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BANKING AND CURRENCY.
1209
$105,000,000 capital immediately and lock it up and let it stay there
for six months you of necessity will compel a contraction of credit.
You are forcing the banks to contract their loans. I assume, of
course, that banks being organized would simultaneously loan their
funds as well as receive them. It would be wrong in theory—in
principle, for the regional banks to receive payment of their capital
to the extent of $105,000,000. That $105,000,000 will support the
credit of eight times its amount and the business of the country
needs it.
Senator B ristow . They could not loan back but two-thirds of it.
Mr. B lin n . They could loan their entire capital. They do not
carry any reserve on capital. They can loan their entire capital.
vSenator B ristow . That is, if a bank at Salina, Kans., became a
stockholder, with its capital, we will say, $100,000. It would be com
pelled to subscribe for $20,000 of capital; but $10,000 would be paid
in within the first few days, and then 5 per cent of its deposits. You
figure that would simply be a transfer of paper, do you not?
Mr. B lin n . Not in a country bank; no, sir. I figure that a country
bank would pay part cash and the balance would be paid by drawing
a check on its correspondent.
Senator B ristow . Does not that take from the country bank a part
of its resources ?
Mr. B lin n . N o, sir. It does not take any of its loaning ability
whatever. In other words, the reserve which it is obliged to carry
is decreased in amount.
Senator B ristow . But that is not equivalent to its capital sub
scription and its deposit of 5 per cent.
Mr. B lin n . The country bank will be able to take care of all those
payments through the payment of cash in excess of its new reserve,
and by drawing upon its correspondent for the balance in excess
of what it will need. For business needs under the new plan the
bank will not be obliged to rediscount a dollar.
I have a reserve summary here. The country banks at the pres
ent time are carrying excess reserves to the extent of $216,000,000.
Under the new plan when the varying period for our excess re
serves------Senator B ristow . Y ou are talking about this varying period.
Mr. B lin n . Yes.
Senator B ristow . I am talking about the period of transition.
Mr. B lin n . They have excess reserves to-day of $36,000,000 of
cash and $180,000,000 of all issues, a total of $216,000,000.
Senator B ristow . That is an excess over the legal requirement.
Mr. B lin n . Yes; that is in excess over the legal requirements.
Senator B ristow . That excess is needed in our business transac
tions of the country, is it not ?
Mr. B lin n . Yes.
Senator H itchcock. If you will permit me to ask a question or
two, Senator Bristow, I think I will be able to clear up what you are
getting at.
Senator B ristow . Certainly.
Senator H itchcock. The question Senator Bristow and I have
been interested in is whether, under the terms of this bill, in the first
place these banks will not be required to put up $105,000,000.
tinder the provisions of this bill the first thing will be an organiza
tion committee, organized here in Washington. They are permitted
1210
BANKING AND CURRENCY.
three months in which to organize the country into 12 districts, and
after they have been organized the banks will then be invited to
become members. When a sufficient number of banks have decided
to become members to organize the 12 districts the following pro
vision will then take place:
Every national bank located within a given district shall be required to subscribe
to the capital stock of the Federal reserve bank of that district a sum equal to 20 per
centum of the capital stock of such national bank fully paid in and unimpaired, onefourth of which subscription to be paid in cash and one-fourth within 60 days after
said subscription is made.
Senator N e l s o n . That means cash; it does not mean paper.
Senator H i t c h c o c k . That means 10 per cent of the cash of the
bank’s capital must be paid in within 60 days. You have not got
vour reserve association organized even yet, because after the stock
holders have themselves been established they have to elect the
directors, and under a computation which I have had made it will
take three or four months to elect the directors.
Senator H o l l i s . Senator, do you think the words “ to be paid in
cash” mean that they must put in the cash? When you buy goods
you have time to make your payment. Of course, it is said that you
ay cash; but time, reasonable time, is allowed. I think that might
e the meaning which could be given to that language here.
Senator H i t c h c o c k . If it provides that you are to pay in chips
and scraps I think it should be so stated in the bill. We are assum
ing that we are going to organize with a capital here. It is not to
be a Christian Science capital or an imaginary capital.
Senator H o l l i s . They might pay notes which they could turn into
cash.
Senator H i t c h c o c k . I think Mr. Blinn has correctly stated it
when he said that a bank in the West is either going to be forced to
ship the cash or to draw a check upon its reserve agent.
Senator B r i s t o w . H o w would you define a measure to require a
cash payment ? What language would you use, that could properlv
be added to the bill ?
Senator H o l l i s . I would change these words here. I would have
a bill drawn so that they could go there with commercial paper and
deposit it.
Senator H i t c h c o c k . T o whom would that commercial paper be
submitted ? No directors have been elected.
Senator H o l l i s . I would have the bill so arranged.
E
Senator H
directors.
it c h c o c k .
Y ou
have no organization.
Y ou have no
Senator H o l l i s . Well, the bill is here to be perfected. We are
now getting some good ideas. I would make this bill meet that
situation.
Senator H i t c h c o c k . I am talking about the bill as it is.
Senator N e l s o n . Then the bank would start practically with com
mercial paper, and it would not have any kind of money to redeem
its pledges.
Senator H o l l i s . It must have the money before it begins business.
Senator H i t c h c o c k . So that this bill provides for the payment of
$105,000,000 cash months and perhaps a year before the reserve
banks are going to be ready for business.
Mr. B l in n . That seems to be the fact; yes, sir.
BANKING AND CURRENCY.
1211
The C h a i r m a n . Mr. Blinn, I will ask you if the country banks
could not check that money out of the reserve city banks—-out of the
reserve released in the reserve city banks—without any harm to the
reserve city banks whatever ?
Mr. B lin n . A s I said before, they must provide $220,000,000 from
some source.
The C h a i r m a n . Your theory proceeds upon a period 38 months
distant. I am speaking of the immediate present. I want to pall
your attention to the net deposits of the 52 reserve city banks which,
on the June statement, are $1,568,000,000. Under the terms of this
bill the relinquishment of 7 per cent of that, which is now in bales
of money in the vaults and in sacks of gold in the vaults, and which
are not used but which are simply reserved there, would be releasing
7 per cent of $1,568,000,000.
Mr. B l in n . H ow do you figure 7 per cent?
The
Ch a ir m a n .
The difference between 18 and 25.
Mr. B lin n . N o ; that is not cash. The difference is between 12£
and 9 per cent, or
per cent.
The Chairman . The total reserve of the central reserve cities is
what I refer to.
Mr. B l in n . Y ou are speaking of the total reserve of the central
reserve cities.
The C h a i r m a n . I am speaking of the central reserve city banks.
The central reserve city banks are required to pay 25 per cent.
Senator H i t c h c o c k . That is releasing seven twenty-fifths of the
whole.
The C h a i r m a n . It is releasing seven twenty-fifths o f $1,568,000,000,
which would more than furnish the amount required for this purpose.
Senator H i t c h c o c k . I would like to ask the chairman before his
question is answered when that release will occur.
The C h a i r m a n . That release begins to occur in 60 days.
Senator H itchcock . Sixty days from what?
The Chairman . From the beginning of the organization.
Senator H i t c h c o c k . After they are ready for business ?
The C h a i r m a n . Yes; after thoy are ready for business.
Senator H i t c h c o c k . I am talking about the time before they are
ready for business.
The C h a i r m a n . I think the real thing which should be sought to
be accomplished in the matter is to correct this bill as to these periods
of time and not to be simply criticizing the measure. It is obviously
the necessity of the case that we must perfect the measure; but the
central reserve city banks which now carry 25 per cent would release
7 per cent, even if there was not a dollar of rediscount. I concede
that there may be some delay about prompt rediscounting with some
banks, but not all of them.
Mr. B l i n n . The chairman is correct, if the new reserve require
ment becomes a law that $284—that is not the figure. I have it
down 10 per cent cash. There would be 7 per cent of the reserve,
which would amount to practically the $105,000,000 which is re
quired to be paid in for the capital.
Senator H i t c h c o c k . I am seeking to establish the fact that the bill
at the present time provides for the payment of $105,000,000 capital,
within 60 days from the time the banks subscribe it, which is months
before the directors are elected and months before the proclamation of
I
1212
BANKING AND CUERENCY.
the Secretary of the Treasury that the reserve organization has been
made, and that is evidently the condition of the bill now, I think.
The new reserve requirements do not go into effect until the Secretary
of the Treasury shall have officially announced in such manner as he
may elect the fact that a Federal reserve bank has been established
in a designated district. He can not possibly announce that fact
before the directors are elected, before an office is opened, and before
the bank is ready for business. So, I say, that the $105,000,000 has
to be paid in, according to the terms of the bill, long before any
individual bank can by any means get any possible benefit out of it.
The Chairman . I would like to call the attention of the Senator
from Nebraska to the fact that under this bill any national bank has
12 months in which to come in, and it does not have to subscribe
within 12 months, and even within that time they may, and will
doubtless, subscribe from time to time at their convenience, according
to the will of the various directors; but so far as these reserves are
concerned, under this bill in its present form on page 38, it is provided
that within 60 days after the date fixed by the Secretary of the
Treasury the reserve shall be reduced to 18 per cent. 'That will
release 7 per cent, or $768,000,000, more than sufficient to imme
diately provide for this, if necessary, without any discounts whatever.
Besides that the discounts which would be available under the public
funds of $200,000,000, two-thirds of which would be capable of being
loaned, would furnish a further sum of cash which would be available,
if necessary, to put into the banks. It might not need the cash be
cause it could get the rediscounts immediately. I merely say that
much in defense of the bill in its present form.
Senator W eeks . That is assuming that the reserve banks were
immediately organized and ready for business. I assume that until
the banks are organized the stock will not be paid in, and I think we
may reasonably assume that.
Senator B ristow . But in this process of organization, in the col
lection of $5,000,000 capital for each bank-----Senator Shafrotii. D o you mean for each bank?
Senator B ristow . Yes; I am speaking of the individual bank.
During that period the banks have to be ready. They do not know
when this may be perfected, and it seems to me inevitable-----The Chairman . I would say to the Senator from Kansas that the
country banks have with reserve agents $496,000,000, which they can
check on.
Senator B ristow . D o you not think that the country banks have
use for that money ?
The Chairman . N o ; they are getting 2 per cent on it.
Mr. B lin n . I think they get more than 2 per cent at home.
The Chairman . I merely wish to point out these facts in view of
the criticism which has been made of the bill.
Senator H itchcock. But the reserves are to be called for before
the reserve bank is ready for operation.
The Chairman . The theory is that within 60 days after the declara
tion is made these reserves will be loaned.
Senator H itchcock. It is at least 60 days after the reserves are
made and the system is in operation.
The Chairman . Incidentally there is a reduction of 5 per cent,
which would meet the contingency.
1213
BANKING AND CURRENCY.
Are there any other questions members of the committee wish to
ask Mr. Blinn ?
Senator W e e k s . I want to ask Mr. Blinn one question. As a cir
culating medium, are you in favor of Treasury notes or bank notes ?
Mr. B l i n n . I am strongly in favor of bank notes. I do not like
the idea of their being Treasury notes. I have avoided that subject,
however, for the reason that one of the subsequent speakers will
dwell on it.
The C h a i r m a n . If there are no further questions, we will ask the
next witness to proceed.
(The statements mentioned by the witness are as follows:)
Abstracts of comptroller’ reports— Bank stati i .
s
st cs
[ A m o u n t s are in m illio n s o f d o lla r s .]
A ll b an ks.
D e p o s it s .
D a te.
Loans.
In v est
m e n ts .
C a sh .
I n d i
v id
u a l.
T o t a l.
N e t.
Bank
paym en ts
and
r e d is
cou n ts.
R eserve.
L e g a l.
A c t u a l.
C a sh .
N um
ber
ban ks.
C a p i
ta l,
su r
p lu s ,
and
p r o fit .
1906.
S e p t . 4 ____
N ov . 1 2 ...
4,331
4 ,419
675
666
626
634
4,2 0 0
4,289
5,897
6,031
4,927
4 ,970
48
44
P .c t.
2 0 .70
2 0 .80
P . ct.
2 5 .72
2 5 .48
P . ct.
12.70
12.75
6,137
6,1 9 9
1,505
1,535
1907.
J a n . 2 6 ____
M ar. 22___
M a y 20____
A u g. 2 2 ...
D e c . 3 .........
4,505
4,572
4,664
4 ,709
4 ,622
659
682
679
700
705
695
656
691
701
660
4,115
4,269
4,322
4,319
4,176
5,952
6,061
6,190
6,076
5 ,800
5 ,1 5 4
5 ,140
5,225
5,256
4 ,906
27
35
39
59
101
21 .5 3
20.74
21.22
21.33
21.31
26.87
25. 45
25. 79
2 5 .5 6
2 4 .7 2
13.48
12.76
13.22
13.33
13.45
6 ,2 8 8
6 ,3 4 4
6,4 2 9
6 ,5 4 4
6,6 2 5
1,551
1,579
1,604
1,631
1,651
1908.
F e b . 14___
M a y 14___
J u ly 15___
S ep t. 2 3 . ..
N ov. 2 7 ...
4 ,4 5 2
4,551
4 ,640
4,781
4 ,879
714
735
765
799
803
788
861
849
868
844
4,105
4,3 1 2
4,374
4 ,548
4,720
5,924
6 ,1 8 8
6 ,330
6,617
6 ,804
5 ,0 3 8
5 ,296
5 ,464
5 ,695
5,773
51
38
42
53
39
23 .4 7
23 .9 4
23 .1 9
22.97
22 .3 2
2 8 .14
28.41
27.81
2 8 .29
2 7 .30
15.64
16. 25
15.53
15. 24
14.62
6,6 9 8
6 ,7 7 8
6 ,824
6,853
6 ,865
1,648
1,670
1,667
1,689
1,700
1909.
F e b . 5 .........
A p r . 28___
J u n e 23___
S e p t . 1 ___
N ov . 1 6 ...
4,869
4,987
5,061
5,158
5 ,190
839
865
877
898
870
860
878
885
854
804
4,699
4,826
4,898
5,009
5 ,120
6,836
6,934
7,009
7,079
7,056
5 ,898
6 ,018
6 ,074
6,164
6,046
24
28
34
50
43
22.36
2 2 .38
22.37
21.67
21.31
27.82
2 7 .20
2 6 .96
26.05
25.26
14.58
14.58
14.57
13.85
13.29
6,887
6,893
6 ,926
6,977
7 ,006
1,700
1,729
1,744
1,746
1,779
1910
J a n . 3 1 ____
M ar. 29___
J u n e 30___
S e p t . 1 ____
N ov . 1 0 ...
5,263
5 ,464
5,455
5,496
5,497
846
847
850
854
856
833
834
820
851
816
5 ,190
5,227
5,287
5,145
5 ,304
7 ,208
7 ,265
7,257
7 ,140
7,261
6,163
6 ,320
6 ,196
6,247
6 ,206
34
41
69
91
71
21.47
21.21
21.22
21.57
2 1 .18
2 5 .52
2 5 .24
2 4 .44
2 5 .19
2 4 .75
13.51
13.19
13.23
13.62
13.14
7 ,045
7,082
7,145
7,173
7 ,2 0 4
1,779
1,825
1,851
1,876
1,899
1911.
J a n . 7 .........
M ar. 7 .........
J u n o 7 ........
S e p t . 1 ____
D e c . 5.........
5,443
5,588
5,634
5,690
5,695
884
927
995
1,018
1,026
836
908
946
895
863
5,113
5 ,304
5,478
5,490
5,536
7,156
7,576
7,675
7 ,628
7 ,675
6,267
6 ,618
6 ,689
6,684
6 ,670
44
33
46
78
64
2 1 .40
21.67
22.10
21.36
21.05
25.33
26.52
26.10
2 5 .05
2 4 .72
13.33
13.72
14.14
13.39
12.93
7,2 1 8
7,2 1 6
7,277
7,301
7,3 2 8
1,892
1,909
1,933
1,929
1,958
1912.
F e b . 2 0 ....
A p r . 18___
J u n e 14___
S e p t . 4 ____
N ov. 2 6 ...
5,833
5 ,902
5,973
6,061
6,0 8 5
1,029
1,028
1,046
1,040
1,037
950
931
945
896
859
5,630
5,712
5,825
5,891
5,944
8,067
8,015
8,064
8,130
8,109
7 ,030
6,997
7 ,050
7,093
7 ,035
40
44
58
82
72
2 1 .44
2 1 .30
21.35
2 0 .69
2 0 .35
26.24
2 5 .39
2 4 .94
24.57
2 3 .89
13.51
1 3 .30
13.40
12.63
12.21
7,339
7,355
7,372
7,397
7 ,420
1 ,958
1,978
1,984
1,989
2 ,0 1 5
1913.
F e b . 4 .........
A p r . 4.........
J u n e 4 ..
A u g . 9 ____
6,147
6 ,198
6,162
6,187
1,044
1,051
1,050
1,040
933
888
914
899
5,985
5,969
5,953
5,761
8,361
8,227
8,144
7 ,948
7,277
7 ,219
7,124
7,097
51
56
73
109
20.91
2 0 .44
2 0 .95
2 0 .72
2 4 .99
2 3 .99
2 4 .02
2 4 .01
1 2 .82
12.30
12.82
12.67
7,425
7 ,440
7,473
7 ,488
2 ,0 0 8
2,027
2 ,046
2,041
1214
BANKING AND CURRENCY.
A b s tr a c ts o f c o m p tr o lle r ’s rep o rts— B a n k sta tistics —Continued.
[A m o u n t s a re i n m il l io n s o f d o lla r s .]
C e n tra l r e s e rv e b a n k s .
D e p o s it s .
L oa ns.
In v est
m e n ts .
C a sh.
R eserve.
In d i
v id u a l.
T o t a l.
N e t.
1906.
S e p t . 4 ..............................................................................
N o v . 1 2 ............................................................................
1 ,017
983
159
156
282
281
866
846
1,639
1,611
1,172
1,129
P e r cen t.
2 4 .37
25.31
1907.
J a n . 2 6 ..............................................................................
M a r. 2 2 .............................................................................
M a y 2 0 .............................................................................
A u g . 22.............................................................................
D e c . 3 ...............................................................................
1,054
1,039
1,097
1,061
1,112
150
157
150
159
177
322
294
325
311
252
666
770
794
739
783
1,486
1,548
1,642
1,508
1,532
1,222
1,180
1,241
1,205
1,157
2 6 .74
2 5 .26
2 6 .5 0
2 6 .18
2 2 .2 0
1908.
F e b . 14.............................................................................
M a y 1 4 .............................................................................
J u l y 1 5 .............................................................................
S e p t . 2 3 ............................................................................
N o v . 2 7 ............................................................................
1,072
1,139
1,196
1,243
1,297
178
182
191
199
190
355
418
413
432
410
761
886
889
961
1,059
1,616
1,797
1,849
1,968
2,059
1,259
1,424
1,501
1,572
1,595
1909.
F e b . 5 ................................................................................
A p r . 2 8 .............................................................................
J u n e 23.............................................................................
S e p t . 1 ..............................................................................
N o v . 1 6 ............................................................................
1,286
1,300
1,309
1,307
1,193
197
202
198
210
202
404
413
434
409
356
965
1,011
1,028
1,038
1,015
1,986
2 ,018
2 ,057
2 ,029
1,876
1,586
1,619
1,635
1,624
1,432
25.73
2 5 .76
26 .8 2
25.44
25.19
1910.
J a n . 3 1 ..............................................................................
M a r. 2 9 .............................................................................
J u n e 30.............................................................................
S e p t . 1 ..............................................................................
N o v . 1 0 ............................................................................
1,246
1,300
1,246
1,277
1,210
182
179
184
188
185
382
376
361
400
349
1,070
1,014
1,076
961
988
1,994
1,922
1,975
1,982
1,848
1,496
1,527
1,462
1,515
1,391
25.88
24.92
24.96
26.68
25.44
1911.
J a n . 7 ................................................................................
M a r. 7 ...............................................................................
J u n e 7 ...............................................................................
S e p t . 1 ..............................................................................
D e c . 5 ...............................................................................
1,206
1,350
1,339
1,321
1,250
203
218
246
245
246
363
437
455
429
379
819
953
1,050
1,043
956
1,740
2 ,029
2,103
2,037
1,913
1,423
1,647
1,679
1,640
1,522
25.83
26.77
27.37
2 6 .00
2 5 .16
1912.
F e b . 2 0 .............................................................................
A p r . 18.............................................................................
J u n e 14.............................................................................
S e p t. 4 ..............................................................................
N o v . 2 6 ............................................................................
1,410
1,397
1,410
1,384
1,298
228
216
223
218
212
457
431
448
403
367
1,001
1,021
1,092
1,056
1,021
2,155
2,084
2,1 2 8
2,0 5 6
1,934
1,741
1,685
1,725
1,647
1,521
26.49
25.87
26.19
24.74
24.39
1913.
4 ...............................................................................
4 ...............................................................................
4 ...............................................................................
9 ..............................................................................
1,388
1,359
1,316
1,375
218
209
211
211
425
383
405
407
1,031
984
975
900
2,097
1,968
1,946
1,892
1,678
1,592
1,568
1,619
2 5 .58
24.33
26.12
25.41
F eb.
A p r.
June
Aug.
'
„
S,
28.62
29 .7 0
27.85
27.81
25 .9 8
1215
BANKING AND CURRENCY.
Abstracts of comptroller’ reports— Bank statistics— Continued.
s
[ A m o u n t s a re in m illio n s o f d o lla r s .)
R eserv e ban ks.
D e p o s it s .
L oa ns.
In vest
m en ts.
Cash.
In d i
v id
u a l.
T o t a l.
N e t.
Bank
pay
m e n ts
and
r e d is
cou n ts.
R eserve.
L e g a l.
A c t u a l.
1906.
S e p t . 4 .........................................................
N o v . 1 2 ........................................................
1,166
1,208
157
147
166
167
985
1,015
1,672
1,725
1,370
1,372
11
11
P .c t.
24.52
2 4 .32
P . ct.
27.87
2 6 .72
1907.
J a n . 2 6 ..........................................................
M ar. 2 2 ........................................................
M a y 20.........................................................
A u g . 2 2 ........................................................
D e c . 3...........................................................
1,203
1,230
1,235
1,246
1,186
144
150
154
156
143
187
172
177
190
162
982
996
1,020
1,012
937
1,719
1,724
1,761
1,722
1,551
1,410
1,405
1,425
1,423
1,263
6
11
8
13
30
25.85
24.31
24.86
25.46
24.72
29.71
27.13
28.00
27.48
26.55
1908.
F e b . 1 4 ........................................................
M a y 14.........................................................
J u ly 15.........................................................
S e p t. 2 3 .......................................................
N o v . 2 7 ........................................................
1,157
1,162
1,178
1,235
1,257
146
157
167
175
178
200
217
219
219
215
932
1,004
1,033
1,067
1,100
1,611
1,692
1,759
1,854
1,894
1,317
1,397
1,457
1,549
1,561
15
6
6
8
6
27.37
27.87
27.44
2 6 .84
2 6 .44
30.44
31.63
31.81
32.17
30.76
1909.
F e b . 5 ..........................................................
A p r . 2 8 ..........................
J u n e 2 3 ........................................................
S e p t. 1 .........................................................
N o v . 1 6 .......................................................
1,255
1,305
1,335
1,376
1,401
191
200
201
199
182
233
236
229
225
221
1,106
1,143
1,179
1,218
1,234
1,923
1,971
2,000
2 ,054
2,043
1,614
1,656
1,681
1,718
1,676
3
4
4
8
8
27.14
26.96
2 6 .28
25.65
25.56
31.94
30.73
30.15
29.05
27.60
1910.
J a n . 3 1 .........................................................
M ar. 2 9 ........................................................
J u n e 3 0 ........................................................
S e p t . 1 .........................................................
N o v . 1 0 .......................................................
1,395
1,479
1,469
1,458
1,476
183
188
183
181
178
220
226
224
221
226
1,211
1,267
1,275
1,240
1,272
2,035
2,125
2,088
2,064
2,096
1,686
1,768
1,724
1,714
1,706
3
5
8
13
12
25.53
25.27
25.30
25.31
25.36
28.00
2 7 .92
27.25
28.04
27.05
1911.
J a n . 7 ...........................................................
M a r. 7 ..........................................................
J u n e 7 ..........................................................
S e p t . 1 .........................................................
D e c . 5...........................................................
1,453
1,480
1,500
1,528
1,542
186
197
217
220
219
232
234
246
238
237
1,246
1,279
1,336
1,325
1,355
2 ,078
2,193
2,216
2,209
2,251
1,718
1,820
1,849
1,850
1,853
7
3
4
8
11
25.81
25.49
26.03
25.46
25.34
2 8 .1 7
30.05
29.29
2 7 .82
2 7 .44
1912.
F e b . 2 0 ........................................................
A p r . 1 8 ........................................................
J u n e 1 4 ........................................................
S e p t . 4 .........................................................
N o v . 2 6 ........................................................
1,540
1,560
1,584
1,627
1,634
229
233
236
232
231
250
251
250
243
235
1,342
1,379
1,420
1,421
1,412
2,313
2,342
2,329
2,368
2,345
1,917
1,918
1,933
1,960
1,927
4
7
8
9
10
2 5 .59
25.61
25.48
24.84
24.48
2 9 .38
28.56
28.13
26.18
26.05
1913.
4 ..........................................................
4 ..........................................................
4 ..........................................................
9 ..........................................................
1,627
1,652
1,643
1,601
231
239
235
222
247
242
242
241
1,412
1,417
1,436
1,340
2.398
2*370
2,352
2,234
1,978
1,974
1,946
1,882
6
9
11
20
25 .0 9
24 .7 5
24.83
25.27
28.13
26.65
26.50
27.48
F eb.
A p r.
June
Aug.
BANKING AND CUBBENCY.
1216
A bstracts o f com p troller’ s reports— B a n k statistics — C on tin u ed .
[ A m o u n t s a re in m illio n s o f d o lla r s .]
C ou n try ban ks.
D e p o s it s .
L oa n s.
In v est
m e n ts .
C ash.
In d i
v id
u a l.
T o t a l.
N e t.
Bank
paym e n ts
and
red is
cou n ts.
R eserve.
L e g a l.
P.
A c t u a l.
1906.
S e p t . 4 .....................................................
N o v . 1 2 ...................................................
2 ,1 4 7
2,227
357
362
177
184
2 ,347
2,427
2,585
2,694
2,385
2 ,468
36
32
ct.
16.71
16.77
P .c t.
2 5 .16
2 4 .86
1907.
J a n . 2 6 .....................................................
M a r. 2 2 ....................................................
M a y 20.....................................................
A u g . 2 2 ....................................................
D e c . 3 .......................................................
2,247
2,302
2,331
2,401
2,323
364
374
373
384
384
184
190
188
199
246
2 ,4 6 6
2 ,502
2 ,508
2,567
2 ,456
2 ,746
2 ,787
2 ,7 8 6
2,845
2,717
2,521
2,555
2,558
2,627
2,485
20
24
31
44
69
16.59
16.70
16.64
16.88
19.17
25.34
24.61
24.21
24.24
24.97
1908.
F e b . 14.....................................................
M a y 14.....................................................
J u ly 15.....................................................
S e p t. 2 3 ...................................................
N o v . 2 7 ...................................................
2 ,222
2,249
2 ,266
2,302
2,324
388
395
407
425
434
232
235
215
215
218
2,411
2 ,422
2,451
2,518
2,561
2 ,696
2,698
2,721
2,795
2,851
2,462
2,474
2,505
2,573
2 ,616
35
31
35
44
32
18.75
18.40
17.92
17.68
17.63
2 6 .66
25.85
25.47
26.24
2 6 .04
1909.
F e b . 5 .......................................................
A p r . 28.....................................................
J u n e 23....................................................
S e p t . 1 .....................................................
N o v . 1 6 ...................................................
2,327
2,381
2,416
2,474
2 ,596
450
463
477
488
484
222
228
222
219
226
2 ,628
2,671
2 ,690
2,753
2 ,8 7 0
2 ,926
2,944
2,951
2 ,996
3,137
2 ,697
2,742
2,757
2,821
2 ,938
20
23
29
40
34
17.52
17.63
17.34
17.08
17.00
2 6 .5 7
25.92
25.09
24.58
23.95
1910.
J a n . 3 1 .....................................................
M a r . 29.....................................................
J u n e 3 0 ....................................................
S e p t . 1 .....................................................
N o v . 1 0 ...................................................
2 ,622
2,684
2 ,740
2 ,760
2 ,810
480
479
482
484
492
229
232
235
230
239
2 ,909
2,945
2,935
2,944
3,043
3 ,178
3,217
3,193
3,193
3 ,316
2,9 8 0
3,023
3,009
3,017
3 ,108
30
34
60
74
58
16.97
16.96
17.07
16.88
16.99
23.94
23.83
22.57
22.81
2 3 .18
1911.
J a n . 7 .......................................................
M a r. 7 .......................................................
J u n e 7 ......................................................
S e p t . 1 .....................................................
D e c . 5 .......................................................
2,783
2,757
2,795
2,841
2,900
493
511
532
551
561
240
237
244
234
246
3,047
3 ,072
3 ,0 9 0
3,121
3,224
3,334
3,353
3 ,356
3,381
3 ,510
3,1 2 6
3 ,150
3 ,159
3,194
3,295
36
30
41
69
52
16.95
16.79
17.00
16.61
16.75
23.53
24.35
2 3 .56
22.95
2 3 .0 0
1912.
F e b . 20.....................................................
A p r . 18.....................................................
J u n e 1 4 ....................................................
S e p t . 4 .....................................................
N o v . 2 6 ...................................................
2,884
2,924
2 ,979
3,049
3 ,153
571
578
586
589
593
243
248
246
248
256
3 ,287
3 ,310
3 ,312
3 ,413
3 ,510
3 ,598
3 ,6 2 6
3 ,6 0 6
3 ,704
3,829
3 ,3 7 2
3,393
3,390
3,485
3,5 8 6
40
37
49
82
60
16.48
16.59
16.53
16.40
16.41
2 4 .32
23.36
2 2 .5 0
22.91
2 2 .52
1913.
4.......................................................
4 .......................................................
4......................................................
9 ......................................................
3,132
3,187
3,202
3,211
594
602
604
607
261
262
266
251
3,542
3 ,5 6 6
3,542
3 ,5 2 0
3,865
3,8 9 0
3,845
3,8 2 2
3,6 2 1
3,652
3,610
3 ,5 9 6
45
46
61
82
16.45
16.42
16.62
16.23
23.01
2 2 .4 0
21 .7 8
21 .5 7
Feb.
A p r.
June
Aug.
1217
BANKING AND CURRENCY,
Abstract of comptroller's reports— Percentages of reserve.
R e s e r v e c itie s .
B o ston .
N ew
Y ork.
C h ica g o.
S t.
L o u is .
A lb a n y .
L egal
re se rv e .
A ctu a l
reserv e.
Legal
re s e r v e .
A ctu a l
reserv e.
P h ila d e lp h ia .
A ctu a l
L egal
reserv e. reserv e.
1906.
S e p t . 4 ...........................
N o v . 1 2 .........................
24.36
25.51
24.54
25.19
24.06
24 .0 2
24.48
25.19
28.43
28.46
23.28
21.22
27.87
24.01
22.36
23.01
26.52
27.45
1907.
J a n . 2 6 ...........................
M a r. 2 2 ..........................
M a y 20...........................
A u g . 2 2 .........................
D e c . 3 .............................
26.82
26.30
26.93
26.81
21.89
26.27
22.57
25.03
25.34
24.21
27.10
24.00
26.53
23.59
20.38
26.87
25.22
25.20
25.57
2 2 .72
29.74
29.31
28.38
27.14
25.43
23.50
20.22
21.88
24.05
18.56
28.47
20.23
32.91
24.05
18.56
23.85
22.44
23.51
25.09
21.82
29.58
26.61
29.55
27.46
24.39
1908.
F e b . 1 4 ..........................
M a y 14...........................
J u ly 15...........................
Sep't. 2 3 .........................
N o v . 2 7 .........................
29.00
3 0 .52
28.37
28.65
26.02
27.14
26.82
26.59
25.12
25.94
28.98
28.86
2 5 .52
25.41
25.71
26.30
26.04
26.92
25.92
26.77
29.16
3 3 .48
36.47
3 1 .60
2 9 .40
23.57
23.96
23.98
24.15
24.26
25.84
3 2 .9 8
32.05
36.23
3 2 .46
25.15
27.07
26.12
25.65
24.44
28.76
3 3 .08
3 1 .2 0
3 2 .87
32.05
1909.
F e b . 5 ............................
A p r . 2 8 ..........................
J u n e 2 3 ..........................
S e p t . 1 ...........................
N o v . 1 6 .........................
25.58
25.68
27.27
25.83
25.52
25.99
26.16
25.73
24.30
24.29
26.52
25.44
25.21
24.72
24.80
26.69
27.06
25.97
25.01
25.97
3 1 .28
32.65
30.49
29.06
28.07
24.03
24.38
24.27
25.16
25.03
3 3 .76
30.73
32.84
3 1 .18
27.72
25.68
26.04
25.78
25.11
24.80
29.76
3 0 .12
29.10
2 7 .58
28.02
1910.
J a n . 3 1 ...........................
M a r. 2 9 ..........................
J u n e 3 0 .........................
S e p t . 1 ...........................
N o v . 1 0 .........................
26.64
25.76
25.27
27.48
25.97
24.12
23.35
23.96
25.19
24.04
24.05
22.36
24.99
23.52
24.82
25.81
24.30
24.95
24.82
26.06
29.85
3 0 .38
29.69
28.51
27.10
24.42
23.31
24.02
23.69
24.14
29.10
25.59
27.40
3 3 .12
27.13
24.57
24.23
24.34
25.02
24.80
2 8 .12
27.67
26.31
29.16
26.93
1911.
J a n . 7 .............................
M a r. 7 ............................
J u n e 7 ............................
S e p t . 1 ..........................
D e c . 5 ............................
26.51
27.80
28.04
26.59
25.25
24.31
24.00
25.84
24.65
24.85
24.31
25.33
25.48
24.51
25.19
26.13
24.76
25.42
25.49
25.95
29.07
29.76
30.02
28.77
27.48
24.52
23.48
24.30
24.23
24.29
28.88
3 6 .98
32.48
32.73
28.05
24.35
24.09
2 5 .88
25.05
24.20
27.92
24.09
30 .6 8
26.53
27 .1 6
1912.
F e b . 2 0 ..........................
A p r . 1 8 ..........................
J u n e 14.........................
S e p t . 4 ..........................
N o v . 2 6 .........................
27.04
26.31
26.69
24.83
24.69
24.83
24.87
25.04
24 .2 2
23.24
25.96
24.87
24.88
25.57
25.09
25.56
25.77
25.95
25.17
25.27
28.80
28.38
29.48
26.66
26.59
24.23
23.54
23.34
23.84
24.20
30.52
28.58
3 0 .28
32.21
28.78
26.50
25.64
24.73
24.80
25.29
28.84
28 .7 2
26.80
27.38
26.97
1913.
4 ............................
4 ...........................
4 ............................
9 ...........................
25.89
25.54
26.97
26.42
25.10
21.46
24.32
22.94
23.94
21.97
23.66
22.93
24.79
24.43
25.91
26.41
29.87
28. 81
30.25
3 1 .37
23.25
24.24
23.67
23.85
2 8 .38
25.59
27.87
29.69
25.21
24.33
24.96
25.65
26.84
26.17
27.74
26.96
Feb.
A p r.
June
Aug.
9 3 2 8 ° — S. D o c. 2 32 . 6 3 - 1 — vo l 2 -
-1 7
BANKING AND CURRENCY.
1218
A bstract o f com p troller’ s reports— P ercentages o f reserve — C o n tin u ed .
R e s e r v e c itie s .
P it t s b u r g h .
£
B a lt im o r e .
N ew
O rle a n s.
C in c in n a t i.
C le v e la n d .
Legal
re
serve.
A ctu a l
re
se rv e .
Legal
re
se rv e .
A ctu a l
re
se rv e .
