cent, 8 per cent, 9 per cent, and more if necessary, as the per centage of gold reserve was lowered, thus forcing either a reduction of the issue or an importation of gold. There might be a commission authorized, composed of one mem ber named by the clearing house in each city of 1,000,000 inhabitants and two by the President, making a board of five, who could have the power to check if necessary, but not to destroy the initiative of the Secretary. The Treasury notes thus issued should not be of a smaller denomination than $20, thus insuring their principal use as bank reserves. Further, the silver issues now con stituting the ones, twos, and fives should all gradually be made into tens. The bank circulation should be reversed; instead of being composed of denominations of $5 and over, should be converted into denominations of $5 and under— that is, ones, twos, and fives. Thus we would have a currency harmonious and well balanced, with the Treasury notes making the larger denominations, and the silver certificates, which would be tens, available as bank reserve; the national bank circulation limited to fives, twos, and ones not available as reserve for national banks at least, and to be used as hand to hand money. Thus, naturally, in the regular day’s work would the reserve 440 BANKING AND CURRENCY. money be separated from the nonreserve money, and the banks would not have to face every Friday and Saturday morning a heavy drain upon their reserve money, as they do now. And again, the recurrent shortage and plethora of small bills with which we are all familiar could be alternately supplied and corrected b y the banks themselves as they saw fit, instead of waiting for the tardy action of the Treasury Department. In fact, the Government will soon have to resort to silver purchases in order to supply the demand for ones and twos unless something like this is done. Thus could the national bank circulation be made useful and still stay within its legal limitations. We know that to-day it is not used for local accommodation, as the theorists presume, but a country bank orders its new issue shipped to its New York correspondent, who has the officers’ names lithographed upon it, and then credits the country bank’ s account. This is the usual procedure, though there are exceptions. Other than I have suggested, I would not be in favor of disturbing the present national bank circulation except that the rule should be more strictly enforced that it should not be carried as a reserve. As to the privilege of the national banks carry ing so large a percentage of their reserve in other banks, as I said previously in this paper, if not entirely eliminated it should be decidedly reduced. I believe there lies the cause of our recurrent money stringency and money plenty in so aggravated a form, and I do not believe that any currency system can be devised which will correct it. A too easily expanded currency will only humor it until it goes beyond bounds and leads to fearful disaster. According to my theory, a legal reserve should be all cash, although the percentage of the total reserve be reduced. For instance, say 25 per cent in cities of 1,000,000 inhabitants, 20 per cent in cities of between 100,000 and 1,000,000, 15 per cent in all cities of between 30,000 and 100,000, and 10 per cent in all other sections, all to be held in legal reserve money in the bank’s own vaults. The natural tendency of funds to collect in money centers is inevitable. W hy add to this a harsh law which aggravates the trouble manyfold? If actual elimina tion of the credit reserve is not possible, then the percentage which is carried in other banks should be reduced. At present a nonreserve bank may carry 60 per cent of its reserve in a reserve city, and that bank may carry 50 per cent of its reserve in a central reserve city. It seems needless to say more on this subject. A little reflection makes the whole trouble so self-evident. Carrying this principle a little further, no two banking institutions in the same city should be allowed to carry each other’s reserve, whether they are national or State banks or trust companies. That situation has obtained and still does in this city. Under what principle of finance such a situation is tol erated I am at a loss to understand. I am aware that in making some of these points I am going to be opposed by many who prefer the present situation to losing deposits. But I think it will be found that such a system can not go on forever. Indeed, I believe that if a central bank is instituted with the purpose of fostering this system of banks in three cities, attempting to carry the reserve for the whole country, it will soon find its power to lend credit exhausted. The present is the very time to make such a change in the reserve system as I have suggested, as after the panic of last autumn and the natural retrenchment which is bound to follow the whole banking system will have an abundance of reserve money, and the change may be made without hardship, and, moreover, that change should be made before heavy gold shipments begin. It is, of course, understood that my plan for remodeling the currency is only given here in a rough sketch. I have used as few figures as possible, and those are only approximated and in round numbers, in order to avert confusion. But I believe that in this manner only can we secure a currency with some elasticity to it sufficient to allow for the enlargement and con traction of business activity at different seasons of the year. But 1 believe that no form of credit currency can be devised or should be attempted calculated to take the place of actual coin reserve during a long period of growth. And, moreover, this increased issue of Treasury notes when necessary would, under certain departmental rules, be available for use by any national bank at least that complied with those rules on an equal footing and thus eliminate the possibility of our Treasury funds in time of stress being put in control of a small coterie of men, be they ever so high-minded, as we have recently witnessed. N o t e .— In this connection a recent statement of Lord Averbury regarding gold reserves in England is interesting. He said that the subject resolved itself under two heads—gold reserves as against banknotes and gold reserves as against liabilities So far as bank notes were concerned, he thought that his hearers would probably agree that the reserve of gold was ample. There was not a shadow of doubt as to the con vertibility of the bank note. The deputy controller of the mint had given an estimate of the amount of gold coin in circulation, including that held by banks. His estimate, 441 BANKING AND CURRENCY. in round figures £116,000,000, was exclusive of bullion. He had no very trustworthy figures as to the amount of gold or silver bullion, but it could hardly, with the gold coin, be less than £150,000,000. The question of gold reserves of banks was, no doubt, a more difficult one. If there were to be any legislation, savings banks must be included. He was surprised that there should be any question on that subject. Yet the chancellor of the exchequer asserted that savings banks were on a different footing. Their deposits, in round figures, were £200,000.000, and against this enormous sum, at the present moment, no reserve gold whatever was held. Yet surely reserve gold was more important for savings banks than for other banks. Table illustrating how the proposed issue would have been effected in January, 1908: Amount. Gold reserve. Percentage. $346,000,000 800.000,000 $150,000,000 800,000,000 1.146.000. 1.246.000. 000 950.000. 000 950.000. 000 000 82 76 Comparison should be made with the table on page 45, where the reports of January, 1913, are used, and notice how deposits of gold would have increased the issue of Treasury notes and strengthened the reserve. TREASURY ISSUE V. BANK ISSUE: LET THE BEST CURRENCY IN THE WORLD BE IMPROVED, NOT EMASCULATED. [Delivered before convention of American Institute o. Banking at Providence, July, 1908.) The first thought, it seems to me, which naturally arises in carefully analyzing the emergency currency bill recently enacted by Congress 1 is, Why should the currency be in the form of bank notes instead of the Government’s own direct obligations? It is to be redeemed by the Government at its own expense, and it is practically loaned by the Government to the various banking associations at a very fair rate of interest upon deposit of approved collateral. In fact, the rate charged for this emer gency relief circulation is double that charged for the Government’s own funds when placed with depositories. And yet the one is useless as reserve and the other is imme diately available as such and for building up or supporting three or four times its volume in credits. The final outcome of all the money and currency agitation which we have experienced for the past few years is a very good example of the manner in which public questions will develop along certain arbitrary lines. When the ques tion first arose a few eminent parties versed in the theory of banking and credit pointed the way of relief in the direction of bank issues, and alon» those lines only the discus sion has continued, oblivious of the fact that there might be relief in a different direc tion. At last a bill has been passed which brings little if any of the benefits which the originators of the argument intended should be accomplished, and which in principle is faulty, to say the least. I am in favor of the Government issuing and guaranteeing its own currency. If it chooses to loan the currency to banks under certain approved and fixed conditions in order to relieve severe monetary difficulties, well and good, but what argument can be advanced in favor of the Government issuing currency with the names of various banks printed on it, but which the Government not only guarantees and redeems, but charges a good round interest for? With our present bank circulation I have no quarrel. We all know the conditions which gave it birth; and so long as it is kept down to a reasonable amount it is not particularly dangerous. Its best quality is the fact that it is rather unprofitable to issue. This currency which I am in favor of should not be an emergency currency, but should as soon as possible be made to absorb all of our present outstanding goldredeemed currency, including both the legal tender and gold certificates, the gold which they represent being held as a reserve by the Treasury. There would be, according to present conditions, under such a rearrangement, a specie reserve of about 86 per cent, arrived at as follows: Gold in the Treasury held as reserve for the legal tenders, $150,000,000; gold held in trust against gold certificates, $1,086,000,000; total, $1,236,000,000. Legal tender outstanding, $346,000,000; gold certificates outstanding, 1 Refers to Vreeland amendment to the national bank act providing for emergency currency. 442 BANKING AND CURRENCY. $1,086,000,000; total, $1,432,000,000; $1,236,000,000 specie reserve against $1,432,000,000 currency outstanding, percentage, 86 per cent. I recognize that the gold certificates represent a trust fund and that it would be impossible to disturb those outstanding by throwing them arbitrarily into such an issue, but if there were issued a Treasury gold note redeemable in gold on demand, and as the gold certificates and old legal tenders came into the Treasury if they were retired and these Treasury gold notes issued in their place the desired result would soon be reached. The percentage of specie reserve to issue outstanding should be fixed, say, 86 per cent, as it is under present conditions, and that percentage never reduced except under such conditions as we experienced in 1907, when an additional 100 or 200 millions of Treasury notes could be issued and loaned to the banks, interest to be charged at not less than 5 or 6 per cent and raised or lowered according to conditions prevailing. When any bank has regained its normal condition it would simply pay off its loan with Treasury notes and the issue thus be reduced, or it could deposit gold to cover the notes loaned to it, and the deficiency in the reserve would thus fie wiped out; or the Secretary of the Treasury could buy United States bonds during a financial stringency and sell them when money was abundant, just as the Bank of England buys for cash and sells for the account, and the reverse at different periods. But that is beyond the scope of this paper. Sufficient it is to say that any plan whereby all banks were treated alike if they conformed to the conditions would do. Under the Yreeland measure any bank wishing to pay off the Government loan may do so by depositing with the Treasury “ lawful money,” which may be an entirely different form of currency from that which it borrowed, and the currency which it is supposed to retire may remain in circulation for years after. To be sure, the Govern ment stands ready to redeem it at any time, but why not make it originally a Govern ment issue and save this complication? The issue under the Yreeland bill is not reserve money, still it is to be an emergency currency, loaned to the banks at the very time when they are short of reserve and all are endeavoring to regain their legal position at once. I know the argument of those in favor of this form of currency that it is to be paid out by banks to their depositors and legal money held in the vault. Let us presume that this is done. That practically all of the reserve money is in the vaults of the banks of the country, and the depositors, the people, hold nothing but bank notes. Then they will deposit nothing but bank notes in the form of money. The deposits may increase, but the reserves of the banks can’ t increase, for they hold all of the reserve already. Bank notes should never be counted as reserve money even though they are guaranteed by the Government, for the principle is wrong. But if the emergency issue under the Yreeland act is to be of any service at all, bank notes will be counted in the reserves of banks. Bank notes are now counted in the reserves of most of our State institutions and of many national banks, owing to the impossibility of banks without regularly organized bill departments doing otherwise. And what is- the result? They are releasing just so much gold from the country’s reserve to be exported. It is a fact now universally recognized by students of currency and money condi tions that any issue which is given power to do what gold can do does not increase the country’s money supply, but simply frees gold to leave the country, or relieves the necessity of gold being imported when it otherwise would be. Therefore, let us lay down the general rule that a sound currency is one which represents gold and not one which takes the place of gold. A currency which represents gold will necessitate the importation of gold if its issue is increased, for presumably the increase will only be made under pressure of a high interest rate and an increased issue necessitates an increased reserve. Whereas, a currency wffiich takes the place of gold, when increased, simply relieves the neces sity for more gold or allows some gold already in hand to go. This has been illus trated strongly several times in this country since 1860. The issue of greenbacks in the sixties caused the exportation of gold which they displaced, but they were shorn of a great deal of their power to do so by the fact that they went to a decided dis count in gold. And let me call your attention to the fact that a money which passes freely with gold at par is far more dangerous in this regard than one which is at a discount, for the very fact that a money is at a discount is proof that it is not taking the place of gold entirely. But it is universally conceded that the greenback did displace a great deal of gold in our currency and was a standing menace until the resumption of specie payments, when it ceased to be fiat money and became vir tually a Treasury note. And that is what this new issue should be; a gold note based upon a certain specie reserve which should be a percentage rather than a fixed amount. To many such an issue appears as fiat money and they at once throw up their hands and refuse to con sider it. But it is not fiat money any more than gold is as long as it is always redeem- BANKING AND CURRENCY. 443 able in gold. To be sure it should be given the legal-tender quality in order to give it an equal power with gold and in order to make it a better representative of the gold for which it stands. Another period in our financial history when a money issue which took the place of gold instead of representing gold drove a great deal of that metal out of circulation— or, rather, released it and allowed it to go, for gold does not have to be driven away— was during the operation of the Sherman Act of July 14, 1890. That act provided for the monthly purchase of 4,500,000 ounces of silver and the payment therefor with Treasury notes which were redeemable in coin. The bill remained in force three years, during which time $156,000,000 worth of silver was purchased and as much new money put into circulation regardless of the need for it and with no reference to any gold reserve, although it was redeemable in that metal at the option of the holder. During the three years’ operation of the bill we exported $160,000,000 worth of gold. We exported almost the exact amount of gold, because the new issue simply took its lace and released it and very nearly bankrupted the Treasury through the operation, ecause the notes were issued for ong metal and redeemed in another. Other instances of issues which took the place of gold instead of representing it were the forced mintage of the Bland silver dollar, whereby about $370,000,000 of that coin were put into circulation between 1878 and 1890. Although they may not have caused the exportation of large amounts of gold, they relieved the necessity for its importa tion, which would have naturally followed our country’s phenomenal growth during that period and the consequent increased demand for currency. Another instance is the national-bank note, which has none of the qualities that a credit issue by banks is supposed to have, especially the quick redemption; it is not elastic; it is not issued in relation to any gold reserve, and although it is not legal tender or available as reserve for national banks, still it is for State banks and, as I said before is reported as reserve to a certain extent by national banks and to that extent displaces gold. ' . With these various issues which we have, displacing gold instead of drawing it to us, our country would soon be depleted of its reserve if it were not for its phenomenal growth, its tremendous and steadily increasing export trade, and the production of its mines. Y et this should not be so. Our currency should be built on such lines that though our exports were diminishing and our business drying up, the last dollar of public credit outstanding would be provided for. This can be accomplished b y means of a currency with a fixed percentage of gold reserve back of it. Then if the volume of the currency is increased, the volume of its specie reserve must also increase proportionately. If there were heavy gold shipments, the specie would be obtained from the gold reserve by presenting the Treasury notes. The Treasury notes would not be reissued except on deposit of a like amount of gold. Thus the withdrawal of gold would at once reduce our circulation and, through the effect upon the interest rate, make further shipments unprofitable, thus automatically protecting the reserve. By a currency founded on these lines we could make a fuller and much more bene ficial use of our stock of gold than we do at present. By clinging to the gold certificate as at present issued we are limiting the development of our credit and of our national resources to the stock of gold in hand, whereas there i6 no reason why there should be any such arbitrary limit set upon them. Does anyone believe that the deposits of gold under the earth’s surface were originally measured b y the need for that metal m carrying on the banking and financial operations of the world? If they were, then let us stick to the use of gold coin and gold certificates. If not, let us, devise some means by which we can use a currency based upon gold, representing gold, redeemable in gold, "but which, if necessary, may almost double the usefulness of the stock of gold which we find it convenient and necessary to carry. Such a currency would be to the people and the banks exactly the same as a gold certificate, for it would be redeemable in gold on demand and it would be issuable on deposit of gold. A default in their redemption would be impossible, for long before the reserve was half used for redemption the volume of our currency would be so reduced that no more could or would be presented. In the famous bullion report of 1810, I think, it was first recognized that a country wall absorb a certain amount of money and that if the circulation is increased beyond that amount it is corrected through the exchanges or the currency decreases in value. Acting upon this, we may take it that our country will always have use for the volume of currency outstanding to-day and probably more as it grows. Therefore we are acting with perfect safety if we take the stock of gold now in the Treasury as a reserve and issue the Treasury notes against it, as I have suggested. In a total issue of over 1,400 million there would be less than 200 million of notes not actually covered by coin. If an occasion arises when additional circulation i6 needed E 9328°— S. Doc. 232, 63-1—vol 1-----29 444 BANKING AND CURRENCY. temporarily, this 200 million of uncovered notes could be increased to 300 or 400 million with perfect safety, for at such a time more money is needed. If the demand for money is permanent, gold would be imported eventually and de posited with the Treasury, thus bringing the uncovered notes down again to 200 