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' FILE COPY - LIBRARY A Plan for a Govern ment Central Bank Address of Mr. Frank A. Vanderlip President of the National Git^ Bank , of New York ' DELIVERED AT THE SECOND ANNUAL CONVENTION INVESTMENT BANKERS ASSOCIATION OF AMERICA OCTOBER THIRTY, NINETEEN THIRTEEN, IN CHICAGO https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis A Plan for a Government Central Bank Mr. Chairman and Gentlemen: It is coming home for me to come to Chicago. I used to sit on this side of the table when I was here (indicating the press side). I remember the first glass of champagne I ever saw was at the first banquet I reported. It is a great pleasure to look over this audience, to see the familiar faces of the men whom I used to interview, with whom I grew up and whom I have for years valued as the best friends I have. It is a delight to be here and I feel that I could not be here on any more important mission today than to talk with you about pending currency legislation. It is a subject that I have followed for a good many years and upon which I have made a good many speeches. For a time the speeches were rather in the air, rather academic, but today it is a subject that is on the table. A bill has passed the House of Representatives. The President of the United States says that the bill is adequate and in every way meets the needs of the people. It is now before the Senate for consideration and for final shaping into a statute. I have been particularly impressed with the imminence of it in the last fortnight, for I have spent three entire days before the Senate Committee on Banking and Currency, answering to the best of my ability the questions of the twelve members, and finally at the request of some of the members, preparing and presenting to the full Committee, a plan for a Central Bank. < ■ 1 The years of discussion which have been going on since I used to be here in Chicago have seen a crystallization of senti ment, a better understanding of the subject and the more com plete education of all of us, as to what is the matter with the present situation and as to what is needed to rectify present shortcomings. There is now pretty substantial agreement among https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis economists, among bankers and among politicians, in regard to the general principles that must be embodied in any sound legis lation. We used to think that an elastic currency was the one great thing that we needed. We only half appreciated the subject then. We know now that more important than that, is the crea tion of a central reserve reservoir. I think there is pretty universal agreement that that is the great fundamental thing which is necessary in our banking system. We need, in addition, a cur rency, which will expand and contract in accordance with the needs of commerce. We need some great institution or institu tions for rediscount, by the aid of which commercial paper will be made liquid so that a bank will know that if it has in its port folio good short term commercial paper it can always turn that paper into liquid assets. We are all agreed, too, that we want some extension of National bank rights so that they may have the power of accept ance—one of the fundamental necessities for the creation of a broad discount market. And we ought all to be pretty well agreed that this government should, in a spirit of honesty, treat the banks that hold government bonds which they have bought to secure circulation, on a basis which was above their invest ment value—I say, we should all be agreed that the honor of the government ought to lead legislation in the direction of properly caring for those bonds. There are then several principles that must be embodied in correct legislation. A bill whose framers have evidently under stood those principles has passed the House and in a consider able measure have embodied them. I have been quite widely quoted as having said that eighty per cent, of the bill is good. I believe that is true and I believe twenty per cent, of it is very bad. An eighty per cent, bill, a bill that is eighty per cent, good, is not good any more than an omelet made of five eggs in which four of them are good and one is bad, is a good omelet. Now as to what is the matter with this bad twenty per cent, of the House Bill. To my mind, there is one great overshadow ing bad feature; it is the provision for an issue of fiat money. That is what the bill provides. Make no mistake about it. It provides that the Government of the United States shall issue its demand treasury notes in the form of circulating money, without limit and shall loan those notes to banks. Safeguards https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2 have been thrown about the terms upon which the banks shall secure these notes. I believe on the whole those safeguards are sound and that the notes will under ordinary circumstances, and perhaps under most extraordinary circumstances, be good. There would be a possibility that they might not be good; that is to say, that the responsibility of the Government for their redemption—remember the Government is the maker of the proposed notes—that the responsibility of the Government for their redemption would involve the Government in serious liability at a time when it was in no position to meet that liability. Re member that these notes are being issued with absolutely no cover on the part of the Government. There is no Government reserve back of them. Provision only has been made for the security of the borrower, the bank. The Government has made no provision whatever. But while there is this danger, that under the terms of this law the Government might become in volved, there is a far greater danger in any entry upon the road of fiat issue. If the Government issues notes, calls them money, loans them to banks, it is but a step, after people have seen these notes apparently operating so as really to act as money, it is but a step, I repeat, toward their issue for some other purpose or under some other conditions. Let people who see these notes loaned to the banks and re-loaned at a profit, see the way in which they serve their purpose, and it will be but a short step to asking that they be loaned without the intervention of a bank, that they be loaned directly to farmer, to planter, to manufacturer, to merchant. There never has been a nation started on the road of fiat issue, that hasn’t gone on a road that led to a depreciation of the currency, and usually to national disaster. History is full of it. There isn’t a case where disaster has not followed that sort of issue, and that is the sort of issue which is now