Legal
re
serve.
A ctu a l
re
s e rv e .
Legal
re
serve.
A ctu a l
re
s e rv e .
L egal
re
se rv e .
1906.
S e p t . 4 ..........................
N o v . 12........................
23.37
2 2 .8 8
2 3 .37
2 2 .8 8
2 1 .2 8
22.71
25.11
2 5 .56
23.35
2 5 .94
2 6 .14
27.37
25.13
25.23
2 5 .4 9
26.73
26.21
20.37
26.21
20.37
1907.
J a n . 2 6 ..........................
M a r. 2 2 .........................
M a y 2 0 .........................
A u g . 22.........................
D e c . 3 ...........................
25. 49
22.96
2 5 .30
2 3 .76
21.04
26.86
22.96
2 5 .30
2 3 .76
21.04
25.79
22.41
24.44
2 3 .24
2 1 .98
28.01
23.74
25.43
25.34
2 1 .9 8
25.46
2 5 .20
24.25
24.81
2 7 .22
3 0 .5 8
2 5 .20
2 6 .58
2 6 .35
2 9 .95
25.51
2 4 .24
2 5 .78
24.93
2 4 .3 2
27 .8 9
25 .1 8
2 5 .78
25.37
2 6 .70
26.33
24.37
24.47
2 3 .45
2 0 .35
26 .3 6
24.37
24.47
23 .4 5
2 0 .3 5
1908.
F e b . 14.........................
M a y 1 4 .........................
J u ly 1 5 .........................
Sep't. 2 3 .......................
N o v . 27........................
2 4 .82
2 5 .62
2 5 .60
2 6 .10
2 5 .87
2 4 .8 2
2 5 .6 2
2 5 .60
2 8 .96
2 6 .56
2 5 .19
27.01
2 4 .69
2 5 .20
24.27
25.73
28.67
2 9 .26
2 8 .29
25.67
2 5 .40
2 7 .40
2 5 .92
2 6 .80
2 6 .30
2 8 .04
3 0 .38
2 7 .95
27.83
3 0 .4 6
3 0 .1 5
2 7 .75
27.74
2 6 .12
2 8 .05
3 1 .3 0
27.75
30.27
26.97
28.06
2 3 .74
2 5 .55
28.21
2 6 .95
2 7 .14
23.74
25 .5 5
3 3 .6 2
3 2 .6 6
30 .0 0
1909.
F e b . 5 ...........................
A p r . 2 8 .........................
J u n e 23.........................
S e p t . 1 .........................
N o v . 16........................
26.61
2 6 .95
2 5 .8 8
2 5 .68
2 5 .9 8
2 8 .17
2 8 .7 5
2 7 .62
26.61
2 5 .9 8
26. 40
25.41
24.43
22.91
2 3 .2 2
2 9 .8 8
2 7 .85
26.83
2 5 .25
2 5 .8 8
2 8 .75
2 6 .08
2 5 .50
2 4 .74
2 7 .59
4 0 .08
3 0 .89
3 3 .4 8
2 8 .89
2 9 .0 4
2 8 .6 2
26.25
26.35
25.43
2 6 .03
2 9 .12
26.25
2 8 .18
25.43
26.03
29.03
29.02
28.18
27.71
23.91
3 3 .3 8
29.40
34 .3 9
27.71
23.91
1910.
J a n . 3 1 ..........................
M ar. 2 9 .........................
J u n e 30.........................
S e p t . 1 ..........................
N o v . 10........................
25 .8 8
2 5 .9 2
24 .4 0
25.66
23 .6 4
2 5 .88
2 5 .92
2 4 .40
2 5 .94
2 3 .64
2 4 .50
23.21
24.25
21.21
22.01
25.73
24.87
2 5 .03
23.43
27.21
26.67
24.54
2 4 .15
2 4 .39
2 6 .2 9
28.26
27.59
27.91
2 7 .34
2 8 .06
26.17
2 5 .90
26.45
26.69
2 6 .56
27.53
25.90
27.06
26 .6 9
26.56
24.74
2 7 .24
26. 49
25.87
2 3 .75
24.74
27.24
2 6 .49
25.87
2 3 .75
1911.
J an . 7 ............................
M ar. 7 ......... .................
J u n e 7...........................
S e p t . 1 .........................
D e c . 5 ...........................
25.65
25.57
25.73
25.18
25.99
25.65
27.21
2 6 .86
25.31
2 6 .37
24.77
22 .0 2
22.48
21 .0 5
21 .2 4
2 8 .79
2 4 .5 8
2 3 .7 2
2 1 .68
25.09
24.53
2 5 .0 6
25.55
26 .3 0
25.01
27.14
28.07
27.72
27.36
27.36
27.50
24.78
2 7 .18
25.19
25.77
32.37
30.97
28.17
2 5 .19
27 .8 2
26.37
27.14
26.45
26.95
26.57
2 6 .60
29.65
32.82
29.66
26.57
1912.
F e b . 2 0 .........................
A p r . 18........................
J u n e 14.........................
S e p t . 4 .........................
N o v . 26........................
2 5 .80
24.71
24.57
24.47
24.05
27.96
26.28
25.18
27.67
24.05
21.72
23.16
2 3 .78
21.47
22.62
24.87
25.22
26.38
25.17
2 5 .86
20.95
25.91
24.08
23.43
2 4 .98
20.95
2 8 .40
27.60
24.07
2 5 .20
26.14
2 8 .60
30.01
25.52
2 4 .%
29.92
29.85
30.41
27.45
2 5 .65
27.79
26.44
26.85
27.68
26.43
31.51
26.44
29.35
29.86
26.54
1913.
4 ...........................
4 ...........................
4...........................
9...........................
24.84
24.02
2 3 .98
2 5 .38
29.54
24.87
23.98
25.91
22.07
20.90
21.53
2 1 .84
25.51
23.24
22.57
22.86
22.35
24.44
23.78
23.06
25.34
26.79
25.20
24.96
25.72
26.87
26.17
2 5 .38
3 0 .59
30.05
26.86
2 8 .45
27.01
26.09
26.83
25.75
30 .8 6
26.14
27.35
28.43
F eb.
A p r.
June
A ug.
A ctu a l
re
s e rv e .
1219
BANKING AND CUKRENCY,
A bstract o f com p troller's reports— P ercentages o f reserve — C on tin u ed .
R e s e r v e c ities.
I n d ia n a p o lis .
D e t r o it .
M ilw a u k e e .
M in n e a p o lis .
S t. P a u l.
A ctu a l
re
se rv e .
L egal
re
se rv e .
A ctu a l
re
serve.
L egal
re
se rv e .
A ctu a l
re
se rv e .
L egal
re
s e rv e .
A ctu a l
re
serv e.
Legal
re
s e rv e .
A ctu a l
re
serve.
Legal
re
serve.
1906.
S e p t . 4 .........................
N o v . 12........................
25 .4 6
2 6 .4 8
3 3 .97
3 0 .35
24.73
2 3 .26
25.93
25.37
2 4 .30
24.80
2 8 .92
2 8 .49
22.56
22.02
28.03
2 2 .02
26 .8 6
24.81
31.25
28.45
1907.
J a n . 2 6 .........................
M a r. 2 2 .........................
M a y 2 0 .........................
A u g . 2 2 ........................
D e c . 3 ...........................
26 .8 2
2 5 .9 9
2 6 .6 7
2 6 .7 8
32.86
33.72
2 9 .72
2 9 .58
31.81
37.25
27 .0 2
2 2 .49
2 5 .6 0
24.81
2 2 .85
2 7 .29
2 2 .49
2 9 .18
24.81
2 2 .85
24.94
2 2 .82
24.05
25.24
24.01
28.71
22.82
25.97
2 7 .78
2 5 .08
2 2 .86
2 2 .27
23.31
24.33
2 6 .24
2 8 .00
2 5 .29
25.70
2 6 .4 9
2 8 .92
25.12
22.56
23.67
25.24
27.94
29.61
27.94
27. 41
29.63
31.51
1908.
F e b . 14........................
M a y 1 4 .........................
J u ly I S .........................
S e p t . 2 3 .......................
N o v . 2 7 ........................
32.94
3 2 .40
31.54
30.61
28.97
4 0 .80
36. 97
3 6 .3 2
33.96
3 1 .88
27.45
2 0 .4 9
2 9 .27
27.78
2 6 .95
2 7 .93
34.32
3 2 .59
31.40
3 0 .37
24.32
26.55
2 5 .50
25.57
25.99
2 6 .50
2 7 .15
2 8 .24
30.88
30.04
2 6 .22
2 6 .86
25.28
25.29
24.31
29.51
27.35
2 9 .90
3 4 .02
32.87
27.05
27.42
27.66
24.61
24.94
3 2 .88
29.78
3 0 .56
32.57
33.67
1909.
F e b . 5 ...........................
A p r . 2 8 ........................
J u n e 23........................
S e p t. 1 .........................
N o v . 1 6 ........................
28.94
3 0 .23
29.39
27.12
2 6 .5 6
33.75
30.85
37.59
32 .2 5
29.17
28.22
2 6 .05
2 6 .69
27.01
2 5 .68
3 2 .02
29.65
2 9 .63
30.37
2 6 .27
2 5 .28
25.63
2 5 .82
24.22
24.28
3 2 .30
25.63
26.76
30.56
24.95
25.49
25.80
24.41
25.26
25.01
2 7 .68
27.10
26.11
30.99
29.10
25.34
25.17
24.31
25.69
24.54
27.78
26.56
28 .1 8
33.30
27.45
1910.
J a n . 3 1 .........................
M a r. 2 9 ........................
J u n e 30........................
S e p t . 1 .........................
N o v . 1 0 .......................
2 6 .66
2 6 .26
28.71
27.19
28.81
29.13
29.84
35 .8 8
41.62
31 .7 8
22.65
2 5 .42
2 5 .0 0
21.73
23.82
22.65
2 5 .4 2
25 .0 0
21.73
23 .8 2
24.88
23.60
23.68
2 4 .2 6
24.51
27.80
2 3 .60
27.35
27.14
26.94
23 16
22.87
2 3 .99
24.53
24.98
24.51
27.20
25.67
2 6 .65
2 5 .06
24.73
25.47
24.53
25.12
2 6 .2 0
28.43
27.55
29.17
2 8 .57
27.53
1911.
J a n . 7 ...........................
M ar. 7 ...........................
J u n e 7 ..........................
S e p t . 1 .........................
D e c . 5 ...........................
29.03
27.20
27.07
2 5 .87
2 7 .08
30.54
32.04
32.74
29.74
2 7 .19
22.97
24.32
26.21
2 6 .87
24.72
22.97
28.94
30.67
28 .6 9
27 .7 3
24.53
23.75
25.24
23.52
23.75
2 6 .25
2 6 .59
2 7 .46
2 7 .39
2 4 .9 2
25.14
24.01
24.96
24.86
23.54
25.70
28.14
25.50
27.31
2 8 .66
25 .4 7
2 5 .2 6
25.03
24.56
24.61
2 6 .95
36.71
25.56
2 6 .89
29.11
1912.
F e b . 2 0 ........................
A p r . 18.........................
J u n e 14........................
S e p t . 4 .........................
N o v . 2 6 ........................
2 6 .85
2 6 .08
2 7 .93
2 6 .03
24.06
31.27
2 6 .08
31.16
29.57
2 4 .06
2 3 .08
26.67
2 6 .76
25.61
22.62
25.74
27.30
29.06
25.61
22.62
2 3 .57
22.02
23. 98
23.78
2 2 .88
2 7 .38
22.02
25.00
27.69
2 6 .1 2
24.21
25 .1 0
25 .3 5
24.60
24.64
29.07
2 8 .58
27.67
25.51
25.05
23.38
23.83
24.01
24.86
24.10
30.23
29.05
25.08
25.40
2 6 .83
1913.
F e b . 4 ...........................
A p r . 4 ...........................
J u n e 4 ..........................
A u g 9 ...........................
2 6 .60
25.38
28.53
2 6 .63
26 .6 0
25.38
34.14
33.21
24.33
23.90
25.55
24.99
25.14
24.84
28.83
29.39
22.64
23.68
2 3 .68
24.30
24.46
24.41
24.64
2 4 .40
23.95
23.87
22.27
25.05
28.19
25.31
22.27
27.27
24.20
25.46
24.96
2 6 .59
25.37
25.46
24.96
26.59
BANKING AND CURRENCY.
1220
A bstract o f co m p tro ller’s reports— Percentages o f reserve — C o n tin u e d .
R e s e r v e c itie s .
K a n s a s C it y .
O m aha.
S a n F r a n c is c o .
D en ver.
L egal
reserv e.
A ctu a l
re se rv e .
L egal
re se rv e .
A ctu a l
reserv e.
L egal
r e se rv e .
A ctu a l
re s e r v e .
L egal
reserve.
1906.
S e p t . 4 ........... .
N o v . 12......... .
22.78
23.47
3 2 .3 5
25.84
24.63
2 6 .30
28.68
26.53
27.39
24.83
4 0 .4 2
35.74
29 .6 7
2 6 .92
3 0 .05
26.92
1907.
J a n . 2 6 ........... .
M ar. 2 2 ...........
M a y 2 0 .......... .
A u g . 2 2 ...........
D e c . 3 ............ .
24.14
22.65
23.57
23. 79
21 .9 3
35.01
3 3 .5 8
3 2 .35
3 3 .13
3 1 .86
25.61
2 4 .86
26. 12
2 8 .20
3 3 .6 0
29.21
2 5 .48
27. 56
30. 10
3 4 .33
2 8 .47
28.40
27. 16
28. 65
3 0 .90 •
3 8 .27
3 7 .9 5
3 8 .94
3 6 .60
3 1 .3 8
28.86
25.81
2 7 .20
28.66
34. 16
2 8 .86
25.81
27.28
28.66
3 4 .1 6
1908.
F e b . 14...........
M a y 14..........
J u ly 15.......... .
S e p t . 23.........
N o v . 2 7 ......... .
2 3 .52
2 5 .22
25.09
23.86
23.32
4 4 .4 8
3 7 .85
3 5 .15
3 6 .09
3 0 .40
3 0 .1 0
2 8 .50
28.47
25. 40
26. 56
34. 98
3 0 .76
29. 10
29. 66
3 0 .6 4
3 1 .9 4
33.77
32.23
31.23
29 .5 9
35 .2 0
38.83
3 7 .0 2
37 .9 3
37. 52
33 .2 7
3 4 .36
3 3 .68
3 5 .40
3 2 .29
3 3 .27
3 6 .39
35.37
3 5 .99
3 5 .89
1909.
F e b . 5 ............ .
A p r . 2 8 ...........
J u n e 2 3 ...........
S e p t . 1 .............
N o v . 16...........
24.29
25.07
24.67
23. 32
23.53
3 8 .50
3 3 .37
3 1 .73
3 1 .78
27.24
25.85
25.95
26. 76
25. 70
24.47
3 0 .8 0
2 9 .38
3 1 .19
29.61
24.47
3 0 .03
29. 42
27.65
28.24
26.64
39.73
40.73
41 .0 8
3 9 .8 0
3 8 .7 0
3 1 .8 9
30. 11
29.51
27.69
29.37
3 5 .83
3 3 .32
3 3 .15
3 1 .1 0
29.37
1910.
J a n . 3 1 ........... .
M a r. 2 9 ...........
J u n e 3 0 ...........
S e p t . 1........... .
N o v . 10......... .
2 3 .85
23.38
24.71
22. 70
23. 74
3 0 .71
31.51
28.46
29. 40
3 0 .86
25 .2 8
25.23
25.50
25. 62
26.06
2 6 .25
25.23
2 5 .5 0
29.84
26 .0 6
2 7 .60
26.54
29. 56
29. 27
28.24
3 3 .7 0
3 7 .17
33.54
3 3 .18
33.43
26. 92
29. 46
27.28
26.44
26.74
27.73
29.51
27.64
28. 17
26. 74
1911.
J a n . 7 ...............
M a r. 7 ............ .
J u n e 7 ..............
S e p t . 1.............
D e c . 5 ............ .
23.91
23.29
24. 11
22.94
23.35
32.83
36.33
31.34
30.29
28.64
24.33
25 .2 4
25. 19
24.94
24.92
24.33
2 9 .92
28 .6 9
28.63
27 .0 9
30 .3 1
31. 10
29.83
33. 74
3 3 .05
3 1 .8 8
34. 15
3 2 .3 2
3 8 .05
3 7 .7 9
29.04
27.25
26.25
2 6 .32
25. 61
29.04
27.65
27.37
27.86
25.67
1912.
F e b . 2 0 ...........
A p r . 18..........
J u n e 14...........
S e p t . 4 ...........
N o v . 2 6 .........
23.11
23.04
23.48
22.09
22.64
3 2 .00
3 2 .7 2
28.01
29.28
27.64
25.08
24.55
23. 74
24.67
24. 21
30.34
26.74
32 .5 6
26.93
24. 21
3 0 .82
3 0 .1 0
29. 72
28. 45
27. 57
3 5 .2 0
36.67
3 5 .39
3 1 .46
3 0 .13
2 6 .1 2
26.02
2 5 .92
2 5 .75
23.87
2 9 .80
28.77
27.71
26. 92
23.87
1913.
F e b . 4 ............
A p r . 4 ............
J u n e 4 ............
A u g . 9 ............
22 .8 0
23. 62
23.71
23.49
3 0 .0 8
29.57
26.63
27.98
24.62
27.85
25.60
2 5 .92
2 6 .77
28.11
26. 81
29.93
2 8 .72
29.28
28.50
2 9 .95
3 0 .47
29.28
28.50
3 0 .31
26. 70
25.40
24.60
26. 14
26.87
25.
24.
A ctu a l
r e se rv e .
27.
1221
BANKING AND CURRENCY,
A bstra ct o f com ptroller'1 reports— P ercentages o f reserve — C on tin u ed .
s
C ou n try ban k s.
N e w E n g la n d .
L ega l A ctu al
re
re
serv e. se rv e .
E a s te r n .
S ou th ern .
L egal A ctu a l L egal
re
re
re
se rv e . serv e. se rv e .
M id d le .
W estern .
P a c ific .
A ctu a l Legal A ctu a l Legal A ctu a l L egal A ctu a l
re
re
re
re
re
re
re
serv e. s e rv e . se rv e . se rv e . se rv e . serv e. se rv e .
190C.
S e p t . 4 ..............
N o v . 1 2 ............
16.53
10.55
25. 10
2 4 .0 0
16.26
16.06
21.43
21.22
17.67
18.16
2 3 .3 0
26 .8 2
16.43
16.60
26.22
24.31
16.85
16.78
3 2 .7 0
3 1 .13
17.81
17.47
31.57
3 1 .10
1907.
J a n . 2 6 ..............
M ar. 2 2 .............
M a y 2 0 .............
A u g . 2 2 ............
D e c . 3 ...............
10.27
16. 71
16.77
17.19
18.22
23.13
2 1 .62
24.13
2 3 .46
2 6 .45
16.04
16.22
16.12
16.61
17.78
2 0 .85
2 0 .0 8
2 0 .5 8
21.14
20 .9 0
17.31
17.00
17.39
17.69
2 1 .1 0
2 8 .54
27.11
2 4 .25
23.23
2 6 .45
16.40
16.43
10.43
16.44
18.65
2 5 .52
2 4 .63
24.33
24.79
2 4 .15
16.93
16. 61
16. 73
16.81
2 0 .7 6
31.37
32 .3 9
31.57
31 .0 9
32.11
18.06
17.77
17.50
17.72
2 2 .2 8
30.55
30.15
2 8 .30
28.27
2 9 .7 0
1908.
F e b . 1 4 .............
M a y 14.............
J u ly 15.............
S e p t . 2 3 ............
N o v . 2 7 ............
17.36
17.37
17.24
17.15
10.99
2 5 .17
2 5 .5 4
2 5 .9 9
2 5 .0 6
24.53
17.09
17.16
16.92
16.92
16.84
2 2 .3 0
22 .3 9
22 .3 9
2 3 .3 8
2 2 .79
21.01
2 0 .13
19.16
19.04
18.62
2 8 .1 6
2 5 .8 0
24.77
2 4 .73
2 7 .4 4
18.23
18.11
17.68
17.40
17.51
2 7 .1 0
2 5 .6 6
2 5 .8 8
26 .3 3
25 .2 9
20 .7 7
19.77
19.00
18.16
18.20
34.83
33.87
31.29
34.72
3 3 .94
2 3 .39
21.57
2 0 .88
19.87
19.54
3 1 .76
31.87
3 0 .64
31.57
31.29
1909.
F e b . 5 ...............
A p r . 2 8 .............
J u n e 2 3 ............
S e p t . 1 ..............
N o v . 1 6 ............
16.79
17.19
16.92
16.84
16.79
2 5 .12
2 5 .1 5
24.51
2 4 .4 0
23.57
16.73
17.02
16.87
16. 66
16.43
2 3 .09
2 3 .1 8
22.19
21.99
2 0 .9 6
18.26
18.51
18.31
17.91
17.87
2 9 .1 0
2 7 .4 0
2 5 .4 6
2 3 .1 5
2 5 .01
17.52
17.48
17.17
16.89
16.82
2 6 .09
2 4 .48
2 4 .97
2 5 .13
2 3 .16
17.96
17.89
17.50
17.33
17.26
3 2 .68
3 2 .49
3 0 .43
2 9 .8 6
29.73
2 0 .16
19.23
18. 46
17.88
17.93
31.14
32.67
31 .2 0
29.99
29.94
1910.
J a n . 3 1 ..............
M a r. 2 9 .............
J u n e 3 0 ............
S e p t . 1 ..............
N o v . 1 0 ............
16.55
16.67
16. 73
16.77
16.63
22.77
23.29
2 2 .03
2 2 .4 6
2 3 .8 5
10.41
16.72
16.69
16.48
16.49
2 0 .58
2 1 .2 0
2 0 .1 4
20. 49
2 0 .93
17.66
17.57
17.67
17.53
17.61
24.21
2 3 .05
2 1 .82
20.97
2 4 .32
16.80
16.67
16.94
16.69
16.97
2 4 .6 6
2 3 .6 5
2 2 .97
23.69
21.91
17.25
17.00
17.35
17.18
17.34
29.43
29.97
2 6 .86
2 7 .79
2 8 .04
18.63
18.10
17.93
17.62
17.72
28.89
29.72
28.13
27.07
2 7 .85
1911.
J a n . 7 ................
M ar. 7 ...............
J u n e 7 ..............
S e p t . 1 ..............
D e c . 5 ...............
16.25
16.58
16.66
16.20
16.79
2 5 .6 5
24.34
2 3 .8 0
22.79
23.31
16.31
16.36
10.58
16.13
16.33
2 0 .99
21.92
2 1 .4 0
2 0 .5 0
20.27
17.67
17. 45
17.63
17.30
17.04
2 5 .5 5
2 5 .92
2 3 .37
2 1 .2 8
22.71
16.93
16.49
16.85
16.47
16.62
2 2 .29
2 3 .72
2 3 .47
2 3 .84
22.43
17.55
17.08
17.50
17.15
17.11
27.22
2 9 .0 6
2 8 .33
2 8 .8 6
2 9 .38
18.21
18.31
17.82
17.62
17.72
26 .5 7
27.55
27.53
26 .8 3
29 .1 4
1912.
F e b . 2 0 .............
A p r . 1 8 .............
J u n e 1 4 ............
S e p t . 4 .............
N o v . 2 6 ............
16.50
16.28
16.21
16.39
16.46
23.41
22 .3 8
2 2 .0 5
22.91
21.73
16.15
16.25
10.08
16.03
16.03
21.37
2 0 .54
19.80
2 0 .55
19.60
16.75
17.14
16.95
16.74
16.56
2 5 .0 0
23.74
21.92
2 1 .88
23.91
16.19
16.37
16.42
16.23
16.26
24 .7 7
23.12
2 3 .19
2 3 .15
21.37
16.82
17.02
17.08
16.82
16.75
29.48
2 9 .10
27.52
2 8 .8 9
2 9 .4 0
17.88
17.50
17.60
17.25
17.55
28 .4 9
29.83
27 .1 5
26 .9 7
27 .7 5
1913.
4 ...............
4 ...............
4 ..............
9 ..............
16.39
16.32
16.78
16.07
23 .2 2
21 .8 2
21 .9 2
22 .2 2
16.08
15.97
16.23
15.72
2 0 .30
19.68
19.58
19.25
16.51
16.70
16.91
16.69
23.11
2 2 .67
2 1 .52
19.71
16.37
16.32
16.47
16.09
2 2 .68
22.07
2 1 .64
22.17
16.83
16.81
16.85
16.66
28.99
2 8 .95
27.24
2 7 .84
17.73
17.61
17.63
17.55
27 .3 8
26 .7 4
25 .0 6
24 .1 3
Feb.
A p r.
June
A ug.
STATEM ENT OF F. A. DRURY, OF W ORCESTER, MASS., PR E S
IDEN T OF THE MERCHANTS NATIONAL BANK.
Mr. D rury . I wish to state some of the objections of the so-called
country banks. We come under that class, and I have talked with
many of them in Massachusetts and New England. I know how they
feel in regard to this. I do not think there is any feeling of opposi
tion to the bill except in a few points. We believe that the bill as a
whole is pretty good, but there are certain features which seem objec
tionable to us which would put us in a position where we really would
not know how to act if it passed in its present form.
1222
BANKING AND CURRENCY.
The small country banks are talking this way in their directors’
meetings constantly, and it is a question in Massachusetts, where they
have a good trust-company law, whether it would not be better for
some of them to change over and be trust companies. We hope that
this bill will be so amended that not only the country national banks
of New England but also these trust companies will come in under
its provisions.
At the present time, to touch a little on the trust-company situa
tion, the president of the Old Colony Trust Co. of Boston, which is a
$70,000,000 institution, said that there was nothing attractive what
ever about the bill to induce them to change and come in under its
provision. Our trust-company law allows trust companies to enter
into direct competition with the national banks, and it allows them
to act as executors of wills, administrators of estates, trustees, transfer
agents, and various things, from which they derive quite a profit.
Senator N e l so n . They loan on real estate I suppose and they
make farm mortgages ?
Mr. D rury , le s , sir; farm mortgages to a certain extent. In our
city of Worcester the largest institution there is a trust company.
There are three national banks and one trust company. The trust
company’s deposits are pretty nearly as large as the deposits of any
two of the national banks put together.
The business man does not put his account in a national bank
because it is a national bank. He feels that the trust company is
exactly as safe to deposit his money, and it is simply an open com
petition between the trust companies and the national bank. If this
bill should go through in its present form, the country banker, the
small banker, looks at it in this way: He is asked to give up 20 per
cent of his capital, turn it over to a board of directors, which they call
a political control board, and they are to have practically no say.
They will have, to be sure, in Class C, three directors, but their con
trol of the reserve board is such, on your reserve bank board, that by
naming the chairman, who is the Federal reserve agent, and naming
three of these directors, and their power of removing class C directors,
it really looks as though they have not much to say about it. They
are turning their money over to other people to manage.
They believe that that should be managed by bankers, and good
bankers, and that the people who manage the institution should not
be people appointed for political reasons.
Senator P om erene . What reason have you for making the state
ment that they would be appointed for political reasons ?
Mr. D ru r y . Well, they would all be appointed by the party in
power— the President of the party in power.
Senator P om erene . D o you know of any President we have ever
had in the last generation that you could believe would appoint a man
in a responsible position of that kind for party reasons ?
Mr. D ru r y . I will answer that in this way: In our district we have
a bank examiner appointed by a Democratic President. Later on we
had a bank examiner appointed by a Republican President. The
first bank examiner appointed by the Democratic Party was a black
smith and he was entirely incompetent. The one appointed by the
Republican Party was a poor—he was a man between 70 and 80
years of age and he was entirely unfit for the position. He was a
brother of a very prominent man here in Washington, and the way
BANKING AND CURRENCY.
1223
we get this story it was a toss-up whether he should be appointed
national-bank examiner or not. They wanted to get something which
would yield $5,000 per year. It was a question, as I say, whether he
was to be appointed a bank examiner or to some Indian reservation,
or something of that kind. They appointed him national-bank ex
aminer. That man went into small national banks within 6 miles of
us. He examined half a dozen banks. The total loans of one of the
banks was $125,000. He could not prove it. He added them and
added them up, and finally he had to call in the cashier and ask him
to help him out. The cashier added them up and found his mistakes,
and then the bank examiner said “ Are they all good ?”
Such things as that are the reasons for my statement.
Senator P omerene . Well, assuming that to be so, you do not
wish to state you believe, because some President may have been
misled by the recommendation of some politician as to the pro
priety of appointing some man as a bank examiner, that therefore
they would select these men who are to have control of these banks
purely for political reasons ?
Mr. D ru r y . Perhaps not that; but what I am stating is what we
believe. We think they should be practical bankers and not law
yers or railroad men, or men who are not familiar with banking.
Senator P omerene . I believe with you they ought to be the biggest
men that can be obtained, but I do not agree with you in reflecting
upon the character of the Presidents in talcing the position that they
would appoint incompetent men for these places.
Senator B ristow . Well, the bank examiners being appointed now
are of the prevailing political faith. Some are competent and others
may not be competent.
Senator P omerene . Possibly that is so.
Senator B ristow . And what has been done in the past is likely to
be done in the future.
Senator N elson . We have a case right here now of a blacksmith
who was appointed a bank examiner; also, the case of the old gen
tleman who was appointed. That may have been all right. Proba
bly he needed an old age pension.
Senator P omerene . That may be so, too; but I am a little bit
surprised that anyone, in view of some of the criticisms that have
been made here, should believe that the President should have the
right to name a member of the Supreme Court or a member of the
Interstate Commerce Commission. We have to place faith some
where, and, as far as I am concerned, on that proposition I am will
ing to trust any President we have now or ever have had.
Senator W eeks . It is true that no President has ever appointed
a judge of the Supreme Court who was not a lawyer; it is also true
that all the traditions that surround the Supreme Court have been
such, and they have come down from the beginning of the Govern
ment, that it would be practically impossible for a President not to
select from the very best material. But that is not true of any other
association or any other organization, and there is not another
instance-----Senator P omerene . It is true of the Interstate Commerce Com
mission.
1224
BANKING AND CURRENCY.
Senator W e ek s . Well, it is possibly true to some extent, but still
men who are practical railroad men are not the only ones appointed
on the Interstate Commerce Commission, and that is advisedly so.
Senator P o m e r e n e . D o not misunderstand m e; I do not mean
to take the position that the men who are appointed to these places
ought not to have had experience along the lines required; but I do
mean to say that there is not any reason at all why they must neces
sarily be bankers.
Senator W eek s . N o ; I do not think there is. Let me inject this
remark, however: What the witness is saying is what he has heard
the country bankers say and that is merely an expression of their
views as I understand it.
Mr. D rury . Yes, sir; that is true.
Senator W e ek s . And he is really giving us what is in the minds
of the country bankers of New England.
Senator H itchcock . We certainly ought to get that in the record.
Senator P omerene . Oh, why surely.
The Chairman . The committee will now take a recess until 2.30
o’clock p. m.
(Thereupon at 1 o’ clock p. m. the committee took a recess until
2.30 o’ clock p. m.)
AFTER RECESS.
The Chairman . Mr. Drury, we will hear you now.
STATEM ENT OF ME. F. A. DRUKY— Eesumed.
Mr. D ru r y . I wish to speak to you about this compulsory sub
scription to stock. In the first place, the rate which the bank
receives is only 5 per cent. Our loans at the present time average
about 5.85 per cent. Since I have been connected with the bank, in
the last eight years, it has never been as low as 5 per cent. The least
it has been is about 51 per cent. We think that rate should be 6 per
cent instead of 5.
We rather favor the recommendation of the conference at Chicago,
that instead of it being 20 per cent that would bo required of the bank,
20 per cent of the capital, it should be 10 per cent.
The Chairman . Ten per cent and 5 paid in ?
Mr. D rury . Ten per cent all told.
The Chairman . The total liability ?
Mr. D rury . Yes.
The Chairman . What would you think of using the capital and
surplus as tho basis and making it a smaller percentage— applying it
to the capital and surplus ?
Mr. D rury . I think that perhaps would be more fair.
The Chairman . D o not let me interrupt you further.
Mr. D rury . I think it would be more fair, because many banks
have capital really in the surplus account.
Senator H ollis . But would not that make a fluctuation to every
thing? Would it ever be constant?
Mr. D rury . Of course it would change from year to year.
Senator H o ll is . They would have to change around more and
more ?
BANKING AND CURRENCY.
1225
Mr. D rury . Yes. Now, in the matter of retiring the present
Government bonds, that is a very serious matter to the country
bank. Some of them are little small banks with $100,000 capital
and they have as high as 100,000 2 per cent bonds. They have seen
the bonds go to 96, and most of them paid a premium, some of them
as high as 110 or 112, and many of the banks have a very small
profit and loss or undivided profit account, and it is putting them
in a very bad condition. Tney are afraid the price will decline
further unless something is put into this bill that will protect the
bonds in such a way that they will sell at par. If something can be
done-----The Chairman . What would you think of the Government taking
off the market at par those bonds that might be offered ?
Mr. D rury . Yes.
The Chairman . Would you provide for the Government buying
the two’s at par that might be offered ?
Mr. D rury . Yes, I would. Now, in your bill where the provision
is for replacing those 2 per cent bonds by 8 per cent bonds, it says
that they shall be payable 20 years after date of issue, which does
not fix any due date at all of the bonds. They can pay them at any
time after 20 years, or may never pay them. We think they should
be payable in 20 years from date of issue, making the due date
exactly 20 years. We believe that ought to be changed.
There was a fifth member of this committee who was to come down,
but was taken ill as he was on the way to the train, and I received this
letter this morning from him right in regard to that point, and I would
like to read that part of his letter which relates to this provision of
the bill.
The Chairman . Read it into the record.
Mr. D rury . He says:
I hope our committee will be able to impress upon the authorities the very serious
menace to the country banks of a drop in the value of the 2 per cent bonds. It is a
most injurious matter for the banks with small undivided profit accounts, and I don’t
see what they can do to save themselves, unless these bonds are somehow or other main
tained at par, or exchangeable for some bond which will command par in the market.
Certainly the faith of the United States Government was pledged that these bonds
should always be worth par. when the banks were prevailed on to take them, and it
would be a serious breach of morals for the Government to allow these banks to suffer
when they, the banks, had provided a way for the Government to obtain money at so
low a figure. I believe this to be the most serious feature of the bill as regards the small
banks.
That is from the president of the Merchants National Bank of
Salem.
That is all I have to say.
The Chairman . Mr. Bowman, we will hear you now. Will you
give your address to the stenographer and your banking connections ?
STATEM ENT OF HENRY H. BOWMAN, PRESIDENT OF THE
SPRINGFIELD NATIONAL BANK, OF SPRINGFIELD, MASS.
Mr. B ow m an . Yes, Mr. Chairman. I am president of the Springfield National Bank, of Springfield, Mass.
Mr. Chairman and gentlemen, what I have to say in this matter
will be very brief. To me is accorded the task of suggesting to you
gentlemen the establishment of a single reserve bank instead of 12
1226
BANKING AND CURRENCY.
regional banks. I bave been told that that suggestion will not meet
with favor, but I believe that the banks of New England and par
ticularly the country banks, of which we are one, believe such an
arrangement would be simpler, less cumbersome, more effective, and
would prevent the competition in times of stress which would natur
ally spring up among the 12 regional banks in reference to thenreserve. The bill seems to recognize the desirability of a central
control in the establishment of the reserve board, which is the
supreme power. Why not have one central bank in which the reserves
of all the banks can be kept, and avoid the possible complications of
competition, which is almost sure to arise; because it is the experience
I thmk of bankers everywhere that when things look uncertain, or
when there are times of stress, each of us, all of us, seeks to strengthen
our own position with more thought with regard to what concerns us
and our customers than anyone else; and I should fear, we fear in
New England, that that may be the result of this number of regional
banks.