million, but allowing the volume of notes outstanding to remain at the higher figure. This process could continue as our country grew and would operate the same with two billion notes outstanding as it would with one billion. Thus we should have an elastic legal-tender currency redeemable in gold and available as bank reserve. And it is as bank reserve that an emergency currency is needed. The use of clearing-house certificates proves that conclusively. The emergency issue of these Treasury notes would remove the necessity for clearing-house certificates and the consequent interruption to our domestic exchange. How much more scientific and useful would such a currency be than that authorized by the Yreeland measure. The one would relieve instantly, going direct to the work for which it was intended, whereas the other has first to be issued by the banks and find its way into the hands of the people, where it is to take the place of reserve money which is to be returned bv the people to the banks before there can be any relief. Or, the banks will put the Vreeland currency directly into their reserve contrary to the letter and spirit of the law, and I am inclined to think that it will be the latter. A comparison of this proposed Treasury note with the issues of the banks of England and Germany will show that it is not very different from them in principle though it would be a direct obligation of the Government, whereas they are the indirect obliga tion through the Government bank. The Bank of England was authorized by the act of 1844 to issue 14,000,000 sterling in notes, against Government securities anything above that amount to be covered by gold, so that the amount invested is fixed and the specie reserve fluctuates with the excess of the issue over that amount. By the same act the privilege of note issue on the part of other banks in the King dom was limited to the amount in existence at that time, April, 1844, with the proviso that upon the privilege of issue of any of those banks expiring from disuse or failure it should revert to the central bank which could thereupon increase its uncovered notes by two-thirds of the amount. Through the operation of this clause the bank may now issue in the neighborhood of £18,000,000 of uncovered notes. We note here the gradual extinction of other banks of issue and concentration of note issue in the one central bank which is opposed to our present policy of having 8,000 banks of issue and increasing their privileges. We note also the amount of uncovered notes £18,000,000 or $90,000,000, which compares with the $200,000,000 of uncovered Treasury notes under the proposed issue. The Bank of England note is also a legal tender, therefore, available as reserve for other banks, through, of course, there is no legal requirement. It is interesting to note also that the only time when the circulation of the Bank of England has been found inadequate or its weak points brought out were in 1847, 1857, and 1866. At these times it was necessary to suspend the act or allow the bank to increase its uncovered notes, which amounts to the same thing as our proposition to increase the uncovered Treasury notes during times of financial stress. Let us also note that the weakness lay not in the bank note issue, but that the bank acted as reserve agent for all of the banking institutions of the Kingdom, and that the trouble was caused by their drawing their balances to replenish the cash in their own vaults. The gold was drawn not by the bank note, but by check. We therefore come to the strong conclusion that to completely divorce the monetary issue of a country from the banking business is the only safe and sound plan. The note circulation of the Imperial Bank of Germany is based largely on the English banking act of 1844. There is a fixed limit of authorized circulation against which specie must be held in the proportion of one-third and issues beyond this amount must be covered in specie for the full amount; except that the bank may exceed this limit without metallic reserve upon the payment o f a 5 per cent tax to the Government. Here also the banks of issue are limited to those in existence at the time the act was passed (1875) with reversion of the privilege to the central bank upon the suspension of other banks and the proportionate increase of uncovered notes to be issued by the central bank. The authorized circulation as originally adopted was 250,000,000 marks, one-third of which (83,000,000 marks) had to be covered in specie; two-thirds (167,000,000 marks) to be invested. You will note that the amount uncovered, 167,000,000 marks, is fixed, whereas the amount uninvested or represented by coin and metal is not; for the issue may exceed 250,000.000 marks by any amount so long as the excess is covered by coin. But if this increase is not all covered by coin and the two-thirds, or 167,000,000 marks, allowed for investment is exceeded, then the 5 per cent tax becomes operative until the note issue is decreased or the metallic reserve increased. 445 BANKING AND CURRENCY. The circulation is something over a billion marks, so the amount to be invested is practically fixed, although the above-given figures have been considerably increased by the imperial bank having taken over the circulation of other banks. Again, we see the similarity to the proposed Treasury notes, with the added feature of the 5 per cent tax which corresponds to the interest to be charged by the Treasury for accommo dation. We hear a great deal about the Government going out of the banking business, but I do not believe that in so far as the currency needs of our country are concerned it is possible or feasible for it to do so. M. Noel, in speaking of the Imperial Bank of Germany, says: “ The establishment is closely bound to the State and is only able to move, think, or act when the State manifests in some manner its presence and affirms its control.” What is that but the Government going into the banking business? If we establish a central bank here we must do one of two things: We must hand the whole of our financial business oyer to private parties or the Government must take full control. I do not believe 1 in 1,000 of our citizens would consent to the first, and if the latter then it seems to me that the Government would be deeper in the banking business than before. Therefore, why not utilize and extend the good points of our Treasury system, seiz ing upon the good points of the currency systems of the world, adapting them to ours and proceed on our prosperous way with the firm conviction that Uncle Sam when he once sees the way clear will do a tiling a little better than anyone else could do it. The following table shows how present Treasury issues would be thrown into pro posed new issue and how easily an emergency issue could be effected, which would bv ia te the necessity of using clearing-house certificates. |Gold certificates are aken as of Jan. 31, 1913.) Present issue. Gold reserve. Legal tender...................... Gold certificates............... $346,090,000 1,086,000,000 $150,000,000 1,086,000,000 Total present issue. 1,432,000,000 1,236,000,000 Inter est Treasury notes. rate. Perct. 4 5 6 7 Gold reserve. $1,432,000,000 $1,236,000,000 1.532.000. 000 1.236.000. 000 1.632.000. 000 1.236.000. 000 1.732.000. 000 1,236 000 000 Per cent age. 86 80 75 70 Those who are familiar with this subject know how delicate an operation it is to tamper with the currency of a highly developed commercial nation such as the United States. The prudence and caution demanded may be compared to that of a surgeon when he wields the knife near the vitals of a human being. Here is a change which may be effected with no more attention attracted than is occasioned by the changing of the engraving on one of the bills of our existing issues, and yet it would go to the very root of our disorder. Experts claim that $150,000,000 increase would be ample to satisfy the reserve shortages of our worst periods. A separate “ issue department” should be created in the Treasury and all currency issues controlled from there and not reported and confused with the fiscal department. A surplus or deficiency in the income of the Government should have no effect on or relation to the issue depart ment. The emergency issue could be put into circulation by loaning direct to banks in proportion to capital and surplus, or to deposits, and be made a first lien against the assets, or through discount committees at the clearing houses, or at the subtreasuries. Any one of these three methods would serve; the main thing is to create a sound cur rency issue first, and, secondly, to keep it in the control of the people’s Government and its operations within the bounds of absolute necessity. FINALE. If through the perusal of the three foregoing papers the reader has been induced to think a little for himself along the general lines of the greatest good for the greatest number; if he has been brought to realize that a plan or proposal which has all of the advantages urged in its favor may have certain disadvantages which are extraneous 446 BANKING AND CURRENCY. or outside the direct argument, but still have great weight; if he has begun to see as in a picture this vast structure of credit which contains and supports our whole business, social, and commercial life, and then to see it crumbling and fading away over night., leaving in its relentless wake the helpless and unfortunate victims of its enticing and tempting possibilities, then they shall not have been published in vain. The average person one meets in the street has so vague and pitiful a view of general financial move ments and of the effect of credit growth or paralysis, that a little study will seem like a revelation to him. The fact that the laws of credit and finance as applied to the indi vidual or the community are so divergent accounts for this in a great degree. How many men who have not made a study of finance realize that an increase in loans results in an increase in deposits? And yet it is axiomatic to a banker. How many earnest men are there who do not rail at "the law which prevents national banks from loaning on real estate? Yet it has been demonstrated time and again, during and after crises, that banks have been crippled by it. How many depositors who do not think that their offerings of notes should be taken indefinitely as long as those notes are unquestionably good? They do not realize the peril of too much credit. How many are there who do not think that an A1 check on Chicago is just as good as gold in New York? That a certified check is identical with money? How many bankers are there who do not think that reserve carried in another bank as long as the law allows it is not just as good as though in their own vaults? How many who wonder why the law does not allow a national bank to carry bank notes as reserve? How many who do not want to carry bonds as reserve? How many who do not fret at having to carry so much useless cash as reserve when it might be earning interest? And what is it which sud denly changes the mental attitude of all of them? It is the panic. Then the merchant does not want notes, the Chicago check does not appeal to him, the banker forgets the coveted interest on his reserve. The panic is at once the scourge and the purger of commercial life. It is the firebrand which sears, but maybe it cleanses. Senator R e e d . Y ou think that it is entirely practical for us to require in this bill, if it should be passed, that the reserves of the banks should be put in in gold. Do you think we can get the gold accessible to the banks ? Mr. A l l i n g . I do not know why not. Every bank carries a certain amount of gold certificates. In fact, you will notice the term “ specie” in the statement of the comptroller’s report. That is not all gold. Various banks are careless about making this amount up. Specie includes gold certificates, silver certificates, and any coin they may have. There was $713,000,000 on September 4, 1913, and on June 12, 1913, there was $724,000,000. That is the amount of specie, and most of that is gold certificates. So you see they have an ample amount of about $400,000,000 or $500,000,000, provided they get these other notes back in exchange so they can go on and do business. I have a statement here which shows— I am not familiar with these figures— the total is appar ently $420,000,000 in gold— coin and certificates. There certainly is $1,000,000,000 in Treasury certificates outstanding. Senator R eed . If we put gold certificates in we would not actu ally increase the gold supply, because the gold we have already got locked up. The thought I had in my mind was whether by a provision such as you suggest in this bill we could actually largely increase the amount of gold in the Treasury or in the banks and the Treasury together. Mr. A lling . Y ou mean the actual metal. Senator R eed . I mean the actual metal. Mr. A lling . N o ; you can not increase that by legislation. Senator R eed . I mean increase the gathering of it. I do not mean to increase the actual gold. I am not a fiat money man— at least I do not think you can create gold by a fiat. What I mean is this: Could we actually gather $550,000,000 more of actual gold coin? Do you think it is in the country and that the banks could get it ? BANKING AND CURRENCY. 447 Mr. A lling . Y ou mean coin that is in the country? Senator R eed . Yes; so that the banks could gather it up. Mi . A lling . I think that could be done— not all of it, but a large portion of it. Senator R eed . D o you think that a large portion of it could be accumulated substantially at once— immediately I mean— and the balance of it gathered in gradually out of the circulation? Mr. A lling . I should think if all of the national banks came into this system that in the neighborhood of $400,000,000 or $500,000,000 in gold could be accumulated. Senator R eed . If we got that much in addition to the $1,100,000,000 that we have back of our gold certificates, and in addition, I think it is, to the $150,000,000 that we have back of our legal tender, we would then have in this country the largest gold reserve of any country in the world. Mr. A lling . I think we would. I am not familiar enough with the figures, however, to state just now. They could use either gold certificates or gold coin if required in the bill. Senator R eed . What I am asking and what I am dealing with, Prof. Sprague, is the actual accumulation of money. I understand that a bank could take a gold certificate and use it in lieu of the gold. In that event our gold in this country in the banks and Govern ment vaults would not be decreased a dollar. I am inquiring as to the feasibility and practicability of actually getting more gold coin. Prof. Sprague . There is a lot of gold coin, of course, in circulation, and by a process of substituting some other kind of money for it, you might gradually attract that gold coin into the banks. I do not believe there is very much away from the Pacific coast in circula tion— that is, outside of the banks— to be gathered in. It would have to be imported from abroad, and they could not secure any great amount of gold other than the gold certificates. Senator R eed . What do you think about that, Mr. Alling ? Do you not find a good deal of gold going through your bank right along ? Mr. A lling . Oh, the bulk of the money above $20 bills seems to be gold— gold certificates. Prof. Sprague . Those are included in the Senator’s supposition. Senator R eed . I am talking about the gold; yellow, shiny, gold coin. Mr. A lling . I could not say how much there would be. What does the statement say ? Senator R eed . I am dealing with the proposition with the idea in mind of seeing how much we can actually increase the gold which will be in the Treasury of the United States or in the vaults of these regional banks or any other system of banks we establish and which will constitute a gold reserve on which notes might be issued. Prof. Sprague . There were $143,000,000 of gold coin, as distin guished from gold certificates, in the national banks. Thst might go into these Federal reserve banks. Then, there is probably some gold coin out in circulation. Senator R eed . That gold is held now back of our Federal cur rency. Prof. Sprague . That, as I understand you, is to include the gold coin in the banks. 448 BANKING AND CURRENCY. Senator R eed . That is not what I am trying to get from Mr. Ailing. What we have already is locked up and is safe. Prof. Sprague . I do not think there is much gold outside of the banks at the present time away from the mountain and Pacific Coast States. What there is could only be gathered up very slowly by a process of the banks carefully keeping any gold that came in over the counter and insisting that their depositors wheiv-they paid checks should take currency rather than gold. I do not believe it would be possible to get by that means $100,000,000. Senator R eed . W h a t> you think about that, Mr. Ailing? do Mr. A lling . I can not make any statement in connection with that. I have not made a study of how much actual coin there is in circulation. W hat were the figures, the limit that the professor gave ? Senator R eed . $100,000,000. Mr. A lling . He stated that you could not get $100,000,000 out side of the gold certificates. Prof. Sprague . And the gold coin in the banks. Senator R eed . I do not care what gold the bank has in it— whether it is in the bank or whether it is in an old woman’s stocking. I would rathe** it would be in a bank because the money could then be used. I am talking about whether there is gold in existence in the United States of America outside of the vaults of the Federal Treasury sufficient to make up $500,000,000 of gold which could be taken now, gathered together and locked up just as we have locked up the $1,100,000,000 of gold back of the gold certificates. Mr. A lling . I do not see why not. The report of the Secretary of the Treasury shows that there is over $1,000,000,000 of gold certifi cates outstanding. And there certainly has not been $500,000,000 destroyed by fire and loss. Senator Shafroth . The Senator says “ besides that.” He elimi nates that. Mr. A lling . I thought you meant the $500,000,000. Senator R eed . Oh, no. Mr. A lling Well, I will have to consider that before I come back from Richmond. Senator R eed . Then you will probably stop on your way back. However, I am going to ask you just one more question. You are in the banking business in New York City? Mr. A lling . Yes. Senator R eed . What is the capital of your bank? Mr. A lling . $1,000,000. Senator R eed . What are your deposits ? Mr. A lling . About $14,000,000— a little over that— gross deposits. Net deposits under $12,000,000. Senator R eed . H ow long have you been in the banking business Mr. A lling . Twenty-six years. Senator R eed . Have you been in New York most of the time? Mr. A lling . Yes, sir; I have been in New York all of the time. Senator R eed . So that you have had an extensive experience in banking in New York City, I take it. How long have you been with this bank ? Mr. A lling . I have been with the bank for 26 years. Senator R eed . Have you been president all that time ? BANKING AND CURRENCY. 