proposed. The last day I was before the Senate Committee on Banking and Currency, after I had completed the examination on the plan for a central bank, there was one more witness called by the Committee. He was gravely, respectfully listened to, and this is the proposition which he put forward: He said it was all wrong for banks to be run by private capital. There should be one Government bank; that all municipalities who undertook to do any work that they desired to do, should issue a non-interest bearing bond to the amount of the cost of such work, should https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 3 take that bond to Washington and get the par value of circulat ing notes upon it. Further than that, he said that every in dividual should be able to take his tax receipts to a local Govern ment bank—and there should be such a bank in every town of 500 inhabitants—and be able to get circulating notes to the full amount of his tax receipts. The gentleman who put forward those propositions was General Coxie, who once led an army on Washington. I tell you he was gravely listened to by twelve Senators, was asked numerous questions about his plan, and was finally asked to prepare his ideas in the form of a bill. Don’t doubt that a nation which starts on an issue of fiat money will find advocates for the wrong use of that money, and any use of it is wrong. It is not money. It is just a promise to pay on the part of the Government, and we are now proposing a promise to pay without any provision whatever for paying on the part of the maker of those notes. That, to my mind, is the greater part of the twenty per cent, that is bad, and it will spoil the omelet. But there are a good many other things in this House Bill that are unworkable. The framers of that bill recognized clearly that they must have one central reservoir, but they were working in the shadow of a platform which denounced the bill prepared by Mr. Aldrich and which said that the Democratic party was opposed to a central bank. They have, therefore, prepared a bill providing for twelve regional banks, twelve separate institu tions, but they recognize the principle of a single reservoir, and so, properly enough, they give to a central Federal Board authority to compel one bank to loaG to another. Now, that is absolutely obnoxious but absolutely necessary, if you have twelve banks and recognize that you must have one central reservoir. It is the only way that that central reservoir can be created out of these twelve banks. They have got to be piped together with a force pump and the force pump is put in the hands of a political board. The bill provides that banks shall be compelled to subscribe to an unliquid security, that they shall be compelled to subscribe twenty per cent, of their capital to a security that they cannot sell, that is more unliquid than any type of security that we https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4 have today, because they cannot sell it at any price. They must hold it dead in their assets. In providing twelve banks they must of necessity have com paratively circumscribed areas. The vital principle of this central reserve plan is that there shall be a reserve center into which there shall be contributed the reserves of banks from many localities operating under varying conditions. This central reservoir may thus be made useful at one time in one part of the country and at another time in another part of the country where the pressure falls, and at the time when there is pressure at one point there will be a condition of surplus in another. Any scheme of creating as many as twelve banks will mean that the area in which some one or several of these banks operate, will be an area of similar climatic and crop conditions, an area in which there will be the same sort of pressure coming at the same time upon every bank in that region. It is therefore absolutely in evitable that under such a scheme there will be almost universal pressure in some one region upon the bank in that center, and it will not be able to withstand that pressure. Anything that raises doubt about the position of any one of these twelve banks will raise doubt about the position of all of them. Anything that leaves the great uncertainty in the management of any one bank that must result from the power of a disassociated board to compel that bank at some unforeseen time to loan to another bank, will bring disaster upon both banks. The scheme is unworkable in that form. The principle of the central reserve is recognized and there has been an effort both to recognize it and to disguise the fact. Now, I believe there is a method that will not be open to any objection on the part of the economist, not open to very many objections on the part of the banker, and will still meet the political exigencies of the situation. That is the plan which at the request of three members of the Senate Committee, I outlined to that Committee a few days ago. I will only very briefly sketch that plan. It is for the creation of one central bank with a capital of, let us say, $100,000,000. The stock representing that capital may very properly all be owned by the Government. The cheap est, the most economical way would be for the Government to own that stock and to raise the money by the issuing of the lowest https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 5 interest rate bond that will float. If it is undesirable for the Government to invest $100,000,000 in this way, let the stock be offered to the public at popular subscription, and allotted, if you like, to the smallest subscribers first so as to get the widest sort of distribution. It would make a security that amounted to a Government annuity and would, I believe, be very popular. I think there would be no trouble at all in floating the stock of such a bank at probably a five per cent, dividend rate. I would put the management of that bank solely in the hands of a Government board. That is a proposition that I think bankers will perhaps draw back from at first. The board that is provided by the House Bill is a political board. It is intentionally a political board. Three of the seven members are to be members of the President’s official family, two members of the Cabinet and the third a subordinate of one of the members of the Cabinet, the Comptroller of the Currency. There are the strongest argu ments against any ex-officio members in such a board. The argument is doubly strong against having the Comptroller of the Currency a member of such a board. The Comptroller of the Currency bears a peculiar relation to the national banking system. He ought not to stand in a double relation of