And if it were not possible, in the wisdom of the committee, or not
desirable, to have one, then we should like to have the number reduced
as low as possible. But personally, and speaking, I believe, for the
large number of banks in New England, we are in favor of one central
bank, with such branches as may be necessary for the proper execu
tion of business. I want to leave that suggestion with you.
I have one other. On page 29, section 17, with reference to the
Federal reserve notes, it is the opinion, I think, almost without excep
tion of New England bankers and of all the bankers with whom I
have had conversation— a large number—that these notes should not
be issued by the Government but should be issued by the banks under
proper Government restriction and regulation, and that when they
are redeemed, as they should be, they should be redeemed in gold
and not “ in gold or other lawful money.” These notes, whether
they be the notes at present in circulation, the Treasury notes, or
whether they be the notes of banks which will be issued, or issued by
the Government under this bill, if it carries, are not money. They
are promises to pay. There is no money except such as is recognized
by nations of the earth, the first-class nations of the earth, of whom
we are one of the chief, and it seems to us that these bills should be
redeemed, when they are re 1
J
1
1
1
' 1 ' is current
1
in the commercial centers
alone. I
would have a sufficient amo
o
:>anks that
issue these notes that they may be at all times redeemed. When we
have a foreign balance to settle we settle it not in other lawful money
or anything but gold or its equivalent, and it seems to me we ought
to treat ourselves as fairly as we treat our foreign friends and that
we should have that matter settled beyond any peradventure in the
bill. It should be beyond any question that the United States stands
upon a gold basis and upon a gold basis alone.
Those two points, Mr. Chairman, after all the others who have
been before me, were the only ones I was particularly requested to
speak upon, and I have done so.
The Chairman . Senator Nelson, have you any questions to ask?
Senator N elson . N o.
The Chairman . Senator Hollis ?
BANKING AND CURRENCY.
1227
Senator H ollis . I think it ought to be stated, so that it will appear
after your question, why we should not have one central reserve
bank. The reason is that the people of the country, as a whole, are
afraid of one great central institution, bearing in mind what hap
pened at the time of Jackson and the bank. That is the short answer,
and that is probably the correct one to your objections.
Mr. B ow m an . Of course conditions, Senator, have changed a great
deal since that time—•commercial conditions. I doubt whether at
the present time one reserve bank of adequate size, under proper
Government regulation, would not meet every requirement of banks
of the country and be entirely satisfactory in its operation.
Senator W e e k s . Y ou would not be in favor of a reserve bank
framed exactly as were either the first or second United States banks,
would you ?
Mr. B ow m an . N o . I am in favor of one bank under such general
powers as these regional reserve banks have, but 1 instead of 12,
concentrating and mobilizing the reserves of the country.
Senator W e e k s . D o you know of any sentiment anywhere against
Government control and supervision ?
Mr. B o w m an . N o.
Senator W e e k s . Of the reserve bank or banks ?
Mr. B ow m an . N o, Senator; none.
Senator W e e k s . Or against the Government control and super
vision of the issuing of circulation ?
Mr. B ow m an . N o.
Senator W e e k s . Whether the circulation is issued by the Govern
ment itself or by the banks ?
Mr. B ow m an . I know of no such opposition. I think it is the uni
versal sentiment, Senator, that there should be the fullest Govern
ment control and supervision. But I believe the notes should not
be issued by the Government itself, but by the banks. I think the
hist ory of nearly all the nations teaches us that that is the line of
issue which has been most satisfactory the world over.
Senator W e e k s . And responds most readily to business condi
tions ?
Mr. B ow m an . Absolutely so; yes.
Senator W e e k s . And necessities ?
Mr. B o w m an . Yes.
Senator W e e k s . That is all.
The Chairm an . Senator Bristow ?
Senator B ristow . Y ou are in favor of one central bank and sug
gest that it is generally conceded that public opinion does not take
favorably to that view, and for the reason, doubtless, as stated by
Senator Hollis, that the people are afraid that the power of one
central concern would be used in the interests of those who control
it more than in the public interest. For one, I think there is very
grave cause for such a provision. What would you think of a cen
tral bank controlled by the Government? Under this system now
there are 12 regional banks with a* one-third representation on the
boards by the Government— that is, they are political appointments—
and then there is the central board which is all governmental in its
character, and it has very groat power over these 12. Now, if a
single central reserve bank is more desirable than 12, how would it
1228
BANKING AND CURRENCY.
be to have a single central bank controlled by the Government, or
by a board similar to this one that is to control all of these ? In that
way the reserves could be mobilized into one reservoir, as has been
suggested by a number that have appeared before us. What would
you think of such a plan as that ?
Mr. B ow m an . Well, Senator, I should be in favor of the single
bank as against the 12, as I stated. I think that bank should be under
Government regulation, but I do think that the banks that furnish the
capital for such a bank as they would for these regional reserves,
should have a large voice so far as the boards of directors and general
conduct of the business is concerned. We are now, as national banks,
under the direct supervision and control, in a large sense, of the
Federal Government; but we select our own directors, our stock
holders select to manage their business the directors they wish to
have. And while it would be proper, perhaps, that in such a bank the
Government should have direct representation, yet I think the man
agement of the business under governmental supervision and control,
used in that sense, should select their own people, who are stock
holders, to manage their business.
Senator B ristow . I understand that is your view. That is the
central bank, of course. But, in my opinion, there is not any possi
bility of a central bank being organized by this Congress, such as you
suggest. There is a probability of 12 regional banks being organized,
controlled by a board of directors, part of whom are elected by the
bank and part of whom are appointed by the President. And these
12 regional banks, with the central political control, are placed under
the supervision of a board that is wholly political and in the selection
of which the banks have no voice. Now, the criticism of the 12 is
that it does not mobilize the reserves sufficiently. They are scattered
too much, and there is the danger of competition, as has been sug
gested, between these regions for the money. Now, the Government
proposes to control the rate of discount; would it not be better
for the Government to establish a central bank and to make it
voluntary as to who should subscribe to the stock of it ?
Mr. B ow m an . Y ou mean individuals?
Senator B ristow . Individuals or banks, and let it be a bankers’
bank and a bankers’ bank only.
Mr. B ow m an . Without any Government supervision, you mean ?
Senator B ristow . Oh, let the Government run it entirely.
Senator H ollis . Y ou mean without any private capital at all?
Senator B ristow . Oh, yes; let it all be private capital; let any
body subscribe that wants to, but let the Government run it. The
Government is going to have a board of 7; it is going to run these 12
from Washington. The details of management, of course, are left
with the local boards on which the Government has a representation
of one-third, but the removal of two-thirds of them is subject to the
President, anyway; he can remove any of them other than the three.
So that this Federal reserve board here has a very great power-----Mr. B owman (interposing). Very.
Senator B ristow (continuing). Over the property and the capital
of men who are compelled to subscribe to it if they continue as na
tional banks. Now, instead of that kind of a complicated organiza
tion, that is, half and half or part and part, how would it do to estab
lish a central bank, as you suggest, except that it is a Government
BANKING AND CURRENCY.
1229
bank and managed by .the Government and performs the functions
that the central bank would so far as the banks are concerned, and
deals only with banks ?
Mr. B ow m an . D o you mean, Senator, that that central bank
would also issue this circulation ?
Senator B ristow . Issue the circulation.
Mr. B ow m an . I should object to that. I do not believe it is the
province of the Government to issue circulation.
Senator B ristow . But the Government is going to do it anyway.
There are a great many men who have your view of that. That is
my judgment. A majority of the people of the United States are
in favor of a Government currency, and the currency that will be
issued will be Government notes. I think you can assume that.
Mr. B o w m an . I should like to get on record my contention you
are wrong in that.
Senator B ristow . Y ou would? Time will demonstrate whether
these notes will be issued by the bank or by the Government only.
But if I understand the sentiment of Congress, and we are to legis
late in a few months anyway on this subject, those notes will not be
bank notes but Government notes, and banks will get them from the
Government and give collateral for them.
Senator W eeks . If I may suggest, I think the witness, Mr. Bow
man, meant Congress would be wrong in authorizing the Govern
ment to issue them.
Mr. B ow m an . That is what I meant.
Senator B ristow . Oh, that is your opinion. I recommend that,
and am very glad to have you state that, because I know that Senator
Weeks here and a great many very able financiers throughout the
country think that is entirely wrong.
Mr. B ow m an . I am sorry my statement was misunderstood.
What I meant was quite exactly what Senator Weeks suggests.
Senator B ristow . I understood you to say Congress would not
provide them ?
Mr. B ow m an . Oh, no; I would not undertake to have an opinion
on that subject.
Senator B ristow . That was what I understood. So I realize,
now-----Mr. B owman (interposing). I am very glad to have that set right.
Senator B ristow . Yes. Now, considering the fact that your
views as to what ought to be done as to the issuing of this currency
will probably not be the views of the majority of Congress as between
12 regional banks managed as they will be, three directors selected
by the Government, six of them removable at the will of the Presi
dent, and these, all of them, under the supervision of a board that is
wholly political and upon which the bankers have no representation
whatever, what I am trying to find out is whether or not you believe
it would be better to carry out the central-bank idea, so far as one
central bank is concerned, and have it managed by a Government
board rather than have 12 managed by a Government board such
as the bill provides ?
Mr. B ow m an . I am inclined to think, Senator, that if it came to
that, if there was to be a central bank which would be wholly a
Government bank, absolutely controlled, in which none of the stock
holders would have a word to say, and that bank was to issue the
1230
BANKING AND CUBRENCY.
currency also—in fact, be the whole thing— without reference to any
body else, I would rather have the arrangement as it is suggested in
this bill, because we do have something to say.
Senator B ristow . But there is this difference: I would like to have
you consider in the suggestion I make the stockholders in the Gov
ernment bank would be voluntary. They could subscribe or not as
they saw fit.
Mr. B o w m an . Yes.
Senator B ristow . Under the present system it is not voluntary.
They will have to subscribe if they remain as a national bank. Would
that fact have anv weight in the matter, in your judgment ?
Mr. B o w m an . Well, the witness who preceded me said that that
was the feeling in a good many of the banks, and I think that is true,
that the banks ought not to be compelled to subscribe, but ought to
be permitted to.
Senator B ristow . Yes.
Mr. B o w m an . I think that the bill should be made so attractive
that they would desire to. You come to a country bank, take a
small country bank, and let it be put up to the management that they
must subscribe, whether or not, if they remain in the system, put up
20 per cent ultimately, or be liable to 20 per cent of their capital, over
which they have practically no control, and on which under this bill
they are not to receive as much income, at the maximum, as their
money is worth in their own business, and they naturally feel more
or less averse to becoming a part of such a plan.
So that, if the bill, after careful consideration on the part of this
committee, could be so amended as to make that more attractive to
these people, so that they would like to subscribe, rather than feel
they were compelled to— if that were possible, I think it would be a
desirable thing to do.
Senator B ristow . N ow , if this board of directors of seven, which
the President has to appoint, should be appointed as the directors
instead of a Federal board or Federal bank, and subscriptions were
invited to that bank, and bankers were given the first choice of taking
stock, and if they took it, well and good, and if they did not, let
citizens come in and subscribe, and then make it a depository of
United States funds; limit the earnings on the capital subscribed to
a reasonable amount, 5 or 6 per cent; and say that any bank in the
United States could rediscount certain kinds of paper there, just as
properly as the Federal reserve banks that we are contemplating
here in 48 cities, where we have these reserve associations, or more
if it is necessary, and let the Federal Government manage, in fact
and assume the responsibility instead of coercing the banks to sub
scribe. Then assuming the responsibility, let it, if it sees fit, limit
the amount of earnings that the reserve banks shall make, or of
directing one reserve bank to send its money to another section of
the country, if in the judgment of the Federal board it needs it
worse than the region where that bank may be located; can you not
see, getting away from any prejudice you may have against the
Government getting into the banking business— it is in it anyway— can
you not see that, if properly managed, they might be as useful as
any central bank might be under the control of private bankers, and
that you would relieve them from the prejudice which the public has
r
BANKING AND CURRENCY.
1231
against the private control of a concentrated system such as a central
bank under bankers’ control would be ?
Mr. B ow m an . I do not think it would meet with general favor.
Senator B ristow . Y ou do not think it would?
Mr. B ow m an . I do not believe it would.
Senator B ristow . A good deal has been said here about politics
controlling the banks. Objection has been made by the gentleman
who preceded you, who seriously objected to banks being controlled
by political appointees and who cited some instances as evidence
that they might be incompetent; that is, that the political emer
gencies which confront an administration might induce it to consider
more its political welfare than the welfare of the investors in these
banks. Is there not another side to this?
I was talking to a Senator at noon, and he remarked that he was
not so much afraid of the politicians managing the banks, as the
banks managing the politicians; that he thought we were putting
the 25,000 banks into politics, and they would run the politics of the
country instead of the politicians running them. What do you
think of that? Do you think there is any danger of that kind of a
condition ?
Mr. B ow m an . Of the banks running politics?
Senator B ristow . Yes. You think this bill would not put the
banks into politics?
Mr. B ow m an . No ; I do not, sir. I do not think politics ought to
have anything to do with it.
Senator B ristow . It is not the question of what ought to be.
You have expressed that with a good deal of clearness, and other
witnesses have expressed the same thing— that politics ought not to
have anything to do with the management of these banks. But it is
declared that this is to be a political board—in fact, a political man
agement, because six of the nine directors of the banks are subject to
political removal.
Now, a gentleman said to me the other day, and I think he stated
it to the committee, that when this law was passed, as a matter of
self-defense, the banks would have to go into politics.
Mr. B ow m an . I do not think he was right.
Senator B ristow . Y ou think he was not right?
Mr. B ow m an . I think not; I have not any idea that he was.
Senator B ristow . That is all.
Senator H itchcock. Mr. Bowman, your argument in favor of 1
bank as against 12 appears to be based upon the impression that the
12 would compete with each other for reserves very much as the
reserve banks now compete with each other and would continue
the practice which is now in existence. Is that correct? Have I
understood you correctly to say that that is your real reason against
12 banks?
Mr. B ow m an . That is what is feared on the part of a good many
bankers; yes.
Senator H itchcock . Have you formed any opinion as to the deree of this competition? Would it be such as in times of stress to
e very serious?
Mr. B ow m an . I do not suppose anybody can tell just how it
would work out, but there are m this country to-day a good many
f
1232
BANKING AND CURRENCY.
thousand banks. I have had more or less experience in that line,
and I know when the occasion seems to demand it we all seek to
strengthen our own individual positions in reference to what we fear
may be coming, whether our fears are well grounded or not. It has
seemed to me, and it has seemed to others, that the same principle
would apply in reference to the regional banks, and that they would
be, perhaps, in severe competition with each other for the purpose
of strengthening their own reserves.
Senator H itchcock. So that to that extent the benefits of mobili
zation would be lost ?
Mr. B ow m an . I should think so.
Senator H itchcock. N ow , you have expressed, as most bankers
have, the opinion that the currency issue should consist of bank notes
and not United States notes, and taking Senator Bristow’s assump
tion as correct, that there is very little probability of Congress resort
ing to an issue of bank notes, what would be your opinion as to the
reserves which the United States should keep on hand for the re
demption of those notes ?
Mr. B ow m an . I think the reserves ought to be very strong, Sena
tor; not less than 50 per cent.
Senator N elson . In gold?
Mr. B ow m an . Not “ in other lawful money,” but in gold.
Senator H itchcock. Not less than 50 per cent. Is it your opinion
that the reserves should be in the regional banks or in the Treasury ?
Mr. B ow m an . A fair proportion should be in the regional banks,
if, as intended in the bill, they are to be accepted for the purpose of
redeeming these notes. They must have the money with which to
redeem them.
Senator H itchcock. The experience of the national banks is that
the national-bank notes are redeemed at the Treasury and not at the
counter of the issuing bank ?
Mr. B ow m an . Yes.
Senator H itchcock. D o you think that would be true to the same
extent with these reserve notes ?
Mr. B ow m an . Under the provisions of the bill, it says that they
shall be redeemed either at the Treasury or at any one of these re
gional banks, and I should imagine there would be a good many bills
presented at the regional banks for redemption.
Senator H itchcock. That is true of the national-bank notes, that
they may be redeemed at the national banks ?
Mr. B ow m an . Yes; they may be.
Senator H itchcock. The fact is that last year 87 per cent of
national-bank notes were redeemed at the Treasury; that is, over
$600,000,000 worth of national-bank notes were redeemed at the
Treasury.
Mr. B ow m an . I have no doubt that the larger portion of them
would go to the Treasury.
Senator H itchcock. In view of that fact, what would be your
opinion as to where the gold reserves should be placed for redemption ?
Mr. B ow m an . I think it ought to be kept in both places.
Senator H itchcock. Y ou expressed your approval of the idea .of a
banking system under Government control. Will you define what
you mean by “ Government” ?
Mr. B ow m an . I mean the Federal Government.
BANKING AND CUEBENCY.
1233
Senator H itchcock. H ow would you define the Federal Govern
ment ?
Mr. B ow m an . Well, I do not know that I exactly follow you.
Senator H itchcock . When you said, “ Government control/’ did
you mean presidential control ?
Mr. B ow m an . N o.
Senator H itchcock . Y ou understand that this board is entirely
under presidential control ?
Mr. B ow m an . Yes, sir; as contemplated here?
Senator H itchcock . Yes.
Mr. B ow m an . Yes.
Senator H itchcock . Are you in favor of a board under presidential
control ?
Mr. B ow m an . I am not in favor of a board under absolute presi
dential control, where all the members of that board are subject to
political appointment, of either party.
Senator H itchcock . This bill provides a board under presidential
control.
Mr. B o w m an . Yes.
Senator H itchcock . And it is always a misuse of language to call
it “ Government control.”
Mr. B ow m an . That is a distinction which I had not made in my
mind. I would say “ presidential control.”
Senator H itchcock . It is a very important distinction, because
the Congress of the United States is a very large portion of the
Federal Government.
Mr. B ow m an . Yes; I realize that.
Senator H itchcock . I think the tendency is to reduce it all the
time, and to create autocratic powers in the President, but I want
that distinction clearly understood— that it is presidential control and
not governmental control which is proposed.
Now, I want to ask you if you can see any distinction between 12
regional banks under one control and 1 bank under one control ? Is
there any distinction so far as an objection to a single control is
concerned? Is not the gravamen of the objection to a single bank
the fact that it is a single control which the people are objecting to ?
Is not a single control over 12 regional banks just as obnoxious on
that account as a single control of 1 bank ?
Mr. B o w m an . I do not think it is, quite, Senator.
Senator H itchcock. Will you please explain the difference ?
Mr. B ow m an . I do not know that I can explain it to your satis
faction.
Senator H itchcock . Just explain it your own way.
Mr. B o w m a n . Of course, there can not be 12 banks without each
one of them having some initiative of their own, or else they would
be unwieldy and inoperative. The very thing which I suggested at
the beginning, which is the feeling of a good many bankers, that
competition, each man for himself, in the regional banks would
operate unfavorably, I should be afraid of. There could not be any
such Federal presidency, with single control, as would absolutely
eliminate that feature if there were a large number of banks in the
country having similar powers; that is, I should be afraid that would
be the situation.
9328°— S. Doc. 232, G3-1— vol 2----- 18
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BANKING AND CURRENCY.
Senator H itchcock. D o you think that this Federal board, as
roposed in this bill, would be regulating the system of reserve
anFs, or would it be running them ?
Mr. B ow m an . Y ou mean whether the Federal board would control
the banks or be running them ?
Senator H itchcock. Yes; whether the board would control the
banks or run them.
Mr. B ow m an . I do not know, I am sure, what they would do.
There was never any board ever heard of which had such unlimited
powers.
Senator H itchcock. Suppose the Interstate Commerce Commis
sion, which is supposed to regulate the railroads, had a right to appoint
one-third of all the directors of the railroads, and had the right to
remove another third which was chosen by the stockholders— had the
right to remove officers of the railroads—would you say the Inter
state Commerce Commission was regulating the railroads or running
them ?
Mr. B o w m an . I should say they were running them.
Senator H itchcock . D o you not think it is a fair assumption to
say that this Federal board is running the banks ?
Mr. B ow m an . I should say so, in a sense.
Senator H itchcock . That is what is proposed in this bill.
Mr. B ow m an . They are, in a sense. Their powers of regulation
and control seem to be very wide.
Senator H itchcock. N ow , then, the Federal board has the power
to control the volume of currency, to a considerable extent, in addi
tion to these other powers. Is that power to control the volume of
currency and the volume of credit not the power also, as a result, to
control the business of the country ?
Mr. B ow m an . Well, they can go a long way toward helping or
hindering the business of the country; there is no doubt about that.
Senator H itchcock . A restriction of interest at any time, a re
striction of the volume of currency and credit, will inevitably result
in falling prices, will it not ?
Mr. B ow m an . I think so.
Senator H itchcock . It forces people to market their goods, it
forces merchants to sell their merchandise, and forces men who have
stocks to sell their stocks, so that in the hands of seven men would be
the power to depress prices or raise prices in the country ?
Mr. B ow m an . I think so.
Senator H itchcock . D o you think it is safe to lodge so much
power in seven men ?
Mr. B ow m an . I do not think it is safe to give them so much power.
Senator H itchcock . Y ou think there should be some limit on the
power of the Federal board?
Mr. B ow m an . I do.
Senator H itchcock . Under the terms of this bill a member bank
may go to a reserve bank to discount its notes, and may be abso
lutely refused, and it has no appeal. Another bank, across the street
from this member bank, may go to the Federal reserve bank and get
the right to discount an unlimited amount of its paper. Do you
think that is a safe power to give to the Federal reserve bank, the
right to discount everything for one bank and to refuse another bank ?
E
BANKING AND CURRENCY.
1235
Mr. B ow m an . Well, practically, Senator, I can not imagine that
anyone who would be competent to be in charge of a Federal reserve
bank would refuse to discount for a member bank, if the member
bank presented paper which was proper to discount.
What you state sounds unfair, but in practical business it would
not work out that way, I think. That is to say, if you were a regional
reserve bank, and I came to you, being a member bank, to ask for
discount, and presented paper which was proper for rediscount, you
would probably take it and give me what I asked for, and if I did
not have paper that was proper to be rediscounted, I should think
we ought to reform our methods of doing business, make better loans,
and get into our hands paper that would be acceptable. Perhaps
that would have the effect of weeding out some banks that are con
ducting business in an improper way. I should not expect, in prac
tical experience, that there would be unjust discrimination between
one bank and another.
Senator H itchcock . Can your mind go back to the time when the
railroads of the country were making such a discrimination between
shippers that Congress was compelled to say to the railroads, “ You
must treat each shipper absolutely the same;” and yet you would
not have imagined that the great railroad companies would have
deliberately made that gross discrimination between shippers which
would ruin one company and build up a monopoly, and yet you know,
as a matter of fact and of history, that the grossest discrimination
did occur until Congress took steps to stop that by ordering the
railroad companies to treat all shippers alike. Do you think you
can treat the reserve banks with any less severity than you have
treated the railroads in the matter of regulation ?
Mr. B ow m an . I think you can.
Senator H itchcock . D o you not think the same protection you
extended to .the shipper should be extended to the bank ?
Mr. B o w m an . I do not think there is any need for it.
Senator H itchcock . Then perhaps you did not think it was nec
essary to extend it to the shipper ?
Mr. B o w m an . Yes, I think it was.
Senator H itchcock . Why could not the railroad be trusted as
well as the bank ?
Mr. B o w m an . Take the history of the banks the last 50 years.
It is true there has been great accumulations of capitals in various
centers. I think it is equally true, Senator, that whenever there has
been occasion for the use of that accumulated capital, it has been
wisely distributed throughout the country without discrimination.
I do not think there has been anything in the conduct of the banking
business in the last 50 years which would justify comparison between
it and the experience with the railroads of which you speak.
Senator H itchcock . Then you think a reserve bank, performing
a public function— that its directors should be left entirely free to
refuse to discount the paper of a bank on one side of the street while
granting to a similar bank on the other side of the street unlimited
discount without any restriction at all?
Mr. B o w m an . I think the directors should be men who could be
trusted, and the officers should be those whose judgment could be
relied upon to do the thing for the public interest that they would
be safely justified in doing. Every banker knows he has plenty of
applications for loans which he is obliged to refuse, and the very men
I
1236
BANKING AND CURBENCY.
who are refused will go out and say hard things about the banker
because he can not get what he wants.
But, as a matter of fact, no man, and not any bank of which I
have any knowledge— and I have been in the business for 46 years—
has ever been refused when he had reason to ask for what he wanted.
Senator H itchcock . I believe you said you are in the banking
business in Springfield, Mass.
Mr. B o w m an . That is correct.
Senator H itchcock . H ow many banks are there in that city?
Mr. B o w m an . There are six.
Senator H itchcock . And if a man comes into your bank and asks
you to loan him $10,000, and you refuse him, he has five other places
in your city to which he can go ?
Mr. B o w m an . Yes.
Senator H itckcock . Suppose your bank goes to the reserve bank,
in which you have practically everything locked up in the way of
reserves that you have not got in your own vaults, and you go to
your reserve bank, and it refuses you, what are you going to do ? Do
you not see there is a vast difference right there; that a customer, if
he is not treated well in one bank, under the competitive system, can
go to another bank and get what he wants, and under this system
which it is proposed to create, where a bank is compelled by law to
put one-tenth of its capital into the reserve bank, and keep 5 per
cent of its reserve in that bank, and then is not guaranteed a single
thing in case of need from that very place ? Is there not a difference
between the competitive system in Springfield, with the six banks
you speak of. ana the situation which would exist under the provi
sions of this bill ?
Mr. B ow m an . If it worked out it would seem to be unfair.
Senator H itchcock . I am not asking you that. I am asking if
there is not a radical difference between the situation you described
and the situation which is going to be created in this bill ?
Mr. B ow m an . It seems to me you are suggesting an improbable
situation.
Senator H itchcock . I s there not a difference between the com
petitive system and this monopolistic system which it is proposed to
build up here ?
Mr. B o w m an . Yes.
Senator H itchcock . There is a radical difference ?
Mr. B ow m an . Yes.
Senator H itchcock . So that the illustration is not of any value ?
Mr. B ow m an . N o.
Senator H itchcock . Y ou are in exactly the same position as the
shipper is on a railroad where he has no other place to go, and can
not ship his goods except over that railroad, and you have conceded
that the railroads must treat all shippers alike. Do you not think
the same Government that said to the railroads, “ You must treat
all shippers alike/’ should also say something of the same sort to
these reserve banks that are given this big power ?
Mr. B ow m an . Yes; except that the Government can not say— you
would not say that the Government should say— that a regional
bank should discount poor paper for a member bank, and take paper
which they did not think was good, if it did not have anything else,
would you ?
BANKING AND CURRENCY.
1237
Senator H itchcock . N o ; I have not proposed such a case. I
have proposed, in the first place, that there shall be a limit on the
amount of paper which a reserve bank shall rediscount for any
member.
Mr. B ow m an . That is very well.
Senator H itchcock . That is not in the bill.
Mr. B ow m an . I suppose you can put it in the bill.
Senator H itchcock . I propose m the second place that the
reserve bank shall not taboo and refuse to discount paper for a bank
because it does not like the way the bank is run.
Mr. B ow m an . I quite agree with that.
Senator H itchcock . And yet we have had witnesses here before
this committee who have asserted that the reserve bank ought to
have a disciplinary power, and if a member bank fails to come up to
the standard of the board of directors of the reserve bank, it shall
be refused credit when it comes.
Mr. B ow m an . I should say that the only thing that ought to
justify a refusal would be the quality of the paper presented for
discount.
Senator H itchcock . Then you would be in favor of some safeguard
put in there so that the banks would be able to get something as a
matter of right, and it should not be left wholly discretionary with
the reserve bank whether paper should be discounted or not ?
Mr. B ow m an . I would.
Senator H itchcock . That is all I have to ask.
Senator B ristow . I would like to ask a question or two along this
line. You spoke of competition between the reserve banks being
inevitable where there are a number of them. Now, if there was
one central bank that competition, of course, would not exist, would
it?
Mr. B ow m an . I should think not.
Senator B ristow . So that if the management of the central bank
was similar, we will say to the management of the reserve bank,
then you would regard the central bank as the better of the two
systems ?
Mr. B ow m an . I think I would.
Senator B ristow . Well, you would not favor a central bank
managed by this central board; you would prefer 12 regional banks
managed by the central board in addition to their present local man
agement ? If the one central bank had the same provision as to
management that the regional banks have, then you would believe
that the one central bank would be better?
Mr. B ow m an . I think I would.
Senator B ristow . Now, you said you did not think that in 50 years
the banks had ever discriminated against one concern or individual
in favor of another as the railroads did. Are you really sure that the
banks have not made it impossible to promote an enterprise because
they were in competition with some of their business friends or
depositors ?
Mr. B ow m an . I could not say, Senator, as to individual cases.
Senator B ristow . I will call to your attention a little personal
incident, and ask you what you think about it. The vice president
of a very large bank was in the little town in which I live a few years
ftgo, and I was talking to him about financing a railroad proposition.
1238
BANKING AND CURRENCY.
He was not familiar with the nature of the enterprise and I explained
it to him. He grew quite enthusiastic and said, “ That would be a
fine thing, and when you get ready we would like to handle the paper
for you, and we can do it.” He went on, and in the conversation it
appeared that four railroads had parceled out a certain territory in
the West there and had come to an agreement that they would not
extend any more branch lines into that territory; that each road
should have the territory which it then controlled, and that the one
would not run into the territory of the other. This branch line would
have run into the territory of one of these competing roads, and of
course, it would have objected to it—it always had objected to it—
and the general manager of the railroad said to me at one time that
they did not intend to permit that line to be built because it would
interfere with their territory.
I suggested to him, “ Suppose this railroad, through its officers,
should object to your company financing this enterprise, and put its
foot down on it with vigor. Will that influence you ? These gentle
men who are going to put their money into this know what they can
depend on, and they do not want to be let down and ruined by any
failure.” “ Well,” he said, “ I will have to think about that a while.”
About a month after that I communicated with him, and he said they
could not handle the securities. I learned that the vice president of
this road was one of the directors of this bank.
Now, what do you think caused that vice president to change his
mind as to the desirability of handling that security?
Mr. B ow m an . Probably he did not like the security. [Laughter.]
Senator B ristow . That was the reason he assigned, but that was
not the reason, was it?
Mr. B ow m an . I do not know.
Senator B ristow . I had rather hoped I might have a more frank
answer from a witness that has been as frank as you have been in all
other matters. But appealing to your judgment and your knowledge
of human affairs, you know that the reason he changed his mind was
the influence of this railroad upon his bank, was it not ?
Mr. B ow m an . I do not know. I think I will let my answer stand,
Senator.
Senator B ristow . Y e s * I think so too. Now, do you think that
situation is any different from the case of the shipper who might
be shipping salt in very large quantities out of one community where
the railroads charged a joint rate, on a little switching line, a very
short distance, at one salt plant— which while under the control of
a separate corporation, was under the same ownership— and that joint
rate was very much higher than the rate from another salt plant,
although the salt plants were then within three-quarters of a mile of
each other and the salt was shipped to the same destination—don’t
you think that the reasons that caused the banker to change his mind
were very similar to the reasons assigned for this increased rate;
that it was because there was a joint rate and it was not a continu
ous rate on their line ?
Mr. B ow m an . I could not say. I do not think I would want to
answer that until I knew all the circumstances.
Senator B ristow . I have given you all of the circumstances.
Mr. B ow m an . When I spoke as I did, Senator and gentlemen, I
meant in a broad general way. I think every man here will con
BANKING AND CURRENCY.
1239
cede that, as a whole, the banking business of the country in the last
50 years has been conducted on a pretty high plane. That is what
I meant to say, and I think that is true.
Senator B ristow . D o you think it has been upon any higher
plane than any other business of that magnitude ?
Mr. B ow m an . Well, a good deal higher plane than the railroad
business, to some extent.
Senator B ristow . I s it not a fact that in many sections of the
country the railroad influence is sufficient to determine the policies
of the banks ?
Mr. B ow m an . I do not know about that.
Senator B ristow . In many of them.
Mr. B ow m an . I do not know of any such cases.
Senator B ristow . Y ou think that a very heavy deposit from a
railroad, the officers of a railroad being officers of the bank, does not
influence that bank, so far as its extension of accommodations to that
railroad is concerned ?
Mr. B o w m an . N o, sir.
Senator B ristow . Y ou think it does not ? I am very sorry you are
so poorly informed in regard to the conditions that exist west of New
England. I suppose that your ideas have been derived from the
relationship that exists in New England.
Mr. B ow m an . Well, in the East. That is true, largely.
Senator B ristow . Are you familiar with the financing of the
Moffitt road out at Denver ?
Mr. B ow m an . N o, sir; I am not.
Senator B ristow . Y ou have not read of the experiences of Mr.
Moffitt in his efforts to get money to build this road ?
Mr. B ow m an . Yes; I have read something about it.
Senator B ristow . D o you think that Mr. Moffitt was treated with
the consideration that he would have received if the railroads with
which his line was going to compete had not interfered with his
efforts to finance it ?
Mr. B ow m an . I do not recall now, Senator, how he was treated.
I have always supposed Mr. Moffitt was pretty well able to take care
of himself.
Senator B ristow . He was while he lived, and he did take care of
himself.
Senator H itchcock . He bankrupted himself trying to build the
road.
Senator B ristow . I should like to ask you, since I was invited
here to read one of Prof. Fisher’s books, to read Mr. Moffitt’s state
ment of his experiences with the New York banks.
Mr. B ow m an . I would much rather read that than to read Prof.
Fisher’s book. [Daughter.] I should feel bound to do, as far as I
could, anything that this honorable committee might suggest, but
I hope it will spare me that. [Laughter.]
Senator B ristow . That is all. I do not know that I agree with
the witness.
Senator P omerene . Let me ask you just a question or two. I
believe you stated that you objected to that provision of the bill
which makes these notes the obligations of the Government. Did
I not so understand you ?
1240
BANKING AND CURRENCY.
Mr. B o w m an . Yes; I said I did tliink they should be the obliga
tions of the banks.
Senator P omerene . N ow , do you not feel, under the provisions of
this bill, that the payment of these notes is pretty adequately secured,
first, by the assets which are hypothecated as collateral; secondly,
by the gold reserve; thirdly, by the fact that they are a lien upon
all the assets of the bank; and, further, protected by the double
stock liability?
Mr. B ow m an . D o you wish me to answer now ?
Senator P omerene . Yes.
Mr. B ow m an . I did not know that you had completed your
question.
Senator P omerene . I think I have.
Mr. B ow m an . I have no question in my mind about the adequacy
of the security. However, in the clause which says they shall be
redeemed in gold or other lawful money, I would strike out “ or
other lawful money ” and make them redeemable in gold alone. So
far as the security is concerned, it seems to me to be ample.
Senator P omerene . I understand, and that is the answer I
expected you to make to the question. Now, then, conceding, as
you do, the fact that these notes are amply secured, what is the
serious objection to making them the primary liability of the Gov
ernment ?
Mr. B o w m an . Well, it seems to me, Senator— and this is merely
the expression of an opinion and is not worth much, I presume-----Senator P omerene (interposing). It is worth considerable, other
wise I should not have asked it.
Mr. B ow man (continuing). That it is far better to have the Gov
ernment furnish the gold to the banks with which to redeem these
notes and have the banks issue them and not have the Government
with a large amount of bills which it shall be, perhaps, called upon to
redeem in times when it will be an embarrassment to the Govern
ment to do so.
Senator P omerene . N ow , Mr. Bowman, of course, if it were to
redeem or had to redeem these notes, that would be another proposi
tion; but you have just admitted that these notes are amply secured.
The securities are passed upon by the Government before the notes
themselves are issued. I can not see that there is a contingent liability
if these securities should waste for some reason or other, but it seems
to me that it is insignificant as compared with the additional credit
which the name of the Government would add to the notes themselves,
so far as the public interest is concerned.
Mr. B ow m an . D o you mean to imply, because an obligation is
secured, that therefore the means for its redemption are inconse
quential ?
Senator P omerene . That depends upon the security.