449 Mr. A lling . N o, sir. I am now vice president. I started in as a messenger boy, practically. Senator R e e d . You have worked right up all the way through. You have been occupying a responsible position with the bank, how long? Mr. A lling . About five or six years. My powers of observation, however, were not limited previous to that time. Senator R eed . I understand. I only desired to get your experience into the record. I wish you might stop over in Washington on your way back from Richmond. In the meantime you might think over the question of how much gold we could gather up in this comitry. Mr. A lling . The committee sits Friday and does not sit Saturday? The Chairman . I think the committee will be in session every day. Senator P o m e r e n e . I would like to ask one question here, if 1 may. You spoke of an elastic system of currency which ought to expand according to the necessities of financial conditions. Now, believing in that system, as you evidently do, is it your judgment, assuming that this system is adopted, that this reserve board should be named by the Government or by the bankers ? Mr. A lling . That is a little outside of the scope of my paper. Senator P omerene . I know it is; but it is not outside of the scope of our inquiry. Mr. A lling . I think the Government should control this, but I still think that no harm could arise from having representation by the banks The banking business is a very peculiar business and there are things that have to be foreseen at times that a man who is not trained in that business does not foresee. Senator P omorene . Assuming that this board is to be appointed by the Government, it does not mean for one minute if I properly construe it, that this board should be composed of men who had no experience or were without judgment. Mr. A lling . Well, I was speaking of men who had no experience in banking. Senator P omerene . It might or might not be a banking experience. Mr. A lling . N o ; I thought that one provision eliminates the rest of them from it. Is not there one provision which said that one shall have had three years’ experience at a banker. Naturally that means that the others shall not. Senator P omerene . Not necessarily so. Mr. A lling . It does not say “ at least one” ? Senator R eed . Well, that would be the construction. Senator P omerene . I am speaking of the reserve board. Senator R eed . That would be the construction, that at least one must be, and the others may be. Senator P om erene . I want your judgment as to another propo sition. Do you think that the national banks should have the privilege of going into this business or staying out of it, or should that provision be compulsory ? Mr. A lling . I think it would be a great deal better if all the banks were in it. Senator Pom erene . I agree with you; and to that end, do you not think, in view of the fact that we are trying to adopt a national 450 BANKING AND CURRENCY. system here, that it should be compulsory, rather than voluntary— looking at it now from the standpoint of an American citizen ? Mr. A lling . I really think that I have an open mind on that sub ject. I am not trying to dodge the question, Senator------Senator P om erene . I understand that. Mr. A l o n g (continuing). But, of course, I am here representing— I am a bank officer. Senator R e e d . Are your views which you have expressed here— with the exception of this one matter, which you have not answered directly— the result of some conference or talk that you have had with some other bankers ? Mr. A l o n g . N o, sir. I never had the honor of being invited into a conference. Senator R eed . D o you know anything about any propaganda that has been carried on— not only now, but for some years past— by the banks to bring about a change in the banking and currency laws ? Mr. A l o n g . W ell; I would not call it a propaganda. Senator R eed . Well, you may call it by whatever term you wish to refer to. Mr. A lling . I think that there is a universal feeling among the banks that there should be some change in the currency system, and different men have different methods of attaining it, but I do not think there has been any concealed move. Senator R eed . D o you know anything about a fund for that pur pose— for publicity purposes? Mr. A lling . I do not. Senator R eed . Do you know anything about letters having been sent out from New York City by certain banks? Mr. A lling . I do not. Senator R eed . Through the other banks of the country? Mr. A lling . No. Senator R eed . That has not come under your observation ? Mr. A lling . N o. Senator Pomerene . Among the powers which are given to the Federal reserve board under this bill is the power denominated as— (b) To permit or require, in time of emergency, Federal reserve banks to rediscount the discounted prime paper of other Federal reserve banks. * * * The American Bankers’ Association proposed an amendment which would eliminate the power to require and confine it to the power to permit this rediscounting. What is your judgment as to whether the board should have the power to require it or the power to permit it only ? Mr. A lling . I do not think that it is anything to be worried about. I mean the fact that the board would have the powder. • Senator P omerene . In other words, you believe that the Govern ment ordinarily would not require a thing to be done unless it in effect should be done ? Mr. A lling . No. Senator R eed . Y ou do not get his answer into the record as it should be. Senator P omerene . And for that reason you are not worrying about it ? Mr. A lling . I am assuming that this board will be composed of men of such character that anything they will do in that line will be BANKING AND CURRENCY. 451 for the best interests of the whole country. I think that is the idea of the drafters of the bill. Senator Shafroth . Mr. Ailing, I want to ask you one or two ques tions, please. There is no way under this bill of getting money issued under its provisions except by the member banks depositing commercial paper, is there? Mr. A lling . There is no other way for member banks to get money. Senator Shafroth . There is no way for any money to be issued under the provisions of this bill except by member banks presenting paper for discount? Mr. A lling . N o. There is no other way. I do not know as I un derstand the full purport of your question, because money is not issued when member banks present paper for discount. It is issued when the—* —• Senator Shafroth . The paper is predicated upon the assets that are in the reserve banks. Senator R eed . Y ou mean the money that is issued? Senator S hafroth . 1 mean the money that is to be issued upon that. There is nothing else back of it except the commercial paper that is in the hands of the Federal reserve banks, placed there by the member bank. Now, if that is true, and the circulating medium should include all ultimately of the bank’s circulation that now exists and the emer gency currency which it is supposed that this bill gives, would it not require the Federal reserve banks to have an enormous banking business in keeping this paper, which is only 90-day paper, in cir culation ? Mr. A lling . I do not know. You say “ enormous banking business.” Senator Shafroth . Yes. If there is $750,000,000 of nationalbank notes now; if that is to be substituted by the currency author ized by this bill, and that currency is predicated solely upon these short-time obligations, it means that for that loan there are to be renewals every 90 days, or even less time than that, for a good deal of the paper is 30-day paper, and would not that require a great banking force ? Mr. A lling . Y ou can figure out what it would require. It would be simply the total at one time. It would be the total amount of the loans and the total amount of the business of the year. With a 45day note you divide the 45 days into the year and the number of notes that would have to bo discounted during the year, if that is what you mean by “ enormous banking business.” It does not seem to me that that is a thing to be worried over a great deal. I am not worrying about the paper being 45-day paper. I think these Federal reserve banks are organized for the purpose of aiding the banks in times when they need aid. They are not organized to give the banks permanent capital or permanent cash or to help them to build up their business. Senator Shafroth . But this bill does provide that the currency authorized under its terms shall ultimately take the place of all the bank currency now existing. Mr. A lling . Yes;but they would not have to loan that, would they? 452 BANKING AND CURRENCY. Senator Shafroth . It would have to be in circulation or it would be a contraction of the currency. Mr. A lling . It would not have to be loaned. There is $700,000,000 of national-bank notes outstanding now. If you held $100, we will say------Senator Shafroth . Yes. Mr. A lling . The reserve bank issues $100 of reserve notes; they give them to you and take the $100 back. There is no decrease in the circulation. Senator Shafroth . Y es; but the national-bank notes that are now issued have to be retired according to this bill. Mr. A lling . That is as I understand it, but the Federal reserve notes are to be issued in exchange for the national-bank notes. Whether that is done through a deposit in the Treasury Building, whether it is done between the Federal reserve bank and the national bank, makes no difference. It is simply an exchange of one note for another. Senator Shafroth . But that bank note in circulation has to be retired by the bank. They present their notes and they are can celed, and they get notes of this reserve bank which are substituted in their place. That circulation then becomes based upon shorttime paper instead of, as it is now based, upon bonds. There has to be some basis for money circulation. It is now based upon bonds, is it not? Mr. A lling . Yes. Senator Shafroth . Y ou have 2 per cent bonds that are on file with the Treasury Department ? Mr. A lling . Yes. Senator Shafroth . They are to be canceled. The banks are to get 3 per cent bonds issued to them and wipe that currency out. It will be as though it had never been issued. That currency has to be issued by these reserve banks, and the only way it can be done is by the banks, in substitution for this currency of the country, to de posit their bank notes and then have the Federal reserve banks issue new notes. Mr. A lling . H ow would they have to borrow it? This $700,000,000, as I understand it, could not be loaned. We have to go back to the beginning of that. Let us say the national bank holds a United States bond worth $1,000. Senator Shafroth . Yes. Mr. A lling . It wants to retire those bank notes, through the operation of the Treasury Department. Senator Shafroth . Yes. Mr. A lling . It sells the bond and somebody has to buy the bond; and he can pay that back for the bond with, we will say, Federal reserve notes. Senator B ristow . Where would he get them ? Senator Shafroth . Y es; where does he get them to do that with? Mr. A lling . I am not particularly in favor of that, as you will notice in my bill. I have never thought of that feature of it, however, and I will ask to let you give me time to think that over also when I go down to Richmond. Senator Shafroth . I wish you would do so. And now I will not ask you any more questions. BANKING AND CURRENCY. 453 Mr. A lling . I am now speaking offhand, without figuiing it out, and I should say it would not result in a contraction. There must be a displacement there; if I have $100 national-bank notes and they are retired I still have $100. The Chairm an . W hat objection, Mr. Alling, would you see to tak ing the $50,000,000 of actual gold coin now in the Treasury of the United States that happens to be theie to-day, all free gold in the current funds they happen to have— what objection would there be to putting that gold in the Redemption Division, the reserve division of the Federal Treasury, and issuing Treasury notes against it, pay able in gold— without being a gold certificate but payable in gold— and issuing then a like amount ox $50,000,000 of Treasury notes against 3 per cent bonds, and take up these 2 per cent bonds, putting these threes in the Redemption Division, the reserve division of the Treas ury Department; so that the result would be to retire $50,000,OOOof twos and $50,000,000 of national-bank notes, replacing the natonalbank notes with Treasury notes, but having $100,000,000 of these Treasury notes and $50,000,000 of gold and $50,000,000 of 3 per cent bonds in the Federal Treasury? Would you regard that as a judi cious or proper way to take care of these national-bank notes out standing ? Mr. A lling . I would not think so at first thought. I would have to think about that, because there are always so many ramifications about a thing like that. A question like that must be thought over very carefully, but it seems to me— your idea is to issue against this $50,000,000 of gold coin just $50,000,000 of United States notes? The Chairm an . In this transaction I speak of, there would be $50,000,000 of gold and $50,000,000 of 3 per cent bonds, against which $100,000,000 of notes would be issued. Mr. A lling . Fifty per cent of reserve against those notes ? The Chairm an . I mean $100,000,000 of notes against $50,000,000 of gold and $50,000,000 of 3 per cent bonds in the Treasury. That would be dollar for dollar of bonds and gold. Mr. A lling . These would be 2 per cent bonds, so that it would result in the retirement of that much national-bank notes in circula tion. There would be no change in the total volume of our circula tion. The Ch airm an . N o ; there would be no change. Mr. A lling . I do not see how it could do any harm, but it looks as though the Government would be tying up the free balance of gold very much. It would not be able to use that any more. That is, the free balance, which the Government has to sustain its credit with. Senator Shafroth . But there would be twice that amount of notes outstanding. Mr. A lling . Yes; but they are outstanding. They are not in the Treasury. Senator R e e d . I do not believe Mr. Alling got the import of that question. The Ch airm an . The proposition is this: It has been suggested that we retire the national-bank notes by issuing Treasury notes in lieu of them as rapidly as we have available free gold to put also into the reserve division of the Treasury, so that— if we have $500,000,000 of free gold now in the current fund— if we replace those gold dollars, 454 BANKING AND CURRENCY. those actual coined dollars now in the Treasury, with Treasury notes and put that coin into the reserve division of the Treasury------Senator R eed . Y ou would have then 100 per cent of gold reserve. Mr. A lling . That is, if you start at that point. The Chairman . Yes, you would have 100 per cent of gold re serve, if you start at that point, against these particular notes. But at the same time, coincidental with this, $50,000,000 of 2 per cents will be taken over. Mr. A lling . With an additional issue------The Chairman (continuing). Retiring the $50,000,000 of nationalbank notes issued against those 2 per cent bonds, and issuing in lieu of the national-bank notes Treasury notes and in lieu of the 2 per cents now in the hands of the comptroller belonging to the various national banks which deposited them substitute 3 per cents owned by the United States and kept in the redemption division, which will be an available form of public credit by which gold can be ob tained in the markets of the world, if necessary, on 3 per cent cur rent bonds, either by borrowing or by actually selling them, if neces sary, but probably by borrowing them through the fiscal agents of the Government, if it should be necessary to add to our store of gold from foreign supplies. It is a somewhat long proposition, but in view of the fact that you are so familiar with the whole subject, I venture to put it before you, because that was along the line of your previous paper. Mr. A lling . These suggestions are sound enough, but I do not like the idea of proposing to issue all forms of currency. What we want is to get our currency down to as simple a basis as it is possible, and to have as few different forms of currency as we can have. The Chairman . The purpose of that was to retire the 7,000 and odd different bank notes, each of which has from four to five plates and therefore there are 28,000 to 30,000 plates, and instead of that have a Treasury note the only form of paper in this country, but have that note secured by dollar for dollar, either of gold or United States bonds, but in that contingency the bonds will be owned by the United States in its own Treasury, the United States can receive the interest on its own bonds, and put an end to the payment of interest upon bonds owned by the banks. Mr. A lling . Another thing that would result would be a replacing of national-bank notes not a reserve for national banks by a note which would be a reserve. That would at once result in $50,000,000 of cash being added to that in the banks. The Chairman . At the present time the State banks have the advantage of the national banks in that they can hold these nationalbank notes as their reserve while the national banks are denied a like authority. It is an advantage which the State banks have over the national banks. Mr. A lling . Possibly, but as our national banks were organized originally, besides having the privilege of issuing currency they are supposed to be the national reserve-carrying banks of the country. That is what I take the concept of the law to mean, that they were to be the reserve-carrying banks of the country. A country which has a central bank relies upon its central bank. W e have none, and we rely upon our national banks. They have certain privileges, or BANKING AND CURRENCY. 455 did have in the past, of issuing currency and doing business with each other in different parts of the country in the way of carrying reserves, which were given to them in exchange for carrying the reserves of the country. That is what I should say was the spirit in which the n atio n al-b an k act was drawn outside the issuing of national-bank notes against bonds. Senator R e e d . If I understand Senator Owen’s proposition that he put to you, it is this: To retire all of the gold certificates, all the greenbacks, and all the national-bank notes, and to issue Treasury notes and to have the Treasury notes backed by 50 cents on the dollar actual gold, and backed by a Government bond bearing 3 per cent interest, so that the holder of a note would have 100 per cent, one-half of which would be gold and one-half of which would be a bond of the United States. Mr. A lling . Y ou have made your statement a little broader than Senator Owen made his. He started with $50,000,000 and increased it to $100,000,000. You have taken in all the gold available. Senator R e e d . That is where it would ultimately work out. Would that be a safe currency ? Mr. A dding. Not if you double it right away by making 50 per cent gold reserve, but it you started off with all the gold in hand and issued United States Treasury notes for the same amount as we have now, and only increased that as circumstances demanded and con ditions warranted, then 1 would call it a good proposition, but I would not call it a good proposition to suddenly double the amount of the gold. Senator R eed . That is a question of inflation. Mr. A dding. And another thing that I do not particularly care for is to carry all United States bonds as security for these notes, be cause they are no more security than the ordinary credit of the Gov ernment, and it looks as though we were trying to fool ourselves. r The Chairman . It is merchantable. Senator R e e d . There is this distinction. Mr. A dding. Y ou mean that you do not have to have a special act to issue them. The Chairman . Y ou can get gold whenever you want to by issu ing bonds and selling them. Senator R e e d . If you devise a system of currency for the country with 50 per cent reserve of gold, it is generally conceded that that in itself is a pretty healthy reserve, and the faith and credit of the Government in addition. Now, as a bracer to that, if actually every time you issue $1,000,000, you squarely set aside $500,000 of gold over that, and at the same time about $500,000 interest-bearing bonds and hold it, if there ever came a run that depleted that gold to a point of danger the Federal authorities would then be author ized to take these bonds and put them upon the market until they got enough gold to replenish the exchequer— the reserve. That would be, would it not, some element of safety over and above the mere faith of the Government, because the Government says: We now have issued ready to put on the market, when necessary, gold interest-bear ing bonds. Mr. A dding. It would give you a means of restoring your gold supply by sacrificing your bonds once in a while. 456 BANKING AND CURRENCY, Senator H e e d . D o you think that would have to be done? If a note will float with a 50 per cent gold reserve, and the faith of the Government back of it, the bond would never have to be used, would it, unless there came some supreme emergency and crisis sufficient to break down the bond ? Mr. A lling . The bond might decrease a little. The Chairman . In connection with the question asked b^ Senator Reed, I submit for the record a table showing the percentage of the actual gold reserve against the notes of the different reserve banks of Europe, the actual gold reserve against the notes and deposits, and the actual gold reserve against the deposits only, which only is possible in the case of the Bank of England, because it is the only bank that keeps the accounts in such a form permitting the cal culation. Senator S hafroth . That is very valuable; it ought to go in. The Chairm an . I want it to go in so that it will explain my ques tion. The meaning of the table is that these percentages show the ratio of reserves in actual gold, or silver, which the Bank of England, the Reichsbank of Germanv, the Bank of France, the Bank of Nether lands, and the Bank of Belgium, which are all reserve banks, carry as against their actual note issue; second, against their note issue and deposits combined; and, third, against their deposits only. The Bank of England carries £22,000,000 of notes against the amount of its deposits and has in actual gold reserve against its demand deposits only about 25 per cent of gold. (The statement submitted by the chairman is as follows:) R eserv e o f a ctu al g o ld v ersu s n o tes o n l y , versu s n o tes a n d d ep o sits a ga in st d ep o sits o n l y . Versus notes only. Per cent. 62.7 50.0 88.0 58.0 19.0 Versus Versus both notes and deposits only. deposits. P er cent. 38.3 37.1 75.0 57.0 17.0 Per cent. 125 > Banking department. See Congressional Record (p. 3466) of Aug. 5, 1913.—R . L. O. It is now five minutes of 5, and I think we had better give Mr. Mar shall an opportunity to be heard. Senator R eed . Will you stop on your way back, Mr. Ailing ? Mr. A lling . Y es; I will have pleasure in stopping here on my way back. STA TE M EN T OF ME. F. E. MARSHALL, OF N E W YORK, N. Y. The Chairman . Mr. Marshall, I wish you would state for the benefit of the stenographer your full name and address. Mr. Marshall . My name is F. E. Marshall, and my residence is New York. BANKING AND CURRENCY. 