comptroller of national banks and a member of that board. He certainly, as a subordinate of the Secretary of the Treasury, ought not to occupy a position on the board equal to the Secretary of the Treasury, thereby virtually giving to that official two votes. I would have a government board appointed for a long term. My suggestion was for fourteen years, a board of seven appointed for fourteen years, with the terms so arranged that the term of one director would expire every two years. I would have the law stipulate that in making these appointments the President is directed to make them from among men qualified by experience for the position and under no circumstances to make such appoint ments as political rewards. I believe that a board so constituted would give continuity of management and would give experienced management. It might be somewhat lacking in experience at the time of the first appointment, but the men would become experienced very rapidly if they were men of the right character. We would thus have a board of long continuity which was re moved from any partisan politics. With a board appointed for such terms a President, even at the end of eight years in the https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 6 White House, would only have been able to change a majority of the board. It would only be at the end of an eight-year term that he could by any chance change a majority, unless vacancies had been made before then. Such a board would bear some relation in its character to our Supreme Court. It has been suggested that the board which the House Bill provides would be comparable to our Supreme Court. It would be no more comparable to our Supreme Court than our Supreme Court would be a correctly constituted body if you put the Attorney General, shifting with each administration, upon the Supreme bench. With a central bank governed by such a board, em powered to have as many branches as you like, because no prin ciple would be involved in the question of the number of branches, where there is the most vital principle involved in having many regional banks, each operating independently. With an institu tion so officered, provided with as many branches as the business of the country needed, I believe there could be brought to the service of the banks and to the service of commerce, the proper sort of an institution for rediscount, for the creation of a national clearing house, which would be a great economy to commerce, and for the proper issue of bank notes providing a truly expansive currency which does not involve the credit of the Government. A great wing of the Democratic party holds that the Govern ment should control the creation and issue of currency. I am not in accord with that view; but with such an institution as I suggest you would have a proper bank note, with the bank the maker and the sole redeemer, and still have the volume of currency controlled by the Government, for every officer in this bank, every employee from Governor to assistant janitor, would be a public officer. You understand, of course, that I would give to the stock of the bank absolutely no privilege but the receiving of dividends. It would make no difference who held it. It might be scattered in the smallest holdings; it might be accumulated by a single capitalist; it would not matter at all. The control would lie entirely with this board appointed for long terms and con sisting of men experienced and qualified for the work. There, then, is the difference between the two plans. It seems to me that the difference when once understood will appeal irresistibly to the intelligent judgment of the public, as I know it appealed to the intelligent judgment of every member of that https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 7 committee. I know that they were convinced at the end of the hearing that it was a sound plan. It did not appeal to the political judgment of a minority of the committee. There are some pretty grave barriers on the political side. The Democratic platform has declared unequivocally against a central bank. Wfliat the framers of the phrase in the platform had in mind, was undoubt edly a central bank owned by banks. It seems to me that even the makers of that plank in the platform might reconcile their views to the creation of a central bank owned by the people and operated solely by public officials; a central bank in which the banks had no controlling influence. It is a grave barrier that the House has adopted the theory of regional institutions. They did that not because they did not understand the principle of a central reservoir, but because they wanted to get away from the political idea of a central institution. They believed, that while recogniz ing the central reservoir principle they could create twelve regional institutions and through obnoxious power given to a Federal board to compel one bank to loan to another, could have in effect a central bank without the name. It was not an honest scheme in that respect and it is not a workable scheme. There is a grave barrier, as I say, in this fact that the House of Representatives has created this plan for regional reserve in stitutions, and has given it approval. There is perhaps even a greater barrier in the attitude of the President himself, who, while perhaps not understanding the subject any too thoroughly— at least he has not discussed the subject with bankers—still holds firmly to the plan that the House has passed. And I doubt if we have ever had a President with greater influence over Congress than we have in the White House today. If we can convince the Senate that public opinion understands the subject, that it sees the danger that lies in the plan which has passed the House, that it sees the advantage in a plan which will measure up to sound economic ideas, we can get sound legislation. Many of the Senators are wedded to the other plan, not because their intellect tells them that it is the proper plan, but because political expediency guides them in that direction. We are face to face with final action. The President hopes that action will be taken in the next thirty days. He has said this was assured. His political wisdom is very great. I doubt, however, if he is correct in this particular. I do not believe a https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 8 plan that has in it the inherent weaknesses that this House Bill has, can be passed by the Senate in the next thirty days. The Senate is still a deliberative body with freedom of speech, and I know that many Senators will have much to say before they will permit a piece of legislation that starts us on the road of fiat money issue, that creates