Mr. B ow m an . I should not say so. Even if a note is secured, we
want it paid some time.
Senator P omerene . Most assuredly, and under the provisions of
this bill we have provided, it seems to me, against every reasonable
contingency that might arise— by the reserve, by the hypothecation
of the assets, by the lien upon the entire assets of the bank, and by
the double stock; liability.
4
BANKING AND CURRENCY.
1241
Mr. B ow m an . Well, if there should happen to be a very large out
standing issue at any time— I do not know that there will be; I do
not suppose anybody knows until this bill, if it becomes a law, is in
full operation, but I can conceive of a time when, by reason of inad
equate income, and there are some who say that the operation of the
tariff bill which has been passed is going to greatly reduce the Gov
ernment receipts. And there is war; we may have Mexico on our
hands— God forbid, but we may. And other contingencies might
arise when it would be very embarrassing for the Government to have
those bills presented at the Treasury for redemption, they being a
direct obligation of the Government. It seems to me, Senator, that
the history of nearly every nation should teach us that the most
elastic and, on tho whole, the most satisfactory currency for any
people is a currency of tho nature proposed by the-----Senator P o m erene (interposing). But we are a Nation of peace,
and I do not think we should be guided by what may be the policy
of a nation that is constantly preparing for war, as the European
countries are. And you overlook, it seems to me, this fact, that this
security, which you indicate might be dissipated, is not of such a
character that it can readily be dissipated, because it is being re
newed constantly every 90 days.
Now, it seems to me that all those are circumstances which over
balance the objection which is raised to making these the direct
obligation of the Government. I do not concede it would be a calam
ity if the Government should have these notes to pay, but I do not
believe there is a possibility that it would have them to pay. That
is all I care to say.
Senator N elson . Are you in a hurry to go ?
Mr. B ow m an . I want to catch the 5 o’clock train to New York.
I suppose I shall have to leave at 4.30.
Senator Siiafroth . Of course, if you are going-----Mr. B ow m an . N o, Senator, let me answer your questions.
Senator H itchcock. The tariff bill will not go into effect before
you get away.
Senator Shafroth . The way this bill provides for the regional
reserve banks, you are in favor of striking out the words 'Tawful
money” and making it read "g o ld ” alone, as I understand you?
Mr. B ow m an . I am.
Senator Shafroth . Don’t you recognize that that would impose a
less likelihood of the Government in times of stress maintaining the
gold reserve than if it were left the way it is ?
Mr. B ow m an . I think there is gold reserve enough in this country
for all purposes.
Senator Shafroth . Don’t you think the strain on the National
Treasury would be a good deal less if these notes were made just the
way the bill provides they shall be ?
Mr. B ow m an . Why, it would be a good deal easier for lots of
people if they could pay their debts in something which is not money.
But my judgment is, and I believe it is the judgment of the bankers
throughout the country—that is what you are asking for when you
have us here— that the only thing to redeem your outstanding
obligations in, as a Government, is gold.
Senator Shafroth . Ultimately that is true. There is not any
question about that. The question is, In what manner can you make
1242
BANKING AND CUEBENCY.
the strain on the gold reserve the least and have the ultimate redemp
tion made ? Now, let me put this to you: If each regional bank is to
keep a gold reserve for the redemption of these notes, it makes 12
competing centers for gold, as against the Treasury of the United
States, does it not?
Mr. B ow m an . Yes; as this bill stands.
Senator Shafroth . That makes a greater demand on gold, and if
there is a strain on gold throughout the world it makes it that much
harder to get the necessary gold. Now, then, if those notes are made
payable, say, in lawful money— suppose the regional banks kept
nothing but lawful money, such as greenbacks, in their vaults for the
purpose of redemption, as they do now, very largely. Suppose this
Government had but $100,000,000 of gold, the Government owning
that as a reserve, and it had issued $100,000,000 of greenbacks,
redeemable absolutely in gold as our greenbacks are at present—it
reads “ coin,” but it has been construed to mean gold.
Now, suppose, under this Treasury note, $100,000,000 more should
be issued payable in lawful money. You can readily see that if I
had $1,000 of Treasury notes 1 could take it to a regional reserve
bank and say, “ I should like to have gold for this.” You would say,
“ No, I can not give you gold, but I can give you a greenback.”
I say, “ All right, give me the greenback.” You could take that
$1,000 note and chuck it in the vaults and keep it there and not
reissue it. I would come to Washington or to any subtreasury
throughout the United States, and I would say, “ Here I have a
greenback and I want gold for it.” The Government says, “ Yes, I
—u
^ they give me $1,000, and they put
You have practically redeemed $2,000, have you not, by simply
giving out $1,000 in gold. And if you had $2,000 of gold notes, or if
this note had been a gold note instead of a lawful-money note, you
can see that there would have been a redemption of $1,000 only by
the payment of $1,000 in gold.
Now, is not that an advantage to the Government to have that
condition so that when there is a great strain on gold it can put the
party to this trouble and can retard matters so that it will not make
that endless chain ?
Mr. B ow m an . I do not think so, Senator.
Senator Shafroth . Well, you can not help but think that there
would not be as much presented to the United States Treasury for
gold redemption as if these were redeemable in gold all over the
United States, can you ?
Mr. B o w m an . That is a provision of the bill.
Senator Shafroth . I understand
Mr. B ow m an . I would just as soon see the provision made that
these notes should be redeemed at the Treasury, but as long as the
bill says they shall be redeemed at the Treasury-----Senator Shafroth . Yes; but it says, “ or lawful money” -----Mr. B ow m an . I object to the term “ lawful money.”
Senator Shafroth . I know; that is true, and so does everybody
who wants a stronger demand for gold. But if you want to relieve
the demand—which it seems to me bankers ought to be willing to
do— it seems to me you would not object to it, especially when you
have in this bill the provision that the parity shall be maintained.
BANKING AND CURRENCY.
12 43
Mr. B ow m an . I suppose, as a matter of actual experience, the
demand for gold would be comparatively small in our local transac
tions, but I should not like to let that bar down at all.
Senator Shafroth . Y ou can readily see that if you keep the reserve
in a bank, say, in Minneapolis —now, how much gold would you keep
there.
Mr. B ow m an . That I do not know. I should think that would
have to be the result of some experience with the way the bill was
going to work out—how much currency would be issued. I do not
think I can say at this minute.
Senator Shafroth . These bank notes or these Treasury notes are
redeemable at any one of these reserve banks ?
Mr. B ow m an . Surely.
Senator Shafroth . And consequently you could cluster into
New York City one-half of this total circulation, and have it redeemed
there, could you not?
Mr. B ow m an . Why, yes.
Senator N elson . I think they are only redeemable by the bank
issuing them.
Senator Shafroth . N o.
Senator N elson . Or at the Treasury.
Senator Shafroth . No ; at any one of these reserve banks.
Mr. B ow m an . I think all the notes are redeemable-----Senator Shafroth (interposing). I want to follow this up—it
would be necessary, then, for each bank to keep in gold more than 50
per cent, as you seem to think that that was the amount of reserve
that ought to be required—more than was necessary to redeem only
the amount of notes which had been issued bv that bank, would it
not ?
Senator N elson . Here is the law.
Mr. B ow m an . I do not know that I could answer that definitely.
Senator N elson . Here is the law.
Senator Shafroth . All right.
Senator N elson (reading):
Whenever Federal reserve notes issued through one Federal reserve bank shall
be received by another Federal reserve bank, they shall be returned for redemption to
the Federal reserve bank through which they were originally issued, or shall be
charged off against Government deposits and returned to the Treasury of the United
States, or shall be presented to the said Treasury for redemption.
Senator Shafroth . These notes are supposed to circulate all over
the United States, are they not ?
Senator N elson . Yes.
Senator Shafroth . I s it possible that these notes so to be cashed
can not be redeemed at any other reserve bank ? I do not mean can
celed; I mean presented there and gold demanded on them.
Senator N elson . I do not think so under that language—abso
lutely.
Mr. B o w m an . I should not think so under that language. I did
not recall that.
Senator Shafroth . I thought it said-----Senator N elson (continuing). It is by the bank issuing the same
or the Treasury Department—charged off.
Senator Shafroth . Then you think that each bank should have
in its vault 50 per cent in gold as to its outstanding circulation?
1244
BANKING AND CUBEENCY.
Mr. B o w m an . I said 50 per cent. I should think so, although
experience might show that it should be more or less.
Senator Shafroth . And now how much would you have kept in
the vaults of the United States for the purpose of redeeming there,
because a demand can be made there ?
Mr. B ow m an . I would have enough.
Senator Shafroth . D o you not think that all of these demands
upon gold would have a tendency to take all the gold and make it
rather hard to maintain that gold reserve ?
Mr. B ow m an . I do not think so. Senator; no.
Senator Shafroth . It would depend on how much money you
issued, would it not, under this bill ?
Mr. B ow m an . Yes; but there is a very large amount of gold in
this country. All the national banks and every other bank through
out the country has got gold in its vaults.
Senator Shafroth . I have not any doubt but that there is con
siderable gold right now.
Mr. B ow m an . Used for reserve.
Senator Shafroth . I think if that condition existed always we
would have no trouble.
Mr. B ow m an . It has existed a great number of years.
Senator Shafroth . That may be; there is no doubt about that. I
do not anticipate any trouble in that line. The national-bank notes
now are not redeemable in gold, are they ?
Mr. B ow m an . N o.
Senator Shafroth . Should they be made redeemable in gold by
the banks ?
Mr. B ow m an . Y ou will not have any national-bank notes after a
while.
Senator Shafroth . Y ou will for 20 years.
Mr. B ow m an . Not after a while.
Senator Shafroth . That may be, but for 40 years we have had-----Mr. B ow m an . I do not understand there is to be any change made
in existing conditions.
Senator Shafroth . I understand, but would you have the nationalbank notes as they are now ?
Mr. B ow m an . I think I would let them stay as they are.
Senator Shafroth . A s they are ? Do you not think this currency
could stay just exactly as the national-bank notes are?
Mr. B ow m an . This is a new proposition.
Senator Shafroth . Yes; but it is supposed to take the place of the
national-bank notes.
Mr. B ow m an . If we give the national banks, as they exist at present,
20 years in which to change over and adapt themselves to the new
order of things-----Senator Shafroth (interposing). You do not see any advantage in
the United States Government having its greenbacks redeemable
absolutely in gold and this circulation redeemable in lawful money?
Mr. B ow m an . I should think not.
Senator Shafroth . D o you not think that if the banker should say
to the man, “ I will give to you lawful money,” and he then would
take that lawful money or have to take it to the United States Treas
ury or to San Francisco or to New York to redeem that in gold, that
he would hesitate in doing that, and would not want the gold at all?
BANKING AND CURRENCY.
1245
Mr. B ow m an . I should say there would not be any objection, if
you were a banker and I came into your office and presented some of
these notes, which you propose to issue under this bill, and I said,
“ I want the gold,” and you said to me, “ Would you not just as soon
have the greenbacks,” and I said, “ Why, yes; that wall be all right.”
My contention is that when a man says he wants gold he should get
gold and nothing else.
Senator Shafroth . Y ou do not want to make it hard for the
Government to maintain this gold reserve, do you ?
Mr. B ow m an . I do not believe it would be made very hard, Senator.
Senator Shafroth . It would be making it a good deal harder than
if you had this condition where he could go to the bank and get his
greenback, and if it was necessary for him to have the gold, he could
go and get it at any one of these subtreasuries, would it not, accord
ing to the doctrine of chances of presentation of a thing of that kind,
would it not be about one-half of the reserve in the Treasury could
answer the purpose under this system which would otherwise take
nearly double the amount in gold to maintain the reserve ?
Mr. B ow m an . Oh; I should think very likely.
Senator M cL e a n . Senator Shafroth, if you will look at the bottom
of page 29, you will see that these notes ought to be redeemed at any
Federal reserve bank. You were right on that.
Senator Shafroth . Senator Nelson, I thought I read that (read
ing):
They shall be redeemed in gold or lawful money on demand at the Treasury De
partment of the United States, in the city of Washington, District of Columbia, or
at any Federal reserve bank.
Senator N elson . There is an inconsistency then between that and
the other passage.
Senator Shafroth . That may be, but that is the language.
Senator W eek s . Y ou do not think it is possible to get gold for the
national-bank note, do you ?
Senator Shafroth . Not in practical effect, except when there is a
strain, and this is intended to be used when there is a strain or crisis.
Senator M cL e a n . Y ou can take a national-bank note and then
turn around to another window of the bank and get a gold note ?
Senator Shafroth . Yes; but when a man has got a national-bank
note out here in Cripple Creek, Colo., he goes into the bank, and says,
“ I want gold.” The banker says to him, “ No; I can not give you
gold. I am not required to do that.” And the banker gives him the
greenback. That man has got in some way to be put to a little
trouble in order to get gold on it, and consequently he would have to
go to the mint at Denver, and demand it there, but that very transi
tion of going there will have a tendency to make an impediment in
the way, which, as a matter of fact, in the doctrine of chances will
require a less quantity of gold to be kept on hand than if the system
proposed by the witness should prevail.
Senator N elson . Mr. Bowman, have you studied this bill for the
purpose of forming an opinion as to what would happen, in the first
instance, upon the enactment of the bill as it is to-day? Would it
lead to a contraction of the currency, in the first instance, or a con
traction of credits?
1246
BANKING AND CURRENCY.
Mr. B ow m an . Well, Senator, so many things happen differently
from what you expect that it is pretty hard to express an opinion,
but I should think it would.
Senator N elson . D o you not think that it would afterwards, with
this rediscount privilege and the privilege of securing currency by
application upon commercial paper, have the danger of its leading,
on the other hand, in the course of time, to an inflation of currency ?
Mr. B ow m an . It seems to me, that those two extremes are quite
possible.
Senator N elson . As I understand, Mr. Bowman, your opinion—
and I want to say that I concur with you— is that this new currency
should be the currency of the banks solely, the promises of the banks
to pay money and not of the Government, and you base that idea,
I take it, upon the prime fact that it is based upon the commercial
credits of the country?
Mr. B o w m an . That is correct.
Senator N elson . It is based on the commercial paper currency
issued by the regional banks to the reserve banks ?
Mr. B o w m an . Yes.
Senator N elson . If you are right about that, that it ought to be
the paper of the bank and not of the Government, would it not follow
as a matter of justice and right, that the regional banks issuing this
currency ought to provide the gold reserve for the redemption of
those notes and not throw the burden onto the Federal Government—
if you give the banks privilege of issuing currency on the commercial
credits of the country?
Mr. B ow m an . Yes.
Senator N elson . And to make that paper good, you not only
require the deposit of the commercial paper, but the bill requires a
reserve of 33£ per cent?
Mr. B ow m an . Yes.
Senator N elson . In gold or lawful money— it ought to be gold,
I agree with you on that— but why should not the banks who issue
those notes and whose promises they are— they do have the sole au
thority to redeem these notes, and why should not they supply the
gold? Would not that be the logical and fair thing?
Mr. B ow m an . I should think it would.
Senator N elson . And not throw the burden on the Federal
Government ?
Mr. B ow m an . Yes.
Senator N elson . Mr. Bowman, under the existing law of 1900
there is a provision made for securing gold if it is necessary for the
purpose of maintaining the parity of that currency, the greenbacks,
and as it is construed the silver dollars, but that is only for main
taining a parity for that currency. Without some legislation in this
bill there is no provision in the law under which the Government
could provide itself with gold, if you cast the burden of redemption on
that; is not that true?
Mr. B ow m an . I should think so.
Senator N elson . Would not it be the fairest and most honest and
businesslike way, both from a banker’s standpoint and the commer
cial standpoint, to make this currency a promise of the bank and
make the bank furnish the gold for the redemption and not throw the
burden on the Government ?
BANKING AND CURRENCY.
1247
Mr. B ow m an . I think so, Senator.
Senator N elson . That would be the legitimate and proper way.
Mr. B ow m an . I think so.
Senator N elson . And not have this double promise and liability
on the notes— promise of the Government and an implied promise of
the bank and then a double liability requiring the banks to redeem
and the Government to redeem. You have doubled that promise,
and you have doubled the method of redemption. Would it not
simplify it to have the sole promise of the bank and the sole redemp
tion of the bank in gold ?
Mr. B ow m an . I think so. My own judgment is that the Govern
ment should be divorced entirely from it.
Senator N elson . Yes, sir; and in that way ultimately we would
retire all of our national-bank notes, and, aside from the greenbacks—
leaving that out of the question—we would have one uniform cur
rency in this country, redeemable in gold ?
Mr. B ow m an . Redeemable in gold.
. Senator N elson . And its elasticity would arise from the commer
cial business of the country.
Mr. B o w m an . I was just going to say, we would have one— and
that is a condition to be looked forward to with great desire— one
currency-----Senator N elson (interposing). One paper currency.
Mr. B owman (continuing). Supported by proper gold reserve.
Senator N elson . The increasing or decreasing as the needs of
commerce dictate.
Mr. B ow m an . And that is ideal.
Senator N elson . And on that principle elasticity arises to a large
extent from the commercial needs of the country?
Mr. B ow m an . Undoubtedly.
Senator N elson . That will be the guiding star. Of course, there
ought to be some Government regulation to restrain it, if it should
become necessary, from issuing too much of this currency, because
the member banks might flood the regional banks with this paper
and seek an inordinate amount of currency under the bill?
Mr. B ow m an . They might. There should be proper regulation of
it, but the banks would not in the natural course of things call for
any more of that currency than they had use for. Of course, how
ever, they might.
Senator N elson . I do not want to keep you too long. Do you not
think it would be a good plan for these reserve banks, when they
issue this currency upon this commercial paper, to issue it, not as
provided in the bill, upon the face value of the paper, but on the
discount value of the paper—you know the difference I mean between
them ?
Mr. B ow m an . Yes.
Senator N elson . And then if it is issued on the discount value of
the paper, give the regional banks the right from time to time to fix
the discount. I will put the case to you as I did to another gentleman
from your State, Mr. Blinn, and that is this, that if you give the
regional bank the right to fix the discount rate, that would prove
both a measure of regulation as to the volume of currency and a regu
lation of interest rate, would it not ?
1248
BANKING AND CURRENCY.
Mr. B o w m an . I think so; I agree with what was said this morning
about that.
Senator N elson . I am much obliged to you, and I am sorry I have
kept you so long.
Mr. B o w m an . May I be excused now ?
Senator Shafroth . I think so, yes.
Mr. B o w m an . I am much obliged to you, gentlemen, for your
courtesy.
STATEM ENT OF JUSTIN E. VARNEY, VICE PRESIDEN T AND
CASHIER BAY STATE NATIONAL BANK, LAWRENCE, MASS.
Senator H itchcock. Please give your name, address, and business
to the stenographer.
Mr. V ar n e y . My name is Justin E. Varney, and I am vice president
and cashier of the Bay State National Bank, Lawrence, Mass.
You had, gentlemen, before you this morning a very interesting
statement by Mr. Blinn, who is president of our Bankers’ Association
in Massachusetts, who gave you some large figures. I will give you
this afternoon some comparatively small figures, but figures that our
committee thought you might be interested in and which would be
of some help to you. They are figures based on a concrete case.
That concrete case, the bank with which I am connected, showing,
I think, how this bill would affect us. You, of course, realize that I
come from one of the largest textile centers in the world, and that we
have a very cosmopolitan population working in our mills, and our
large corporations do not borrow in Lawrence. They finance them
selves outside Boston, New York, and Chicago. The finances of
Lawrence, so to speak, are controlled and confined to the pay rolls
that are paid out in those mills. There is a very large amount paid
each week. The Bay State Bank, I think, perhaps is just the medium
example of the country bank of Massachusetts. We have a capital
of $375,000. We have deposits of $1,000,000.
Senator N elson . How much surplus ?
Mr. V ar n e y . The surplus on our books is about $100,000.
The reserve now required, as you know, is $150,000. Three-fifths
of that may be in our own vaults— $90,000; two-fifths of it, $60,000,
with the reserve agents. The $60,000 which can be with the reserve
agents is divided up amongst several banks, all acting as reserve
agents. Because o f collections they make for us, we make that
reserve quite profitable to ourselves. Thirty-five thousand dollars
of that is so divided, and that nets us from $1,000 to $1,500 a year.
Of the $60,000, $25,000-----Senator P omerene (interposing). At what rate of interest ?
Mr. V ar n e y . That varies. I do not mean to have any collection
accounts but what will pay us about 3J per cent. That varies, how
ever. I can not state any fixed rate. Of the $60,000, $25,000 is at 2
per cent and nets us $500. The reserve required under this Federal
reserve act would be $120,000. We should be obliged to keep $90,000
in our vault anyway, and a large part of the time that would be nearer
$150,000, because of the requirements of the pay rolls. Five-twelfths
of it, that is, $50,000, after 36 months must be with the Federal reserve
bank. At that rate our reserve would be $140,000 instead of $120,000,
BANKING AND CURRENCY.
1249
and our reserve would actually be nearer 16 per cent than 12. If we
were in a good many communities where it was not incumbent upon
us to keep so much cash, we could keep right down to the reserve that
is specified in this bill, of 12 per cent, but we shall probably have to
carry about 16.
Senator P omerene . Let me catch you there. Do I understand
that according to your calculations the pending bill would increase
the amount of your reserves?
Mr. V ar n e y . N o, I do not mean that, but I mean to say that while
this bill cuts our present reserve of 15 per cent to 12, allowing only 12,
we should have to carry about 16.
Senator P omerene . Y ou have to carry it anyway-----Mr. V arney (interposing). I beg your pardon.
Senator P omerene . You have to carry that anyway under the
present law ?
Mr. V arney . We have to carry it anyway.
Senator W eeks . Then the change would not be of any advantage
to your bank?
Mr. V ar n e y . I was going to bring that out.
Senator W eeks . Proceed.
Mr. V arney . If present arrangements of collections and accommo
dations are maintained— iefore I go on to those figures I want to
speak a word, if I may, in regard to those present arrangements of
collections and accommodations. This bill disturbs, if it does not
disrupt, the relations—I will not call them pleasant relations,
although they are— present relations of collection and accommoda
tion between a country bank and its city banker. The city banker,
the reserve agent, and the country bank are very closely connected
and must be. There is no way of divorcing them if we are to carry
on a successful system of banking. We should have to have, if we
want to keep up our present rate of earnings, some sort of a relation
to maintain these collection agencies. We should also have to have
a certain amount deposited in Boston, which could not be counted
as a reserve, of course, but we should have to have that to get our
accommodations.
Senator N elson . Your exchange business ?
Mr. V arney . I did not mean that, Senator; I meant, if I may
refer to it again, the pay roll business.
Senator N elson . Oh, yes.
Mr. V arney . For instance, to-day is Friday. Perhaps to-morrow
at half-past 8 in the morning we have got to pay out $125,000 in
actual money— bills. The teller comes to me at 11 o’clock this
morning and says, “ I can not get but a very small amount of money
here in Lawrence.” I have got to get it quick from Boston, and that
has got to be largely sorted money, ones, twos, fives, tens, and so on,
because your corporation paymasters will not accept mixed money.
I must have that money quick. In order to get that sort of an
accommodation, I have got to keep— and I think it must be very
evident to you— a good fair balance in Boston. That explains what
I mean by “ pleasant relations of collections and accommodations.”
In order to keep that money in Boston, I have got to get that money
somewhere. I have drawn out my $60,000, which is with the reserve
agents, and I have put $50,000 of it with the new reserve bank. I
have got to get that money from somewhere. I do not know of any
9328°— S. Doc. 232, 63-1—vol 2-----19
1250
BANKING AND CURRENCY.
other place to get it except to call in some loans. This is a very small
example; but you have asked the question several times here to-day,
“ Will the influence of this bill be to somewhat contract loans?” I
should say it would. I do not know how the country banker is going
to get his money any other way, except to contract his loans. He
wants to keep all his money working, and so he has loaned it out. He
must get that money somewhere, and he has nowhere else to get it,
as I know of, except to call in some loans or sell some bonds. He calls
in his loans and deposits with his former reserve agent $35,000.
That is going to mean a loss of between the 5£ per cent which that
money formerly paid him on the loans— of course these figures must
of necessity be somewhat in the rough—he is going to be at a loss of
between 5£ per cent which was formerly got on that money and 3 £
per cent, which I said a few moments ago those collection accounts
paid us. There is a loss of $700.
He also calls in some loans and deposits $25,000, at least, with a
bank so that he can get these cash accommodations. The loss on
that is between 54 per cent and the 2 per cent which that will pay
him, only, is $875. The loss of interest on deposit with the Federal
reserve bank, $50,000, which we have formerly had to work, as I
have told you, partly at 34 per cent and partly at 2 per cent—I have
struck an average there of 2 f per cent. The loss on that is to be
$1,375. The loss of interest on our 5 per cent fund, I have reckoned
at 2 per cent, because we have been allowed to count that as reserve.
Now, we shall not, and so it will be the same as 2 per cent loss on
that— that is $370.
Senator H itchcock . What do you refer to as the 5 per cent fund
for redemption ?
Mr. V ar n e y . Five per cent fund for redemption that lays in
Washington, but we are allowed now to reduce our deposits, to count
that as reserves, or reduce our deposits by six and two-thirds times
that, which amounts to the same thing.
There is a loss of $370. The loss of the difference on the average
interest of the possible capital paid in, between the 55 per cent which
it pays now, and 5 per cent at the most which this bdl says can be
paid, one-half per cent of $75,000 is $375 a year. That gives us a
total loss under this new bill of $3,695— almost 1 per cent on our
capital.
I have tried to make those figures as carefully as I know how, and
I think actual experience will bear them out. Here is a bank with
$375,000 capital, and it worked out that under this bill we will have
lost about 1 per cent—I would like to touch, if I may, on two or
three phases of this matter that have been brought out here by
others—saying nothing of the possible loss on the United States 2
per cent bonds. Being in the community we are, and having the
ability to keep out our circulation every day in the year and make
it quite remunerative. And, by the way, our circulation pays us at
least $3,000 a year, and if we surrendered our circulation, of course,
we should lose that; but, supposing we keep our circulation but the
bonds have depreciated very largely, as they have now, there is
another loss which you can estimate as well as I.
Here are the losses, but I can not see, gentlemen, how we are to
get any advantage—country bankers, like ourselves— out of this bill.
BANKING AND CURRENCY.
1251
Senator N elson . Can you not get any “ value received” — that is
what we would like to know— what benefits the country bank would
get out of it.
Mr. V ar n e y . I can not see any. I can see the losses, but I can
not see any benefits that the country bank would get out of it.
Senator Siiafroth . Suppose by reason of this system it should be
recognized that the country banks can operate upon exactly the
reserves that are prescribed by the bill. Then there would be a
great advantage to the banks, would there not ?
Mr. V ar n e y . I am simply giving you, Senator, the facts. Yes;
I think there would; but I am giving you the concrete example of a
country bank that I am familiar with.
Senator Shafroth . Y ou would realize for bank operations 3 per
cent upon your total deposits, would you not ?
Mr. V a r n e y . Three per cent-----Senator Shafroth (interposing). The difference between 15 per
cent and 12 per cent?
Mr. V a r n e y . Yes; but to offset that, Senator, let me suggest we
are going to pay in a certain part of our capital, which I have shown
you there is a small loss on— between 5 and 5£ per cent. We are
also going to deposit our reserve with you, which now we get 2 per
cent on, and then it would be nothing. We are also going to put
perhaps, as you hope, some deposit with you, but as I understand it
at no interest, and it seems to me-----Senator P omerene (interposing). Are you assuming you are going
to carry all your reserves with this reserve bank ?
Mr. V ar n e y . We have got to, all our reserve agent money, be
cause the reserves of it is needed-----Senator P omerene (interposing). But you have spoken about the
reserves that you now carry in excess of the lawful requirement ?
Mr. V ar n e y . Yes.
Senator P omerene . D o you anticipate that you would carry all
of your reserves in excess of 12 per cent with this reserve bank?
Mr. V ar n e y . We should carry all but what is actually needed in
worKing casn m our own vaults witn tne reserve hank. We shall
C
have to in order to keep up to your requirement.
Senator Shafroth . The proposition that I stated to you, namely,
that vou would not have to carry any more reserv es than the law
required, would release, over what you now carry, a great volume of
money, would it not? You say you carry 16 or 17 per cent now?
Mr. V ar n e y . Sixteen per cent, about that.
Senator Shafroth . Sixteen per cent ?
Mr. V ar n e y . Yes.
Senator Shafroth . It would reduce that down to 12 per cent,
which would be 4 per cent upon your total deposits ?
Mr. V ar n e y . I can not reduce that.
Senator Shafroth . I am assuming that this great backing that you
get from the United States Government would enable you to do that.
Mr. V arney . I can not figure it out that way.
Senator Shafroth . D o you not think it is worth something to be
able to go to a Government institution and say to them, “ I have got
here collaterals that I want money on” ? Do you not think that is
worth something as against your reserve?
1252
BANKING AND CUBBENCY.
Mr. V ar n e y . That is not worth any more, Senator, than it is to
slip right down to Boston, an hour away, and say, “ I want $50,000
or $100,000 on my balance sheets.” It is not worth any more to me.
Senator Siiafroth . Oh, yes; it is. It is worth a good deal, be
cause at the same time you are doing this you are putting into cir
culation that which relieves the entire situation, namely, currency.
Mr. V ar n e y . I have never seen the time yet when I have been
able to put into circulation all the currency that was needed in our
vicinity.
Senator Shafroth . That may be, but we know that in 1907 you
were not able to get any out of the banks of New York.
Mr. V ar n e y . 1 did in Boston.
Senator Shafroth . That might be, but you could not get it in
Minneapolis.
Senator N e l so n . Y ou could not get it in Alexandria.
Mr. V ar n e y . I got it in Boston both in 1893 and 1907.
Senator Shafroth . Y ou could not get it in Chicago.
Mr. V a r n e y . We were not short one pay roll. We received all the
cash we needed.
Senator Shafroth . That may be, but these shortages do occur,
and they have to issue clearing-house certificates and things of that
kind in order to relieve the situation ?
Mr. V a r n e y . Oh, yes.
Senator W e e k s . Was there any concern of any kind short in their
pay rolls in 1907 in Massachusetts?
Mr. V a r n e y . Not that I know of.
Senator W eek s . Did not the Boston banks supply everybody in
Massachusetts with sufficient circulation to meet their pay rolls ?
Mr. V a r n e y . A s far as I know.
Senator W e e k s . I never heard of a case otherwise.
Mr. V a r n e y . I recollect, in 1893-----Senator Shafroth (interposing). If there is plenty of money for
pay rolls always and it is going to be that way, there is not any need
of a bill at all; but we recognize there is a necessity for this congested
condition that arises occasionally.
Mr. V a r n e y . I recollect in 1893 I telephoned to our bank in Boston
and asked them if they would send us up any part of $10,000 in bills
or silver. I said, “ Just give us some money; our pay rolls must be
made up.” They begun, and within a week they had sent us up
$50,000. They have always responded. I do not know where they
got it; I can not explain that, but they have always responded to
all our calls.
There are one or two items, gentlemen, that I would like to bring
out, if you are willing. One is the matter that has been touched on,
of competition of the regional banks and the necessity of that com
petition to fix the rate of interest. It strikes me, as I know country
banking and have known it for a great many years, that that neces
sity of competition— they are going into the open market I suppose
and buying notes the same as usual, but it seems to me that compe
tition will be wholly unnecessary, because the rate of interest and
the supply of money will be governed by the public, I mean the bor
rowing public, and I will illustrate it this way: A man comes into
me and says, “ Here, I want to borrow $10,000.” “ Well, but we are
short. Money is tight.” “ O, well,” he says, “ I know all about
BANKING AND CURRENCY.
1253
this regional bank business, and you can go there and get it. ” We
are going to be faced right up with that, and rightfully, too. I
think that the borrower himself, if he puts up a good note is going to
come pretty nearly regulating the rate of interest, and the supply of
money. I do not believe that it is just. I do not believe that it is
right from any standpoint to compel the banks to pay this capital
into this regional bank, and then let that regional bank turn right
around and become our competitors, and I do not think there is any
reason or need of it.
Senator P omerene . In one moment you complain because this
money is tied up in the regional bank, and you will not get any re
turn on it, and on the other side it is objected to because it will be in
competition with your money; that is, a part of your money would be
in competition with the bigger part of your money ?
Mr. V ar n e y . Yes. It has been mentioned here that this will regu
late the rate of interest. I do not know, and in all my experience
I have not seen, anything that regulated the rate of interest or volume
of currency in this country except supply and demand, and that sup
ply will bo gotten from your regional banks. I do not see but your
supply and demand come right together there, and there will be no
need and no reason why any other course should be adopted to fix
the supply of currency or the rate on money.
Mr. Var n e y . I would like to speak a moment on the control of the
regional banks. As I read the bill, these regional banks have nine
directors. It is quite possible that only four of those shall be bankers;
five not bankers—five inexperienced in the management of finance.
That is as I read the bill. It is specified plainly that three shall not
be bankers. Gentlemen, I want to say that it is very hard to go into
a good many communities in this country and pick good men who
would be capable men for the management of such large financial
matters as these regional banks would be, who are neither nationalbank directors, trust company trustees, or savings bank trustees. It
will be a hard matter.
Senator S h a er o th . The Bank of England does it; the Bank of
Germany does it; the Bank of France does it.
Mr. V ar n e y . That may be, but we have come pretty near, in very
many communities, scouring the field for directors and trustees.
Senator P omerene . Very often they are selected because it is
expected that they will bring depositors and customers to the bank.
Mr. V ar n e y . But I will concede that, Senator. In nine cases out
of ten they are selected because of the value of their advice. We
must have that advice. They are selected because they know one
kind of business. Another director knows another kind of business,
and of course our business—banking—comes in contact with very
many kinds of businesses, and we want men who are familiar with it.
Senator P omerene . D o you not anticipate that the same care and
caution will be used when we come to the selection of class B of these
directors ?
Mr. V ar n e y . That may be. I will not dispute it. I do not know,
and I will not dispute that. But it seems to me that it is not right
to compel the banks to put their money in, contribute their money
toward this capital, and then take away from them a voice in the
management. I think all the banks ask for is a voice.
Senator P omerene . Are you speaking of the regional bank?
«
1254
BANKING AND CURRENCY.
Mr. V a r n e y . I am speaking of the whole fabric, the whole system.
The same principle runs through it all. But we shall come more in
contact with the regional banks. They will have men who will be
called upon to pass on our paper, and I say they should be men who
are familiar with the finances of these districts.
If you will let me touch on one other thing, I believe I shall be
through. It has been told you to-day by one of our committee that
Mr. Philip Stockton, who was a member of the large Old Colony
Trust Co., of Boston, made the remark that there was nothing in
this bill that appealed to him or which would influence him to go
into this new system. He could not see a thing. I want to submit
this proposition: It has seemed to me for a good while that the
finances of this country will never be on the best and the soundest
basis until there is a bill passed which will be so attractive to national
banks and trust companies and to all-----Senator N elson (interposing). State banks?
Mr. V a r n e y . State banks and to all financial institutions. By
financial institutions I mean mercantile financial institutions; I do
not mean savings banks. The bill should be so attractive to all of
them as to draw them in under one system.
I want to mention in regard to that the usefulness and, it seems to
me, the necessity of having our financial system on a sound and attrac
tive basis. Our system has gotten to be so large now, and there are
so many large institutions, it seems to me that the management and
the examinations of all the mercantile institutions of the country
should be under one head. You may know that there was a regula
tion sent out from Washington not long ago which influenced Mr.
Ewer and Mr. Gage, who have been bank examiners in our district
for a great many years, to give up the examinations of national banks
and confine themselves to private examinations of trust companies
and other banking institutions. They had been examining these
trust companies and other institutions. They had gotten inside, so
to speak, all the inside information which could be gotten, both on
trust companies and national banks. Now there they are, no longer
examiners of national banks; they are examiners of trust companies.
They are not in a position any longer to help the United States Gov
ernment in regard to credits of national banks as connected with
the credits of trust companies.