457 The Chairman . With reference to the various positions which Mr. Marshall has occupied as a banker, incidentally, I wish to preface his statement by saying that I expressly requested him to appear before the committee in connection with this bill, because of his long and particularly valuable experience in the banking world, he having started out as a bank examiner, then was vice president of the National Bank of Commerce of Kansas City, afterwards president of the Con tinental National Bank of St. Louis, vice president of the National Bank of St. Louis, and afterwards president of the Phenix National Bank of New York. With that explanatory statement, I will allow Mr. Marshall to proceed. Mr. M arshall . Responding to the request of Senator Owen, I will say that I am not here to discuss the bill from a scientific point of view. I have read the bill and have tried to fit it practically to the banking business of the country as I have come in contact with that business in all sections of the United States. I have been a country banker, and then have been in the different cities named by Senator Owen. Like most people in reading this bill, my apprehension first was about the contraction of credit, whether or not the banks would be called upon and that it would be necessary to contract credit faster than the conditions would justify in order to meet the provisions of the bill; second, my apprehension was as to the issue of currency, whether or not the door was open for an inflated currency. While I am not at this time an active officer of a bank, being out of business actively, yet I consider that I am a banker. I am a stockholder in several banks, and from that standpoint I have studied this bill. Like other bankers, I have realized that we need something, and that is about as far as the bankers themselves have gone. They have never agreed amongst themselves as to what that something was. I think that really down at the bottom of the bill that probably the experiences that we went through in 1907, which brought us facing the fact that we must do something that would put us on a more stable basis in times of stress and that we can not simply go on in times of stress and shut down and say “ N o,” that that was what 1907 did for us. When New York gets in trouble, it is big trouble, and there is no place for that city’s banks to go for help, and therefore the reserves of the country are locked up and are not available, and I assume that the purpose of this bill is, first, to get the reserves back into the country, where they are needed and belong, and at the same time establish a bank or banks that is a safe depository and a surer source of supply in times of stress. Whether this meets it I can not say any more than you can. Unless the banks come in and work with you, of course, it will not be worth much. It all depends upon the banks coming in. I have taken the liberty of preparing a few suggestions which I want to make as to a few changes in the bill. I am very much in favor of the bill, but like many bills it probably needs a number of changes here and there in order to make it more workable. My idea was right in the beginning here, on page 3, where it says: The total number of reserve cities designated by the organization committee shall be not less than 12. 458 BANKING AND CURBENCY. To make it perfectly sure, I will put that: Not less than 6 nor more than 12. If enough do not come in to establish 12, I would let it be so you could establish less than that number to start with. Now, with respect to section 7, which was the next one I took up and referred to. This relates to the division of earnings, and which reads, “ Dividend of 5 per cent” — and it is fixed at that— “ to the stockholders.” My suggestion is that that should be 5 per cent until the surplus fund is built up to the 20 per cent; then the dividends should be increased to 6 per cent, the balance of the earnings to be divided equally between the United States and the stockholders. I would, however, in addition to the surplus funds, create an undivided profit account of, say, 10 per cent, making it that much more safe and as a protection to the surplus fund. My idea there is that that is an inducement. Naturally, bankers are like other people, they are human, and they want to get a return on their money, and the majority of banks are accustomed to making 6 per cent or more. I am speaking from the stockholder’s standpoint. When we speak of the “ banker,” we are liable to misconstrue it as just simply referring to the managers of the bank. It should be remembered that the stockholders of the country banks throughout the United States are country people largely. I next direct your attention to section 11, relating to the Federal reserve board, about which there has been a great deal of talk. I am just as strong as anybody can be in the belief that the Government should be in control. I believe that the governmental supervision of this bank should be as we are discussing “ governmental control.” But, I also believe that the stockholders. of the different banks should have representation on this board or the Federal reserve board. My sug gestion is that that board consist of seven members, composed of the Secretary of the Treasury and four members to be chosen by the President of the United States, at least two of whom are to be ex perienced bankers and two members to be chosen by the stockholders of the Federal reserve bank, all to be with the advice and consent of the Senate. Senator R e e d . Y ou are speaking of the regional bank now? Mr. M a r s h a l l . N o ; I am speaking of the reserve board. It gives the Government absolute control, yet it gives the stockholders of the bank representation. Of course, I would go on as to the politics of each one of them. I think that that should be as it now provides, of different parties. Senator R e e d . D o you think that that feature would amount to much ? Mr. M a r s h a l l . I believe that the people would be better satisfied. There is a great deal of talk to the effect that we are going to have a politically managed bank. Senator R e e d . I I o w would you control that, Mr. Marshall ? I observe you are speaking from notes. Mr. M a r s h a l l . N o ; I have just a little memorandum here. Senator R e e d . I take it that my interruption will not interfere with the trend of your remarks ? Mr. M a r s h a l l . That is right, it will not. BANKING AND CURRENCY. 459 Senator R eed . H ow would you control that bipartisan feature ? My experience and my observation have been that a bipartisan board, selected by a bipartisan, is more thoroughly under the control of the partisan who selected him than a purely partisan board. Mr. Marshall . Purely nonpartisan ? Senator R eed . N o ; than a purely partisan board. In other words, I want to illustrate it and see if you can suggest something: If the Republican Party could pay two Republicans by some means and the Democratic Party could pay two Democrats, the source of the appointment being partisan in each case, you get two partisans to represent each side. But if the Democrat is President and he picks a Republican, how are you going to prevent him picking a couple of “ Democratic” Republicans? Senator Shafroth . Who will “ out-Herod Herod” ? Senator R eed . A couple of Republicans who will be more subser vient to him than the Democrats? I have had some experience and have made some observations of those things. I always found out that when I appointed a bipartisan board that my Democrats were rather independent. They felt they had earned the right to some recognition and promotion, and that they had received only that which was coming to them, and that often not as much as they ought to obtain; but when I came to my Republican appointees, they were solely my creatures, and I had appointed them because they were exceedingly friendly to me; and I always found that if I had any trouble with my boards, that my two Republicans were sure to stand with me and my Democrats might be doubtful. I have observed that when Republicans made appointments that it worked out about the same way; and when you come to talk about appointing a bipartisan board of bankers, my observation has been that you would have some difficulty in getting Democratic bankers. [Laughter.] Mr. M arshall . N o ; I do not agree with you there. Senator R eed . Unless you went out and got some man whose conscience and partiotism outweighed his interest. Mr. M arshall . Senator, I have tried to look at this and have looked at it------Senator R eed . I want to say right now if a man can devise a plan— perhaps you can suggest it— by which the Republicans in Congress, or some other authorized party source, could name the two Republicans, and you had an equal partisan force to name a Democrat, you would have a bipartisan board. In other words, I think it is a farce------Senator S hafroth . The length of service would have a tendency to cure that. Senator B ristow . T o my mind, that would make the board con tinually bipartisan. The Supreme Court is not bipartisan, and that is appointed for a long period of time. When a Republican is appointed under a Republican administration, he is a Republican. Senator R eed . D o you propose to have this board a long-term board ? Senator S hafroth . Yes. Mr. M arshall . Three, six— how is this ? Senator S hafroth . Eight years. Mr. M arshall . Three, six, and nine years, is it not? 9328°— S. Doc. 232, 63-1—vol 1-----30 460 BANKING AND CURRENCY. Senator R eed . This is not giving the witness an opportunity to make his statement, but I will never consent while I live to creating a system in this Government that the people of the United States can not change at the next election. Mr. M arshall . Well, you would not put a board of directors— that is what it is, the management of a bank— up as an elective office, subject to election of the people? Senator R eed . N o, sir; but I would not create a power that con trolled the finances, controlled the commerce of a nation, and call it a Government power, as an arm of the Government, that would be independent of the men that the population of the United States sent down here to represent them. I never would consent to that. Mr. M arshall . Senator, I have tried to look at that provision of it, and I have thought of it not as a political matter, but we are trying to get something here to take hold of the conditions which now exist. Senator R eed . It is not political. I am not talking about that. Mr. M arshall . And I, for one, would be willing for this board just simply to be appointed. W e hear a great deal of talk about the politi cal complexion, and that we are going to have a politically controlled board of management. Senator R eed . If you are going to have the Government out of it, if you are going to turn this over to the banks and let the banks control it, that is one plan. It might be the right plan, and there are many things that might be said in its favor. But, if you are going to have a Government control, then I am not in favor of fixing that Government control so that the people who elect the Government can not change it whenever they see fit to elect a new set of men to represent them. Mr. M arshall . I suggest that the two members chosen by the Presi dent of the United States and the two members chosen by the stock holders shall be with the advice and consent of the Senate. Senator R eed . That, of course, is a different question. Mr. M arshall . A s I say, that is simply to answer the question that is abroad in the country as to a political complexion of this board. I believe I have enough confidence in men, and m y experience has taught me that the responsibility will be so great on the men who are to sit on this board that they will be equal to the responsibility and never think of their political beliefs, and it will not be run along that line. Senator R eed . I do not think there is, however, so much danger from politics coming in as I do from creating a concern here that is practically permanent and which is, to a large extent, independent of that Government which the people have the power to elect. Mr. M arshall . Well, so far as creating the bank is concerned and the idea that bankers are going to control, that is as far as we got with the Aldrich plan. Two-thirds of the people who read that, whether Congressmen or bankers or others, thev got far enough to see that the door was unlocked and that the bank would be in a little while in charge of the bankers of New York, and that was enough to kill it. The people of this country aie not going to stand for a central bank or any other one bank controlled by the bankers of this country. W hat we call our “ country bankers” are not going to submit to that. BANKING AND CUBBENCY. 461 Senator P omerene . They had their experience in that regard in 1907. Mr. M arshall . I feel a little closer to the country bankers myself than to the city bankers. I am a country banker. I was president of a bank in New York, however, during the panic of 1907, and I believe that the country bankers of this country are very much in favor of this bill. I have never seen it figured------ Senator B ristow . I would like to find one of them out in our country who is. I have not found him yet. Mr. M arshall . I am not saying that from personal observation. I have not been out in the country, but I am speaking of my general knowledge of the country banker. W e know that every time that there is the least scare or anything of that kind the country banker commences to fill his vault with money. Senator R e e d . He would not do that if he could go and get the money from the reserve bank when he needed it. Mr. M arshall . I think not. In the panic of 1907 customers who were my best friends in Missouri, my home State, and from Kansas, came to me, and I asked them to send me a statement to look at. They were wanting money. They would have 50 or 60 per cent reserve, and then they were crying for more. They wanted it to sleep on. Those are really the facts when you come down to it. Senator R eed . That is because they did not know when a run would be started on them. Mr. M arshall . Certainly. Senator R eed . W hy can not a plan be devised whereby that country banker could go to the Government, of his own right, accord ing to the laws that are prescribed, and get the relief which he needs without having to depend upon New York or some other bank, and when the occasion is over let it automatically retire ? Mr. M arshall . Well, I think this will take the place of it. Senator R eed . W hy should anything take the place of it? W hy is not that the best plan? Mr. M arshall . Y ou can go out here, say, to the State of Kansas and Nebraska and Oklahoma, and the men in control of the reserve banks are in a position to know and they do know that country. They know the people that they are dealing with. Senator R eed . D o you mean they know the banks they are dealing with or the customers of the banks ? Mr. M arshall . They know both. Senator R eed . There is a domain that is as big as Germany, France, and the island of England put together, and even more. Mr. M arshall . Y ou are going to have men on that board from every one of those places. Senator R eed . Y ou can get a man from each State. Mr. M arshall . There are to be nine, and they are all right in that immediate neighborhood; three of them are to be elected by the bankers and are to be bankers themselves; three of them are to be business men of that section; and then there are to be three appointed by this Federal board, and they are to be from that section, as I understand it— all local men. Senator R eed . They can not be local in the sense of being able to pass upon securities, except they have some method of testing it 462 BANKING AND CURRENCY. because you take two men from the State of Missouri; there are nearly 3,000,000 people in the State of Missouri, as you know. There are three large cities in the western part of the State, one with nearly three-quarters of a million, another with a population for banking purposes of 400,000, another with a population of 125,000, with 30 towns or cities above 10,000. No man can know the individual credits, nor can any three men know the individual credits, Mr. Marshall. You do not mean that. Mr. M arshall . I do not mean for a minute that the first time a note comes up they are going to say “ yes” and “ no.” Thev have got to build up a credit bureau, just as our banks have to do, and become acquainted with it, and that will take time; but in the mean time they are going to have their bank examiners and they are going to have their means of finding out these things. Senator B ristow . The Government has its bank examiners. W hy has not the Government means of knowing the reliability of this debt or that debt, just as well as a bank in Kansas City or St. Louis has ? Mr. M arshall . They are closer at hand— the bank examiners. He oes into a bank and examines all of its assets, of course, but naturally e can not tell, when he comes across John Smith’s note, and says to the cashier, “ Who is he?” “ He is John Smith out here; he is a farmer.” But he can not go out and see John Smith and see where he lives and verify that. Senator B ristow . Y ou do not expect one of these nine men, who will not even see the notes and who will never get inside of the bank------Mr. M arshall . Y ou are mistaken about that. Senator B ristow . One of these nine men ? Mr. Marshall . One of the member banks. He will not go out into the country or anything of that kind. A t the same time the members of that bank will have all the information there from the member banks. If that man offers a note of John Smith he should tell him at least that John Smith is one of our farmers here, that he knows his farm, etc. Senator R eed . He will tell them just exactly what he told the bank examiner when he goes to get a credit. Mr. M arshall . My experience, as far as that is concerned, is that now and then you will find a banker who lies, and he is wrong; but, as a rule, the manager of that bank, I think, may be relied upon to tell the truth. My experience is that the banker who runs tne bank is interested in his bank, although now and then you have a cashier, a president, or a bookkeeper who will go wrong; but this must be done on faith and confidence in men, and I believe that you have got to do that in this case as well as in other banks. Senator B ristow . W hy do you think this intermediate step neces sary ? You take 20 per cent of the capital of a bank at Salina, Kans., out of its banking capital and put it into this bank in St. Louis or Kansas City, and you take 5 per cent of its deposits and put them down there in order to create a bank to do business, in order that this bank might get its paper discounted at a critical period. W hy should you impose such an unjustifiable burden on the country bank in order that it may get exactly what this regional bank comes to the Government for? W hy can not the country bank go direct to the Government ? f BANKING AND CURRENCY. 463 Mr. M arshall . I do not agree with you that you are imposing a burden on this country bank. You take the 10 per cent capital that the regional bank gets— — Senator B ristow . It is 20 per cent in the bill. Mr. M arshall . Call it 10 per cent. Senator R e e d . I understand that the bank capital is as to the bank deposits as one to eight, in round numbers. Mr. M arshall . Y es; the capital represents simply a portion of the reserve of that bank. If you take a part of the reserves of the banks and start a bank with it, you have got $500,000,000 of deposits, or $600,000,000, we will put it. You are going to keep one-third of that as a reserve. Then, you have got $400,000,000 of it to use. You are not going to keep all of it in the vault. Senator B ristow . Y ou are taking 20 per cent of the banking capital out of the country community, and you are taking that to a distant city and compelling it to be invested there, and you do not permit more than 5 per cent dividends to be paid on it. Mr. M arshall . Y es; but I am asking 6. Senator B ristow . W e will say 6, then. The bill puts it at 5, and that is money that is taken out of the community; it is the com munity’s money which comes from the farmers and the merchants and the men in various occupations there, that they have put into their own bank for their own local community. You take that capital to a distant city, limit the amount they can earn on it, which is less than they are getting now in nineteen-twentieths of the banks, and compel this bank to take a part of its deposits down there, and then it gets in return the privilege of borrowing it back. That is the proposition that you are putting up to the country banker. Mr. M arshall . But the money that you say you are taking away from them is now already away m New York, Cnicago, or St. Louis, and under the law it is legal reserve. Senator P om erene . And where they can not get it when they want it. The Chairm an . It is tied up in stock and bond loans. Mr. M arshall . I have never seen this worked out in tables. I am sorry to say that under the provisions of the bill it is necessary for any of the banks individually or collectively to become borrowers. I noticed from figures submitted— I have forgotten the name of the Member— in the House a day or two ago, showing that in order to comply with the provisions of this bill that reserve banks would have to borrow about $105,000,000 or $110,000,000, and the central reserve city banks about $150,000,000 or $160,000,000. I was very glad to see that if it should be borrowing at all that it should be by the city banks, because their assets are more liquid, and it gives them three years in which to accomplish it, and my prediction is they will never Dorrow a dollar, and that these banks will be able to take care of themselves and turn themselves over in ample time; in fact, the reduction in reserves as now fixed takes care of the capital stock investment. Senator B ristow . W hat is the use, if you are going to reduce the reserve, which I think ought to be done, of creating this intei mediate machinery in order to permit the country bank to avail itself of the advantage which the Government proposes to create for it? W hy not let it have the full advantage of the reduction of the reserve ? 