twelve regional banks to do the work that can only be properly done by one and then in effect, try to make it one by an improper method. I believe that if public opinion is aroused—and this hall would not be as fpll as it is if it was not aroused—I believe if public opinion makes itself felt in Washington, as it will, and as it has been doing, that we will get good currency legislation. I still have faith in our legis lative methods, and I do not believe that any law which comes as near to the welfare of the people as this—and no law could come nearer—can be passed without thorough consideration, and in the end, I believe it will be a good law. I have seen the process of education go on with this committee until, let me tell you, they understand the subject pretty well. If you sit before them day after day and be questioned by them you will come to the conclusion that they have grasped pretty fully the general prin ciples that should be discussed in framing such legislation. They know what really ought to be done. Now, make them see what is politically the thing to do, make them see that this country understands the subterfuge of the present bill and I believe we will get sound legislation. I have been accused of dragging a red herring across the path and trying to confuse the political situation. Nothing is further from the truth. I have volunteered nothing. I only appeared before the committee at their request. I have only presented a plan which three members of the committee asked me to devise. I have not delayed the presentation of that bill to some psychological moment that might confuse political con ditions, I presented it on the day they asked me to present it. If there has been any upsetting, any turning up side down of political affairs because of this, it is because the political condi tions were wrong side up. They would not have been turned up side down otherwise. Now they have been turned up side down to some extent. There was a strong hope a few days ago that this committee would make a unanimous report, and I believe that expectation was well grounded. I am inclined to think if https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 9 several members of that committee had not come to see the necessity for a single central bank, there might have been a unanimous report for this bill, though not in its present form; There isn’t a member of the Senate Committee that believes the bill is workable as it stands. I can state that positively. They know it is not a workable bill as it stands.. They have received many recommendations for its amendment. They have received many from me. They asked me to prepare such amendments to the bill as I thought desirable without changing its general form, and I have recommended, if we can’t have a central bank, the reduction of the number of regional banks to three, and I have made many other recommendations. But a central bank is the correct solution; it is the only correct solution. In effect, they are providing for a central bank under another name. I believe a central bank is the only way in which we can by any chance, now escape from an issue of fiat money. I think under the dominance of Mr. Bryan, there is such a strong wing of the Democratic party wedded to the idea that the Government should control the issue and the volume of currency that we can get no legislation that does not give the Government such con trol. That cannot be done safely under the present plan. It will start us on a road which I believe, will lead to national disaster. It can be done safely with a Government-controlled central bank. A note can be issued that will be the obligation of and will be redeemable by, that bank and by that bank alone, and still the tendency of the Democratic party in regard to the issue and control of the volume of currency by the Government, will not be violated. I think the road both to correct economic legislation and to the possibility of keeping within the political tenets of the dominant party lies in that direction. I recognize clearly as I have outlined, the barriers, but if groups of men like this can be brought to understand it, if you will transmit your influence to Washington, and you can do it, and you know how, and it wants to be done forcefully and quickly, we will get sound legislation. I have no desire whatever to defeat legislation. I have the strongest desire for early legislation, but I have no desire for early or late legislation that is bad. This is a great moment. This is a great opportunity. The stage is set now for legislation and there is the possibility of securing legislation that will be of such benefit to this country that these figures Mr. Hill has been https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 10 relating would not measure the good that it will do us. I will take second place to no one in my belief in the benefits that such legislation will effect. It will place this nation in its proper place both as to the commerce of the country and in international finance. Without it, that is impossible. Without it, we must go on always fearing our periodical panics. But with it we will mobilize credit, we will mobilize commercial paper so that the banking capital of the country can be properly devoted to com merce instead of as now, partially devoted to the carrying of stock exchange securities, not because banks want to carry so many of them but because they have to under our present system. I believe that proper legislation will give us first place in the world in international finance. I know something of the attitude of European bankers. I know how they are watching this legis lation and what they expect of us if correct legislation is obtained. We want legislation. We want it now. But we want it right. The Senate of the United States very well understands what is right. You make them see that what is right is politically ex pedient and you will get it. The barriers in the way are by no means insurmountable, and it will only take for its accomplish ment the vigorous work of, I might almost say, this group of men with the interests that they represent, with the investors that they serve. If you will transmit the force of right opinion to Washington and do it promptly you will get legislation that will measure up correctly to the ideas of the economist and which it is possible for the dominant party even with its political tenets to pass. I hope that you will exercise the greatest force and the greatest activity in bringing that pressure to bear upon Wash ington which will accomplish that result and which is sure to be of untold benefit to the country. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 11