Gentlemen, I think you know, you must know, that the similar
credits of trust companies are also found in national banks and are all
intertwined, and it is one of the most necessary things for the United
States Government managing the national banks to know what is in
the trust companies of the country as well as the national banks,
and in that way, it seems to me, that the very thing the Government
saw fit to displace Mr. Ewer and Mr. Gage for was the very reason
why they ought to have kept them.
Senator W eeks . I am very glad to hear you say that, Mr. Varney,
because it seems to me that the comptroller’s office was taking a very
inadvisable step. The fact that they were examining private trust
companies, which in Massachusetts are really State banks doing a
general banking business, and national banks enabled them to see
where people were overextended, very frequently, and to warn the
banks that certain lines of paper were in their institutions which
BANKING AND CURRENCY.
1255
were not safe, and therefore they were of value to the Government
and to the State as well; and I quite agree with you that the step
taken in severing those connections is a backward one.
Mr. V a r n e y . It seems to me, Senator, that step merely illustrates
the necessity of having one mercantile banking institution in this
country, under one management and under one examination.
These examinations are most valuable. They are as valuable as
anything can be that is connected with financial institutions, and
they ought to be made as thorough and as comprehensive as may be.
In regard to United States bonds—our 2 per cent bonds— I think
that this Government ought to think pretty carefully before they take
a step that shall upset the standing of those 2 per cent bonds. I do not
want to repeat what has been said here to-day in regard to it. They
were taken in good faith, and all that sort of thing. But I want to
remind this committee of Senators that the 2 per cent bonds now held
as security for circulation are simply the successors of a higher rate
of bond which national banks took m time of great need of this Nation,
and now if the United States Government takes any action that will
interfere with the value of those bonds and cause great loss throughout
the country on those bonds to the banks, I want to submit this ques
tion: If the need arises again, and it may— we are not immune here
in this country from trouble—if the need arises again I want to ask
the question if it is supposed that the national banks of this country
will rally to the support of the Government in furnishing them money
as they did before. I think it is a sober question, Senators. I think
it should be regarded and thought of.
Senator N elson . Would not the substitution of 3 per cent bonds
in place of the 2 per cent bonds be fair?
Mr. V a r n e y . I can not quite answer that fully, Senator, for this
reason: I am afraid that the 3 per cent bonds, with so many thrown
on the market, would not sell at par. I would favor, if they do not
want to maintain the volume of these twos, the substitution for those
twos of 31 per cent bonds, and while the bank has them enlarge the
tax so that the income to the banks will not be increased; but they
will be a security that can be sold in the open market if the bank wants
to sell. I do not think that it is a thing that the Government ought
to be responsible for, but we know that very many of the banks have
paid 107 or 108 for the bonds; but they took the risk on that.
Senator N elson . For the twos?
Mr. V ar n e y . Yes. They sold as high as 110. They took the risk
on that, though.
Senator N elson . They got into the hands of the combination up in
New York?
Mr. V ar n e y . I think not, Senator. That was a time in the early
life of the bonds. They had a long time to run.
Senator N elson . I mean 2 per cent bonds.
Mr. V ar n e y . I mean 2 per cent. They were still valuable at that
price. They could charge off a certain amount and still make their
circulation valuable.
Senator N elson . If the Government redeemed them at par and
retired the circulation gradually, that would not work any injustice,
would it ?
1256
BANKING AND CUBBENCY.
Mr. V a r n e y . Oh, n o; it would not work any injustice as far as we
are concerned. We should be sorry to see that done, because it
pays us.
Senator N e lso n . Retire it gradually and substitute this new cur
rency for it ?
Mr. V a r n e y . Yes. They could do that, or substitute 3£ per cent
bonds.
Senator N e lso n . That would be a contraction of the currency. I
hope any system we pass here will have as an ultimate result to give
us one uniform paper currency outside of the greenbacks.
Mr. V a r n e y . 1 can not go now until 7 o’clock, Senator.
Senator N e l so n . I will not detain you.
Senator W e e k s . Y ou referred to your relations with reserve
agents. There was one connection which you did not speak of, and
which it seems to me would necessitate a country bank keeping the
deposits with some city bank, whether they were any benefit as re
serves, and that is the many little obligations you are put to in
your banking connections. I do not know that you do it, but gener
ally speaking country banks depend on the city connections or the
reserve agent for advice in buying paper, which is freely given; and
in other words, you get the benefit of the credit department of the
great banks and get that without any compensation whatever, and
that is of material benefit to every country banker.
Mr. V a r n e y . That is so. We, as you personally know, Senator,
are not in the market very much for mercantile paper. Our real
estate takes the place of a large part of our loans.
Senator N e l so n . Real-estate loans ?
Mr. V a r n e y . N o, sir; a large piece of real estate which we own,
an office building. So we do not use our reserve agents in that way
as much as I know a great many other banks do. But as an illus
tration of what Senator Weeks says, I want to say that we keep
a perfectly inactive amount of $5,000, or between $5,000 and $6,000,
with the Chase Bank of New York, simply for the sake of having a
bank there that we can go to for information on different matters.
That may seem simple to you Senators, but to a country bank such
matters are vital to its life. It is very important that they have some
such connection. It is perfectly apparent, gentlemen, that we can
not get these favors which we must ask for to carry on our business
without in some way paying for them, and the natural way for a
bank to pay is to keep an account. It is precisely the same as you
and I and others keeping accounts in national banks, and the better
the account the more assurance we have to go there and ask favors.
Senator W e e k s . It is very frequent, too, for reserve agents to
make loans.
Mr. V a r n e y . Oh, very often.
Senator W e e k s . T o make them for their correspondents?
Mr. V a r n e y . Yes; and they carry their collateral loans.
Senator W e e k s . And they exchange, and do all those things
without any charge.
Mr. V a r n e y . I would like to mention this, gentlemen, while I may,
in regard to the collateral loans which seem to be rather in disfavor.
I have now been in the banking business 40 years. There has never
been a loan— and I am also connected with a large savings bank in
Massachusetts where we have many collateral loans— there has
BANKING AND CURRENCY.
1257
never been a form of loan which has so uniformly been without loss in
payment as our collateral loans; and I want to say this to you: A
sayings bank in a place like Lawrence is very liable to a run. We
have 10,000 Italians, 5,000 Syrians, 5,000 Poles, and all that popula
tion in Lawrence. They are a very inflammable people; and you
let a rumor get started of any little weakness in a large savings bank,
and it is very likely to start a run. There has never been a form of
note which has been surer and quicker for us to meet that run with
than our broker’s collateral loan. I want to say that in favor of it.
Senator N elson . What kind of notes are they?
Mr. V a r n e y . Broker’s collateral loans.
Senator N elson . Are they given by wholesalers, merchants-----Mr. V arney (interposing). Oh, no, sir. They are note brokers and
bond brokers in Boston. You may know some of them—Lee, Higginson & Co.
Senator N elson . What is the paper? Is it a bond?
Mr. V ar n e y . The paper is a note secured by stocks and bonds.
Senator N elson . Oh, yes; I see. They are notes of those brokers
of Boston given to your banks secured by collaterals of stocks and
bonds ?
Mr. V ar n e y . Yes, sir; on which we have advanced the money.
Senator B ristow . H ow much of the paper of your bank would be
available for currency issued under the provisions of this bill ?
Mr. V ar n e y . Of course, we have a good loan of, we will say,
$700,000, in the rough— probably $400,000 of that would be availa
ble; most likely.
Senator B ristow . That is,
" ' ‘‘
™ 1
Mr. V ar n e y . Oh, excuse
true. I had in mind the goodness of the paper, the kind of paper
that would appeal to this board; but it is not 90-day paper.
Senator N elson . A s to time?
Mr. V ar n e y . I think you will find that in the banks to-day,
aside from the demand loans, which I take it would not be taken by
this board ?
Senator B ristow . That is forbidden.
Mr. V ar n e y . Aside from the demand loans, where the note is paid
every three months, I think you will find comparatively little to-day
of three months’ paper. If this bill was enacted, there might be
more three months’ paper made instead of four, five, or six months.
Senator N elson . What is the time in which it is usually made?
Mi-. V ar n e y . Anywhere from three to six months.
Senator B ristow . What is the nature of this paper that you are
talking of? Who makes these notes, as a rule; what class of your
citizens there ?
Mr. V ar n e y . All classes. For instance, the merchant on the
street, if he wants to buy his fall goods, will come in and borrow
$20,000 to buy his fall goods. That would be Daid for $5,000 at a
time, perhaps, and by February it will all be paid for. Another man
wants to buy a piece of real estate, and he pays $10,000 for it and
gets a mortgage of $5,000 and has got $2,000 in cash, and he wants
to put up a note for $3,000. His note is perfectly good, because he
has more property besides that.
Senator N elson . And you have the real estate mortgage as
collateral ?
_
1258
_
BANKING AND CUREENCY.
Mr. V a r n e y . Oh, no, sir; that is not permissible for national
banks.
Senator N e l s o n . They do out West.
Mr. V a r n e y . It is permissible. The comptroller made it permis
sible for national banks to take strictly first-class mortgages as
collateral loans, and so in some cases we do indirectly loan on real
estate.
I am glad you mentioned that, because that leads me to touch on
another phase of this act. You have a clause there, an enabling
clause, to provide for the taking on of some farm loans. I can see
no reason why a national bank— I am not a country banker; perhaps
it would not be wise for a central reserve except in large cities—but
a country bank, whose assets are not supposed to be quite so liquid
as a central reserve city, should not be allowed to a certain extent to
take on securities on real estate. I have found in my experience
that you can not get a better and more secure loan than from mort
gages. I would not allow a bank to take over 15 per cent of its
capital and surplus and put that into mortgages, because a bank
ought to keep its assets more liquid.
Senator N e l so n . In the West, in the country banks, the bulk of
the deposits are time deposits. But would it not be better to base
it on a certain percentage of time deposits instead of capital and
surplus ?
Mr. V a r n e y . That might be. I had not thought it over, but I
would not allow a bank— the idea I would like to throw out is that I
would not allow a bank to put a very large percentage of its assets
into a mortgage.
Senator N e l so n . D o you regard it as good security?
Mr. V a r n e y . I regard it as good security— in many cases as firstclass security.
Senator B r is t o w . Y ou said that but a small part of your paper
was 90 day paper, and added that if the bill passed a larger amount
of it would probably be made 90 days. That does not mean that
you would require your customers to pay their obligations sooner
than they now do, but you would shorten the time in order to bring
it within the limitations of the bill ?
Mr. V a r n e y . If I found our customers wanted to use that privilege
to any extent. That brings to my mind another thought. You
may get tired of these thoughts, gentlemen.
Senator P o m e r e n e . G o ahead.
Senator B r is t o w . That is what we asked you to come for, to hear
your thoughts.
Mr. V a r n e y . That brings to my mind another thought, whether
it is best to confine these notes to strictly mercantile paper that is
pledged. There are very many other kinds of paper which is superior,
say, to what is based strictly on produce or products. For instance,
I want to illustrate. A man is worth $100,000, and we know it. He
comes in and wants to borrow $10,000. It is not right for us to ask
him what he wants that money for; he wants it, and it would not
look very well if we asked him what he wanted to do with it. That
is not based, we will say, on produce, or anything of that sort; it is
based on goods. It is “ borrowed and received” ; it is perfectly good.
Why ought not that note to be perfectly good with this reserve board ?
BANKING AND CURRENCY.
1259
Senator P o m er en e D o you think that would not be embraced
within the term “ commercial paper,” in its broader significance?
Mr. V a r n e y . If you think it would. I did not suppose it would.
Senator P o m e r e n e . I am not sure about it; I am asking you.
Mr. V a r n e y . My impression is that the bill says it must be based
on notes given, broadly speaking, for merchandise.
Senator B r is t o w . I think that is the intention of it.
Senator P o m e r e n e . The bill has been a good deal criticized for its
indefiniteness.
Mr. V a r n e y . It is a little unwise.
Senator B r is t o w . I am interested in having a Massachusetts banker
advance that idea, for that has been the universal idea of those of the
West, but in the East they seem to have adhered to the prime com
mercial paper that matures in a short time; and your observation
leads me to believe that a country banker in New England is doing a
good deal the same kind of business that the country banker does in
other sections of the country. That is, he is accommodating the
business men of his community and adjusts the time of his loans to
the conditions that exist in the incurring of the indebtedness and the
realizing on the business whatever the indebtedness is incurred for.
Senator P o m e r e n e . If you will pardon me, I have the language to
which I think you refer:
Upon the indorsement of any member bank, any Federal reserve bank may dis
count notes and bills of exchange arising out of the commercial transactions; that is,
notes and bills of exchange issued or drawn for agricultural, industrial, or commercial
purposes, or the proceeds of which have been used or may be used for such purposes;
the Federal reserve board to have the right to determine or define the character of
the paper thus eligible for discount within the meaning of this act. Nothing herein
contained shall be construed to prohibit such notes and bills of exchange secured by
staple agricultural products, or other goods, wares, or merchandise, from being eligible
for such discount: but such definition shall not include notes or bills issued or drawn
for the purpose of carrying or trading in stocks, bonds, or other investment securities.
Notes and bills admitted to discount under the terms of this paragraph must have
a maturity of not more than 90 days.
Mr. V a r n e y . That wording there, “ which may be used,” it seems
to me, that ought to cover the matter.
Senator P o m e r e n e . I should think that that covered that class
of paper that you spoke of.
Senator B r is t o w . The question has been quite elaborately dis
cussed here as to just what that does mean, and both views have been
taken— that it does mean general notes, such as you describe, but
others say that it only means goods in payment for merchandise or
bills of lading; that is, shipments of grain or cotton or agricultural
products of that character, where there is to be an immediate realiza
tion on the transaction.
Could you estimate what per cent of your present business, as you
are now running your bank upon the theory that this is prime com
mercial paper which is maturing within 90 days; that is, paper for
commercial business for the purchase of merchandise, for the handling
of grain or cotton—what per cent of your loans would come within
that 90 days ?
Mr. V a r n e y . I do not think, Senator, that I can estimate that,
even roughly, because, as I have said, in the ordinary country bank,
in the general country bank, there is no measure to-day, it seems to
me, of 90-day paper. I would not want to estimate as to how much
1260
BANKING AND CURRENCY.
of our paper was based on such things; I would not do it. If I had
known before I came here, I could have gotten those figures.
Senator B ristow . A s I understand from your answer to Senator
Nelson’s inquiries, you believe that these notes of business men or
first-class real estate or farm mortgages are just as good and reliable
a security as any 90-day paper would be?
Mr. V ar n e y . Why, yes, sir. But for the purposes that it is pledged
for, it strikes me that it would be better to have shorter time paper
with a definite due date, within 90 days.
Senator B ristow . Why ?
Mr. V ar n e y . T o make it more liquid.
Senator B ristow . That is, so it would be paid ?
Mr. V ar n e y . Yes; there is less liability, broadly speaking, for a
man who has issued a note or signed a note, of getting in trouble in
90 days than there is in 190 days.
Senator B ristow . D o you believe that the notes that you have in
your bank are any better secured than your four months’ or six
months’ notes ?
Mr. V ar n e y . N o , sir; but if I could have all of our bills receivable
payable within 90 days, I would like it a good deal better.
Senator B ristow . You would?
Mr. V arney . I certainly would.
Senator B ristow . That is, you would rather collect and reloan
all of your entire amount every 90 days?
Mr. V ar n e y . I would rather do it four times a year.
I would like to say in regard to this pledging and rediscounting that
personally I do not suppose a great many bankers would agree with
me, but it does not appeal to me. I can see no need of it, either. I can
not see the difference between requiring a bank to put up its actual
notes which are a direct lien on all the assets of that bank, if it endorses
that note— I can not see the difference between that and an asset
currency based on the assets of the bank.
Senator B ristow . I am very much interested in your statements
here, because they seem to be individual opinions growing out of your
experience. I can not see— of course, I am not a banker— why the
notes of the bank with any kind of good assets as a collateral would
not be just as good for currency as anything else.
Mr. V ar n e y . I will illustrate it this way. We go to Boston—I have
mentioned having the privilege of going to a bank any time and
asking for $50,000 or $100,000, if we want to make large loans for any
special reason. I go there and they are perfectly contented to loan
on what we call borrowed and received, signed by the president and
cashier of the bank. There is a loan purely on the assets of the
Bay State Bank, and they feel perfectly secure. Now, I do not
believe that they would feel any more secure if I should carry to
them $50,000 or $100,000 of my bills receivable and indorse them.
I do not think they would feel any more secure. They have a lien
and a straight lien and a complete one on all the assets of the Bay
State Bank.
Senator B ristow . Of course, you may do away with these assets
in some way.
Mr. V a r n e y . Yes, sir; we have a building there that we would
not do away with; but every bank does not have that.
BANKING AND CURRENCY.
1261
Senator B r is t o w . I would like to know why it is that a mortgage
on a farm, which is the basis of our national existence here, conserva
tively made on the value of the land, is not as good a security as can
be found ?
Mr. V a r n e y . It is, if it is passed upon by competent judges. It all
depends on that.
Senator B r is t o w . Why is not that as good security for currency ?
This currency is to be returned to the bank. The Government is not
going to collect these notes in 90 days. The bank collects the notes
and collects these accounts, this paper, and takes up the notes which
the Government has issued to it. Why is not a bond or a mortgage,
if it has a good, A1 security, if it runs five years, just as good, so far
as the Government is concerned, as paper that matures in 90 days.
Mr. V a r n e y . Y ou could put that exactly on a par, I think, with
first-class, high-grade bond issues against different Kinds of property.
We have thousands issued against pieces of real estate, bonds of SI00,
S500, or $1,000, that sell broadcast. Those are capable of being just
as good as any property which you can possibly hold.
This suggestion comes to me in regard to this making of notes, and
I can not get rid of it. A great many of our people will take excep
tion to it, probably.
Senator N e l so n . Of your pledging their notes?
Mr. V a r n e y . A man comes in and gives me a four-months note
which is a perfectly good note. He stands high in the community
and he is willing that the Bay State Bank, whose cashier and directors
know all about his condition; he is perfectly willing, he is more than
willing; he is a borrower and he wants them to know his condition;
but he does not want that reserve board, off 100 miles or 200 miles,
to have that note of his presented there. So he comes in a month
before that note is due and he says, “ I want to pay my note.” We
will give him a rebate of interest, of course. We will say, “ We have
not got your note here; it is pledged with the reserve bank.” Can
you imagine that some men might have a little feeling about that?
Senator B r is t o w . I know how they would feel.
Senator N e l so n . That is the objection they have to the system of
rediscounts.
Senator B r is t o w . A s a matter of fact, you will not sell the notes
of your customers of that kind, will you ?
Mr. V a r n e y . If it is first-class, high-grade notes I might be awfully
tempted to if I wanted this currency and was badly in need of it.
Senator B r is t o w . Y ou would not do that unless you were badly
in need of it ?
Mr. V a r n e y . N o ; probably not.
Senator B r is t o w . I think that is illustrated by a little experience
which I had once, and I give it to you because it illustrates a point
that I want your judgment on. I gave a mortgage on a piece of real
estate and it was given to a bank, a national bank. I do not know
how they handled it, but I know that they did handle it. It ran for
a long period, five years, I think. The president of the bank came
to me one day and he said, “ Would you object to my transferring
that to a customer of ours who is anxious to get some real estate
mortgages ? He carries an account with us and he wants us to select
for him, for investment, some mortgages, and we would like to trans
1262
BANKING AND CURRENCY.
fer to him this mortgage of yours, if you have no objection to it.”
Well, of course, I did not care. But the fact that he came to me
indicated that he was delicate about transferring any of the notes or
obligations of his customers unless he was certain it would be per
fectly agreeable to them. Is not that a common feeling with bankers?
Mr. V a r n e y . Well, we have never had this test put up, you know,
but I think I know enough about the temper of borrowers to see that
a great many would be averse to having his note sent out of the Bay
State Bank to another banking concern. They are delicate about it.
You may say that that is too particular altogether, but you can not
take that feeling away from them.
Senator B r is t o w . Sometimes business men would rather that
everybody did not know just what their business relations were; for
perfectly legitimate reasons, too.
Mr. V a r n e y . I have said that I wish a bill would be passed which
would take in all mercantile banking institutions. I think that
this bill might be so amended that the national banks would find
it attractive. As long as it is to deal with national banks only, as
far as it has gone, it should be made attractive for national banks.
I want to say that I have talked this over at some length with our
board. We have a board of representative business men. I have
talked it over' with our board, and there is a grave doubt, as the
bill is in the present form, whether it would want to recommend to
the stockholders to go into this institution as at present formed;
but they do not want to go out of the national-banking system. We
want to stay there. We have been there 50 or 60 years now, and
we want to stay there. But we feel that we would like the bill so
framed that we can come in, and come in gladly, and cooperate with
the managers of it.
Senator N e l so n . Here is Mr. Varney’s statement, Mr. Chairman,
and I want to put into the record. It is just a page. It is what he
read from.
Senator S h a fr o th . There will be no objection to that.
Senator B r is t o w . There are some other matters I would like to
ask you some questions about.
Senator S h a fr o th . Are there any other witnesses here ?
Senator H itchcock . N o.
Senator S h a fr o th . Why not sit to-morrow ?
The Ch a ir m a n . There are several of the witnesses waiting to be
heard. We are simply waiting for these gentlemen here.
Senator S h a fr o th . D o you not think that we had better sit to
morrow ?
Senator N e l so n . We have got a lot of outside business to do,
department work.
Senator B r is t o w . If I may go on for a few minutes longer-----Senator H itchcock (interrupting). I do not see any way to stop
you. [Laughter.]
Senator B r is t o w . Y ou touched upon an interesting point, and
that is the cash reserve required was not as large as your business
necessities required you to keep in cash on hand; that while you
were only required to keep 15 per cent you do, as a matter of fact,
keep 16 and would keep the same amount if you were not required
to 1
1
1
•12 per cent?
BANKING AND CUEBENCY.
1263
Senator B r is t o w . H ow generally do you believe that that con
dition exists with country banks ?
Mr. V a r n e y . I should think that would apply to all banks in large
textile centers, as we are. I can conceive that it would not apply to
a bank in the center of a farming community, or anything of that
sort; but I should think where large weekly payrolls must be taken
care of, a large cash balance must be carried.
Senator B r is t o w . A s a matter of fact, I think, Senator Nelson,
in our section of the country the national banks do carry a larger
reserve.
Senator N e l so n . A s a rule, they carry more because they feel that
they ought to have it.
Senator B r is t o w . They feel that it is necessary for them to
have it.
Mr. V a r n e y . I would like to say that we believe that a reserve
is for emergency use, that that is what it is created for, and we have
used it at times and cut it down pretty low. We carry in our vaults
$20,000 all the time in gold— gold coin— as a part of our reserve, and
when there has been a run on our large savings bank across the street,
there is nothing to stop that run like carrying that gold across the
street and dumping it on the table.
Senator N e l so n . Especially among those foreigners.
Mr. V a r n e y . I once spoke to the examiner about it, and I said,
"W e have depleted our reserve; it is pretty small.” He said: "That
is what it is for.”
Senator B r is t o w . There is a thought, Senator Shafroth, that I
have called your attention to. The reserve is not used as a life
preserver, that is, nailed down and that can not be taken up. It is
required just to meet such emergencies as have been suggested.
Senator N e l so n . Let me say to you in that connection, Senator,
that under the banking law if the reserve falls below the requirement
the comptroller is to notify the bank and the bank has 30 days to
make it up in. And unless the comptroller notifies the bank there is
no trouble brewing. It is only after the comptroller has notified the
bank to replenish the reserve and it fails to do it that it is liable to any
penalty.
Mr. V a r n e y . Yes, but a well-managed bank will not wait for that
notification.
Senator B r is t o w . N o. Concerning the pay-roll condition of which
you speak, you are the first witness we have had before us who has
outlined to us a situation of that kind in the community, and I think,
Senator Shafroth, that that demonstrates the great value that these
hearings are to those of us who are not intimately familiar with the
banking business.
Senator S h a fr o th . I have no doubt about it.
Senator B r is t o w . We have had conditions presented in Minne
sota that were new to me, and the pay-roll condition in Lawrence is
perhaps a condition that exists in a large number of cities where
the textile industries are located, and I think it is very important that
we should have it apparent on the record.
Senator W e e k s . That would be equally applicable in every manu
facturing community ?
Mr. V a r n e y . I should think so, Senator; it would be applicable
to Fall River and New Bedford and all of those places in the country
BANKING AND CURRENCY.
1264
that are textile centers. I should say it might be somewhat appli
cable in Worcester, where they have so many pay rolls.
Senator B r is t o w . I am very much obliged to you, Mr. Varney.
Senator N e l so n . Y ou made a very interesting statement.
B A Y STATE N ATIO N A L B A N K , L A W R E N C E , M ASS.
[C a p ita l, $375,000; d e p o s it s , $1,000,000.]
Reserve now required: $150,000. Three-fifths equals $90,000 in our vault; twofifths equals $60,000 with reserve agents. Because of collections $35,000 of above
$60,000 nets $1,000; $25,000 of above $60,000 nets $500.
Reserve required under Federal reserve act, $120,000: $90,000 in vault; fivetwelfths equals $50,000 with Federal reserve bank; total, $140,000 equals 14 per cent
reserve.
If present relations of collections and accommodations are maintained: Call in loans
and deposit with former reserve agent $35,000—loss between 5£ per cent and 3$ per
cent equals $700; call in loans and deposit for accommodations, $25,000—-loss between
5£ per cent and 2 per cent equals $875; loss of average interest on deposit with Federal
reserve bank, $50,000 at 2f per cent equals $1,375; loss of average interest on 5 per
cent fund, now counted as reserve, $18,500 at 2 per cent equals $370; total, $3,320;
loss of difference in average interest possible capital paid in $75,000 at one-half per
cent, $375; total, $3,695.
This bank has cash demands of about $150,000 per week to meet manufacturers’
pay rolls alone.
Respectfully submitted,
J u s t i n E. V a r n e y ,
Vice President and Cashier.
The Ch a ir m a n . The Chair will submit for the record certain letters
from bankers in the interior showing their viewpoint with regard to
exchanges, and some letters which show an obvious misconception
of the bill and its effect upon interior bankers.
(The letters referred to are as follows:)
F ir st N a tio n a l B a n k of C om m erce ,
H a tties b u r g , M i s s ., A u g u s t 2 2 , 1 9 1 8 .
Senator R. L. Owen,
Washington, D .
C.
Pursuant to our recent correspondence, I am addressing you
with reference to the currency bill from the standpoint of the country banks.
The one particular feature of greatest interest to country banks is paragraph 6 of
section 17, which threatens to force country banks to remit at par to cover collections.
If this is due to the suggestions and influence of city bankers, they have sorely for
gotten their friends in the country, their confiding, weaker brethren who have so
long given them business and now deserve their support.
The country banking interests must be protected and safeguarded by the proposed
currency reform, otherwise it will fall flat and will be of little benefit to the masses.
Benefits only can flow to the rank and file through country banks, and the great cry
against concentration of wealth and power in the centers only can be appeased by
reasonable distribution of privileges throughout the country in such a manner as
to enable every class to obtain its just proportion of the benefits. The best interests
of big business demand an even flow of equities among the people, since peace and
repose are essential to the well-being of finance, and if the proposed new system
brings about happy results it must be by satisfying the people; otherwise agitation
and unrest, so disastrous to business and enterprise, will not cease, but continue in
every quarter.
At present the country banks are charging for remittances to cover collections.
They can only be expected and compelled to do things in their offices and to make
settlements at their counters, and when they make transfers to distant points they
charge reasonable fees for the service, being both legally and morally entitled to such
compensation. Ever since the origin of banks the earning of exchange has been
regarded as legitimate, and the banks have so charged for such services. City banks
have likewise earned profits buying and selling domestic and foreign exchange; the
Government charges commissions for making transfers by postal-money orders; the
express companies do the same on express orders, and charge for actually transporting
money. The soundness of this practice on the part of the banks is amply justified
M y D ear Se n a t o r :
BANKING AND CURRENCY.
1265
and supported by these precedents, the principle involved being the same. This is
simply a question of transportation, and every other transportation agency could be
just as reasonably required to perform its service free.
These charges are made principally in remitting to cover the checks of individuals,
firms, and corporations. A merchant, for instance, will pay a dealer located at some
distant point by checking on his Hattiesburg bank account. The Hattiesburg bank
receiving the check for collection realizes on it and sends the proceeds to the owner
of the check, charging at the rate of $1.25 per thousand for the service. In the large
cities practically without exception the expense is borne by the depositors. The
city banks ordinarily incur little expense in handling such items; and if they do absorb
any of the expense, they always are warranted in so doing by the value of business
received from the depositors of such items, who, as a condition precedent, contract to
carry sufficient balances to justify such service.
Wholesale merchants and manufacturers, who pay nearly all of these charges, seldom
complain to their customers. Tliev appreciate the (justice of same and are glad to
have the collection facilities offered by the banks and are willing to pay. Usually a
merchant or manufacturer who sells a bill amounting to $1,000 can afford to pay $1.25
collection charges. Country banks are the most valuable aids the wholesale dealer
and manufacturer have. They represent both actively on the ground, expedite settle
ments, provide all information necessary to safeguard the business. The free and
easy movement of trade without congestion is due mainly to the offices performed by
country banks.
Paragraph 6 of section 17 threatens to break up the exchange business as a source
of revenue to country banks. It is true that the paragraph only provides that mem
bers of regional banks shall remit at par, but, it being the purpose of the law to admit
and reach all banks, the provision, therefore, contemplates that all banks will be
required to remit at par. That would certainly be the ultimate end, if the law is so
enacted, and becomes broad enough in its scope, power and influence to accomplish
general financial reform and relief. General good can not be accomplished through
the law unless it reaches the people generally, through local agencies. It is, there
fore, necessary to enlist local banks, and the law, to be effective and useful, must,
in the end, reach all banks. It would be manifestly unfair to make comparatively
few banks, forced into the system by circumstances, par all of their items, and have
to compete with other banks not doing so. If regional banks do not collect items at
par on all banks regardless of membership, they could only collect a small percentage
of the items of member banks. The country bank members, being required to remit
everything at par, and left to pay exchange charges on the great bulk of their own out
of town items, would be left in a desperate situation. If member banks lose this
revenue, and nonmember competitive banks are permitted to continue to enjoy same,
the effect would be that nonmember country banks could cut interest rates or reduce
charges otherwise, and be placed in position thereby to easily override, and perma
nently impair the usefulness of country banks members. This would apply to points
containing two or more banks, and to all competitive districts throughout the land.
Therefore, if the Government intends to force any paring at all, for the sake of the
safety of the new financial system, it will ultimately have to undertake the general
collection business of the country, and handle same through postmasters, or otherwise,
if necessary. This provision is unjust and dangerous to the country banks from every
point of consideration, and should be entirely eliminated.
Country banks can continue to control the buying and selling of exchange over
their counters, and exercise their discretion as to their charges for same, but revenue
from this source will cease upon the passage of the bill as now written, for the reason
that the Government would make all individual checks current at par the country
over. If the banks are forced to par all checks there will be no demand for exchange.
Paragraph 6 of section 17 of the proposed bill without right, warrant, or necessity
carries the bill entirely beyond its province. It seeks to settle a question that is not
germane to the great plan involved. What is an exchange charge, if it be not re
muneration for a distinct service performed, and performed at an expense, which
must vary more or less with facilities available and specific conditions involved?
Therefore, how can there be either justice or consistency in this proposed parring
feature that would compel the performance of substantial service without remunera
tion? To do so would be to destroy the inherent right of men to demand compensa
tion for their labor and for the use of their property.
Exchange is a commodity and should remain one whose price should be fixed by
its cost, plus a fair profit to the forces creating it.
Traders constitute nearly all the purchasers of exchange, and it is vitally neces
sary to provide exchange for them.
9 3 2 8 ° — S. D o c . 2 3 2 , 6 3 - 1 — vol 2 -------- 2 0
1266
BANKING AND CUEEENCY.
The higgling and bargaining or the expediences of traders alone determine whether
buyer or seller should pay for exchange in transactions that must be cleared by it,
and, whether actually discussed or not, it is invariably understood that the inevita
ble and proper cost of the transmission of funds from one party to another distant must
be provided for.
The question of exchange can arise only between traders. They create and present
to banks practically every exchange transaction.
It is the function of banks to pay checks on themselves over their own counter,
certainly their duty is no ihore.
If a distant trader permits any bank’s customer to pay him with a check on such a
bank, wherein lies the obligation that such a bank should deliver to such distant
trader the proceeds of such check in part funds at an actual net loss to the remitting
bank?
It is the almost universal custom for the wholesaler to accept in payment of his
accounts against retailers, the retailer’s local check.
Custom makes law, and the universal acceptance of country checks has practically
made them legal tender to the trade.
If these conditions relating to exchange are unjust or unsatisfactory, then let the
trade that established the conditions adjust them. If it is unfair for the retailer to
pay the wholesaler or manufacturer with his local check, let the wholesaler or man
ufacturer demand current funds of the retailer, and altogether refuse his checks.
The trade is now bearing these charges as an item of selling expense and includes
them in all prices quoted.
So far as the country banks are concerned the onus certainly belongs on the trade.
Traders should have the moral courage to demand and enforce a proper settlement
of the exchange question; the city banker should not gratuitously or selfishly attempt
to transfer the entire burden to the country banks.
The Government claims to be conducting its money-order department as a public
convenience and to have its schedule of fees arranged on a basis to cover actual cost.
The reports of this department show fees collected amounting to $6,537,000 for the
year ending June 30, 1912, for which it transferred $680,000,000, or at the rate of $9.60
for every $1,000 transferred, against our exchange charge of $1.25 per thousand. The
Hattiesburg post office transferred during the year ending June 30, 1913, $127,000, for
which it received $1,264 fees, or $9.80 a thousand, or nearly eight times the Hatties
burg exchange rate. A bank is compelled to employ exchange clerks who perform the
work corresponding to that of the post-office money-order clerk. Some of the House
Currency Committee have expressed the idea that Federal reserve banks would per
mit members to charge exchange as before and absorb all exchange and collection
charges. We fear that they do not appreciate the volume of this business, and if ex
change rates were reduced ever so much the burden would still be too much for them.
For example, one bank in Hattiesburg will remit as much money in three days as the
money-order department of the Hattiesburg post office will remit in a year. It has
been estimated that the regional banks will absorb losses in effecting these collections
at their own cost of from $50,000,000 to $75,000,000 in addition to the expense of
handling this business. Is there not grave danger as a result of such stupendous
annual losses that the regional banks would soon be compelled to either demand a
great reduction of the rates paid member banks for remitting or entirely discontinue
the payment of exchange? Should such far-reaching arbitrary powers be given
regional banks? Are not country banks justified in being afraid of this big stick in
the hands of regional banks?
It would be unsound and wrong in principle to permit regional banks to receive
country checks and drafts for deposit as cash, and immediately give depositors the
benefit of same as cash, such items not being cash by virtue of the fact that they are
only ordinary collection items, many of which are never paid and all of which re
quire much time for collection and final liquidation; that the receiving of such items
by regional banks as cash, and immediately giving depositors the benefit of same as
such, would put a great and unjust burden on the regional banks which would mili
tate seriously against the best interests of shareholders of banks not handling huge
volumes of such items; that the effect would be immediately to give such depositors
the benefit of such funds as cash without charge, which would be a burden on the
institution and a tax on its shareholders and other depositors; that if this practice is
permitted on a large scale, it will result in a tremendous fictitious, floating, and un
certain element in the business of regional banks, causing credit balances against
which reserve would have to be provided and carried, thereby largely increasing
reserve requirements and proportionately reducing the ability of regional banks to
issue currency.
BANKING AND CUKRENCY.
1267
The provision vitally affects the interests of 30,000 shareholders of Mississippi banks.