464 BANKING AND CtTRBENCY. Mr. M arshall . When you come to issuing notes— and I am very much afraid of the issuing of notes— I have always been opposed to asset currency, it seems necessary as an emergency currency and it should be for that purpose only. These reserve banks are built by reserves that are now dead— you make that a bank, and a bank of $600,000,000. You use that as active, working monev, except the 33§ per cent of this $600,000,000 of deposits which is now dead capital, which is in the vaults as reserve, ana you make that now a working item of $600,000, less 33 J per cent, or $400,000, which you are going to loan out to the various banks that want it. They are not all going to come in at once. They are going to come in as it is needed, and I believe that this reserve board and the board of directors that you have will weigh very carefully their power of rediscounting, and my opinion is that it will be very seldom if ever that the note issue will be resorted to. If I followed it correctly, you said that this note issue of the reserve banks was to take the place of national-bank currency as retired. I do not so construe it. Senator B ristow . That is the provision of the bill. The t hairm an . Oh, yes; it is. Senator R eed . Taking care of emergencies without the issuance of money. Let us say that you establish at the city of St. Louis a regional reserve bank for the States of Missouri, Kansas, Nebraska, and Oklahoma; that is, four States— that is about what would go into that reserve. They have a capital of $500,000,000; and you want money to move crops. How is that bank going to give it? W hy, the banks of Kansas City asked Mr. McAdoo for a loan of $5,000,000, and they got $2,750,000; and the banks of St. Joseph— I will not be sure of this— wanted $1,500,000. I think the banks of St. Louis wanted much more than those of Kansas City. That is only the State of Missouri. If you took in these other States you would find a very heavy demand from Senator Bristow’s State of Kansas, because they have a large State and a population of 1,700,000. Then, there is Omaha, up in Nebraska; and then comes Oklahoma. It means to me that you would exhaust the total assets of that bank before you got well started. Mr. Marshall . My understanding, Senator, is that the banks of the country— take the banks of Kansas and Missouri— are not going to do all of their business with this reserve bank. My understanding is that this is their reserve repository. The Chairman . Part of their reserve. Mr. M arshall . But they will continue to do business— the country bank— with Kansas City, St. Louis, or New York, but they will not do as much. Senator R eed . They will use the whole of that $5,000,000, and in crop-moving time they will not have enough to start on. Mr. M arshall . $5,000,000 is only the capital. I do not think that this bank in the district you say would be able to furnish all the money they would need with $5,000,000. Senator R eed . I do not know whether they are going to be able to furnish enough to cut any substantial figure; you understand, I am not opposing this matter. 1 am trying to find out what it is going to be able to accomplish, and absolutely where we are going to bring up. Senator B ristow . Excuse me. Mr. Marshall, referring to the sug gestion you made a while ago, that this money would not be used BANKING AND CURRENCY. 465 by these banks— why, we are to have no other kind of currency. Tne national-bank notes will be retired. Mr. M arshall . I understand. Senator B ristow . This will be substituted for it. Mr. M arshall . My construction of it was that the currency issued by these reserve banks was simply to be resorted to in times of emergency or stress. So far as that is concerned, I am not alto gether in sympathy with the idea of retiring the national-bank cir culation at this time. Senator R eed . H ow will we keep it in flow when the banks pro test about the bonds'? Mr. M arshall . So far as that is concerned, these 2 per cent bonds, we have them. Those 2 per cent bonds, as you all know, were put out under conditions and representations which caused the banks to run after them, because it was not a basis of circulation, but they were all going to be made depositaries, and every little bank in the country was going to get $25,000 or $50,000, and many of them were appointed; the money was to be put right back, and it hardly got warm until they began to call it. These bonds went up on that basis to 110. Senator P omerene . And the Treasury Department called it out of those depositaries where it was supposed to draw interest and put it in others where it did not draw interest. Mr. M arshall . That is true as far as that is concerned. A t that time I do not believe the banks were paying interest, but, at the same time, that was done. Senator R eed . Tlmy robbed the little banks. Mr. M arshall . There is no use talking about that, it was done. It was necessary to find a provision, then, to maintain these 2 per cent bonds. They then turned around and made them the only bond that was available for circulation, taking off the 3 per cent bonds. The idea that I had in mind in order to bring these bonds back to par, or above— I can not name the section of the law, but you gentlemen can refer to it. There is one section of the law where banks of $150,000 capital and under must buy these bonds equal to onefourth of their capital, and keep a circulation. Banks of $200,000 capital and above— that means the reserve city banks —can buy a minimum of $50,000. In other words, you take one of the big banks of New York City, and it can buy $50,000 worth of bonds and be within the meaning of the law. I would amend that section so that the reserve city banks of New York and Chicago and Kansas City and everywhere else should buy bonds at least equal to half of their capital. Senator R eed . In other words, you would treat them the same as the small banks have been treated. Mr. M arshall . If it is a burden, let them carry their part of it. It is a just and fair thing to do, and you are making a market for your bonds. Senator Shafroth . Y ou would not have enough bonds to supply the demand. Mr. M arshall . Y ou had better have them above par and the banks running after them than to have them kicking them around. I went over the list the other day and figured out about 10 banks—■ 5 or 10 in New York, 1 or 2 in Chicago and St. Louis, and so on—-and 466 BANKING AND CURRENCY. out of those 10 banks on that scale you would have a demand for $20,000,000 of bonds. Senator R eed . That sounds to me like a pretty practical sugges tion. Mr. M arshall . It is fair. You will find some banks that have a capital of $5,000,000 that have less than one-half million dollars of bonds. Suppose those banks during the panic would have had that much more circulation and would have had their full capital in circulation. If I had the national-bank act, I think I could refer to that section of the law. These 2 per cent bonds going below par have, in a way, destroyed a little confidence. I have recently been out West— in fact, I have been spending most of my time out there— ’and I was talking to some brokers, and they told me there were men and women who had come in with $100 or $200 or $300 worth of bonds, 2 per cents and others, where they had seen these United States bonds going down, and they thought they would sell. Of course, there has been a great deal published on that subject. Senator Shafroth . I thought nearly all of those bonds were held by banks— hypothecated. Mr. M arshall . I said it was not altogether twos— different United States bonds. It had an effect on all bonds. If you will notice, 4 er cents have dropped from 114 to about 110, and our threes are just arely par. I doubt very much if you will find the threes, so far as the investment basis is concerned, maintained par. I will go on with this. This will give the Government five mem bers and the shareholders two, the Government, however, having a majority of the board, but the shareholders would have represen tation, which would seem to be but fair. In the board of directors of the Federal reserve banks the shareholders elect a majority, six to three. In this case the shareholders have a majority, but all have representation. This change would drop the Secretary of Agri culture and the Comptroller of the Currency from the Federal reserve board. While I fully realize that their presence on the board is desirable, yet I also fully realize that the gentlemen composing this board hold a very responsible position, and it will justly require all of their time and attention. They will, no doubt, find it necessary to visit the different reserve banks from time to time, and will find it advisable to make their stay long enough to become acquainted with the conditions and detail operations of the banks, and I very much doubt if the positions now held by the Secretary of Agriculture and the Comptroller of the Currency would admit of them giving the time to this position that it will require of each and every member of the board. Now, as to section No. 13. That covers the Federal advisory council. It seems to me that this is unnecessary and not required. The close and active relations of the reserve board and the board of directors, it would seem, meets this requirement, especially if the shareholders have two members on the Federal board. Section 16 is the next one I allude to, in reference to Government deposits. The Government proposes to charge interest on their deposits. My idea is that the Government should accept division of profits in lieu of interest the same as other depositors. In other words, if we go into partnership let us divide the profits. E BANKING AND CURRENCY. 467 Senator Shafkoth . That does not require the Government; it says it “ may.” Mr. Marshall . It is in there, and I think if you would leave it open, it would------Senator B ristow . Public opinion will have something to do with that. Mr. M arshall . If the Government is going to be a depositor the same as other stockholders, let it get interest when it is divided up the same as the other depositors. Next is section 17, page 30. Collateral security to protect the issue of notes should have 20 to 25 per cent margin, and it would seem to me that security should include United States bonds and other securities that might be held by Federal reserve banks. In other words, this money is not to be issued to the Federal reserve bank. It is to be issued to the people and the reserve bank is going to be used as the distributor, but that bank is to furnish the collateral. Senator B ristow . Y ou think bonds are not good security? Mr. M arshall . The assets of the Federal bank. Senator B ristow . That suits me better. Mr. M arshall . I would not confine it to simply collateral notes, commercial paper as defined and looked upon in this country as it is to-day. I believe that if any one class of credit is inflated it is com mercial paper, and it has been going that wav for some time. Senator R eed . I s it not true, Mr. Marshall, getting down to real absolute truth, that there are more mercantile failures of a disas trous character than any other class of failures ? Mr. M arshall . There are a good many of them; I have been in a good many. The Chairman . When you speak of commercial notes, Mr. Mar shall, being inflated, you really are grouping together all that class of accommodations extended to commercial men, are you not ? Mr. Marshall . I am speaking now of what we bankers call “ com mercial paper.” The Chairman . Are you speaking of commercial paper as qualified and narrowed down in this bill to paper drawn against actual ship ments of merchandise? Mr. M arshall . No; I am not putting it that way. In other words, I am not including any commercial paper------The Chairman . That is the only kmd of commercial paper the Federal reserve bank will have. They will only have commercial paper drawn against shipments of merchandise— cotton, corn, and wheat, and manufactured goods. Mr. M a r s h a l l . I would say that the security, or the paper, if you please, that this board would require as collateral against notes issued would be different and would get quite a different scrutiny from the discounts of a member bank. Senator R e e d . H ow are you going to tell whether notes are drawn against cotton, corn, and wheat? If you attached a warehouse re ceipt, then it would be all right, but without that how are you going to tell ? Mr. M arshall . Suppose you go to Temple, Tex., which is a big cotton-shipping point, and there are 1,000 bales of cotton which is 468 B A N K IN G AND CU RRENCY. going to Liverpool. That will go by the way of Galveston. They draw their draft, with railroad bill of lading attached, and send it through to be exchanged for the bill of lading. That is what I call a draft against existing values. Senator R eed . They have nothing in this bill requiring any such thing. Mr. Marshall . I think it says “ against existing values." Senator R eed . There is nothing in this bill, as I understand it, that requires a bill of lading or warehouse receipt to be attached. The C hairman. It dots require that the Federal reserve board shall clearly differentiate these bills and make them bills which are actually based upon commercial transactions, and it is intended that they shall be limited to transactions of that character. Senator R eed . Upon commercial transactions. That is very in definite. The Chairman . It is not indefinite when you come to deal with individual bills, Senator. Senator R eed . I am a merchant. I am a retail merchant, and I have a stock of goods which cost SI,000,000. I am in debt to the wholesale houses lor a lot of it, and I give the wholesale houses my notes. I have creditors who are owing me, and I get their notes. Would that come within the purview of this bill? The Chairman . It would. You take a shipment of stoves to this retailer, and that retailer gives his note in payment for those stoves, to be paid for at a particular time. It is assumed that those stoves would be sold out to country people and the money from them used to liquidate that. Senator R eed . The trouble is that the money collected for the stoves may be collected and may not; but if it is collected there is no guaranty that it will follow that the money will go back to the dis charge of the note given by the retailer to the wholesaler, and the fact is that of all men who are liable to break out any moment and to fail disastrously it is these merchants. The C hairman. If they mix up their accounts in that way. Senator R eed . They all mix them up. Mr. Marshall . Y ou do not get much more paper such as you describe there; that is, you take the merchant, for instance, in Kansas City— the wholesale merchant who gives his note to the manufacturer from whom he buys, and then the manufacturer comes to the bank and discounts it. That paper has really passed away, because the wholesale merchant in St. Louis or Cnicago borrows through the note broker on his open credit, on his statement as a basis of credit, and from his bank in Chicago, St. Louis, or New York. That is why I said that such paper was inflated, if any line of credit is inflated. Within the past 10 or 15 years what we call our “ note brokers" have sprung up, and they are the distributers of paper and they borrow on their open note. The Chairman . That permits the very evil Senator Reed was describing. Mr. Marshall . Single-name paper. The Chairman. That is what it does and encourages it. Senator R eed . There is no way to stop it on that class of paper. The Chairman . This plan would not mclude that class of paper. B A N K IN G A N D C U R R E N C Y . 469 Senator K e e d . Without it you would not have anything according to the statement of Mr. Marshall. Mr. M a r s h a l l . Oh, yes; you would. I was just saying that in the broad sense commercial paper such as I am describing now, while the majority of that paper is good, it is renewed over and taken up and renewed.. I believe that any currency that is issued on an asset should, on what we call merchandise, such as corn, cotton, or wheat, which is seeking a final resting place, and that is to be absorbed and going to be paid for in money. Senator 1 e e d . Then you would attach a warehouse receipt? Senator P omerene. A o u discriminate and designate that as prime paper? Mr. Marshall . I discriminate and designate that as prime paper, given for existing values— that is, in the process of transportation, you might say, or that is to be consumed and paid for. Senator R eed . If you were going to loan money on that and be perfectly safe, you would take a bill of lading ? Mr. Marshall. Or a warehouse receipt or something of that kind. Senator R eed . There is nothing in this bill that says that there shall be attached anything of that kind. Mr. Marshall . It says, “ Drawn against existing values.” etc. Senator B ristow . Suppose that a merchant at Kansas City has a large stock of goods and lie has not the money to pay for them and he wants to discount his bills, which most of them want to do, if they are good ? Mr. Marshall . They must do it, if they are successful. Senator B ristow . He goes to the bank and borrows the money and pays the wholesaler and takes the discount. His note is given for 30, 60, or 90 days or probably 6 months— I don’t know. Do you mean to say that that merchant’s notes in that bank are not the assets that could be available here on the 90-day note ? Mr. Marshall . A s far as that is concerned, I am inclined to think that this may cover that. Senator R eed . If it does not cover it, it does not do much good, does it ? Mr. Marshall . Oh, yes; we have plenty of instances. When we go to move the crop is when we need the money. The movement of cotton absorbs more real money than any one product. The bankers in the South in the cotton district provide and get most of their money for planting along in April and May, ana that is for the planting purpose and does not bring on a stringency or anything, because it is bank credit; but when September and October comes, then that is the money to move the cotton, and it takes a good deal of money. With the exception of probably September and October— maybe commencing the latter part of August— you will find New York exchange at a premium the year around in Chicago, St. Louis, Kansas City, and Galveston and every place; but n those months when the money is coming back from the East and going there you will find it at a discount, but just as soon as the movement comes and a whole lot of cash is required you will begin to see New York exchange at a premium. Senator R eed . Coming back to this other question we were just discussing: A man has 100 bales of cotton. He sells that to a cotton 470 B A N K IN G A N D C U B R E N C Y . broker or merchant in Galveston and he draws upon that man for his money. Of course that is a transaction to be settled in a very few days. He puts up his draft at the bank, and that would be good to issue assets against, because back of it lies the cotton. Let us take the man now who has bought the cotton and put it in his warehouse. He goes to the bank and borrows money. The cotton is back of that just the same as it was in the other transaction. Would you say that was good ? Mr. Marshall . I would say that was good, if you got your margin. Senator R eed . Suppose instead of it being cotton in the bale it is cotton in the roll, ana silk and woolen goods. Mr. Marshall . Oh, you mean it is manufactured? Senator R eed . That it has been manufactured. Would you say that man was not entitled to those benefits ? Mr. Marshall . He certainly is entitled to those benefits. Senator R eed . Y ou have gotten down to a point that the mer chant’s note should be accepted if he is a solvent man and has a stock of goods? Mr. Marshall . Certainly. Senator R eed . Then you have gotten down to the point where that merchant’s note issued and sold by a broker and scattered throughout the country is a thing that can be put into the banks and currency issued on it ? Mr. Marshall . Of course it is good for value, if you follow it through. My idea there was that the line can be drawn, and that is why I put in tnere what are the assets of the bank. These Federal reserve banks are going to have United States bonds and municipal bonds, etc., and I should say that the assets of that bank is the thing that wants to be scrutinized. I do not care what their security is, if it is good. But then the time limit must be considered. Every one of these notes must find their home as quickly as possible. Senator R eed . Y ou say that is a margin of safety against taking all those assets, of course throwing out those found to be bad. You would put in 20 per cent? M b*. Marshall . Twenty per cent margin in place of issuing it on par. Senator B ristow . W hy would not a few good mortgages do to put in as assets of a bank ? Mr. Marshall . There is nothing that I like better than a good real estate farm mortgage, as far as being good is concerned, but we have not a good market for that. You want to have something there that is liquid if you have to realize on it. It is either going to be paid or there must be a market for it. There is really not a built-up active market for farm mortgages. Senator B ristow. Mr. Marshall, you interest me there very much. Here is John Wanamaker, Woodward & Lothrop------Senator R eed . I wish you would go into that in the morning. Senator Shafroth. Mr. Marshall is not going to be here to-morrow morning. Mr. Marshall . I will stay here and arrange to catch the 11.45 train. Senator P o m e r e n e . All right; we will question you further in the morning. BANKING A N D C U R R E N C Y . 