The Mississippi banks are now earning about $650,000 every year in these particular
transactions, and they can not afford to lose the revenue. To illustrate, the entire
accumulations of all the Mississippi banks, over and above dividends paid, appear
to be less than $500,000 per annum. On November 16, 1910, the total surplus and
undivided profits of all Mississippi banks were $7,012,000; on December 18, 1912, the
entire surplus and undivided profits of all Mississippi banks were $7,937,000, making
an increase for the 25 months of $925,000. It is therefore apparent that the Missis
sippi banks will be seriously injured and their usefulness greatly impaired if they
are forced to sacrifice this revenue. The dividends now received by shareholders
are barely normal.
It is of great importance that the United States 2 per cent bonds be properly sup
ported and taken care of in the act. These bonds are selling below par at present, and
the effect on the public mind is distressing. Our Government has always been in
high credit, and we have for so many years accepted its standards as correct ideals to
imitate and live by, that we can not afford to have Government standards lowered.
To lower Government standards would be to greatly depreciate the high morale of
our citizenship which has made our people great in business and in every other walk
of life.
The law provides that 2 per cent bonds shall be retired after 20 years, but no contract
to that effect has been proposed. In my opinion, if the Government would call in all
of its outstanding 2 per cent bonds and substitute 20-year bonds for same the trouble
would be cured and 2 per cent bonds would be worth par, but in the absence of a
contract of this nature I am afraid 2 per cent bonds will never sell at par again. I
fear they will go far below par. Any succeeding Congress could repeal any portion of
the law as now proposed, and that is what is disturbing the holders of these bonds,
and the holders of same ought to be protected absolutely, and the only way to do it is
to issue new bonds.
Senator, our lawmakers should keep the fact always before them that nearly all the
2 per cent bonds are held by national banks, and that they were practically forced by
the Government to buy them.
I fear the savings-bank feature of the bill, although it would be an advantage to
the banks to have the present reserve requirements against savings deposits reduced to
5 per cent as provided in the bill. The effect of the present high reserve require
ments, the same being usually 25 per cent or more, is to largely increase the cost of
such deposits, thereby making such business difficult to handle at a profit. All
country banks are now required to carry 15 per cent reserve, but, in addition thereto,
it is necessary to carry working capital, and 25 per cent is about as little as a bank can
ordinarily get along with. It would therefore be a great relief to reduce reserve
requirements of savings deposits to 5 per cent, but I fear we would have more trouble
with the Federal board and the Comptroller of the Currency in handling the business
than we would gain benefits by the relief. In my judgment it is unwise to legislate
on this particular subject. There is not much savings business done by national
banks except in the country and small cities, and in most instances there is not enough
such business to justify extraordinary expense and effort. Money that can be at
tracted as savings deposits is needed in the country communities for general business
purposes, and general business can not afford to give up the funds. It would cause
a great deal of trouble all over the South and West if the banks having savings depart
ments had to segregate same and invest the money in some peculiar way out of har
mony with local requirements. At present all savings moneys in country banks are
used just as the other deposits are, and there are very few communities that have a
surplus of money. Therefore it would be serious to enact a law that would interfere
with the present use of such deposits and also to divert a part of the capital stock of
banks to savings departments, to be invested in some strange and unreasonable manner.
In large cities the savings business is taken care of in separate and distinct savings
banks, and the law, therefore, would not reach the great savings business of the
country. It would only apply substantially to country districts and very small
cities where the business is, practically speaking, inconsequential, yet the funds are
essential to the business life of such communities.
Every bank ought to have a savings department. All classes of people in every
community ought to be encouraged to save. Children ought to be urged to com
mence saving early in life, and savings departments in the country banks are becom
ing quite numerous, but I fear they would have to be cut out largely if this law went
into effect, because such deposits are very small in most communities. In a southern
town of 2,000 people the savings deposits would probably not exceed $25,000 in all the
banks in the town. The business is, therefore, so small that most of the banks could
not afford to segregate it and incur the expense of a special separate department to
administer same.
BANKING AND CURRENCY.
1268
I think this question had better be let alone, as I fear it involves great danger to the
numerous small communities in the country. Such communities as have a large
amount of savings business can take care of same by organizing savings banks under
State laws and in that manner take care of the business economically and with strict
reference to just how such a business should be conducted, and inasmuch as this
business has this natural and logical outlet in communities where there is enough of it
for special attention, I think it would be best to eliminate the subject from the cur
rency bill.
I have said nothing regarding the control of regional banks, as I understand the
policy of the lawmakers is definitely fixed in that regard, and I have not referred to
the matter of compensation to shareholders and depositors for the same reason, although
I think the dividend rate on the capital stock of regional banks should be increased to
6 per cent. Most country banks are paying 4 per cent interest on time certificates of
deposit and savings deposits, and this money is costing them 5.33 per cent, reserve
requirements considered. We pay $4 per year for the use of $100 and can only lend
$75 of the amount. While the provision to give bank depositors 40 per cent of the
earnings of regional banks over and above dividends paid is very much better than the
previous provision, which provided that no interest should be paid them, yet it appears
to me that it would be eminently more fair that the earnings of regional banks over
and above dividends paid be divided between all depositors in proportion to balances
carried, Government and bank balances to be treated alike. I can not see wherein it
is just for the Government to claim greater benefits in the premises than it would allow
other depositors.
I think it would be perfectly safe and best to allow 50 per cent of the capital stock
of regional banks to be owned by individuals, they to be limited in the amount one
could own, the stock to be owned by individuals in each State.in proportion to stock
owned by banks in each State. This would assure a widespread distribution of the
stock and no pyramiding of interests.
Referring to the exchange matter, I would suggest the entire elimination of that por
tion of paragraph 6 of section 17 which permits regional banks to receive checks and
drafts from depositors at par, and further permits them to act as clearing houses for
country items generally. Regional banks should be restricted to handling checks of
other regional banks. It might possibly be well to allow regional banks to handle
checks drawn by members on other members, but they should be forbidden to receive
any items drawn by or against individuals, firms, or corporations.
Two per cent bonds should be put on a substantial contract basis that would shorten
their maturity sufficiently to make them worth par.
The law, I think, should be silent, for the present at least, regarding the savings
business.
Thanking you sincerely for your patience, I beg to remain,
Yours, very truly,
F . W. F o o t e , V ic e P re sid en t.
F
a r m e r s
a n d
M
e rc h a n ts
B
a n k
,
F o r e s t, M i s s ., S ep tem b er 2 2 , 19IS .
Senator R. L.
O
w e n
, W a s h in g to n , D . C.
: A s a small country banker, I have been very much inter
ested in the Owen-Glass currency bill now pending before your honorable body and
have studied the bill since it was first made public, and I heartily approve the bill
as a whole; however, I see in it one objection that if enacted into law will not only
take practically all of the net earnings from the country banks but will force a great
many into liquidation. This objection is the handling by the regional banks col
lections of every kind at the sacrifice of exchange to the country bank.
For example, I quote from our books at the close of business last evening. We have
earned this year on interest account, $2,770.08; on exchange account, $1,072.20; total
earnings, $3,842.28, with an expense account of $2,532.43, leaving net earnings
$1,309.85 on a paid capital of $20,000. You can see at a glance that should we be
deprived of our exchange our investment would be anything but profitable.
We had expected to join the regional bank as soon as the bill was put in operation,
but unless the bill is amended so as to forbid the regional banks handling collections
we will have to remain out, and it is our opinion that if the bill becomes a law without
this amendment the banks in Mississippi will not (unless forced to) go into the system.
Some of the national banks may have to remain in on account of having such large
investments in United States bonds, but in our opinion the banks that are not heavily
loaded with 2 per cent bonds will get out.
D
e a r
S
e n a t o r
O
w e n
1269
BANKING AND CURRENCY.
If the Senators want the bill to be popular with us country bankers and banks it
will be wise to so amend it as to forbid regional banks handling collections of this
kind.
Hoping you will see fit to use your influence in the interest of the majority (the
country banks), I am,
Sincerely,
W. D. C o o k , Cashier.
A
l a b a m a
B
a n k e r s
’ A
s s o c ia t io n
,
P e l l C ity , S e p te m b e r 2 0 , 1 9 1 3 .
Hon.
R
o b t
.
L.
O
w e n
,
C h a irm a n S en a te C o m m ittee o n B a n k i n g a n d C u rren cy, W a s h in g to n , D . C .
Dear Senator O w e n : Your request of September 18 received. It is difficult to
explain the matter in a letter. I will do my best, but would prefer coming before the
committee in order to do so in greater detail and with more clearness.
That you may properly understand our situation, Pell City is a little one-bank
town in northern Alabama. Birmingham is the collection center of this territory.
At least 50 other banks are tributary to Birmingham in the same sense that we are.
Our mercantile and other customers buy goods at Birmingham and other wholesale
centers. They pay for these goods by their own check drawn on us and sent to their
creditor. Each day these checks are presented to us for “ clearing” through the mail.
Banks in the collection centers each day receive from their customers and connections
quite a number of these checks on us. They send them here by mail. We pay by
returning to them the total of the letter, less deduction for exchange, by check on
New York.
September is not one of our very active months, yet I can not do better than give
you a transcript of our draft register, which shows transactions as follows:
D a le .
S ep t.
S ep t.
S ep t.
S e p t.
S e p t.
S ep t.
2 ...............................................
3 ...................................................
4 .......................................................
5 .........................................................................
6 ....................................................................
8 ..............................................................................................
L e tte r s
r e c e iv e d .
T ota l
a m ou n t.
P r o fit
exchange.
15
7
6
l ' 320.26
0. zo
The above represents a little less than an average week’s transactions between our
selves and other banks which in the ordinary course of affairs would become members
of the new system. It does not include any entries save these.
It therefore appears that our profit for that week was $25.35, which sum was paid to
us by the banks of the collection centers, Birmingham, Atlanta, Nashville, Mont
gomery, etc. A similar profit is made by each of the 50 banks in this section of Ala
bama, as the record listed is fairly typical of all.
Now, under section 18 of the bill, at page 32, fine 13, et seq., it is provided that
every Federal reserve bank must receive on deposit at “ par” and “ without charge
for collection ” checks from any of its depositors on any of its depositors, etc.
The First National Bank of Pell City hopes to be a member of the regional bank.
The banks of these collection centers will certainly be members unless the system is
to fail for lack of membership. Let us presume that New Orleans is the site for our
regional bank. What follows?
Instead of sending checks on us to Pell City for payment in New York draft, less
exchange, they will mail these checks to the regional bank, get credit for full amount
of the total, the bill says so, and the regional bank must then make a corresponding
entry to our debit on our balance. In other words, our exchange profit is gone.
Where will the profit go? Its destination is not open to question. Business men,
individuals, firms, and corporations, will not get it, as they do not now pay the exchange
charge. If they did get the benefit I would not object so strenuously. But the
gain will go direct into the profits of the collection center banks. If these banks
were just eking out a miserable existence, or if country banks were making profits
unduly large, I would not object again. But the reverse of this is true. Few country
banks are making unjust profits. They are making only reasonable profits, and the
fact is well known that bank salaries in the country are small. Collection center
banks are making as much and more than we country banks, and their salaries are
much larger. I have heard it said on authority that with this section unchanged
BANKING AND CTJEEENCY.
1270
one St. Louis bank will add $200,000 to its annual net profit and that one Birmingham
bank will net $50,000 more than they now do. Neither need or deserve this gain.
Country banks do need and deserve present exchange profits.
From the discussion I have heard about this section, in bank meetings, etc., the
collection centers are just putting one across on us. This is the admitted object of
the section and its undisputed result in operation. I defy anybody to assert the con
trary. I also believe that the undisclosed object of the savings section is to prevent
country banks from accepting such deposits and throwing them into the big towns.
Banking legislation has never been drawn in the interests of the country, its banks
or its people, yet politicians assert that we are the bulwark of the Nation! The time
has come when we should receive at least equal consideration. It is our money that
runs the national business machine. Birmingham to-day does not carry enough
available cash to pay its country bank depositors, nor does Cincinnati, or St. Louis,
or Boston, or Chicago, or New York, to go up the scale. To paraphrase the poet:
“ Money is gathered by unseen degrees, as brooks make rivers; rivers run to seas.”
We are the brooks, and where would the rivers be without us? Dry as a bone, literally.
Senator Owen, if I understand the meaning of language and its effect upon present
methods of business, I am right in the position taken. With those two sections left
unchanged in the bill, I make the prediction that when enacted into law, it will be a
tinkling brass and sounding cymbal, as empty as a bass drum. What is the use of
running any risk on points not germane to the measure? Why not start the system
with as few uncertainties as possible, caring for exchange and savings matters by sub
sequent and separate legislation?
I thank you for the opportunity you have given me to make this explanation, and
if my presence is wanted before the committee I will be glad to come on the first train.
Trusting you will use your large talents and high office in the interests of the coun
try banker, and with kind personal regards, I remain,
Very respectfully,
M c L a n e T i l t o n , Jr.,
Secreta ry A la b a m a B a n k er s' A s s o c ia tio n .
T
h e
F
ir s t
N
a t io n a l
B
a n k
of
N
a p a
,
N a p a , C a l., S ep te m b e r 1 3 , 1 9 1 3 .
Hon.
R
o b e r t
L.
O
w e n
,
U n ited S ta tes S en a te, W a s h in g to n , D . C .
D e a r S i r : We are writing to express this bank’s opinion o f the pending banking
and currency bill. We assume that you are interested in knowing the position of the
banks, and particularly of the country banks, concerning this bill, which is now before
the Senate.
As a preliminary word we will say that we have not been asked to write this by any
central reserve bank or by any other bank. It expresses merely our own ideas of the
situation as we have studied it.
We have been connected with all the various forms of banks and have had experience
with the private copartnership system, State commercial banks, savings and loan
corporations, and national banks during the 30 years and more that we have been in
the business. Of all these systems, the national-banking system has been our first
choice, and we have always been strong advocates of Federal supervision and control.
Notwithstanding this, after a careful study of the bill, we feel that if we are to be
forced into a central reserve organization, in which we have little or no representation,
and whether or not we approve of its management and conditions—if we shall be com
pelled to deposit our funds with such an institution without interest while the Govern
ment shall receive interest—and if we shall be forced to place a portion of our capital
in such an investment, whether or not we deem the benefits and returns to be satis
factory, then, we say, our people would probably elect to leave the national-banking
system before we would be forced to subscribe to and support such a plan.
This probably is of little interest to you as to what we might do, but if our views
represent those of any large portion of the country banks (as we believe they do), it
would seem that those in charge of the administration measure should stop a moment
and consider the action which is at present apparently determined concerning such
legislation.
Asking, therefore, your kind consideration of this statement, we are,
Very truly, yours,
H. P. G o o d m a n , P re sid en t.
J. A. M c C l e l l a n d , V ice P resid en t.
E. L. B i c k f o r d , Cashier.
1271
BANKING AND CURRENCY.
F
ir s t
N
a t io n a l
B
a n k
,
M e rid ia n , M i s s . , S ep tem b er 1 8 , 1 9 1 3 .
Hon.
R
o b e r t
L.
O
w e n
,
C h a irm a n C o m m ittee o n B a n k in g a n d C u r ren c y,
U n ited S ta tes S en a te,
W a s h in g to n , D . C.
My D e a r S i r : I have followed with intense interest and anxiety the proceedings
of your honorable body with reference to the pending currency bill as disclosed by
the daily papers and such journals as come to my desk, and, so far as I can judge, but
little is known of the attitude of the country banker toward the proposed bill. He has
had no representation on such committees as may have appeared before you from
time to time, and, so far as I know, but little effort has been made to ascertain his
views. The number of country banks in the aggregate make up quite a total, and the
distribution of the stock of such banks is widely scattered among the plain, hardworking
people of their respective communities. There are some serious objections to the
bill, which are held in common by the city and country banks, but a tremendous
mistake will be made if you proceed on the assumption that it mil operate alike for all
banks. There are some objections common to all of us, city and country banks alike;
such, for instance, as the feature requiring contribution of capital and deposits for the
regional banks and lack of provision for representation in the administration of our
own money. Many of us will not dare to part with so large a per cent of our means,
and for which we are directly responsible to our own people, and intrust this money
to any board or body in the selection of which we have no voice; and, further, with
no provision for indemnity to us for the proper use of our funds or for its ultimate
return to us. These objections, I say, are common to all of us.
The most serious objection, however, of the country banks is one in which the
city banks have but little or no direct interest. I refer to the section of the bill which
contemplates the abolition of exchange charges on country checks handled through
the regional banks. We have in this State about 30 national banks as against some
300 State banks, and the latter, of course, would not be affected by this provision of
the bill. The item of exchange forms so large a part of the revenue of the country
bank that any national bank in this State would be seriously hampered in competi
tion with the State banks, and this of itself would impel a surrender of national char
ters. Moreover, the great preponderance of State banks argues their peculiar adapta
bility to the needs of the people of an agricultural region as contrasted with the limi
tations imposed upon national banks. I believe it would be entirely proper to have
the bill provide for a transfer of funds at par as between the regional banks them
selves, but the law as now drawn would necessitate the emplovment of a vast army
of clerks, how many no one could conjecture, who would be charged with the duty
of handling the checks of the entire country, and since no charge is to be made for
exchange or collection, you will readily see how enormously the expense of the ad
ministration of such regional banks would be increased by the employment of this
vast array of clerical help. The benefit would be wholly in the interest of the great
merchants and manufacturers of our large cities and entirely at the expense of the
rural districts. The charge for transferring funds or credits from one section of the
country to another is an entirely equitable and proper charge, since it entails upon
the banks considerable expense and responsibility, and such charges should be left to
the discretion of the banks directly interested. In my opinion, the regulation or
abolition of exchange charges on country checks has no proper place in the national
currency bill. Unless this feature of the bill is eliminated, it will, in my opinion,
force more country national banks out of the system than all other objections com
bined. Certainly there would be not the slightest incentive for any State institu
tion to enter the system.
I earnestly request of you to give this feature of the bill your careful consideration.
Yours, very truly,
E
d w in
M
cM o r r ie s
, P re sid en t.
The Chairm an . The Chair will submit to the record a letter from
William A. Linn, president of the People’s National Bank of Hacken
sack, N. J., an institution with over three millions of resources,
opposing the savings-bank section and giving reasons to justify hia
opposition, to which I call the special attention of the committee.
BANKING AND CURRENCY.
1272
(The letter referred to is as follows:)
No. 7799.
T
h e
P
e o p le
’s
N
a t io n a l
B
a n k
,
H ackensack, N . J ., S ep tem b er 1 9 , 191S.
Hon.
R
o b e r t
L . O
w e n
,
S en a te C h a m ber, W a s h in g to n , D . C.
D e a r S i r : I bespeak your assistance to secure the striking out of section 27 of the
proposed banking and currency bill—the section concerning savings departments in
national banks. This section has no connection whatever with the general revision
of our banking laws, and its enactment would simply cause unnecessary disturbance
in the business of national banks throughout the country. Its elimination, therefore,
would not affect the object set forth in the bill itself.
Currency legislation is either constructive or remedial. This section is not con
structive, because thousands of national banks all over the country have been for
many years successfully conducting savings departments, and they will continue to
do so if this legislation is omitted. It is not remedial, because no evils have mani
fested themselves in the savings-bank business conducted by national banks. The
report of the Comptroller of the Currency, under the call of April 4, 1913, showed that
of the 7,440 national banks in the United States 3,353 conducted savings departments
with savings deposits amounting to $810,975,367. There should certainly be some
specific reason for disarranging all this banking business as would be done by the
adoption of section 27 referred to.
This effort to upset and curtail the savings business of national banks is traceable
directly to interests representing the old-line savings banks throughout the country.
The secretary of the savings-bank section of the American Bankers ’ Association wrote
to Chairman Glass on August 6, 1913, commending the plan to incorporate such an
amendment as section 27 in the currency bill, and saying: “ May I venture to suggest
that in drafting this amendment some special protection should be afforded the
savings depositors? I would not advocate a sweeping segregation law, but believe
that if your amendment should provide that the savings deposits in national banks
shall be invested according to the law relative to the investment of savings deposits
in the State in which each national bank is located the best interests of all would be
conserved.” The old-line savings bank interests have been for many years trying to
bring about such a segregation of savings accounts in national banks as this section
provides, but they have been fairly met at all points and have always been defeated,
as in their efforts before the American Bankers ’ Association. I feel that their jealousy
in the matter is ill considered. They fought vigorously the scheme for postal savings
banks, but results have shown that these new savings deposits have not diminished the
deposits of the old-line banks.
The claim that “ some special protection should be offered the savings depositors
in national banks” does not bear investigation. In every discussion of this subject
it has been easy to point out that a national bank, with its capital and surplus and
double liability of stockholders, offers to its savings depositors a secutiry which is
not afforded by a savings bank which has no capital and which has no surplus until
a surplus is earned. In a comparison I had occasion to make a few years ago, I found
that the capital and surplus of the national banks of New Jersey represented 35 per
cent of the deposits, without including the stockholders liability, while the surplus
of the savings banks of New Jersey equaled only 7.8 per cent of their deposits. It
was doubtless this weakness of the old-line savings banks which caused their invest
ments to be limited to the most conservative securities.
While the securities designated for savings bank investments may be considered
as nearly absolutely safe, as regards final payment, as any securities may be, they are
not liquid assets, and in time of financial disturbance they can not be sold quickly
without a loss. During the last year the price of such securities has shown a marked
decline, and this decline is often sufficient to wipe out the surplus of savings banks
if they were required to write down their values to the market rate of the day. It is
due to the fact that these securities are not a quick asset that savings banks have been
given the privilege of taking 30, 60 or 90 days in which to honor drafts upon them by
their depositors in times of financial stress.
A national bank, as in our case, treats all its depositors alike, savings and commercial.
We have no clause permitting us to defer the honoring of any checks presented at our
window. We invest all our funds without any segregation and it is our large invest
ments in commercial paper and short-term securities which give us at all times liquid
assets to meet any demands made upon us. During the pamc of 1907 we not only met
BANKING AND CURRENCY.
1273
the demand of all our depositors without question or without delay, but we made
loans to some of them whose funds were tied up in New York City savings banks,
taking their pass books on those banks as security. It will be a most serious matter
to require the national banks of the country which have made investments of savings
funds on commercial lines to liquidate these investments and reinvest in some
restricted list of securities; $800,000,000 is a big sum to monkey with. In discussing
this subject before the New Jersey Bankers’ convention two years ago, President
James, of the Easton (Pa.) Trust Co. (referring to the savings investments in Penn
sylvania outside of the requirements of the savings-bank law) said: “ Imagine
$350,000,000 taken from the ordinary channels of trade and all the securities or loans
represented by that $350,000,000 converted and then replaced in United States
securities netting 2 per cent and somewhat upwards, or in State bonds, or in municipal
bonds now netting 4 per cent or less, or in bonds and mortgages, and fancy the condi
tion that the Keystone State banks and people will have fallen upon. Business would
shaken, credit must be withdrawn, wheels must be stopped—interest rates will
bepress the business borrower.”
opThe seriousness of this question can not be overlooked.
The national banks have done a great work in encouraging savings by the people
and in providing means for such savings where they do not otherwise exist. In the
State of New Jersey there are old-line savings institutions in only 18 cities and
towns, while there are in the State national banks in 148 cities and towns, all of which
do or can provide savings facilities. There is no old-line savings bank in Hackensack,
and none nearer than Paterson or Jersey City.
We bespeak your careful consideration of this subject and earnestly hope that you
will use your influence to have the objectionable section stricken from the bill.
Very truly, yours,
W. A. L i n n , P resid en t.
(Thereupon, at 5.20 o’clock p. m. the committee adjourned until
Monday, September 29, 1913, at 10.30 o’clock a. m.)
M ONDAY, SEPTEMBER 29, 1913.
Committee
on
Banking and Currency,
U nited States Senate,
Washington, D. G.
The committee assembled at 10.30 o’clock a. m.
Present: Senators Owen (chairman), Hitchcock, O’Gorman, Reed.
Pomerene, Shafroth, Hollis, Nelson, Bristow, McLean, and Weeks.
Senator Nelson. While we are waiting, Mr. Chairman, I have a
letter which I wish to read and insert in the record. I would be glad
to have you gentlemen listen to it, and I want to say that what this
letter states is borne out practically word for word in the treatise
by Warburg on Discounts, if you gentlemen have read it.
The Chairman. Yes; read it into the record.
Senator Nelson. It is in reply to Mr. Untermyer’s statement. It
reads:
I learn from the daily press that on the 22d instant Samuel Untermyer gave
the Senate Banking Committee his ideas on currency reform and that he criti
cized adversely the provisions of the administration currency bill allowing
banks to deal in acceptance given for the exportation or importation of goods.
The United States uses annually 880,000,000 pounds of coffee. The value of
the coffee imports to the United States is at present prices about $117,000,000.
Every dollar of this vast sum must be financed through London bankers and
payable in London.
The only way coffee can be bought is on 90-day acceptances drawn on London
bankers. It can not be imported for cash.
We are importers of green coffee. The minimum quantity that can be bought
in one shipment is 250 bags. We are obliged to purchase a letter of credit from
some banker in New Orleans or New York for each shipment and pay one half
1274
BANKING AND CURRENCY.
of 1 per cent for it. On tlie strength of this letter of credit bills are accepted in
London for the amount of the purchase. Funds must be in the hands of the
bankers who issue the letter of credit in time to be remitted and reach London
at the time the acceptance is due.
Undoubtedly vast importations in addition to coffee are financed the same way
and furnish a fabulous amount of profitable business to the London banks.
It is really ridiculous that this the richest country on God’s green earth should
be compelled to do business that way. Every dollar of the imports to the
country should be financed by the banks of this country, and our banking law
should not only permit it but encourage it. If the law now before the Senate
committee will not do this, it should be amended so that it will.
The vast financial machinery now in operation which furnishes such an
immense volume of business to London can not be superseded in a day, but a
start should be made now. It is to be hoped that Congress will give this matter
the serious consideration which its importance deserves.
It is signed by T. H. Green, of Green & De Laittre Co., importers,
manufacturers, wholesale grocers, and coffee roasters, of Minneapolis.
Minn. As I said before, this statement is exactly borne out in this
treatise of Warburg on Discounts.
The Chairman. I think he has misunderstood Mr. Untermyer.
Senator Nelson. Well, I do not know about that.
Senator H ollis. A s I understand it, the branch banks that are
contemplated will take care of this sort of thing.
The Chairman. Yes. However, the Federal reserve banks and
branches could do this very business. More than that, the national
banks having a million of capital can do the same thing.
Senator Nelson. The provision of the bill referred to is in section
15, first part.
The Chairman. What is that?
Senator Nelson. This is the clause to which objection is made. It
is on page 27, and reads:
That any Federal reserve bank may, under rules and regulations prescribed by
tlie Federal reserve board, purchase and sell in the open market either from
or to domestic or foreign banks, firms, corporations, or individuals, prime
bankers’ bills, and bills of exchange of the kinds and maturities by this act
made eligible for rediscount, and cable transfers.
Senator H ollis. Mr. Untermyer objected to going into the market
to compete with other banks.
Senator Nelson. Yes.
Senator H ollis. I do not understand that the regional banks have
got to do this. These member banks can do that.
Senator Nelson. No ; this is the regional bank.
Senator H ollis. Yes, I know; but I do not think it is necessary to
do it under that. I think these branch banks can do it perfectly
well.
Senator Nelson. The trouble is that in the foreign countries the
ordinary banks would not have such large credit accounts as the
reserve banks.
The Chairman. Senator, I think you refer to the first paragraph,
on page 26, that any national bank may accept bills of exchange and
drafts having not more than six months to run.
Senator Nelson. Yes; but this other provision is important. In
transactions with foreign countries I think these reserve banks would
have a higher standing abroad—their bills would stand higher than
the member banks, being larger and being national institutions.
The Chairman. Yes; I think that is so. What is the exact point
he was making there?
BANKING AND CURRENCY.
1275
Senator Nelson. The objection, as I understood it, from Mr.
Untermyer and others was against this provision, section 15, first
paragraph. That is the way I understood him here the other day;
but is he not coming back here to-day ?
The Chairman. Yes; he will be back here this morning. He
wanted to enlarge this paragraph, did he not?
Senator Nelson. I am not clear about it. My idea was he thought
it interfered with other banks.
The Chairman. Oh, no; I do not think he feels that way.
Senator Nelson. Well, when he comes here we will find out.
The Chairman. Mr. McRea, who was- for many years in Congress,
is here this morning. He was just coming through to attend a
bankers’ convention in Boston. I have consulted with the committee
and requested him to speak to the committee a minute with regard to
his views about the bill, he now being in the banking business.
Mr. McRea, we will be glad to hear your opinion about this bill
and what the view of the banks in your neighborhood may be with
regard to it, as far as you happen to know. Will you give to the
stenographer your present position in banking? You have charge
of a bank, as I understand.
STATEMENT O THOMAS C M’RAE, PRESIDENT O THE BANK
F
.
F
O PRESCOTT, ARK.
F
Mr. M cR ae . I am president of a bank at Prescott. I have been
president of the Arkansas Bankers’ Association and am now del
egate and vice president from Arkansas for the American Bankers’
Association.
I did not come here, Mr. Chairman, expecting to make a statement
to the committee about this bill, but I have given it some considera
tion from the standpoint of the country banks—the small banks.
Senator Nelson. The State banks?
Mr. M cR ae . The State banks. I think that it is a good bill. I
would not want to commit myself to all the details of the bill, but I
believe that the principles upon which it is based, the fundamentals
of the bill, are correct, and I believe it will be helpful to the banking
interests.
I have, as some of you know, been in political life in the past. For
the past 10 years I have been in the banking business and I am sorry
to see any distrust of the banking interests by the legislators of the
country, and vice versa of the legislators by the banking interests.
I would like to see a better understanding between the two. Most
of this distrust is not well founded. I believe that this bill will be
of great help to our section of the country, and I believe a large
majority of the small bankers who have carefully considered it, Na
tional and State, in my State and the surrounding States in which
I have mixed with the bankers, favor the bill. I believe with the
restrictions upon national banks which will be removed by it, that
it will carry into the national system a great many State banks,
unless the regulations for the transfer are too rigid. Whether it does
or not, it will help the banking business, I think, in the southwestern
part of our country.
1276
BANKING AND CUBRENCY.
The Chairman. We are glad to have an expression of opinion.
We have not had many country bankers appearing before the com
mittee; many interior bankers.
Mr. M cR ae . Mr. Chairman, they have not been invited, and, if
they had been, it would be inconvenient for many of them to come.
In "fact, I would not have come except I was on my way to the meet
ing of the American Bankers’ Association and I wanted to see some
of mv friends here, and so I came here this morning—not to talk,
but to hear others upon the bill—to hear what objections others could
urge to it and, at your suggestion and request, I am here simply to
say in my individual capacity I think the proposed legislation is
important and I would like to see it enacted. I believe it will be
helpful to banking and to business generally.
The Chairman. D o any members of the committee wish to ask
any questions of Mr. McRae?
Senator H itchcock. Mr. McRae, you are in the banking business
in Arkansas?
Mr. M cR ae . Yes, sir.
Senator H itchcock. And what is the size of your bank?
Mr. M cR ae . $75,000 capital and $75,000 surplus.
Senator H itchcock. S o that under the terms of the bill you would
be required to part with $17,000 of capital ?
Mr. M cR ae . Yes; I understand that—$7,500.
Senator H itchcock. Y ou said $175,000 capital?
Mr. M cR ae . N o ; $75,000, and $75,000 surplus.
Senator H itchcock. Oh, you would be required to part with
$7,500, then.
M r. M cR ae . Yes.
Senator H itchcock. And what do your deposits amount to?
Mr. M cR ae . N ow about $300,000. They have been as high as
$450,000. They run from $250,000 to $350,000 generally.
Senator H itchcock. Are you in the habit of rediscounting notes?
M r. M cR ae . We rediscount some usually from the 1st of July
until the 1st of November. We have this year. I f the farmers are
ready to sell the cotton on a good market like the present cotton
market, we pay our notes at maturity; but if they want to hold the
cotton, we generally help them, and have to renew or make further
rediscounts.
Senator Hitchcock. What class of notes do you rediscount?
Mr. M cR ae . We usually use the largest size loans—the commercial
and industrial concerns’ notes. Most of our loans, however, are to
the farmers, and are small.
Senator Hitchcock. Those notes you rediscount are notes that are
to be paid at maturity?
Mr. M cR ae . Yes, sir; usually; not always.
Senator H itchcock. Are they paid to the banks to whom you re
discount them?
Mr. M cR ae . N o ; not always; sometimes. It depends on whether
they mature before the maturity of our obligation.
Senator H itchcock. I f they mature after the maturity of your
obligations, then they are returned to you?
M r. M cR ae . Returned to us.
Senator H itchcock. Then, really, it
are deposited as collateral security?
is a loan you make and these
BANKING AND CURRENCY.
1277
Mr. M cR ae . Yes. We call it rediscounting, but usually it is a
loan secured with notes payable to us as collateral. That is the cus
tomary method in our section.
Senator H itchcock. And where do you find the best place to mar
ket your rediscounts now?
Mr. M cR ae . I have never sought but one, St. Louis. We probably
could get a little better rate in New York, but we have always been
able to get what we wanted in St. Louis at a fair rate of interest.
Senator H itchcock. I f you were unable to get what you wanted in
St. Louis, you would go to New York, Chicago, or some other point?
Mr. M cR ae . I do not know what I would do then, but I have
always been able to get what I wanted in St. Louis.
Senator H itchcock. Y ou now have a choice; you are not re
stricted ?
Mr. M cR ae . Oh, no. We have never been denied what we asked
for.
Senator H itchcock. Where you have correspondents, I suppose,
you would be able to get a reasonable advance ?
M r. M cR ae . Y e s ; 1 think so.
Senator H itchcock. Have you ever thought of the fact that under
the terms of this bill you would practically be restricted to one place
and have no choice at all ?
M r. M cR ae . I understand that, but I could use the same collateral
there at that place that I use now, and perhaps at a better rate of
interest.
Senator H itchcock. Suppose you presented your collateral at
St. Louis, now, and were refused; you would have the privilege of
going to New York or some other point.
M r. M cR ae . Yes.
Senator H itchcock. But if you were to present your collateral at
your regional reserve bank and were refused, what would you do?
M r. M cR ae . W e ll, I suppose I would have to do without the money.
The Chairman. D o you understand from this bill that you would
be precluded from dealing with any other correspondent in the
country ?
Mr. M cR ae . Oh, no. But I mean if they would decline to allow
us to rediscount, I could not get the money there and would have
to get it elsewhere.
Senator H itchcock. Under the terms of this bill you have all of
the legal reserve which you are required to keep on deposit with the
regional reserve banks unless it is in your vaults.
Mr. M cR ae . Yes.
Senator H itchcock. S o that you would have no claim upon any
reserve agents.
Mr. M cR ae . I would have no claim, but I still might have credit;
and if they had money to lend and I had good paper to offer them
and was willing to pay the interest, I take it they would make the
discount or loan.
Senator H itchcock. Y ou understand that the reserve agents that
now exist in the central reserve cities and in the 48 reserve cities
will be required to turn over all the legal reserves to the regional
banks ?
Mr. M cR ae . Yes.
1278
BANKING AND CURRENCY.
Senator Hitchcock. S o that they will no longer have facilities to
make advances to country banks that they have now. Even if they
have the disposition, they will not have the facilities.
Mr. McRae. I do not assume that that is correct—that after they
have provided for the reserve they would not have anything else
to loan. I think they will equally as much under this bdl as now.
Senator H itchcock. A s it is now, jmu keep your reserve, to a con
siderable extent, in St. Louis, and the St. Louis bank is under ob
ligations to you when the season arrives when you need money ?
Mr. M cR ae . We keep reserves in three places—New York, Little
Rock, and St. Louis.
- Senator Hitchcock. You not only have St. Louis, but you have
other centers where your correspondent bank is under a business
obligation to meet your reasonable demands?
Mr. M cR ae . Yes.
Senator H itchcock. Arid under the terms of this bill you would
take your reserve out of the St. Louis bank, out of the Little Rock
bank, and out of the New York bank and put it into the regional
reserve bank ?
Mr. M cR ae . Yes.
Senator H itchcock. Y ou may have some surplus funds you can
put elsewhere, but you would not have any reserve to put elsewhere.