471 The Chairman . To-morrow, Mr. William H. Berry, of Chester, Pa., is to be with us. Mr. Marshall . Can you start with me at 10 o’clock? Senator P omerene . Y ou are giving the practical side of this mat ter in a very intelligent way. Some of these bankers only see the matter through a banker’s eye. Mr, Marshall. I am interested not as a bank president. I am a stockholder— a little one— in country banks and a reserve city bank. Senator P omerene . I have a bill of lading here that I think you will see the benefit of. Mr. Marshall. All right. The Chairman . W e will now adjourn to meet to-morrow morning at 10 o’clock sharp. (Thereupon, at 6 o’clock p. m., the committee adjourned to meet to-morrow, September 17, 1913, at 10 o’clock a. m.) W E D N E S D A Y , S E P T E M B E R 17, 1 9 1 3 . Committee on B anking and Currency , U nited States S enate , Washington, D. C. The committee assembled at 10.15 o’clock a. m. Present: Messrs. Owen (chairman), Reed, Pomerene, Shafroth, and Bristow. FURTHER STATEMENT OF F. E. MARSHALL, OF NEW YORK. The Chairman. Mr. Marshall, the committee will be glad to have you conclude your comments of yesterday upon the pending meas ure. Have you a written memorandum which you desire to submit ? Mr. Marshall . N o, Mr. Chairman; I have just some memoranda for me to refer to. I think yesterday afternoon when the committee adjourned that we were discussing section 17 of the bill, as to collateral security. Senator P omerene . Y es; I believe you were discussing that feature. Mr. Marshall . Collateral security to protect the issue of notes. The bill now provides that that security be put up to par. Senator P omerene . Yes. Mr. Marshall . And I should say that it should be a margin of 20 to 25 per cent. Senator P omerene . D o you mean above? Mr. Marshall . Y es; above------The Chairman (interposing). You mean by that that as to those notes to be issued by the Government, you think that the member bank getting a loan from the Federal reserve bank should also put up a light margin above the amount of that loan ? Mr. Marshall . Yes, sir. Strictly construing the law, it speaks of discounting certain paper. You construe that to mean that if the member bank came to the Federal reserve bank to borrow money, it would bring a note of, let us say, John Smith, for $5,000 or $10,000, and the Federal reserve bank would discount that note. I have 472 B A N K IN G A N D C U R R E N C Y . always preferred, as a banker, to have a bank come to me to borrow. I always preferred, if a banker borrowed money from me, rather than to discount his customer’s note, that I would take the bank’s note, with his bills receivable as collateral security. Do you under stand the distinction I make? Senator P omerene . Y es; you mean to make it a primary obliga tion of the bank? Mr. Marshall . I was saying, Senator Pomerene, that this language would seem to be rather that you were aiming to discount the paper of the bank. I always prefer, in lending money to a country bank, to take its own note, with its bills receivable as collateral. Then you get a margin of 35 or 40 per cent, taking the customer’s note as col lateral to work on. You discount the note of John Smith, on the indorsement of the bank, you have. Senator P omerene . In making that statement, do you have in mind the provision of the bill which permits the board to demand at any time additional security from the bank? Mr. Marshall . Certainly. That is why I put in my suggestion of having a margin. And it would seem to me that this security should include United States bonds and other securities that the Federal reserve bank might have. Senator P omerene. I think that is a good suggestion. Mr. Marshall . Now, in this same section 17, page 31 of the bill, where it refers to the redemption of the notes— 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. It says the notes shell be charged against the Government de posits. I would not give this privilege; it seems to me no bank should be given the privilege of making a charge against the Gov ernment account. In other words, they should not charge these notes against the Government account and then return them for redemption, but should return them to the Treasury for redemption. Senator B ristow . If they charged them against the Government deposits, the Government would not have any way of knowing what its balance was at a given time. Mr. Marshall . N o. Then, there is a redemption fund provided for that purpose. Let it go through the regular course. The Chairman. I think that is a substantial objection. Mr. Marshall . Yes. It is a bookkeeping matter; but it is im portant. The 5 per cent redemption fund that the Government has for the redemption of notes issued, I would have in addition to the 33§ per cent required reserve carried in the vault of the Federal re serve bank. You make that redemption fund now as a part of the 33^ per cent reserve. I would make it in addition to the reserve. The Chairman . D o you think it is necessary to have these notes redeemed at the Treasury of the United States at all, since they are redeemable by the Federal reserve bank? Mr. Marshall . Well, it is a Government note. The Chairman . I know; but these reserve banks are agents of the Government and are acting as redemption agents. Would it not really tie up that additional amount oi money to send them to the Treasury ? B A N K IN G AN D CU RRENCY. 473 Mr. M a r s h a l l . Y es; of course it would tie up that amount of money— not, however, if you would increase the reserve in the vault. If you only have 33$ per cent reserve in the bank’s vault, it would tie up more; but if you increase that 33$ per cent by 5 per cent more, there would be the same amount of money. But I think with the custom of redeeming notes at the Treasury— then you would have part of your own circulation out, which was redeemable at the Treas ury, and part which was not, which would make a confusion. The Chairman . If it was made redeemable at the banks alone, the bank report would contain a constant record of that; whereas other wise, there would have to be Treasury account, and at the same time an account of the bank coincident with that. Of course, that is not a matter of vital importance. Mr. Marshall . Yes. Now, I will continue at the same page of the bill, or rather, the next page, 32, line 21, reading as follows: Any 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. It would seem to me that a Federal reserve bank which desired to reduce or retire its note issues should be required to do so by the deposit with the Treasuiy of the United States only of its own notes, or gold, or lawful money of the United States and should not make the redemption deposit for retiring such issues with any Federal reserve agent and should not make the retirement by the deposit of note issues of other Federal reserve banks. My understanding is that one Fed eral reserve bank is not liable for the issue of another Federal reserve bank; is that right? The Chairman . Yes. That is, the Federal reserve bank does not itself issue the notes. The bank is merely a borrower of these notes. Mr. Marshall . I understand that. The Chairman . And the banks are not issuing the notes, and hence they are not responsible for them, except to the extent that they borrow them. Mr. Marshall. Certainly. Well, they are responsible for them, are they not ? The Chairman . T o the extent that they borrow them, but no more. Mr. Marshall . But this bill would provide that a bank located, for example, at St. Louis, if it should take an issue of these notes from the Government, when they got ready to retire these notes they could send in the notes of another Federal reserve bank located in New York, and thereby retire their own circulation. The Chairman . Yes. Mr. Marshall . Well, I do not think that is right. The Chairman . But in every case the notes of the various banks are identical. Mr. Marshall . Y es; but the national bank to-day is responsible for its own note which it issues. You are going by this bill to make the Federal reserve bank responsible for the issues of other banks. The Chairman . But these Federal reserve notes are issued upon the responsibility of the Government of the United States, and then loaned to the Federal reserve bank; and the bank is responsible only for such notes as it borrows. Mr. Marshall . Only for such notes as it borrows ? 474 BANKING AND CURRENCY. The Ch airm an . Y es; only for those. Now, whether it returns upon retirement these identical notes which it borrowed, whether they are earmarked, or whether they are not earmarked, would make no difference. Mr. M arshall . I understand, but they have got to deposit gold or lawful money with the Treasurer of the United States. The Chairman . Certainly. Mr. M arshall . Well, I think the deposit for the purpose of reduc ing the liability of a bank upon its note issues should be a deposit of its own identical note, and not the notes of another bank. The Chairm an . I s your suggestion, then, that these particular notes should be earmarked ? Mr. M arshall . N o, Mr. Chairman; I want nothing of the kind. The Chairman . Well, would they not have to be earmarked in order to return the identical note ? Mr. M arshall . Well, as I understand, you are going to provide by this bill for a number on these notes; and I want to have them earmarked just as little as possible. The Chairm an . I do not think they ought to be earmarked at all. Mr. M arshall . Well, that is understood. When you mark a note you put a question mark on it. Senator R e e d . If a bank goes down to the Federal Treasury and gets $1,000,000 of notes issued by the Treasury clerk, and another bank goes and gets another $1,000,000, and so on— it is not necessary to extend the illustration further. But finally there is $10,000,000 out in that way. Now, the Government is interested in being paid back its money. If you are one of those bankers and you take the same $1,000,000 that you borrowed and bring it back, of course the Government is made whole. Now, if you take the $1,000,000 that I borrowed, which is the same kind and class of money, and carry that back to the Treasury, why is not the Government made whole just the same? There is just $9,000,000 of that money still outstanding in either event. It is all the same class, character, and kind of money. Mr. M arshall . My suggestion, Senator Reed, was not to protect the Government. Each one of these Federal reserve banks is re sponsible for the amount of notes which it takes out. Senator R eed . Yes. Mr. M arshall . For its own notes. Senator R eed . Yes. Mr. M arshall . I say then, going on the theory that there would be a mark on them------Senator R eed (interposing). W hy is there any necessity for doing that? The Chairm an . Mr. Marshall is addressing himself to the form of the bill as it was reported to the House; and he agrees with us that the Federal reserve notes should not be earmarked. Mr. M arshall . Y es; but if they are going to be earmarked— which this St. Louis bank, which I have been mentioning, for in stance— it may be numbered 7, it is going to be liable for every note that is marked with the number 7, for instance. Senator R eed . Well, if you fixed a liability on the bank to re deem, not $1,000,000 of its money, but a particular $1,000,000 out BANKING AND CURRENCY. 475 of that $10,000,000 that has been mentioned, then, of course, you must identify that $1,000,000. Mr. Marshall . Y es; but you are doing so if you earmark them. The Chairman . Well, you agree that the notes ought not to be earmarked ? Senator R eed . It would introduce interminable confusion. Mr. M arshall . W e agree on that, but I am taking the House bill as it now provides. The Chairm an . All right, Mr. Marshall; we understand. Mr. Marshall . I will now refer to page 33 of the House bill, line 13, where it says: It shall be the duty of every Federal reserve bank to receive on deposit at par and without charge for exchange or collection'------ And so on. I predict that this will be very heavy and expensive operation, and will absorb a large amount of money. Senator R eed . W ill you please read that again ? The Chairm an . W ill you please read that portion of the bill a little more fully, Mr. Marshall? Mr. M arshall (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 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. Senator R eed . I understand what you refer to now. You have read enough of the context. Mr. M arshall . There are a great many checks afloat— too many of them to make it proper to bind the Federal reserve bank down to par. W e should let the business itself take care of that. Do you not think so ? Senator B ristow . D o I understand that if I were in Missouri somewhere and gave a bank there a check on a bank at Salina, Kans., and it was presented to one of these member banks, both banks being members of this regional association, that that bank is compelled to take that check ? Mr. M arshall . It is compelled to take that check at par, yes, according to this bill. In other words, if your bank at Salina, Kans., was a member bank and any other bank that was a member should deposit that check which came in to them with the Federal reserve bank, they must take it at par. Now, as a rule, that bank at Salina would charge 10, 15, or 25 cents. Senator B ristow . Well, in some places they do and in others they do not make a charge, but let us suppose that the check was not good. Mr. M arshall . Well, that is a banking matter. They should not take it unless it has some good indorsers. That is simply a business transaction. Senator R eed . Well, let us suppose this sort of case: W e have been dealing with the question of exchange. Let us suppose that a large institution in a bankrupt condition, and with no funds in its own bank, should draw a check for $1,000,000— that is a very large sum, of course, but we will take an extreme case— and the institution should cash that check at a member bank with a capital of only $100,000; but the bank thought the check was good and indorsed 9328°— S. Doc. 232, 63-1— vol 1----- 31 476 BANKING AND CURRENCY. it. Now, under this bill the regional bank would have to take that check, would it not, whether it was good, bad, 6r indifferent, or does the language of the bill simply relate to exchange ? Mr. M arshall . Well, it means simply taking checks, and so on. I do not think it means to bind the regional bank; the managers of the bank must always say “ ves.” Senator R eed . Of course the first bank does not have to say “ yes” ? Mr. M arshall . N o ; nor the regional reserve bank. Senator R eed . Well, I think that language in the bill is broad enough to cover that. Mr. M arshall . My idea is that these banks are going to be con ducted like other banks. Senator R e e d . I am speaking of that language in the bill. It says: “ It shall be the duty of every Federal reserve bank,” and so on. The Ch a irm an . If you look at that language I have interlined you will see what is meant. Let me explain that, if I may. If that were written out in full it would read this way: It shall be the duty of every Federal reserve bank to receive on deposit [from mem ber bank], at par and without charge for exchange or collection, checks and drafts drawn upon any of its depositors [member bank] or------ Mr. M arshall . Certainly. The Ch a ir m an . And that might include private checks— or by any of its depositors [member bank] upon any other depositor [member bank] and checks and drafts drawn by any depositor [member bank] in any other Federal reserve bank upon funds to the credit of said depositor [member bank] in said reserve bank last mentioned, nothing herein contained to be construed as prohibiting member banks from making reasonable charges to cover actual expenses incurred in collecting and remitting funds for their patrons. That would still permit the member banks to charge their patrons. Mr. M arshall . Certainly. The Ch airm an . And would still permit the member banks, so far as they themselves are concerned, to par their own items through the Federal reserve bank. Senator P o m erene . It is not intended to apply to the collection of checks drawn by an individual depositor on a member bank ? The Chairm an . N o. The member bank may par such checks, however, through the Federal reserve bank, so far as the member bank is concerned. Senator R eed . Well, I am taking a different view of that or else I am not making myself understood. I am not dealing for the mo ment with the question of the exchange that may be charged off. I am dealing with the question that this language seems to make it incumbent upon the reserve bank to cash a check. Mr. M arshall . N o ; I do not think that, Senator Reed. Senator R eed . Well, I think you can say that the language is sus ceptible of the other construction; and certainly in drawing a law we ought to remove any possible ambiguity. Mr. M arshall . Yes. Senator R eed . And it ought to be framed so that it clearly applies only to the matter of exchange. Mr. M arshall . Well, my idea was to get away from what I know, from discussing the matter with one banker at one time; I know that he had the idea in view that he could take this great bundle of BANKING AND CURRENCY, 477 items he had in the process of collection all over the United States and go and dump them into this Federal reserve bank. Now, every city bank has got a large amount of money tied up, running all tne way from Maine to California, in the process of col lection; and the man I spoke of was working on the idea that he could take all of those checks and dump them into the reserve bank and convert them immediately into what we call reserve funds. Do you not see ? Senator B ristow . Yes. Mr. M arshall . And it would rather sound to me as if they were aiming to put that burden on the Federal reserve bank, which would tie up a lot of money in the first place, and be expensive; and I just thought I would call attention of the committee to it for that reason. Now the next suggestion I have------Senator R eed (interposing). Will you wait just a moment, Mr. Marshall? I think this language ought to go in after the word “ patrons” on line 23 of page 33: Nothing herein contained shall be considered or be construed so as to require any banks to receive any checks or drafts which it believes to be unsafe. Mr. M arshall . Y e s; that would prevent them from being com pelled to handle it when it was unsafe. Senator B ristow . Well, Mr. Marshall, if you are going to take up some other subject now I would like to take up the matters we were considering yesterday afternoon. Mr. M arshall . All right. I will refer to section 19, relating to re funding bonds. Now, 1 have not any memorandum on this for mv guidance. As I said to the committee, I am not in sympathy with the bill to the extent of refunding the 2 per cent bonds and retiring the national bank circulation at this time. The Chairm an . D o you think it better to defer that ? Mr. M arshall . Y es; I think it better to defer it. The Chairm an . Would you think it advisable to have a provision in the bill for retiring a part of these bonds that are now on the market ? Mr. M arshall . I think, Mr. Chairman, that I would amend that law so as to make the national banks take out circulation alike, and thus create a demand for the present 2 per cent Government bond. The Chairm an . S o as to absorb a quantity of them ? Mr. M arshall . S o as to absorb them all and make a demand for them. The Chairman . Y ou might create an overdemand for them. Mr. M a r s h a l l . It would be better to have an overdemand than an underdemand. But you can figure that out to adjust it. The Chairm an . Yes; relatively. Mr. M arshall . A s I say, you can take a dozen or two of banks now in the larger cities and by increasing the circulation very little you can get a demand for $25,000,000 to $50,000,000 of bonds. It would bring these bonds to par, in my opinion. The Chairm an . Well, there is no doubt about that; not the sli 1 :est. • M arshall . I look upon bonds which are below par as very undesirable and unsafe. The Chairm an . I agree with you upon that. 478 BANKING AND CUKBENCY. Senator P omerene . W hat do you regard as the cause of these bonds falling below par? I understand what is given as being the reason but I should like to know what is the actual reason. Mr. M arshall . Well, it is lack of demand, so far as that is con cerned. The law provides for the larger banks taking out a minimum amount. Of course, the supply is more than the requirements. I have read something about it but I know nothing about it at all per sonally, but it has been a strain all the time to keep the bonds at par. Senator P omerene . Yes. I had in mind a statement which is cur rent to the effect that they were being purposely discredited. I have no doubt that you also have heard of that. Mr. M arshall . Yes, sir. Senator P om erene . Now, the question is, is there any foundation for that statement ? Mr. M arshall . I know nothing about that. Senator B ristow . W hy would the banks try to depreciate' 8600,000,000 or $700,000,000 worth of property which they own? That is the question to my mind. The Chairm an . The term “ they” is pretty broad when making a charge against anybody Mr. M arshall . Yes. Now, this charge has been made as to a few. The Ch airm an . T wo or three. Mr. M arshall . S o far as that is concerned, the market for United States bonds, as well as for practically all other bonds, is largely in one center, and that is New York. It you want to sell even a Gov ernment bond in San Francisco, or St. Louis, or Chicago, you will wait until the broker gets a quotation on it in New York, and he is probably selling it in New York for delivery in New York. Senator B ristow . Well, the quotation may be in New York, but these bonds------Mr. M arshall (interposing). Y es; the real purchaser is in New York as a rule. Senator B ristow . That is, if a bank at Salina wants to increase its circulation------Mr. M arshall (interposing). Or decrease it. Senator B ristow . If it wants to sell $25,000 of these bonds, they would sell them in New York? Mr. Marshall . They would sell them in New York. They may do so through their Kansas City correspondent. Senator B ristow . Yes. Mr. Mar sh a ll . But the Kansas City correspondent will get for the broker in Kansas the quotation in New York. Senator B ristow . And suppose they wanted to buy ? Mr. M arshall . It would be the same way. The Ch airm an . $15,000,000 or $20,000,000 of these bonds would fix the market price, would it not ? Mr. Marshall . Y es; when I was in St. Louis I sold them always in New York. Senator B ristow . Of course these 2 per cent bonds would not sell as an investment? Mr. M arshall . N o ; I doubt if you could keep up that amount of even 3 per cent— $700,000,000. T think it is very doubtful. BANKING AND CURRENCY. 479 Senator B ristow . Speaking of retiring these bonds, suppose that we should issue a currency, put a gold reserve behind it— tne same as our greenbacks are— and take that up and substitute instead of a bonded national debt a noninterest-oearing national debt in the shape of currency, like our greenbacks------Senator Shafroth (interposing). With the 50 per cent gold reserve ? Senator B r isto w . I would put it at even more— at 60 per cent or more. Mr. M arshall . Well, you are opening the door for redemption faster than you have got the money to do it, of course. But it would probably be safe. Senator B ristow . I think Mr. Ailing in the article which he pre pared suggests about 70 per cent gold reserve. Senator Shafroth . Y es; I read that last night. Senator B ristow . Seventy or seventy-five per cent. Mr. M arshall . I have no doubt 75 per cent would be safe, so far as that is concerned. You would never have any trouble. Senator Shafroth . Well, would not 50 per cent be sufficient, if you had in the law itself a provision directing the Secretary of the Treasury to buy gold, if necessary, and sell bonds, if necessary, in order to maintain that 50 per cent reserve? Mr. M arshall . Well, no doubt it would be safe; but you would never want to buy the gold or sell the bonds except when you needed it, and then you would be at the mercy of the fellow that had gold to sell or could buy your bonds. It is like we had to put out the 4 per cent bonds; it had to be done at the mercy of the man who had the gold. And yet the 4 per cent bonds, after they got them, sold at a premium of 32 or 33. Senator Shafroth . But that would not cost as much as the pay ment of interest on these bonds which the banks hold, of $14,000,000 a year. Mr. M arshall . Well, so far as that is concerned, as long as we are a borrowing Nation, and have got out already these 2 per cent bonds, we must figure on that. It is a fact that they are out at the present time, 2 per cent interest bonds, payable at the option of the Govern ment. Senator S hafroth . N o ; they are not payable at the option of the Government. Mr. M arshall . Y es; I think they are payable at the option of the Government, Senator Shafroth. Now, I would like to correct something that some member of the committee said last night, that the purpose of these Federal reserve banks was to issue currency to take the place of national-bank notes. I think you are mistaken. I read that law over again, and it says distinctly that the issue of this currency is for these banks, and for them only. There is no provision in this bill------Senator Shafroth (interposing). Well, there is a provision for the retirement of these 2 per cent bonds. Mr. M arshall . Y es; but it does not say that it shall be done through the issue of currency through these banks. Senator B ristow . W hat becomes of that, then ? Mr. M arshall . There is no such provision. 480 BANKING AND CURRENCY. Senator Shafroth . D o you mean to say that we are going to give 3 per cent instead of 2 per cent interest, and have the national-bank circulation still in existence ? Mr. M arshall . N o ; you are going to retire that. Senator Shafroth . Then there would be a contraction in the currency ? Mr. M arshall . That is the way I should see it. Senator Shafroth . That would be a crisis that would be terrible. Mr. M arshall . One moment, please. I had that here before me. It is under the section of the bill relating to note issues. It says: That Federal reserve notes, to be issued at the discretion of the Federal reserve board for the purpose of making advances to Federal reserve banks as hereinafter set forth, and for no other purpose, are hereby authorized. Now, where do you get such a provision for retirement? Senator Shafroth . Well, if they retire these national-bank notes it is supposed that some currency snail take their place and that there will be a demand by the national banks for this currency to take the place of their own bank notes. Mr. M arshall . Well, this section provides that the basis of the security for this issue of notes shall be the assets of the bank, 90-day notes, etc. Senator Shafroth . Yes. Mr. M arshall . Y ou do not think that that contemplates getting out a currency for the retirement of these national-bank notes, do you? Senator Shafroth . Yes. Mr. M arshall . My construction of this language is that that is to be an emergency currency only. Senator Shafroth . Yes. Mr. M arshall . And it certainly should be held for that purpose. Senator Shafroth . I think it ought to be limited to emergency currency; but I think the national-bank note should be retired by the substitution of United States notes. Senator R eed . But you are talking about what you believe, while------Mr. M arshall (interposing). While I am talking about what this bill provides. Senator Shafroth . Yes. Senator R e e d . This bill provides for the retirement of these national-bank notes, without any substitute, or else for this emergency currency as a substitute; one or the other? Senator Shafroth . If that were the case, you would have a crisis such as we had in 1893. Senator R e e d . All of which leads me to believe that we ought to rush this bill through in the next two or three days without read ing it. Mr. M arshall . N ow , in section 21 of the bill it says: That so much of sections two and three of the act of June twentieth, eighteen hunclred 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 association 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. BANKING AND CURRENCY. 481 In other words, the 5 per cent redemption fund the national banks now carry with the Treasurer of the United States for the redemption of national-bank notes is now carried as a part of the national-hank reserves. You repeal that part of that act. They have got to carry the 5 per cent redemption fund and it is not a part of their reserve. I suggest that if that is to be done that that redemption fund of 5 per cent should be reduced to 2^ or 3 per cent. You will relieve a considerable amount of money that is now tied up for redemption loses. )w, I have not looked into the redemption bureau, but my expe rience as a banker is— for instance, while I was in New York we had $1,000,000 currency, and we had $50,000 redemption fund with the Treasurer of the United States. W e seldom had more than $5,000 to $10,000 of redeemed money. That is charged to our $50,000. We might make it good— in other words, the $25,000 to $40,000 that is tied up there------Senator B ristow (interposing). Is never used ? Mr. M arshall (continuing). Is never used. It is tied there in the Treasury for that purpose. Now, if that is checked up, you will find that at certain times that 5 per cent redemption fund is overdrawn. In other words, when they redeem this currency, they do not promptly make it good. Senator B ristow . They do not promptly make it good to the bank ? ] lit Mr. M arshall . That is the fau of the Government; the fault of the fellow in charge. Senator S hafroth. I would like to call attention to this language in the report of the House committee upon this bill, as Chairman Glass says that these bonds are redeemable after 1930: The bonds now have no due date, and while the Government may redeem them after 1930 they are not necessarily payable after that period. Mr. M arshall . That is right. Therefore they are redeemable at the option of the Government. Senator S hafroth . Yes, and not until 1930; not now. Mr. M arshall . Y es; but you want to redeem your bonds. The Chairman . There is no danger whatever of any disturbance from the provision in this bill, because the possible maximum is only $39,000,000. Mr. M arshall . Y ou mean that much a year. The Chairm an . Yes. Senator Shafroth . $37,000,000 a year. But you can, under this bill, get out new bank notes, under the provision of this bill, after the 20 years elapse. They do not limit that. There is a provision in there that they can go on and organize new national banks and take out new currency until the 20 years expire. Mr. M arshall . Yes. Senator B ristow . Or they can surrender their currency. Senator Shafroth . They can surrender their currency, yes; they can do that now. Mr. M arshall . N ow , section 23 of the bill relates to bank exam iners. That the examination of the affairs ot every national banking association authorized by existing law shall take place at least twice in each calendar year and as much of tener as the Federal reserve board------ 482 BANKING AND CURRENCY. I would put in there the words “ Comptroller of the Currency” before the words “ Federal reserve board” ; and also after the words “ Secretary of the Treasury” in line 10 I would put the words “ the Comptroller of the Currency.” Line 19, “ amount whereof shall be determined” — as to the salaries I would put it that the Secretary of the Treasury and the Comptroller of the Currency should fix the salaries of bank examiners. Senator R e e d . Well, now, why have a subordinate sit with his superior officer to fix those salaries ? Mr. M arshall . The bank examiners generally are closer in contact with the active work. Do you mean that the comptroller should not have power with the Secretary ? Senator R e e d . Yes. Mr. Marshall . The comptroller knows what the examiners are doing and the duties of the examiner better than the Secretary. Senator R e e d . Y es; but you have got to have a superior in every office. Mr. M arshall . That is true. Senator R e e d . N o w , the Secretary would naturally consult, if he was a man of proper discretion, with the comptroller; but to give the comptroller an equal authority with the Secretary— does the comp troller have the appointing power of examiners ? Mr. Marshall . Yes; he has the appointing power. The comp troller appoints the bank examiners. Senator R e e d . But the Secretary of the Treasury appoints the comptroller, does he not ? Mr. M arshall . N o ; the Treasurer appoints him. Senator R e e d . But on the Secretary’s recommendation. Mr. M arshall . He is a presidential appointee, and the comptroller appoints the examiners with the approval of the Secretary of the Treasury. And I put it that way because— now, this goes on here, and I think the way the examinations are provided for here in the bill is very burdensome. The Comptroller of the Currency shall so arrange the duties of national-bank ex aminers. That is the same as it is now. That no two successive examinations of any association shall be made by the same examiner. That is wrong, because an examiner knows more after he has examined a bank 5 times or 10 or 20 times than he did before. The Chairm an . D o you think that the purpose contemplated by that provision might be accomplished by providing merely that other examiners should be allowed to come in? Mr. M arshall . Yes, sir. The Chairman . And you think it is better not to bind the comp troller down to that arrangement as contained in the bill? Mr. M arshall . My idea is to make him responsible, my idea being that all examinations of Federal reserve banks and the mem ber banks and the national banks should be made by the direction of and to the Comptroller of the Currency. All requests for special examinations by Federal reserve board should be made to the comp troller, who should have charge of all examiners and their work and BANKING AND CURRENCY. 483 the supervision of all banks, Federal examinations not to be oftener than twice a year, special examinations as often as necessary and as often as requested by the Federal reserve board. The Chairman . So that your suggestion is as to page 41, line 18, that the whole provision should be that the examination should not be more than twice a year ? Mr. M arshall . Yes. Suppose you have got a trust company. The State is examining that company twice a year, or more and the Comptroller of the Currency is examining it four times or more; and you would have examinations for that company nearly all the time. Now, banks are like everything else, there are good banks and bad banks. Some banks would be better off without examination at all, and others would be better off with examinations three or four times a year. You would not want to burden a good bank on account of the faults of another. Senator Shafroth . In the banks in England, no examination whatever is required. Mr. M arshall . That may be true; but we are different. Senator Shafroth . Oh, I think that is a wrong principle. The Chairm an . Our system is very different from theirs. Senator R eed . My idea is that the author of that provision in the bill undoubtedly thought that one examiner should be a check upon another. Mr. M arshall . Yes. Senator R eed . That apparently is a good idea. The Chairm an . Yes; of course. Senator R eed . But it would be better to provide for an examiner in chief who might at stated intervals, or at such times as he saw fit, drop in and make an independent examination. Mr. M arshall . Well, the Comptroller of the Treasury is the exam iner in chief. Senator R eed . But he does not go out to the different banks. Mr. M arshall . No. Senator R eed . But if there was an examiner in chief, too, he would simply drop around occasionally and look over the work of these exammers. Mr. M arshall . That is exactly what is being done now. Senator R eed . I suppose so. Mr. M arshall . These examiners are being switched from place to place; but the idea of this bill seems to be that no one examiner should examine a bank a second time. Senator B ristow . That would be a great weakness. Senator R eed . A bank examiner might get his mind on a certain class of paper. He might begin to suspect it, but not have sufficient ground to reject it. Mr. M arshall . I speak from experience. I was a bank examiner at one time. I knew more about a bank at the end of three years as an examiner than I did the first year. Senator S hafroth . You got familiar with some of the paper then ? Mr. M arshall . Yes- and with the bankers themselves. Senator B ristow . Yes; with the bankers; it is also a personal matter. 484 BANKING AND CUBEENCY. Mr. M arshall . And my idea of that is to put the responsibility on the comptroller, and to put the examiners under him, as they are now, and make him responsible for his work. The more responsi bility you put on him the better it would be done. The Chairm an . Have you any other points which you wish to submit, Mr. Marshall? Mr. M arshall . Yes. Section 25 relating to transfer of stock. On page 43 it says: 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. I would change that provision to apply not to the stockholder, but to any officer or director. W e have got many stockholders that know nothing about the management of the bank, and they should not be liable for the criminal acts or mismanagement of the officers or directors, except as they are liable for their double assessment in case of failure. If you were a stockholder in some bank you might be away a great deal and know nothing about what was going on. There are many women up in New England who are stockholders, and if a bank failed and a woman happens to sell her stock 30 or 60 days before the bank fails, by this provision she is made liable just the same. Senator R eed . It seems to me that when you fix the 60-day limit you do not reach the real evil, because the man who knows that the bank it going to fail and wants to escape his liability might know it 60 days or 6 months or a year before it failed. It seems that some thing should be inserted that would cover that point, such as— every stockholder who transfers his stock, with knowledge of the insolvency or im pending insolvency of the bank, or any knowledge of facts sufficient to put him upon inquiry or notice, be held liable. Mr. Marshall . Yes. The Chairman . That is much better, I think. Senator Shafroth . D o you not think that in addition to such a provision there ought to be that fixed limit ? Senator R eed . I would not put in any limit at all, but only actual knowledge of the failing condition of the bank. The Chairman . That is the important point. Senator S hafroth . But if you do not have any limit you might go back to a director or stockholder within six years. Senator R eed . But if he transferred with knowledge of the bank’s failing condition, he ought to be held. I will give an illustration: There is a bank in my State that I think for five years was absolutely insolvent. The president I believe— well, I believe it was not the president but the cashier— knew that there was a very large amount of paper that had been forged. The paper would have been good if it had been signed by the man whose name it bore; but it was forged aper which was carried along there on a note from time to time. ow, a man who knew that condition never ought to be able to escape liability for his stock. Probably he would be liable on another ground than as a mere stockholder. Senator Shafroth . If he sold his stock, the person to whom he sold it would have a right of action against him for false pretenses. S BANKING AND CURRENCY. 485 Senator R eed . But I am speaking about his being liable to a stock holder upon another ground than stock ownership. Because a man who runs any bank, and has actual knowledge of fraud of that kind being perpetrated, if I put my money in it, there ought to be a liability on him absolutely unlimited. The Chairman . I suppose you refer to the Shafer case ? Senator R eed . Yes. The Chairm an . I s there any other point you wish to submit, Mr. Marshall? Mr. M arshall . Yes. Section 26, relating to farm loans. Now, suppose that a trust company or State bank comes into this system. They loan money. Would this 12 months’ limit apply to trust companies and State banks? Senator B ristow . It would have to apply to all the banks that come in. The Chairman . But these banks have different policies; one is a commercial bank and the other is an investment bank. I think there ought to be a distinction between them, not to compel them all to come under the same rule. Take a savings bank; they make a large part of their investments in real estate. Senator B ristow . Before we leave that I would like to suggest------ Mr. M arshall . Will you please let me finish this point ? I would not have a separate capital for the commercial and the savings departments, but would have a regular savings department with proper books, and provide safe investments for savings funds; and the reports should clearly state the amount of savings deposits and the amount of investments carried for account of savings; but one capital should be liable for all deposits, both commercial and savings alike. I think it would be complicated otherwise. This bill pro vides for a certain amount of capital. It says that it shall not be less than $25,000. Well, there are several national banks, small ones, with $25,000 capital; and they might desire to start a savings department, but it would not justify them with a capital of $25,000. The Chairman . Of course, that is right; they are carrying on savings departments now on the time-certificate plan. Mr. M arshall . Y es; that is better. Senator B ristow . I should like to take up that matter in con nection with these farm loans. I asked yesterday why a real estate mortgage should not be made the basis for this currency and why it is not preferable and more desirable than the short-time paper; and you suggested that the difficulty was that there was no established market for a security of that kind like there was for bonds. Is there not just as much of a market for real estate mortgages as there is for commercial paper ? Mr. M arshall . Oh, no. Senator B ristow . There is not ? The Chairm an . Might I interpose a statement here ? Senator B ristow . Certainly The Chairm an . Mr. Festus J. Wade, of the Mercantile Trust Co. of St. Louis, established a market for farm loans, by wide advertise ment among the people themselves, so that he actually made those farm mortgages a liquid asset; and right in the middle of the recent panic he was selling farm mortgages at 6 per cent. When money was 486 BANKING AND CURRENCY. easy he was selling them on a 5 per cent basis. But he was able to collect money right in the middle of the panic upon farm mortgages, owing to the fact that he had, by himself, through that institution, established a market for farm mortgages. I think that answers your question. Of course there is no market for them now, except as built up by some individual. Senator R e e d . There might be some market for them if we had some means of cashing them. The Ch a irm an . Certainly. Mr. M arshall . My idea is that back of this currency there is a security that is going to be paid, and therefore retire the currency. Senator B ristow . That is a beautiful theory. But as a matter of fact the banks of the country with which I have a very slight famili arity— while their short-time paper is the only kind of paper they do carry, as a matter of fact it is not paid any more than a farm mortgage is paid. They are carried along from year to year. I have renewed notes over five times. The banker would know that it would ultimately be paid. Senator R eed . Y ou run a newspaper, do you not? [Laughter.] Senator B ristow . Now, that is a way the majority of the news paper men do. Mr. M arshall . I know that. Senator B ristow . And it will not be paid. Mr. M arshall . Well, suppose that your bank at Salina discounts John Smith’s plain note. John Smith is a farmer breeding cattle. His note is as good as gold. Senator B ristow . Yes. Mr. M arshall . N ow , that note— I do not know whether it would be under the bill— it says paper, “ issued for agricultural purposes,” whether the money is used for or is going to be used for that purpose or not. Senator B ristow . The point I am making about the discrimination against farm mortgages is that John Smith is a farmer at Salina in the example you mentioned; and a banker can take his note, due in 90 days, and make it the basis of this currency. Now, if John Smith did not have a farm his note might not be worth anything. Mr. M arshall . Yes. Senator B ristow . And yet a mortgage on his farm is barred by the bill. Mr. M arshall . Yes. But the argument against that is that it is not a liquid security for payment. Senator R eed . You mean that it does not come due quickly? Mr. M arshall . Y es; it does not come due quickly. Senator R eed . Then, the evil does not reside in the fact that it has got a security back of it of a certain character, but in the cir cumstance that it does not become due soon enough. Is not that the real objection, instead of the fact—■ —Mr. M arshall (interposing). It does not come due, and, as 1 said, it is not liquid. That is no reflection on the security. Senator R eed . Well, I would like to have somebody define to me what is meant by a security being “ liquid.” If “ liquid” means that a note is a good note, and it is coming due in 30 or 60 or 90 days, or a shorter time— if that constitutes being a liquid security, I know what you mean; if it means anything else, I would like to know what it does mean. BANKING AND CURRENCY. 