Mr. M cR ae . I understand. Most good banks have more cash than
the legal reserve.
Senator H itchcock. And what I am asking is whether you have
considered the situation that would result if the individual bank goes
to the reserve bank under those circumstances and is refused the dis
count ?
Mr. M cR ae . Well, I assume if we take the right kind of paper we
will not be refused.
The Chairman. Y ou mean you have other amounts above the legal
reserve you have on hand—you have extra money besides the legal
reserve with your correspondents?
Mr. M cR ae . Oh, yes; the most of the time, not all.
Senator H itchcock. H ow much extra money do you keep above
the reserve with your correspondents?
Mr. M cR ae . Oh, sometimes we have three times what is required;
sometimes, in hard times, we get very close to what is required.
Senator Nelson. Let me ask you a question there in this connection.
Does your State law require you to keep within a certain limit?
Mr. M cR ae . Yes.
Senator Nelson. H ow much?
Mr. M cR ae . The same as the national bank.
Senator Pomerene. Y ou mean the same as the country bank—15
per cent?
Mr. M cR ae . Fifteen per cent; yes.
Senator Nelson. And can you keep it, like the national banks,
part of it in your own vault and part with the reserve banks?
Mr. M cR ae . Yes, sir. Under our law—our law has just gone into
effect; we are the last State, I believe, to pass a State law—we have
the same requirements as to the amount of the reserve as the national
banks. It may be kept part in the vault and part with reserve agents.
Senator Nelson. Six per cent in the vault and 9 per cent with the
reserve agents?
BANKING AND CURRENCY.
1279
Mr. M cR ae . Yes.
Senator H itchcock. Now, I want to ask you a question, Mr. Mc
Rae. As an individual banker in a small town, whether you think
in this legislation in creating these 12 regional reserve banks we
should not put language in the bill which will make it obligatory
upon the regional reserve banks to treat member banks of equal size
and belonging to the same class and in the same town with equal con
sideration ?
Mr. M cR ae . I think so. That ought to be done.
Senator H itchcock. I should add to my question, also, if it fur
nishes for discount the same class of paper.
M r. M cR ae . Yes. Certainly that ought to be required, unless you
are willing to trust those who administer the law to do that. I as
sume that will be done.
Senator H itchcock. I want to know if you are willing, as a
banker, to put your hand in the lion’s mouth-----The Chairman. I s not that rather a leading question on the part
of the Senator from Nebraska?
Senator H itchcock. I am going to take a chance on it. You are
now an independent banker; you can go to St. Louis, you can go to
Little Rock, or you can go to Chicago or New York, and you can
present your paper for discount. And, as an inducement for that
discount, you have a reserve which you can place with that bank or
with any of those banks, as you please. Now you are pretty well as
sured of good treatment at one place or the other, because you have
the power to control it. Do you want all that wiped out, to have all
your eggs put in one basket and no assurance that your paper will
be discounted when you present it?
M r. M cR ae . Your question assumes that the place where I can
now present my paper will have plenty of money to accommodate
me. This was not true in 1907. The fundamental principle of this
bill is to increase the opportunity to get currency when it is wanted.
I f it were always true that the country bank, with good paper, could go
to its correspondent, and get all the currency it wanted, there would
be no necessity for this bill. But that is not true. I might go with
perfectly good paper and my correspondent, perhaps, might not have
the money; conditions were such he could not accommodate me. So
I assume if there is anything in this bill at all, it is to make it easy
to increase the volume of currency based upon credit.
Senator H itchcock. That is true; there is no question about that,
but that is not the question I am putting to you.
Mr. M cR ae . And I am assuming the regional reserve in which my
bank might be located would have funds to lend and it would be as
easy to get from them as it would be from my correspondent.
Senator H itchcock. There is no question about that, but that is
not the question I am asking. The question I am asking you is this:
Whether you, as an individual banker, would want to leave the dis
cretion with the board as to whether they would discount your paper
or not in time of need.
Mr. M cR ae . I think there ought not to be any question about the
treatment of bankers situated in similar conditions as to the paper
offered for rediscount.
Senator H itchcock. Would you want the possibility under this
legislation that the management of the regional bank might refuse
1280
BANKING AND CURRENCY.
you a discount and grant a discount to your competitor across the
street ?
M r. M cR ae . N o ; I would not want that.
Senator H itchcock. S o you think there ought to be some guar
anty of equal treatment, do you ?
Mr. M cR ae . Yes. They ought to be fair and impartial—act alike.
Senator H itchcock. Have you any objection to saying (of course
you need not answer if you have) to what extent of the $300,000
deposits you would require discounts during the year?
M r. M cR ae . I did not hear your question.
Senator H itchcock. T o what extent do you require discounts
during the year, at any one time with, say, $300,000 of deposits ?
Mr. M cR ae . I think the largest discount we have ever made or
ever had to make, in any one season, was $75,000.
The Chairman. Just the amount of your capital. That happens
to be the amount of your capital ?
Mr. M cR ae . Yes.
Senator Nelson. I want to call your attention to this fact: This
transaction with the bank of St. Louis is not a technical discount of
the farmer’s note; it is a discount of your own note. You discount
your note, the note of your bank, and you put up the farmer’s note
as collateral.
M r. M cR ae . Well, we put up some notes that are farmers’ notes,
and also industrial and commercial paper.
Senator H itchcock. I was coming to that later on. I want to see
if we can arrive at any basis where we can say that a certain redis
count is legitimately and probably necessary. This witness, Mr.
McRae, says he requires a discount amounting to at one time as high
as $75,000.
Mr. M cR ae . It runs from $25,000 to $75,000.
Senator H itchcock. The maximum has been $75,000?
Mr. M cR ae . Y e s ; I think we have never rediscounted beyond
$75,000.
Senator H itchcock. I will say I have in mind a provision requir
ing that the reserve bank should always be ready to discount the good
notes of the member banks to the extent, say, of its capital, or some
other thing, so that it could have something to depend on and not
something altogether discretionary and in the power of the board of
directors.
Senator Pomerene. Provided it always had the funds.
Senator Hitchcock. That is always provided. Here we have a
strong bank. It has $75,000 capital, $75,000 surplus, and $300,000
deposits, which is a strong bank, and its maximum of rediscount,
apparently, is the amount of its capital. My judgment is it ought not
to be compelled to go to a bank with its hat in its hand and say,
“ Will you please help me,” but it ought to be able to go there and
put down the paper and demand the rediscount as a matter of right.
Senator Pomerene. It could not do that anyhow.
Senator H itchcock. I f the bank says no, it can say, “ Very well, I
will take out my reserve,” but it can not say that to the regional
reserve bank; its reserve is impounded, tied up there.
Senator Pomerene. It may not be able to take out the reserve, as
in 1907.
BANKING AND CURRENCY.
1281
Senator H itchcock. I want to come to another point Senator
Nelson raises.
Senator Nelson. In connection with that, let me say that on page
24 of this bill you will find the rediscount provided for there is a
rediscount of this kind of commercial paper which will bear the
indorsement of the bank. It will not be a rediscount of the note of
the banker, but it will be a discount of this commercial paper and
bear its indorsement.
Senator H itchcock. I think, Senator, there is a provision of the
bill authorizing the regional reserve banks to make a loan upon the
deposits of security. That is my recollection.
The Chairman. That is provided for in the bill.
Mr. McRae. It ought to be, if it is not; but it is practically the
same thing. Most banks now prefer to take your note and take your
paper as collateral security.
Senator H itchcock. N o, Mr. McRae, it is really not the same thing
if the currency is based upon the paper which you discount.
Mr. M cR ae . I do not mean it is the same thing, but so far as the
local banks’ liability is concerned it is the same thing. The redis
count would be preferable to the borrower.
Senator H itchcock. The theory on which this bill is constructed is
that the notes are rediscounted by the regional bank, and as they are
retired the currency which was issued on them shall retire with them.
So it is not the same thing as if you make a loan which may or may
not be paid. That is not the same basis for the issue of currency.
M r. M cR ae . The local bank is obligated the same. That is, in the
one case it pledges its own note with these notes as collateral, on
which it is indorser, and in the other case it pledges these notes on
which it is also an indorser.
Senator H itchcock. D o you always pay the obligations at ma
turity, or do you sometimes renew them ?
Mr. M cR ae . I do not recall to have ever had to renew them,
though we may have renewed once or twice.
Senator H itchcock. Suppose this bill went into effect and you
were only permitted to rediscount notes having a maturity of 90
days with a bank; you would not be able to rediscount the amount
that you would require under those terms ?
M r. M cR ae . Oh, yes.
Senator H itchcock. Y ou have 90-day paper?
Mr. M cR ae . We have some 90-day paper, but, as I understand
this bill, it does not have to be 90-day paper, but paper that matures
in 90 days.
Senator H itchcock. Yes; paper that matures in 90 days and be
paid at maturity.
M r. M cR ae . And be paid at maturity.
Senator N elson . W h a t is the ordinary length of time of your
farmers’ paper?
Mr. M cR ae . Our farmers’ paper is generally from three to nine
months, but we do not usually have to use that paper for rediscount
until June or July.
The Chairman. S o that it comes within the three months ma
turity ?
Mr. M cR ae . Yes. I ought to say, however, that is not the rule
in my country. Our bank is operated a little differently from most
1282
BANKING AND CURRENCY.
banks. We do not make large cotton loans, nor do we carry large
cotton accounts as many do. The farmers pay us early in the fall
and we have a surplus of cash from the 1st of November to the 1st
of March. Then they begin to borrow again, and this continues
through the summer. In July the public funds belonging to the
State is usually withdrawn from the banks and put in State vaults.
Senator Nelson. Do they not deposit that money in the bank?
Mr. M cR ae . Heretofore they have been keeping it locked up in a
vault. The purpose of this bill is to require public funds of the
United States to be kept in circulation, and it will set a good example
to States, counties, and municipalities that w ill be worth a great deal
T
to the business of the country. You will take money the United
States usually locks up in the vaults and put it in circulation.
The C h a ir m a n . Y ou regard the impounding of that money as
dangerous?
Mr. M cR ae . I do.
Senator Nelson. We deposit the money in our State with the
banks and they are required to give bond.
Senator Pomekene. We put it in the banks in our State now, and
we put it out by competitive bid.
Senator Nelson. Our State money is drawing an average of about
3.6 per cent.
Mr. M cR ae . T o illustrate what I mean, in Arkansas on the 10th
of July we take out about $2,000,000, and have been heretofore put
ting it in the safe and keeping it until October—a period when it is
most needed.
Senator Bristow. Y ou say you have a bankers’ organization in the
State of Arkansas?
Mr. M cR ae . Yes.
Senator Bristow. Do you have it organized into groups ?
Mr. M cR ae . Yes.
Senator Bristow. H ow many groups have you in your State?
Mr. M cR ae . Seven.
Senator Bristow. And they have their meetings by groups, do
they?
Mr. M cR ae . Yes; and they have an annual association of all the
bankers, following the meeting of the groups. We usually meet in
the spring.
Senator Bristow. Suppose a provision was made whereby the
groups of banks could go direct to the Federal board or the Comp
troller of the Currency, when occasion required it, and get this addi
tional currency upon their assets direct without the intervening of
this regional bank; would you see any objection to such an arrange
ment as that, if it could be worked out?
Mr. M cR ae . Well, if it could be worked out from a practical stand
point, I do not know that I can see any objection. But I do not want
to be suggesting any details for the bill. I think you gentlemen here
can work those things out. There are some changes that ought to be
made, but they will just as readily occur to you if I did not suggest
them, and so I would not like to go into the question of suggesting
changes. But it ought to be so that any bank with good collateral
could go and get what it wants, when it needs it, and the money of the
people ought to be fairly distributed throughout the country and
put where it can be used.
BANKING AND CURRENCY.
1283
Senator Bristow. A s I understand, then, and I think probably we
all are in accord on that, the primary object to be accomplished is that
in times of necessity a bank can have a place to go to get currency on
the security it presents and there will be no doubt about it, so that a
crisis such as we had in 1907 could not occur again.
Mr. McRae. Yes.
Senator Bristow. The way to bring that about, of course, is a mat
ter upon which there is some difference of opinion. Some are con
tending that the organization of these central reserve banks is con
centrating too much power in the hands of a few individuals of the
banking interests of our country, and that criticism of the bill has
led me to ask one or two of the witnesses that have appeared before
us if we could utilize these banks you have in the organizations so as
to make the opportunity for concentration or control very much less
than it would be under the present arrangement—whether that would
be practicable. And that was what led me to ask the question.
Mr. McRae. I would not want to commit myself, because I do not
know that the group organizations are well enough organized to deal
with business features. O f course, if the bill provided for that, they
could be so organized.
Senator Bristow. I was interested in a suggestion you made that
the deposits of your reserve agents, or with your correspondents, was
very large—more than your legal-reserve requirements. Do you
find that it is necessary, in the conduct of your business, to keep more
money with your correspondents than your legal reserve require
ments?
Mr. McRae. Well, I do not know that it is necessary, but we have
always felt a little safer if we had more money than the law required
us to have, and we try to keep more money if we can do so and at the
same time meet the legitimate demands of our customers. We try to
take care of our customers, but do not lend except for legitimate
business.
Senator Bristow. H ow much of cash do you carry on hand in your
vaults; that is, what percentage of the deposits, as a rule ?
M r. M cR ae . W e carry about $15,000 or $20,000 in our vaults A
the present time. I had a letter this morning from the cashier of
our bank, and he said the cash reserve is about $80,000.
Senator B r i s t o w . I mean the cash on hand.
$20,000 in your vaults?
You carry about
M r. M cR ae . H ardly that; from ten to twenty thousand. W e do
not carry any more in the vaults than is required.
Senator Bristow. With $300,000 of deposits, do you feel that
$10,000 or $15,000 is all the money it is necessary to have on hand in
crder to meet the ordinary requirements?
Mr. McRae. I do not know that we have ever allowed that to run
as low as $10,000 when our deposits were $300,000, but we keep the
larger part of our reserve that we are not required to keep with our
correspondents in New York, Chicago, St. Louis, Little Rock, and
sometimes in Chicago.
Senator P omerene . When you spoke of keeping $10,000 you meant
that you had that amount in your vaults; you also have some reserve
elsewhere ?
Mr. M cR ae . Oh, yes; that was the actual amount in the vaults,
I
1284
BANKING AND CURRENCY.
Senator Bristow. That is what I was referring to.
Mr. McRae. I do not believe that we have ever permitted our cash
in the vaults to run as low as $10,000 when our deposits were $300,000.
Senator Bristow. I was under the impression that a bank in which
there were $300,000 of deposits would not feel very comfortable with
only $10,000 cash on hand.
Senator Nelson. The amount you mentioned a while ago is all the
Federal law requires, is it not ?
Senator Bristow. I do not think so.
Senator Pomerene. Six per cent—about $18,000.
M r. M cR ae . We keep as much as the law requires. Perhaps I
was mistaken when I said it would run as low as $10,000. We keep
whatever is required and usually more.
Senator W eeks. Y ou know, I suppose, there was a meeting of
bankers in Chicago some little time ago at which, I believe, they came
to some conclusions about this bill. Are you familiar with those con
clusions ?
M r. M cR ae . In a general w ay; yes, sir.
Senator W eeks. Are you in agreement with them?
M r. M cR ae . I am not. I do not believe, so far as Arkansas is con
cerned, that they represent the sentiment of the country bankers in
that State.
Senator W eeks. In what respect do you disagree with them?
M r. M cR ae . W e ll, if you would state just what they asked, I could
tell you. I can not recall all the objections they made to the bill, but
generally they were in opposition to the bill.
Senator W eeks. Not in opposition to the principles of the bill, I
think, but to some of the details of the bill.
Mr. M cR ae . They oppose the 12 regional reserve banks, I believe.
Senator W eeks. They think it is better to have less.
Mr. M cR ae . I do not care anything about that, whether we have
7 or 12. I think we ought to have more than 1.
Senator W eeks. Why do you think so?
M r. M cR ae . In order to prevent centralization and to keep the
money in different sections of the country and make it easier for each
section to get what it needs.
Senator W eeks. I f you had one bank and sufficient branches, would
it not be equally easy?
Mr. M cR ae . I can see a difference between separate reserves and
a central reserve with branches. I think it better to have dependent
reserves than to have branches.
Senator W eeks. Y ou followed then the action of that conference
in Chicago, and you think it does not represent your views?
Mr. M cR ae . N o, sir; I think it represents the sentiment of country
bankers in the State of Arkansas.
Senator W eeks. I heard you use the expression a few moment ago,
“ the money of the people.” What did you mean by that ?
Mr. M cR ae . I meant the public funds, the money in the public
Treasury.
Senator Nelson. Collected by the Government?
M r. M cR ea . Yes, sir.
Senator W eeks. Y ou mean gold?
Mr. M cR ae . Anything that comes into the Treasury.
BANKING AND CURRENCY.
1285
Senator H ollis. What is collected in taxes.
Senator Nelson. The revenues of the Government I suppose he
referred to.
Senator W eeks. All right.
M r. M cR ae . On the matters of detail, of course, I would not care
to say very much, because I have not given the bill sufficient study for
that. To do that I want to attend all your hearings.
But as a general proposition, I think we ought to provide for the
issue of notes upon good paper, the deposit of public funds in
these regional reserves, and remove the restrictions from national
banks, which this bill does. I f you do this it will make, banking
very much easier, and I think will carry many State banks into the
national system.
Senator W eeks. Will it carry your bank in?
M r. M cR ae . I think so. I would not undertake to say definitely
without consulting the directors and stockholders; but, personally, I
think I would advocate going into the national system if this bill is
passed, unless the regulations as to assets should be such as we could
not stand.
Senator Nelson. Y ou can loan on real estate?
Mr. McRae. Yes.
Senator Nelson. On farm mortgages?
Mr. McRae. Yes, sir.
Senator Nelson. N o limitation as to time and amount?
M r. M cR ae . N o.
Senator W eeks. That is all I have to ask, Mr. Chairman.
Mr. McRae. I can not recall all the objections.
Senator Nelson. The first objection they made was in making it
compulsory on national banks to join the reserve banks. They
wanted it left open as in the case of State banks.
Mr. McRae. I think it makes very little difference, because I think
most of them would go in voluntarily.
Senator Nelson. They thought it was too arbitrary. The next
objection, and one of the main objections, was to giving the reserve
board the power to compel one regional bank to discount the paper
of any other regional bank, whether it wanted to or not. That was
another objection.
Then Mr. Reynolds made another objection in respect to any
change in the method of reserves, taking them away from the other
banks. The reserves in these reserve banks do not pay any interest,
as you know.
Mr. McRae. Yes.
Senator Nelson. Then there was a gentleman here who represented
southern banks—I think he was from Mississippi. He objected to
that feature of the bill which does not allow them to charge anything
for collecting checks and drafts, etc. He said that was a great source
of revenue for the small banks, and that that would handicap them
a great deal. I do not remember his name just now.
Senator W eeks. It was Mr. Maddox, of Atlanta, I believe.
M r. M cR ae . I think he is right about that.
Senator Nelson. Those were the principal objections.
Mr. McRae. It costs something to collect these country checks, and
they ought to have something for it.
1286
BANKING AND CURBENCY.
Senator Nelson. He said it was a source of revenue for the banks,
a great source of revenue for the small country banks.
Mr. M cR ae . It is not a great source of revenue, but it is a source
of some revenue, and if it could be so arranged, they ought to have
pay for it. It is a service that is worth something and should be
paid for.
Senator Nelson. Another point which was made was that these
notes ought to be redeemed in gold only, these new notes, and not in
gold or other lawful money.
M r. M cR ae . I beleive that all paper issued by the Government
ought to be the best you can make it. I do not believe in anv cheap
notes; but as I understand it all lawful money is redeemable in gold,
and if the lawful money is in turn redeemable in gold you have
reached the same object, so I see no objection to the phraseology of
the bill, and at the same time I do not see any objection to striking
out the words “ or other lawful money ” if there is serious objection
to it.
Senator Nelson. Y ou believe they ought to be redeemable in gold?
M r. M cR ae . Yes. sir. I think the issuance of money is a govern
mental function and I want the notes issued by the Government.
The banking business proper ought to be turned over the bankers.
I think that all the notes provided for by this bill should be issued by
the Government.
Senator W eeks . There is no money except gold.
Mr. M cR ae . I may be inapt in the use of words, but what I
meant------Senator Shafrotii. A s a matter of fact, if you take this provision
out of the bill, “ or other lawful money,” would it not have a tendency
to make it more difficult to maintain the gold standard than if it were
not stricken out?
M r. M cR ae . I see no necessity for striking it out, because I think
it still leaves the gold standard as it is.
Mr. Siiafroth. Does it not do this: I f we have each one of these
reserve banks redeeming in gold, will it not make 12 competing
points, all competing for gold against the National Treasury, and
taking a great deal more gold to make the same redemption than
is some of this money is redeemable in lawful money and some re
deemable in gold, ultimately all of it in gold?
Mr. M cR ae . I think you are right about that. It just removes-----Senator Shafroth (interrupting). It make the banks competitors
with the Government, does it not?
M r. M cR ae . It pushes the final redemption in gold one step fa r
ther off.
Senator Shafroth. And by making it one step farther off. it will
take a great deal less gold to accomplish the same result than if each
bank had to keep a gold reserve, making the banks compete for gold
against the Government.
Mr. M cR ae . The objection made to that feature of the bill is not
well taken, in my opinion. The bill would be better if those words
were left in.
But I do not want to be understood as being in favor of any money
being issued by the Government that is not ultimately payable in
gold.
I
BANKING AND CURRENCY.
1287
Senator Shafroth. Now, as a matter of fact, the House has placed
in this bill a clause which obliges the Government to keep at a parity
all these forms of money. It seems to me that that provision alone
would be sufficient and that there ought to be a tendency to relieve the
strain upon gold by making this our lawful money, and in that man
ner helping preserve the gold standard, so far as the Government is
concerned.
Mr. M cR ae . I rather think you are right about that.
Senator H ollis. The two chief objections at the Chicago confer
ence were these: What they call political control, and what I call by
a Federal reserve board appointed by the President and confirmed by
the Senate, and the other that the Government should not be under
obligation to redeem these Treasury notes. W ill you take up those
chief objections and give us your idea, first, as to the control by a
Federal reserve board appointed by the President, with the advice
and consent of the Senate?
Mr. M cR ae . I think I have no objection to that, and I do not be
lieve that any President of the United States will appoint a board
that will interfere with the banking business. There is, as I stated
a while ago, some unfair distrust of Congress on the part of the
bankers and some unfair distrust of the bankers on the part of
Congress. I would like to see them get closer together and under
stand each other better; but I do not feel that there is any danger
in that provision of the bill. I think it is a wise one. I believe if
they are going to issue notes and guarantee them it would be safer for
the Government to be represented by a nonpartisan board, as is pro
vided for in this bill, or substantially so, and I take it in making
the appointments any President we have had during my experi
ence or any we are likely to have would not select a board that
would do any harm to the banking and business interests of the
country.
Senator H ollis. What do you say about having the Government
under obligations to redeem the Treasury notes, as opposed to having
them banking notes solely on the credit of the regional reserve bank
and the members?
M r. M cR ae . For the simple reason that anything that goes out
and circulates as money ought to be issued by the Government, and
everybody who takes it ought to know they are getting a dollar that
will be redeemed and will be good anywhere. And in order to make
it good there ought not to be any doubt about it. I f the bill is to be a
success, there must be no doubt about the payment of the notes to
be issued under it.
Senator Shaeroth. Mr. McRae, in your judgment, should the
money issued by the Government and made redeemable by the Gov
ernment in gold be made a legal tender for the payment of debts?
Mr. M cR ae . I think it makes very little difference whether it is
or not.
Senator Shafroth. Does it not have a tendency to strengthen the
currency by making it a full legal tender?
Mr. M cR ae . I think not. Take the matter of taxes. The amount
of taxes we have to collect is increasing all the time, and this cur
rency is to be received for all kinds of Government taxes. I think the
legal tender immaterial. It will be used just as much without the
1288
BANKING AND CURRENCY.
legal-tender facilities as with them. It is the convertability that
will make it good.
Senator Shafroth. I have seen it stated there are 80 billions of
debt in the United States. Would not the demand which would be
made upon a full legal-tender currency with which to pay those 80
billions create such a demand for it that it would keep it at a parity
with gold more clearly than if it did not have that clause there?
M r. M cR ae . I hardly think so, Senator. When you have a note that
you can get gold for you are not going to trouble yourself much about
going to get the gold. The main thing is to have currency issued by a
government in which the people have confidence. It will be sub
stantially money, whether it is or not.
The Chairman. We are greatly obliged to you, Mr. McRae, for
coming before the committee.
Mr. Untermyer, the committee is ready to have you go on at this
time. I have been requested, Mr. Untermyer, by several members
o f the committee to ask that you be permitted to make your state
ment uninterrupted until you have entirely covered the points you
desire to cover. I would iike to ask the committee if that is agree
able this morning?
Senator Nelson. What is the request?
The Chairman. That Mr. Untermyer be permitted to present all
the points he desires to present without being interrupted.
Senator Nelson. I think that is a good plan.
The Chairman. I f that is the will of the committee, it will be so
ordered.
Senator Nelson. We will be able to get his own statement in a
much better way.
FURTHER STATEMENT OF SAMUEL UNTERMYER, ESQ., OF NEW
YORK, N. Y.
Mr. Untermyer. Mr. Chairman, before taking up the recommen
dations that occurred to me with respect to this bill, I would like to
say a few words bearing upon the testimony I gave last week. I
find that in two or three particulars it is rather fragmentary and
unsatisfactory.
The Chairman. The Senate will meet in a few moments, Mr.
Untermyer, and it is the desire of the committee that a recess be
taken until 1 o’clock, when we will hear you to the conclusion of
your statement.
(Thereupon, at 11.50 o’clock a. m., the committee took a recess until
1 o’clock p. m.)
AFTER
RECESS.
The Chairman. Mr. Untermyer, the committee will hear you now.
Mr. Untermyer. At the adjournment I was about to suggest that
Senator Reed presented, at the time of my examination on Tuesday,
what he referred to as the Hitchcock plan, and asked me to state my
views concerning it. They were partially stated in a rather frag
mentary and unsatisfactory fashion, and before proceeding with the
recommendations I have in mind I should like to say a little more
about that plan if I may.
BANKING AND CURRENCY.
1289
As I understand it, the plan involves permitting any national bank
having good commercial paper to go directly to the Treasury Depart
ment or such department as may be set up in the Treasury Depart
ment under the terms of the proposed plan; and there receive cur
rency to the extent of 75 per cent of the capital of the bank; and of
that currency so received it is proposed that one-third of the amount
thus rediscounted for the bank shall be set aside as a gold reserve.
Is that about right Senator Hitchcock ?
Senator H itchcock. That was a tentative rather than a definite
plan; and I think perhaps I had better state it, as far as it has been
considered at all, if you would like to have me do so.
Mr. Untermyer. I should very much like to have it stated so we
will get it correctly before us.
Senator H itchcock. The proposition was to add to the number of
subtreasuries now in existence enough to bring the number up to
about 50, located in the leading banking centers of the United States;
to create in the Treasury Department a division which might be
called the Federal reserve division; to provide that any national
bank could present at any subtreasury commercial paper of a certain
standard, and secure advances from the Government in the form of
Treasury notes to the extent of 75 per cent of the paid-in capital of
the bank; that the rate of interest should be fixed on a graduated
scale, beginning at one month and running up to five or six months—
the longer the term the higher the rate of interest; that in order to
provide for the redemption of Treasury notes, the Government should
establish in the Treasury a reserve of at least 40 per cent in gold-----Mr. Untermyer (interposing). Out of the proceeds of the dis
counts ?
Senator H itchcock. By the sale of bonds. It was estimated that
the interest which the Government would derive from the loan of
currency to the banks during perhaps four or five months of the year
would much more than pay the interest on the bonds sold to procure
the gold. It was estimated that that would give practically to every
national bank an opportunity to secure all the currency it would
require in addition to the opportunities it now has through its re
serve agents.
Mr. U ntermyer. I was asked what objections there would be to
that plan, and had stated on Tuesday, at the time of the adjournment,
seme of the objections that occurred to me. There are others that
I should like now to state. The most important objection to the plan,
it seems to me, is that it provides no method for mobilizing and
utilizing the reserves of the country. It rather assumes that those
reserves are going to be kept, as they are now, in the great cities, and
that they will continue to be utilized for stock speculating purposes
as they are now. The chief virtue of the present plan is that it does
mobilize and give back to the banks the use o f those reserves. No
plan would seem to be comprehensive that did not provide for
mobilizing and utilizing those reserves. That is the first objection.
The next objection is that it would not in any way tend to regu
late the discount rate.
The next objection is that it would create a bureaucracy of credit
and would put the Government directly into the banking business,
where it does not belong.
1290
BANKING AND CURRENCY.
The next objection is that it would offer no sufficient security to
the Government. That objection was quite fully discussed at the
session on Tuesday.
Next in importance to mobilizing and utilizing the reserves of the
country that are now driven to the great centers is the opportunity
of making a market for bills of exchange and acceptances—an open
discount market—so that we can get along hereafter with less money
and have more credit. That can not be created unless you have cen
tral reserve banks and a demand created for bills and acceptances.
This seems to me crude in that it deprives you of the opportunity
of ever creating such a market.
Again the bill does not provide for an elastic currency. The
amount of capital possessed by the national banks of the United
States is no criterion of the commercial needs of the country. The
total capital of the banks is a little over a billion dollars. I f each
bank were permitted to borrow 75 per cent of its capital that would
be about $750,000,000 as against which a gold reserve would have to be
set aside. It takes no account of the amount of commercial paper
that requires currency, and, as I say, it is not a fair criterion of the
needs of the country. It would simply be superimposing upon the
existing inelastic currency another inelastic currency for a further
amount.
Then again, assuming that you established these subtreasuries in
50 sections of the United States, you would simply have an autocrat
in every one of those sections wlio would pass upon the paper pre
sented; because the central government at Washington, the Treasury
Department, would have no means really of knowing anything about
the quality of the paper and every bank in that community would be
subject to the will and whim of that treasury official in that depart
ment. You would not have what you would get under this bill, a
board selected by the bankers, with nine members upon it drawn
from the various localities whose combined judgment and check
upon one another would assure some measure of justice in passing
upon the collateral for which currency is to be issued. It seems to
me it would be a most autocratic form of financial government, and,
in a country as vast as ours in area and commercial importance it
could not possibly maintain itself for any length of time.
They have such a system in France and Germany, but in as small
a country as France they have 467 of these agencies, and the volume
of business done in those countries is a bagatelle compared to the
business we do. I think we do something like sixty times the business
of France, if I remember correctly. I f you consider the task of
attempting to have a single individual in a locality pass upon all the
paper that will be presented, really subject to no review, I think it
must be agreed it would be in practice rather an unworkable scheme.
Further, it seems to me it would be quite impracticable to regulate
the interest rates in the different localities, except in a most crude and
arbitrary fashion. You might start at some given point, according
to the suggestion made by you a moment ago, Senator Hitchcock.
You might say that all loans shall begin at, we will say, 2 per cent,
and that there shall be a rising rate, but that would not allow for the
varying uses and the varying values of the money in the different
localities. You would have to start with a different interest rate in
BANKING AND CUKBENCY.
1291
different localities, and who is to determine that difference? The
plan offers a thousand opportunities for favoritism to every one that
is offered under the plan that is now criticized as being possibly sub
ject to abuse in the direction of favoritism.
I do not think I care to add anything to what I suggested the other
day as to the lack of security, but it seems to me it would be rather a
dangerous kind of collateral on which to issue the currency of the
United States. Let us assume a bank with $50,000 of capital and
$100,000 of deposits, if you please, going to the Treasury and dis
counting $37,000 of its promissory notes and receiving currency,
which it would have the absolute right to do. There is mighty little
security to the Government in that kind of collateral as a basis for
currency issue. When we compare that sort of so-called security
with what is offered under this bill, I should say that the chances, on
a guess, would be about twenty-five thousand to one as to the character
of the security under this bill. Every time a bank failed the Govern
ment would be without redress, except dollar for dollar of these col
lateral notes against the obligation owing to the Government and a
first lien upon the assets of that bank.
The issue of currency should be so far removed from doubt or ques
tion that it will pass like gold, and I do not think it would be likely
to pass in that way with so little security back of it. This bill offers
overwhelming security. It is not necessary to rehearse that further.
It has been fully exploited.
That is all I wanted to say on that subject.
Senator H itchcock. Now, Mr. Untermyer, as far as your criticism
goes, that it does not mobilize the reserves, I admit that.
Mr. U ntermyer. I s not that the most important part o f any cur
rency system?
Senator H itchcock. Will you give the committee an idea of your
estimate of the importance of mobilizing the reserves as compared
with the importance of providing an additional or elastic currency?
Which is the important thing to do?
Mr. U ntermyer. I think they are equally important, and the pres
ent bill does both. When you mobilize the reserves, Senator Hitch
cock, you provide to that extent an elastic currency under the scheme
of this bill. I mean you add to the currency that is available in
mobilizing the reserves.
Senator H itchcock. Can you tell me to what extent the reserves
are mobilized in France?
Mr. Untermyer. I do not know the figures, but I know that not
only every banking institution in France but many thousands of
individuals are depositors with the Bank of France. I think it has
70,000 depositors.
Senator H itchcock. But the aggregate of their deposits is com
paratively insignificant.
Mr. Untermyer. I do not know the figures, but I thought not;
I thought they were very large.
Senator H itchcock. No ; very small. And the aggregate deposits
of the Bank of England are insignificant as compared with the
deposits of the independent banks.
Mr. Untermyer. All the independent banks pretty much in
England and France have accounts with the Bank of France and
12 9 2
BANKING AND CUBRENCY.
with the Bank of England. I doubt whether there is a single insti
tution in either of those countries of any consequence that does not
have a deposit account with the bank. I am not sure, but that was
my general impression.
Senator H itchcock. But, if the importance of mobilizing the
reserves were understood, you would see a great deposit in the Bank
of France and a great deposit in the Bank of England. As a matter
of fact, there are independent banks in France with greater deposits
than the Bank of France has, and there are independent banks in
England with greater deposits than the Bank of England has.
Mr. Untermyer. But the answer to that is, Senator Hitchcock,
that they do not require any reserves in those countries, and there
are therefore no idle reserves that require mobilization and use as
with us. Since we do require the locking up of so large a part of
the money of the country in the form of reserves, the proposition
■with us is to use and mobilize those reserves that are not being used
in the way in which they should be used.
Senator H itchcock. The testimony of all business men who have
come before the committee is that in their opinion the need of the
business world is to secure additional currency in times o f necessity,
and that for that purpose the amount of additional currency required
is not very great. And I think if you will look up the experience
of Germany, France, and Great Britain you will find that that is
the big thing in those countries—that is, the elasticity of the cur
rency rather than the mobilization of reserves.
Mr. U ntermyer. Because their reserves are already utilized.
They are already made use of because of the fact that there is a cen
tral bank to wdiich any one of those banks can go and get currency
on commercial paper when it wants it and therefore that bank does
not need to keep a reserve. I f you want additional currency, the
mobilization of these reserves gives you additional currency. Those
reserves are now sent on to the great cities. There are, I think, 800
or 900 millions of them in New York, and, as the testimony before
the Pujo committee showed, they are used in carrying collateral loans
in Wall Street speculation instead of being kept in the regions where
they belonged. Under this plan, with these regional reserve banks,
those reserves will stay in the communities where they belong and
two-thirds of them will be loanable to the banks who are members
of the regional bank; You will have that additional money put at
the service of those banks loaned back to them, whereas it now goes
away from them.
Senator O ’G o rm an . I f I may interrupt you there, Mr. Untermeyer, if two-thirds of the reserves may be loaned by the regional
banks to the member banks, is there any restriction as to the manner
in which the member banks will make use of the two-thirds?
Mr. Untermyer. N o.
Senator O ’G orm an . They could send that money back to the East
if they wanted to?
Mr. U ntermyer. Yes.