487 Mr. M arshall . Well, as you say, it runs a year sometimes. Senator R eed . But I am trying to get you to tell me what you mean by “ liquid,” if it does not mean what I have said. Mr. M arshall . A security that will be reduced to cash— be paid. Senator R eed . Well, I am speaking of a note of 30 or 60 or 90 days, a note the maker of which can be compelled to pay it. Does that constitute a liquid note ? Mr. M arshall . Not compelled; that means at the end of six months or a year— through a court. Senator R eed . I mean the maker is good, and if you demand your money you can get it. Mr. M arshall . If you demand your money you can get it; and the purpose is to pay it at maturity; the purpose of the borrower and the holder of the note is to cash the note at maturity. Senator R eed . If the Senator will pardon me another question: Now, as a matter of fact, banks have a line of credit which consti tutes a large part of their business with regular customers that they carry from year to year, renewing the notes every 30, 60, or 90 days— do they not ? Mr. M arshall . Oh, certainly. Senator R eed . N ow , would you exclude that character of note ? Mr. M arshall . S o far as that is concerned, that is a note that is given for the purpose— that is practically going to be renewed, and you know it— why, I would exclude it. I would make a great dis tinction between security that is to be put up between the note issue, and the security or note, if you are going to discount it for the bank for the puipose of taking care of his customers. Senator R eed . That is what I am getting at. Here is a large mer cantile concern in a city. It goes down to the bank and arranges for a line of credit. It proposes to open its account and says, “ How much of a line of account will you extend to m e?” The banker says, “ Up to $200,000.” Now, he borrows that. Sometimes he is up to $200,000; sometimes he is down to $10,000 or $15,000; but as a matter of fact he is probably owing the bank something all the time. Would you exclude that class of paper ? Mr. M arshall . Not if he was a good substantial customer. Senator R eed . Well, if, as a matter of fact, he borrows $200,000 and was entitled to a credit of $200,000; he borrowed $100,000 and ran along just at that amount; would you exclude that paper? Mr. M arshall . D o you mean that he is a continuous borrower ? Senator R eed . Yes. He generally owes that bank $100,000, renew ing his notes from month to month, but at any time the bank said to him “ Pay,” he would get the money in there in a very short time. Would you exclude that? Mr. M arshall . If he is good I would not. Senator R eed . Well, I want to know now in the name of the Lord God of Israel— and I do not say it in any irreverent sense— whether you are going to exclude that class of paper in the practical operation of this law ? Mr. M arshall . Well, as I said a while ago, I would make a dif ference in the paper that I take as security for a note issue and the paper that I discount as a paper for its general use. Senator R eed . I understand that your distinction is that you want liquid paper on the one hand and would accept nothing else, while on 488 BANKING AND CURRENCY. the other hand you would accept other paper; but when you come to really decide whether a paper is liquid paper or not, by what rule will you decide and by what yardstick will you measure it? Mr. Marshall. In the first place, if you have a note that is good — what we call commercial paper, that we defined yesterday— paper based on cotton, we will say, in the course of shipment, with a draft at 30 or 60 or 90 days, that is strictly prime paper, and I would put just as much of that kind of paper behind a note issue as I said. Senator R eed. Y ou say a note with a draft. Do you mean an acceptance? Mr. Marshall. Yes; I mean an acceptance. Senator R eed. N ow, I want to ask you what proportion of the com mercial business of this country is carried on through acceptances? Is it not the fact that the acceptance has almost gone out of date ? Mr. Marshall. Well, the acceptance has, so far as that is con cerned. There are, however, a good many acceptances while the cotton is on the way to Liverpool. Senator R eed. Well, there may be some foreign acceptances; but now, getting down to the real situation in this country— but is it not a fact that the aggregate of all the acceptances in this country would not begin to furnish enough securities to issue money against ? Mr. Marshall. Certainly. Senator R eed. N ow, that is what you call prime commercial paper. That is one call. What else ? Mr. Marshall . I told you last night. You spoke of a certain line of paper. Take your wholesale merchant, who buys his goods and gives his note to the manufacturer, and the manufacturer discounts it. Those are what we call commercial paper. That class of paper is not used much more, because the creditor who borrows through his bank and the commercial broker and gives his paper direct and pays and takes his discount, and so on. Senator R eed . I am through with my line of questioning, Senator Bristow; I beg your pardon for the interruption. Senator B ristow . As to commercial paper I will give an illustra tion. W e will take Woodward & Lothrop, or John Wanamaker, or Armour & Co. These merchants, as I understand, keep out a large amount of paper. Say it is 90-day paper of Woodward & Lothrop’s. The broker settles that. That wiil be paid; but it is paid by the sale of another note. Mr. Marshall , Quite often. Not always. Senator B ristow . Not always, but frequently. And he keeps so much of that afloat all the time. Mr. Marshall . Certainly; no question about that. Senator B ristow . Well, why should that be given any different consideration from the merchant at home, in a small way, who renews his notes every 90 days ? It is a part of his capital, is it not ? Mr. Marshall . But if your bank at Salina buys John Wannamaker’s note through a broker he is absolutely free from all obliga tions to John Wannamaker to renew. He buys that note. When it comes due he sends it to the place where it is payable, and he gets his money, and it is reduced, so far as he is concerned, to money. Senator B ristow . N ow, when you take the 90-day notes or 60day notes that are held by any bank—-I do not know much about these city banks, but take a country bank— and most of the banks BANKING AND CURRENCY. 489 are country banks— and there is not a bank in the United States that could compel payment of those 90-day notes without disaster. Mr. Marshall . D o you mean all at once ? Senator B ristow . All at once— when they become due. There is not a bank in the United States that could do it. Mr. Marshall. D o you mean compel them all at once? That is not a condition ever heard of. If all depositors, for instance, should demand payment at once it would produce a very serious situation. Senator B ristow . W hy is not the mortgage on the farm, on the land itself, which is the basis of the prosperity of this country anyway, conservatively made, the best security in the world ? Mr. Marshall. Senator, I have seen the time when it was about the poorest— in 1893, when I was a banker in Kansas City, and one of these farm-mortgage concerns, which was taking mortgages and selling them, broke, and we had to take quite a number of its mort gages as security. Senator Shafroth . That was the Lombard Investment Co. Mr. Marshall. I had 14 of them on land in your State, and some of them not so far from you. Those mortgage descriptions read fine— fenced, barn, house, etc.— and not one of them had the improvements they said they had, and those mortgages were on 80 to 320 acres, and loans run from $300 to $500 apiece. I got a lawyer at St. John, Kans., to go out and run down a lot of those pieces of land and fix up the titles, and see where they got to, and when I got through they were not worth over $1 an acre, and they could not be sold. Senator R e e d . Mr. Marshall, you furnished an illustration o f the badness------Mr. Marshall. Of what? Senator R eed . The badness of farm loans by citing a splendid, barefaced fraud, a parallel of which would be to say that a lot of rascals got together and organized a fake corporation and put in a lot of paper that had nothing back of it, probably part of it forged, and put it into the channels of commerce for the purpose of imposing upon somebody. You would not want commercial paper con demned because of that, and I do not think your illustration, with all due respect, about farm loans is any more fair. W e all know what the Lombard Investment Co. was. Mr. Marshall . I was speaking not as a whole. Nobody has a higher regard for farm mortgages than I have, and the day I was speaking of is past. That was when the country was settling up and everything was new. It is quite different there now. Senator R eed . Maybe you have heard of some gentlemen who laid out some lots that were 50 by 140, and had a nice map of them, and they mortgaged them, and they had perfect titles, and then it was discovered that the lots were 50 inches wide and 140 inches deep; but we hardly take that as an illustration. Mr. Marshall. Senator, it was far from my purpose to give that as an illustration to base farm mortgages on generally. Senator R eed . Certainly; I thought so. Mr. Marshall. I have taken plenty of farm mortgages, and I have great confidence in them, and I was just speaking of that isolated instance. The Chairman . There is no doubt about it that the Lombard In vestment Co., with the gigantic fraud that was behind it, which 490 BANKING AND CURRENCY. Senator Reed points out, as we all know, did have a very bad effect on the country at large. Senator B ristow . H ow many merchants were there in 1893 who were in financial straits? Mr. Marshall. There were many. Senator B ristow . What was their paper worth ? Mr. Marshall. It might also be asked, What were many banks worth ? Senator B ristow . Take the banks that failed, what were they worth ? Mr. Marshall. That in 1893 not only the farm but practically the rest of the country was broke. Senator B ristow . Everybody was broke. W e can look back and recall farms which you could not get $1 an acre for, but if the man gets the mortgage or took the farm, there is not one in all that western country who kept it who did not make money. Mr. Marshall. Certainly. I wish I had kept them all. Senator B ristow . Yes, if you had kept them all------- Mr. Marshall. But those were extreme conditions. Senator R eed. If you had kept them you would have had enough money to start a country newspaper and come to the Senate. Mr. Marshall. W e were all broke, because we were selling $1.50 hogs, and $1 and $2 cattle, and burning corn for fuel. Senator R eed . What was the trouble with prime commercial paper in those days? Mr. Marshall. Those were extreme times, and it is not a fair com parison. The Chairman . I will remind the witness that he will miss his train. Senator B ristow . Just one more question. Only as a rule— there are exceptions, but, as a rule, the only security that did come back in the end was good farms, was it not ? Mr. Marshall. Well, I think some of the merchants and banks that were shaky at that time got well. Senator B ristow . Many of them went into bankruptcy. Mr. Marshall. Many of them that were sick got well. Senator B ristow . But all the farms got well. Mr. Marshall. Many of them got well; yes; I should say so; I agree with you there. Senator R eed . That could be accomplished if the man who had the farm could have lived without anything to eat. Senator B ristow . They could find something to eat and get a little sorghum t(Asweeten the bread. Mr. Marshall. It is no reflection on the farm-mortgage security, because as a class of security it is probably the best, or among the best, that we have. Senator B ristow . Y ou have six minutes yet. Senator R eed . He can not catch his train unless he goes. Mr. Marshall. I have a conveyance down there waiting for me and I can catch the train all right. • Senator B ristow . The Government issues this currency and loans it to the banks and the banks put up the security and tne currency is returned. The banks, as far as tne Government is concerned, do not have to return that money and it is not intended that they shall BANKING AND OUBRENCY. 491 return that money until the community can conveniently meet their obligations ? Mr. Marshall. That is right. Senator B ristow . W hy is it necessary to have short-time paper, making it possible to force the community to return the money until they can conveniently ? Mr. Marshall. A s far as that is concerned, that is just why I injected that, that I would take the assets of the Federal reserve bank as collateral, and other bonds. When you go to issuing money, I say, take all the security you can get. Senator Shafroth. Mr. Marshall, do you think there is enough prime commercial paper that could be used for the purpose of deposit ing in the reserve banks that would take the place of the $750,000,000 of bank currency ? Mr. M arshall . N o, sir. Senator Shafroth . D o you think it would be more commercial ir than would be in existence ? r. Marshall. Well, I do not know as to totals; but, on the other hand, Senator, I would not indorse putting out a permanent asset currency. I believe that to be asset currency, if you please, but it would simply be a short time— emergency— currency to meet the emergency and to get it back in and cancel it just as quickly as conditions would justify. Senator Shafroth. Would it not require enormous machinery on the part of the reserve bank to handle $750,000,000 of commercial paper ? Mr. Marshall. Certainly. Senator Shafroth. Maturing at from 30 to 60 and 90 days ? Mr. Marshall. Certainly it would, and especially if you undertook to make it permanent. Senator R eed . I am very sorry you have to go. The Chairman . I will ask the committee now to give Mr. Dos Passos a few minutes to be heard. STA TE M EN T OF JOHN R. DOS PASSOS, OF N E W YORK, N. Y. Mr. Dos P assos. I will take onty about 10 minut s. The Chairman . I want you to give your name and address to the stenographer. Mr. Dos P assos. My name is John R. Dos Passos, and my resi dence is New York City. I have some thoughts on these questions, and I have put them in print to save you gentlemen’s time. Senator R eed . Before you begin, will you make a statement as to who you are? Not for our enlightenment, but for the enlighten ment of those who want to read your statement. Mr. Dos P assos. With becoming modesty, I wish to announce myself as a gentleman who has had to do with Wall Street for 35 years. I am the author of the work on Stockbrokers and Stock Exchanges, but I am before this committee in a perfectly inde pendent character, representing nobody but myself, and nobody is responsible for my thoughts. Senator R eed . W hat has been your experience in financial mat ters, in a broad way ? 9328°— S. Doc. 232, 63-1—vol 1----- 32 492 BANKING AND CURRENCY. Mr. Dos P assos. Everything; I have been connected with all kinds of trusts, and I have been connected with all kinds of corporartions for 35 years in Wall Street. Senator R eed . A s a capitalist and investor? Mr. Dos P assos. N o, as a lawyer, representing capital and investments. The last retainer I had was from a French syndicate, which built a road out in the State of Oklahoma. The Chairman . He refers to the Missouri, Oklahoma & Gulf, which was financed by a French syndicate represented by Mr. Dos Passos. Mr. Dos P assos. W hat I wanted to do was not to take your time now, but if after you have read the pamphlet if you think it is of sufficient importance to read the little pamphlet I have printed here, I shall be very glad to obey the call of the committee and to appear especially on questions that you have discussed here this morning about the farm mortgages. I have studied that question thoroughly, and I think possibly I might give you some enlightenment in regard to that— views that perhaps may not have occurred to outside people. You have here, in the fourteenth section, under the head of “ Re discounts,” this language: * * * but such definition shall not include notes or bills issued or drawn for the purpose of carrying on or trading in stocks, bonds, or other investment securities. * * * Senator Shafroth . W hat page is that ? Mr. Dos P assos. That is under the heading “ Rediscounts,” I have it on page 120 of this book here. Senator P omerene . That is the Glass report, I think. The Chairman . That is the report of the House, page 120. It is section 14 of the bill and page 24. Mr. Dos P assos. This language that I have read here— * * * but such definition shall not include notes or bills issued or drawn for the purpose of carrying or trading in stocks, banks, or other investment securities, * * * W hat does that mean? The aim of the author of that language, I assume, is to exclude banks from lending on securities of the stock exchange, but it is very ambiguous and will give rise to enormous discussion, both among the lawyers and everybody else who read this passage. If you want to exclude or prevent' or prohibit the banks formed under this law from loaning money on securities dealt in on the stock exchange, I think you had better say so plainly. I am in favor of that to a certain extent, and yet I am supposed to represent Wall Street interests. I believe to-Sav if you pass a law by which the stock exchange would be excluded from participating in the proceeds of banks you would do something for tne benefit of the stock exchange and you would not have to legislate in regard to currency at all. Senator R eed . How would it benefit the stock exchange ? Mr. Dos P assos. The stock exchange would not be required to borrow money, but do as they do in London and Paris. The Chairman . Bimonthly ? Mr. Dos P assos. Bimonthly; and if thev did that the whole busi ness of currency and rates of interest would be settled, and you would never hear of tightness of money. Where does that all come from, this tightness of money? You have not gone into that aspect of the matter. BANKING AND CUREENCY. 493 Senator P omerene. Y ou mean “ tightness” of money as it has to do with operations in W all Street? Mr. Dos P assos. Everything; that is when interest goes up to 100 or 200 or 300 or 500 per cent, which is a thing absolutely unheard of in London and in Paris. Senator R eed . Y ou do not expect to cover such a subject as that in 10 minutes ? Mr. Dos P assos. No. The Chairman. When could you return, Mr. Dos Passos ? Mr. Dos P assos. I will come here Friday. Would that suit you ? Senator Shafroth. He had better come Monday. Senator P omerene. I suggest that we wire him when he shall come. Mr. Dos P assos. I am going to sail for Europe on the 24th of this month, and, of course, I would not be able to get here next week, but I can come back here on Friday and I shall do it with great pleasure. Senator Shafroth. I think that is all right. The Chairman . Will it suit the convenience of the committee to hear him on Friday ? Senator Shafroth. I think so. Mr. Dos P assos. I will leave a number of copies of this article of mine, which will open up the subject to you, so that you will be able to examine me with a great deal more skill. The Chairman . Very well. Mr. Dos P assos. I am obliged to you for allowing me to intervene for a moment. (The document filed with the committee by Mr. Dos Passos follows:) T he R e l a t io n of th e Sto ck E xchanges to the C u r r e n c y Q u e s t io n . [By John R . Dos Passos, of New York City.] The pith of the President’s views on currency reform is contained in these words in the message which he personally read to Congress: “ Our banking laws * * * must not permit the concentration anywhere in a few hands of the monetary resources of the country or their use for speculative pur poses in such volume as to hinder or impede or stand in the way of other more legiti mate, more fruitful uses.” Without questioning the general necessity of a new system for banking and cur rency, and without criticizing the remedies or language of the new measure intro duced in Congress by the distinguished chairmen of the Senate and of the House of Representatives, Messrs. Owen of Oklahoma and Glass of Virginia, 1 venture to suggest a method by which “ the concentration * * * in a few hands of the money resources of the country or their use for speculative purposes” will be pre vented most effectually and which will not interfere with the reforms sought to be accomplished by the above or any other measures finally adopted. I believe that the first step toward true banking reform would be to divorce the transactions of the stock exchange from the banks—to prevent brokers from using the money of these institutions in speculative adventures. The operations of the exchange as now conducted require the banks of New York to furnish a vast sum of money to facilitate the business of its members. When one gives an order, for example, to purchase, say, 5,000 shares of New York Central Railroad stock in the stock exchange it involves the raising of, say, about $500,000, of which the customers’^ordinary margin contributes 10 per cent, $50,000, and 10 per cent, $50,000, is furnished out of the capital of the stock broker, making $100,000. As the broker must pay for the stock on the following day he is required to go into the money market and borrow $400,000 by the pledge of the 5,000 shares of stock bought. Now, as 85 per cent of the trans actions of the exchange are speculative, in the case put $400,000 is furnished by the banks to aid a purely speculative venture. And as one can very readily perceive, if 1,000,000 shares of stock are dealt with in a day, which has been a common occur rence, the aggregate sum of money drawn out of the banks would be simply colossal.