Senator O ’G orm an . S o that, according to this suggestion of yours,
the restraint or limitation contemplated by this new program would
only affect one-third of the reserves— —
Mr. Untermyer. Hardly that.
BANKING AND CURRENCY.
1293
Senator O ’G orm an . The other two-thirds could remain where they
are now.
Mr. U ntermyer. That is hardly conceivable, Senator O’Gorman,
for the reason that the regional bank, when it loans back these re
serves, is going to charge interest and to get security—notes and
bills—it is going to pass upon the question whether that money is
needed in that region, whether the people who borrow it want it for
the purpose of legitimate business there—and if they use it for other
purposes they are not likely to get it.
Then, again, another check upon any such use as you suggest lies
in the fact that they probably can not get in the East as much interest
as they would have to pay the reserve bank for this money. They
are now sending their reserves to New York and are getting 2 per
cent. Presumably the reserve bank is going to charge them 2 per
cent, or more than 2 per cent, for the use of that money. So unless
■a--.,.
- - J
1 - 1 j used in the regions where it belongs,
Senator Nelson. Are you not confounding the technical reserves
provided in the bill with that other class of money that may be called
reserves? Take the country banks. Under this new bill they are
entitled to maintain 5 per cent reserve in the regional bank and 5 per
cent in their own vaults, and there is 2 per cent that is elective. As
some gentleman suggested here the other day, if you divide that
equally, you leave 6 per cent with each. Now, as I understand the
law, those reserves—with the 6 per cent in the vault of the bank or
with the regional reserve bank—those reserves are not for discount
purposes. They remain there as a reserve just as they do under our
existing system.
Mr. Untermyer. No ; on the contrary, they are all loanable, providedSenator O ’G orman (interposing). The reserves of the member
banks, too?
Mr. U ntermyer. Certainly; that is just the fund that is there,
practically the only fund that is there except the capital of the bank
and the Government funds. Those are the only three funds that the
bank has for loaning purposes. The reserves of the member banks
put into the reserve bank are reloanable, except to the extent of 33£
per cent gold that must be set aside. And if the reserve bank does
not reborrow— does not ask for currency—it need not set aside the
33 per cent and can utilize all those reserves in the rediscount of
paper for the member banks.
Senator Nelson. Y ou are assuming the only money the regional
banks will have will be these reserves. I take it, if the system works
well, the member banks will deposit a good deal more money than the
mere reserves, and those will be the available funds.
Mr. U ntermyer. I should say not, because the reserve bank can
pay no interest, and if they have further funds they will deposit
them with their correspondents where they can get interest.
Senator Nelson. They can not pay interest on that special reserve.
Mr. U ntermyer. I can not see that they have any right to pay
interest on any of their funds.
Senator H itchcock. I should like to take up in reverse order
some of these objections you have made. You say it will create 50
1294
BANKING AND CURRENCY.
autocrats in the subtreasuries throughout the country. Suppose that
paper is standardized. Government agents are examining that paper
constantly. Suppose the paper that has been examined and found
good he may permit to be used at these subtreasuries and take away
the arbitrary power. I have not any idea of intrusting to a man in
the subtreasury the power to refuse-----Mr. U ntermyer (interposing). Then you will probably get all
kinds of cats and dogs in the way of paper.
Senator H itchcock. No; the United States Government has ex
amined these banks three or four times and passed upon their paper.
Mr. U ntermyer. In the most general fashion; I have never heard
o f any bank examiner who could undertake to standardize the paper.
The bank examiner can not tell whether it is accommodation paper
or the purpose for which the paper was issued, and does not under
take to do so.
Senator H itchcock. D o you think it will be any more difficult to
have this examination made in 50 cities of the United States, as pro
vided under this Treasury plan, than to have it made in 12 cities?
Mr. Untermyer. The systems would be entirely different. I f the
examination in the 50 cities is to be by a single man, there is no
check at all.
Senator H itchcock. Not necessarily; no, not at all. You have
assumed that.
Mr. Untermyer. I have assumed that the Treasury agent would
pass upon the paper.
Senator H itchcock. I have assumed that the subtreasury would
be properly equipped with men sufficient to pass upon the paper of
the several hundred banks of that region.
Mr. Untermyer. I f you are going to have a board in each one,
then you come back to the regional board under this bill, which pro
vides for nine men who are supposed to know the needs of that
locality.
Senator H itchcock. It is not contemplated that the security shall
be wholly commercial paper. The Secretary of the Treasury would
establish a rule requiring a certain per cent of Government bonds, a
certain per cent of State bonds, a certain per cent of municipal bonds,
a certain per cent of commercial paper of a certain valuation, say, 80
per cent; and the Government would retain a first lien upon all the
assets of the bank. And, moreover, the fund which the Government
would derive from any interest from these various banks would be
sufficient not only to pay interest on the bonds used in purchasing
gold, but also to establish a safety fund to pay losses that might arise.
And I believe it could go further and establish a fund sufficient to
pay the cost of the subtreasuries, and possibly even to start a fund
for the guaranteeing of bank deposits.
Mr. Untermyer. That is a very elaborate plan, but it involves put
ting the Government into the banking business in most violent
fashion.
Senator H itchcock. Much less so than does this pending bill.
Mr. Untermyer. Let us see if that is so—because I think every
body is opposed to putting the Government into the banking business
any more than is absolutely necessary. The system proposed in the
pending bill, to my mind, does not put the Government into the bank
ing business at all, for this reason: The paper that is rediscounted
BANKING AND CUBBENCY.
1295
at the reserve banks is passed upon by the elected directors of the
member banks; that is, six of the nine directors of the reserve bank
are nominees of the stockholders. They pass upon that paper. There
are three Government directors in the board, whose duty it would be
to check that sort of paper, so that when the reserve bank needs cur
rency no machinery on the part of the Government is necessary in
passing upon the collateral that is offered for that currency. It has
already gone through the process of investigation at the hands of
the directors representing the shareholders of the bank and the Gov
ernment’s representatives on the board. All the Government relies
on when it rediscounts that paper or loans upon it and gives its cur
rency is the indorsement of the member banks, supported by the
indorsement of the reserve bank, with a first lien on the assets of the
reserve bank; and about all that those people are interested in in
discounting that paper is to determine whether it is entitled to dis
count. The Government is not really in the banking business under
that plan. It is deeply in it under a plan by which its agents have
to pass on this paper.
Senator H itchcock. Let me ask you a question or two with re
spect to that. The President appoints the board of seven men, and
they control the rate of interest for the Government?
Mr. Untermyer. I do not think they do; no.
Senator H itchcock. They control the rate of interest at which the
advances are to be made to the reserve banks?
Mr. U ntermyer. Yes; the rate at which the currency is to be
issued, just as the Government fixes the interest on Government bonds
when it issues them. But that does not put the Government in the
banking business.
Senator H itchcock. I f you will just answer my questions, Mr.
Untermyer— —
Mr. Untermyer (interposing). I am trying to do so.
Senator H itchcock . The seven men control the rate of interest at
which the currency is advanced to the reserve banks?
Mr. U ntermyer. Yes.
Senator H itchcock. They control the rate of interest at which
the reserve banks pay for Government deposits?
Mr. Untermyer. We will come to that later-----Senator H itchcock (interposing). That is true, is it not?
Mr. U ntermyer. A s the bill stands now, yes. I do not think there
ought to be any interest on Government deposits.
Senator H itchcock. They have the power to require one reserve
bank to make advances to another?
Mr. Untermyer. Yes; in order to mobilize the reserves. It is an
essential part of any system.
Senator H itchcock. Whatever the purpose is. They have the
power to remove three of the directors upon any reserve board or all
of them?
Mr. U ntermyer. No ; not all of them.
Senator H itchcock. They can remove the three directors from the
12 reserve banks?
Mr. U ntermyer. They can remove three of the six upon charges
and after trial. They can remove them for dishonesty and a few
other specified offenses; that is not a banking power; that is a sort
of judicial power.
1296
BANKING AND CURRENCY.
Senator H itchcock . It is a power to control the rate of interest,
in the first place, upon all the currency of the country, because this
currency is not only to be in addition to the bank-note currency but
is ultimately to supplant it. They will have the power to control
the rate of interest upon all the currency in the country; they are to
have the power to direct-----Mr. Untermyer (interposing). They think they will, but under
this bill they never will.
Senator H itchcock. They have the power to direct one reserve
bank to loan to another; they have the power to remove three of the
nine directors of the reserve bank which the stockholders have
chosen.
Mr. Untermyer. And the stockholders will elect their successors.
Senator H itchcock. They have the power to remove the officers of
any reserve bank at any time; they appoint three of them directly,
and yet you say that they are not running a bank.
Mr. Untermyer. In the first place, I do not agree to your sum
ming up or to your premises; and I do not think they are running a
bank, Senator Hitchcock.
Senator H itchcock. Which of my premises do you dispute ?
Mr. U ntermyer. I dispute, in the first place, your premises as to
their power of removal, which is far too restrictive, to my mind.
Senator H itchcock. Y ou admit they have the power of removal?
Mr. Untermyer. They have a judicial power of removal after
trial, but they can not substitute their own directors for those re
moved. The member banks simply substitute others. They have
the power to select the chairman of the regional reserve bank, but
the board of directors, under the peculiar provisions of this bill,
have the power to set him aside the next day, which they ought not
to have.
Senator H itchcock . And yet with all these vast powers in their
hands you think that they are not running a bank?
Mr. U ntermyer. I do not think they are anything like running a
bank, because they are not passing upon credits, which is the essen
tial base of running a bank, and under your plan they would be
passing on credits. You say they have the right to regulate the
interest rate. The bill says so; but to pass a law saying that they
have the right to regulate the interest rate does not give them the
right. They will never be able to regulate the interest rate unless
the bill will permit the reserve banks to go into the market and buy
paper and regulate the interest rate in that way, as they do in other
countries.
Senator
H itchcock.
It is provided in section 15.
Mr. U ntermyer. I do not agree with you.
Senator H itchcock. That may be the disputed point.
Mr. U ntermyer. We will come to that in a moment, because I think
it is not provided there.
Senator H itchcock . Y ou say they pass on no credits, and there
fore they are not in the banking business ?
Mr. Untermyer. That is one reason.
Senator H itchcock. Suppose the regional bank desires to procure
currency, what does it do?
Mr. U ntermyer. It presents a certain amount of paper, with its
own indorsement, that has been passed upon by its board, and there
BANKING AND CUERENCY.
1297
upon the Federal board has no machinery for finding out anything
about it, but simply goes and issues the currency.
Senator H itchcock. The Federal board has a representative in the
reserve bank.
Mr. U ntermyer. Certainly, it has three of them—it has a minority
representation.
Senator H itchcock. And the paper passes into the custody of the
Federal board in that way.
Mr. U ntermyer. Quasi custody; yes.
Senator H itchcock. Y ou argue that there is to be no audit of that
paper. Is there anything to cause them to accept it if the reserve
bank turns it over?
Mr. U ntermyer. It seems to me that is the effect of the bill, be
cause there is no machinery provided.
Senator H itchcock. Buit that is the security to the Government, is
it not?
Mr. U ntermyer. The paper itself is not the only security to the
Government.
Senator H itchcock. I did not say it was the only security. I say
that is security for the purpose of being security for the Government.
Mr. U ntermyer. A part of the security.
Senator H itchcock. Just as the individual bank puts its paper
into the custody of the Federal Government for security, so that there
is as much passing upon the credit in one case as there is upon the
other ?
Mr. U ntermyer. I differ from you entirely In the one case the
Government must pass upon this paper, because there is no one else to
interpose for the purpose. In the case under the bill the regional
reserve bank, with its nine directors, is interposed to pass upon the
paper and thereby the Government is relieved of the duty of passing
upon it.
Senator B ristow. I understand, Mr. Untermyer, that you say that
the Federal reserve board could only remove these directors in class
B upon trial ?
Mr. U ntermyer. That is the effect of it, I think.
Senator B ristow. This is what the language says. Let me read it
to you.
Mr. U ntermyer. Yes.
Senator B ristow (reading) :
The Federal reserve board shall have power, at its discretion, to remove any
director of class B in any Federal reserve bank if it should appear at any lime
that such director does not fairly represent the commercial, agricultural, or
industrial interes s of his district.
Is that a malfeasance of any kind ?
Mr. U ntermyer. I f you will let me supplement that, and you will
turn to page 22, subdivision ( f ) — please read that, as to the powers
of the Federal reserve board. [Reading:]
To suspend the officials of Federal reserve banks and, for cause stated in
writing with opportunity of hearing, require the removal of said officials for
incompetency, dereliction of duty, fraud, or deceit, such removal to be subject
to the approval by the President of the United States.
Do you not think those two paragraphs should be read together?
Senator B ristow. O f course, it shall be its power, but does not the
language on page 8 confer a broader power?
932S°—S. Doc. 232, 63-1—vol 2----- 22
1298
BANKING AND CURRENCY.
Mr. U ntermyer. It would if it were not for the language on
page 22.
Senator Bristow. But the language on page 22 does not pretend
to limit the power on page 8 ?
Mr. Untermyer. I think that wherever you have a specific dele
gation of power and a general delegation of power that the rule of
construction is that the specific delegation of power limits.
Senator Reed. Then about the amount of it is this: That you claim
that the Government’s right to remove those three directors is limited
practically to malfeasance in office?
Mr. Untermyer. Yes.
Senator Reed. So that the banks, having once elected a majority
of the board of directors, can practically hold that majority, and
even if the Government for malfeasance removes a director the bank
can immediately substitute another?
Mr. U ntermyer. Yes; and I think that is wrong.
Senator Reed. S o that the banks under this bill absolutely control
and dominate the regional banks?
Mr. U ntermyer. They do, and they ought not. I think that that
is the defect in the bill. That is one of the reasons why I said I
thought the bill was too generous to the bankers.
Senator H itchcock. Then you, Mr. Untermyer, think that this
does not provide an elastic currency ?
Mr. U ntermyer. Yes.
Senator H itchcock. Let me ask you now how much currency
would be taken out by the national banks if all of them took out
their limit under this suggestion.
Mr. Untermyer. It would be about $750,000,000, would it not, of
which they must set aside a reserve in gold ?
Senator H itchcock. Y ou would not think that the banks would
all take out this amount of currency and pay a high rate of interest,
a constantly increasing rate of interest, which starts at 3 per cent
and rises to 10 per cent? Would not that give it an elastic feature?
Mr. Untermyer. I think not, Senator Hitchcock, and I think that
would be about as dangerous a thing as anything could be—to have
a rigid rise in an interest rate, which you call “ elasticity ” and
I would call the opposite of elasticity, because there may be time
when that currency must play out.
Senator H itchcock. H ow long?
M r.
U ntermyer.
Y ou can not tell; it depends upon the conditions
of the country.
Senator H itchcock. Let me ask you-----M r. Untermyer. D o you not think it would be rather a blind
folly to have a rigid rising rate of interest without discretion any
where ?
Senator H itchcock. N o, sir; I think that is the very thing we
want.
Mr. U ntermyer. Y ou would have a contraction when you per
haps needed most of all an expansion.
Senator H itchcock. A s the length of time it kept out its loan
increased it would be required to pay higher rate of interest, and
it would charge that to its customer, and we know as we increase the
rate of interest to borrowers we put a restraint upon their borrowing
and reduce gradually the contraction which is desired ?
BANKING AND CURRENCY.
1299
Mr. Untermyer. Yes. But I call that a pretty dangerous form
of currency, because you would call in the money when it was most
needed.
Senator Hitchcock. Not at all. You would only do it in indi
vidual cases, where the banks of one region might begin to borrow,
and borrow for 30, or 60, or 90 days, it would regulate the rate of in
terest to cover all their needs, other regions would not be borrowing
until a later period in the year, and you would have your elasticity
occur in different parts of the country at a different time, by that
very method of allowing each bank to call for its own needs. We
have had testimony here indicating that the length of time which a
bank requires relief of this sort is only three or four months during
the year, and the experience of Germany, as you very well know,
shows that there is a period of contraction and expansion of the
currency four times a year there, almost as regularly as the seasons.
Is not that true?
Mr. U ntermyer. I do not think it is quite to the extent, Senator
Hitchcock, to which you have stated, but there are periodic expan
sions and contractions of the currency which in Germany and France
occur sometimes at one time and sometimes at another.
The Chairman. I call your attention to page 542 of these hearings,
which gives the number of days and the different rates of interest
which have been charged by the banks of England, Germany, France,
and other European countries.
Senator Hitchcock. That would hardly satisfy me. I have had a
computation made of it, so that I am advised when I say there is a
period of contraction and expansion of the currency four times a
year there almost as regularly as the seasons, and in Germany the
contraction almost invariably occurs in the fall and the expansion
in the spring.
Mr. Untermyer. Does not that depend upon business conditions?
Senator Hitchcock. I have a number of years computed, and it
runs wonderfully regularly.
Mr. Untermyer. For instance, when the crops are bad, the farmers
have to borrow for a longer period than when the crops are good.
Senator H itchcock. There are variations, of course. I want to
ask you, though, before I leave that, why you say that this oppor
tunity of the individual bank to secure a limited amount of currency
for its own needs applied to 7,000 banks in different parts of the
country will not result in an elastic currency, expanding in the local
ity as it is desired for the season, and contracting when the season for
demand is past?
Mr. Untermyer. Because, when the bank gets up to three-fourths
of its capital, no matter what the need is in that locality, it can not
get any more money. You have measured the elasticity of the cur
rency by the capital of the national banks instead of by the needs of
commerce. Now, the needs of commerce are demonstrated by the
commercial paper that is in circulation, but as long as there is genu
ine, good commercial paper to be discounted, why, that is the unfail
ing sign that the needs of commerce have not been supplied.
Senator FIitcticock. Y ou are speaking so positively, Mr. Unter
myer, that you must know what the rate of expansion and contrac
tion is in these countries that have this system, and I would like to
have you state it.
1300
BAN ICING AND CUEBENCY.
Mr. Untermyer. I do not know it from memory; I do not under
take to state it from memory.
Senator H itchcock. Could you approximate it?
Mr. U ntermyer. I do not think so.
Senator H itchcock. Suppose you found that the rate of expansion
and contraction in European countries is something like 10 per cent
of the volume of currency. Would you still say that there was a
need for a greater expansion of credit than 75 per cent of the capital
of the national banks?'
Mr. U ntermyer. The capital of the national banks has no relation
to the amount of currency outstanding, and how do you make that a
criterion? You might as well say the number of bricks that are
manufactured every year-----Senator H itchcock (interposing). Suppose that the experience of
Europe over a long period of years has indicated that the volume of
expansion and contraction of the currency, from the maximum to the
minimum, is about 10 per cent; suppose we applied that contraction
and expansion to this country, and that 10 per cent did not ap
proximate what I have stated as a limit to be measured by the capital
of the bank, would you not know that that was a fair limit?
Mr. Unter?£yer. N o ; on the contrary, I do not see how you can
argue from European conditions in this country. I do not think that
the same conditions of trade apply here.
Senator Reed. Let me understand you. You do not think that we
get very much light, from the experience of European nations?
Mr. Untermyer. Oh, I think we get a vast amount of light from
the workings of their systems, but I say when you come to the ques
tion of the amount of expansion and contraction in a compact
country like Germany or France, within a very narrow space on that
subject, it is not a criterion, but on many subjects it is, Senator-----Senator Reed. I wish now, in order that I might have some kind
of a guide to go by, some of you gentlemen who understand these
matters, I do not, would tell me just how far we are to follow Euro
T
pean precedents. It seems to me, I will say frankly, that when a
European precedent suits a witness it is a thing that is then sacred
and inviolable and is to be blindly followed, but when it does not
suit that it is utterly without competency. I would like if somebody
would draw for me the line then showing how far we are to follow
Europe and where we are to depart from this lead.
Mr. U ntermyer. I think that the asking of that question rather
demonstrates that we would be unlikely to agree on that general sub
ject, because we can not draw a line on that subject, Senator Reed;
and, furthermore, it seems to me that some time the inquirer refers to
the experience of Europe when it suits his purpose and when it does
he does not do so.
Senator Reed. In the last analysis this committee has got to follow
the light of Europe as of no account?
Mr. U ntermyer. On the contrary, the experience of European
countries ought to be of very great value to us, and it seems to me
ought to guide us in many respects. For instance, they have been
able to establish a discount market for bills and acceptances, and in
some countries they have established a discount market to such an
extent that they have a credit system that takes the place of money.
Now, there seems to be no reason why we should not in this country
I
BANKING AND CURRENCY.
1301
be able likewise to establish such a market. Every student of finance
whose works I have ever read has insisted upon and has emphasized
the importance of a discount market as a part of any system we
might originate, and it seems to me it is one of the most essential
things of any system that we do originate; but, of course, a discount
market can not be created unless you have these reserve banks that
will buy and sell exchange and acceptances and bills, and in that
way create a market. That is one point on which we can learn vastly
from the experience of foreign countries, because here you have Great
Britain, for instance, getting along with only £32,000 of currency
outstanding and £32,000 of gold, doing almost as much business as
any part of the world, with its vast Empire, and it gets along on that
small amount of gold and that small amount of currency because it
does it business upon this credit system, to the acceptance market that
it has created.
Senator H ollis. Pardon me, you said £32,000.
Mr. U ntermyer. £32,000,000. I will ask the stenographer to kindly
correct that.
Senator H itchcock. I want to test this elasticity proposition a
little more, and I will start, for instance, with a date in Germany;
say 1901. In December, 1901, there was an expansion of the currency
amounting to 14 per cent-----Mr. Untermyer (interposing). Expansion over what date?
Senator H itchcock. The expansion was—no, the expansion was in
March, 1901, amounting to 14 per cent.
Mr. Untermyer. Expansion from what? You have to expand
from some point.
Senator H itchcock. I have to start from some point or from
what it had been. In December there was a shrinkage of 11 per cent;
in February, 1902, there was an expansion of 124 per cent; in Decem
ber there was a shrinkage of 11 per cent.
Mr. Untermyer. What is the normal figure at which you start?
Senator H itchcock. There is no normal point from which I start.
M r. U ntermyer. Y ou can not have expansion or contraction with
out starting at some point.
Senator H itchcock. I am starting with 1901, I should say, on the
date that I took, and it had expanded 14 per cent from what it had
been at the previous taking. We have got to take an arbitrary point
for starting.
I will repeat that proposition: In March there had been an expan
sion of 14 per cent over what it had been-----Mr. U ntermyer. I understand now.
Senator H itchcock. In December, 1901, there was a shrinkage of
11 per cent from that; in February, 1902, it expanded 12-| per cent:
in December it shrunk 11 per cent; in February, 1903, it expanded
124 per cent; in December it contracted 114 per cent; in Februar}7
.
1904, it expanded 12 per cent; in December it shrunk 114 per cent:
in February, 1905, it expanded 13 per cent; in December it shrunk
114 per cent; in February, 1906, it had expanded 15 per cent; by the
end of the year it had shrunk 12 per cent; in February, 1907, it ex
panded 13 per cent; and there my statistics stop.
My point is that while there has been a gradual increase in the cur
rency in Germany and an expansion each year there, there has also
1302
BANKING AND CURRENCY.
been a contraction each year, so that the average change is not over
10 per cent.
Mr. U n t e r m y e r . I s not that very misleading, for this reason-----Senator H itchcock (interposing). I will finish my question----- Mr. U ntermyer. Yes.
Senator H itchcock. I f we have a currency in this country of
$3,000,000,000-----Mr. U ntermyer (interposing). $3,700,000,000.
Senator H itchcock. Say $3,700,000,000, and it expands and con
tracts according to the experience of Germany about 10 per cent.
Would not the limit of twice that amount for elasticity, as suggested
in this Treasury plan, be sufficient to meet the elastic needs of cur
rency ?
Mr. Untermyer. It does not follow at all.
Senator H itchcock. Why not?
Mr. Untermyer. I am going to tell you why. In the first place,
when you speak of expansion and contraction of the currency in Ger
many, there has been a gradual and continuous increase in the cur
rency issue of France.
Senator H itchcock. S o there has been in Germany and France.
Mr. Untermyer. We are starting with a rigid issue.
Senator H itchcock. N o ; you are mistaken there.
Mr. UnterM . We are starting now with a rigid issue. We
yer
have a bank-note issue, and we have gold certificates represented by
gold deposits, and we have greenbacks-----Senator H itchcock. Our currency is increasing every year $60,000,000 or $70,000,000.
Mr. U ntermyer. Only the subsidiary currency.
Senator H itchcock. No ; our gold is increasing.
Mr. U ntermyer. From the gold, yes; but that is not the case in
France and Germany. They are increasing very largely or have in
creased something like $200,000,000, for instance, in France in 10
years in subsidiary coin alone. They have got now 1,400 million
francs of subsidiary currency out. I am trying to explain why that
is a misleading illustration and precedent. In the first place, if you
start now with a new kind of currency, you have got to find out what
are the needs of the country, how much expansion is necessary. In
Germany, at the time at which you have started, they had that cur
rency in existence; they had their discount market, their acceptance
market in existence; they had a fixed system that was in working
operation and had been for years, and so the needs from year to year
of expansion and contraction could be pretty well determined from
the experience of previous years with the same system.
Now. you are proposing to start upon an entire new field without
any experience in our own country as to what are the real needs of
commerce to guide you, and therefore you can not say that because
after Germany has had a certain system for 10 or 15 years, and as it
has had it and there has been a circulating market for credits to
help out the needs of currency, and that when we start on a new
system that the conditions in a given year there are going to guide us.
Senator Hitchcock. Mr. Untermyer, the suggestion made by Sen
ator Reed of what he called the “ Hitchcock plan ”■ it is no more
—
my plan than it is his, as a matter of fact-----Mr. U ntermyer. I thought it was a joint creation.
BANKING AND CURRENCY.
1303
Senator Hitchcock. Or of Senator Bristow. The suggestion of
that plan is not to start with a new system. We propose to hold on
to what we have got and simply add this to it.
Mr. U ntermyer. It is a superadding system, then ?
Senator Hitchcock. And we figure that enough elasticity is pro
vided, if we give the banks of the country an opportunity to secure
a maximum of $700,000,000 of additional currency for short periods
during the year, and we point to the European experience and we
ask you to say where there has been any greater expansion and con
traction in any country of the world than would be provided for
with the limit that we have named.
Mr. Untermyer. I f you will take the German system at the date
when it first went into effect, then you would have some sort of
anology, but you are taking a system that has been working for years.
Senator Hitchcock. Y ou are mistaken again. We are not pro
posing to disturb the existing system. What we propose is to give
something additional without detracting in any respect from the
credit system that we now have.
Mr. Untermyer. Senator Hitchcock, what you are proposing to
do is to engraft a superadded system upon the existing system, some
thing that you believe will be an expansive and elastic system ?
Senator Hitchcock. That is right.
Mr. U ntermyer. Now, then, you ask what is the extent of re
quired elasticity in this country, and you are being told that nobody
knows, because it has never been tried. Then, in response to that,
you point to the German system and show the elasticity there, and
the rejoinder is made to that that it is no analogy because it is not
giving us the figures of Avhat happened when it was first introduced.
Senator Nelson. Here is the point that you both overlooked, it
seems to me, and that is this: The growth and volume of business in
the Old World, in Germany particularly, is more stationary than it
is here. Our business, like our growth in wealth and population, is
at bigger leaps and bounds, and hence because of this we can not
always measure these things by the measure of the Old World. I f
our growth in volume of our business was increasing and expanding
at the same rate as in Germany, then it would be a good criterion.
Senator H itchcock. The criticism would be just if we were pro
posing to contract anything that we have. We are not proposing
to take away anything from the banking power of the country at all,
but simply to add this—and we think that it is not up to us to show
so much that it is sufficient as it is for somebody else to show that it
is inadequate.
Mr. Untermyer. On the question of its inadequacy let us assume
that you need a vast amount of money to move your wheat crop.
You have a small corn crop, and you will not need so much to move
that, but you have a very big wheat crop and you will require a good
deal of money in those sections to move the wheat crop. The banks
in that section may have a comparatively limited capital. They may
not be able to get the money with which to move that wheat crop.
You are trying to measure the needs of a locality by the bank capital
in that locality instead of by the commercial requirements of the
locality in the securing of additional currency.
1304
BANKING AND CURRENCY.
Senator H itchcock. Let me stop you right there. They have at
the present time certain facilities for moving the wheat crop, and
nine out of ten years they will have sufficient to move it without any
difficulty—or nineteen years out of twenty. We are not contracting
what they have got, but the resources they have now remain. All
that has been suggested is to do this; and what we are proposing to
do is not to tear up by the roots what we have got now and substitute
something else for it. It is not necessary for us to go to the extent
that you indicate. You are making a fatal and tremendous mistake;
but if we provide something in addition to what we have already got,
that much at least has been gained and experience may indicate that
we can go further.
Mr. Untermyer. Y ou do not tear up by the roots what you have
under this plan, it seems to me; but apart from that you are endeav
oring to establish a new currency system, and you admit that you
have got to make it elastic, and the first question that arises in con
nection with the suggested plan is, Is it elastic or is it rigid? It
seems to me that it is absolutely rigid, just as rigid as the bank-note
currency is, because it is based and fixed on a known factor, to wit,
the bank capital.
Senator H itchcock . I can not think it possible, Mr. Untermyer,
that you seriously intend to say that. You know that under the
law that when the banks take out these bank notes and have that cur
rency they can not retire it except very slowly—it is practically im
possible to retire their bank-note currency as long as they continue
in business, except in the slowest possible way.
Mr. Untermyer. I do not know about that.
Senator H itchcock . I will not dispute it with you, but that is the
law. The situation is such that banks can not retire it, can not
market their bonds, and can not afford to retire their currency.
Senator Shafroth. There is a limit by law.
Mr. Untermyer. But, subject to that limit, they can retire them.
Senator H itchcock . There is a limit by law. Suppose three banks
out in Wichita take out this currency, when the time comes to move
the wheat crop, and they pay a rate of interest on it. They may be
able to take it for 30, 60, or 90 days, or 4 months, because the rate
would not be greater than conditions would enable them to meet it,
but ofter they passed that point and the wheat crop moved, the rate
of interest becomes practically prohibitive, and those banks will,
from self-interest, pay up the Government what they have borrowed
and retire that much currency. Why is that not elastic ?
Mr. U ntermyer. Because it is limited by the capital of the banks
and not by the needs of the community.
Senator Hitchcock. In other words, you say it is not elastic be
cause it does not go without any limit at all ?
Mr. U ntermyer. N o ; because it is not regulated by the only known
scientific basis of regulation, that is, the amount of legitimate com
mercial paper requiring that accommodation.
Senator H itchcock. Y ou say that such a currency would not be
elastic, because we propose a limit at $700,000,000?
Mr. U ntermyer. No ; not all; I do not say----Senator H itchcock . Because we limit it by the capital of the
bank ?
BANKING AND CURRENCY.
1305
Mr. U ntermyer . Y es; which is no criterion at all.
Senator H i t c h c o c k . Then you know, as a matter of fact, that the
bank-note issue of Germany is limited?
Mr. U ntermyer . It is not limited by the capital of the bank; no.
Senator H itchcock . But you know it is limited ?
Mr. U ntermyer . It is limited by law.
Senator H itchcock . Y ou know that the bank-note issue of Ger
many is limited ?
Mr. U ntermyer . It is not limited in any way.
Senator H itchcock . It is limited by law.
Mr. U ntermyer . They passed the statute to the effect that there
should not be any more than so much currency.
Senator H itchcock . No ; they do not do that.
Mr. U ntermyer . Yes; they do.
Senator H itchcock . They provide that the Reichesbank can not
issue any currency, except about $500,000,000, which is gold, in bul
lion and silver, and its indebtedness to the Government.
There is, therefore, I say, a limit to the bank-note issue of Ger
many and the bank-note issue of France, and therefore, according to
your argument, that is not an elastic currency?
Mr. U ntermyer . Here is the distinction. They have based their
legislation limiting the currency issue upon the experience of a gen
eration with the discounting of commercial paper. They know how
much paper there is in existence, what the needs are, and they place
a wide margin of safety upon their wants and then they put that
limit upon it. They have had the experience; we have had no
experience.
Senator H itchcock . Y ou say—this is merely a suggestion pro
posed for consideration—you say it is not an elastic currency ?
M r. U ntermyer . N o.
Senator H itchcock . It might result in the issue of $700,000,000 of
United States notes? Is that not true?
Mr. U ntermyer . After putting aside the resources, we will say,
$500,000,000.
Senator H itchcock . O f United States notes?
M r. U ntermyer . N o.
Senator H itchcock . That is possible?
Mr. U ntermyer . Yes; if every bank in the United States took out
currency at the same time.
Senator H itchcock . N ow , then, when that is issued, the tax will
rise in proportion to the time it is kept up? You do not deny the
banks wil be retiring that issue from time to time in order to save
the interest?
Mr. Untermyer. They will be compelled to.
Senator H itchcock . Why will that not be elastic?
Mr. Untermyer. An elastic currency is one that meets the needs
of the country in elasticity. You might by this compulsory interest
rate be retiring it when you most need it.
Senator H itchcock . I understood you to say it was not elastic.
You practically admit now it expands and contracts.
Mr. Untermyer. N o ; it can not expand over and above 50 per
cent of the bank capital under your plan. That is not elastic.
In other countries they know what the total amount of probable
commercial paper circulates. We know nothing about it. You are
I
1306
BANKING AND CURRENCY.
refusing to take note of the difference between a country that passes
jaws based upon an experience of perhaps half a century or more
with a given system and a country passing a law with respect to a
new system, as to which it does not know what the amount of need
is going to be.
Senator Reed. In order that a thing be elastic, is it necessary
that that elasticity should be illimitable?
Mr. U ntermyer. The extent of the elasticity depends upon the
point at which it is limited.
Senator Reed. But there can be elasticity within limits. Can you
not say yes to that?
Mr. U ntermyer. I will if I think it is right.
Senator Reed. I thought when I asked the question you would
have to say yes.
Mr. Untermyer. When we are speaking of an elastic currency
we are speaking of a currency designed to meet the needs of the
country, and a currency that stops short is not elastic.
Senator Reed. Now, then, no currency is elastic unless it will
stretch far enough to exactly meet the needs of the country ?
Mr. U ntermyer. That is my opinion.
Senator Reed. Will it stretch beyond that?
Mr. Untermyer. I think not.
Senator Reed. I f it did, it would be a very dangerous thing, because
it would mean inflation?
Mr. Untermyer. Yes.
Senator Reed. Therefore, in order to have a system elastic, or a
safe currency, you must have one where something, either the law
of commerce or the law of the country, has fixed a limit?
Mr. U ntermyer. The law of commerce; that is the only kind of
elastic currency I can conceive of.
Senator Reed. I think I understand you about elasticity. You
say that nothing is elastic unless it will stretch far enough fo abso
lutely meet every need of commerce?
Mr. U ntermyer. Now, you are rather magnifying the definition.
I said that an elastic currency is one that meets the legitimate needs
of the commerce of the country.
Senator Reed. I said every need.
Mr. U ntermyer. N o ; I do not think you need provide for the
possibilities of some cataclysm, because you can not always foresee
that.
Senator Reed. Y ou do not want to foresee meeting that?
Mr. Untermyer. Yes, we do; but human intellect has never been
able to accomplish that.
Senator Reed. Y ou do not want to provide a currency elastic
enough to meet a cataclysm?
Mr. Untermyer. One that might be looked forward to. yes; but
one that is not within our conception we can not provide for.
Senator Re .d. Then there is to be a limit in order to have a cur
f
rency that will stretch far enough, and not go beyond that point.
There must be a limit, and you would place that limit; you would
regulate that stretching point by the laws of trade and commerce
rather than by the laws of the country ?
Mr. Untermyer. N o ; I would regulate it by the laws of trade
rather than by the arbitrary capital of certain banks.
BANKING AND CURRENCY.
1307
Senator Reed. Well, by the laws of trade. That brings us to the
question of what are the laws of trade. Nobody knows what they
are. They ebb and flow, these tides of demand and of activity, and
they sometimes are greater and sometimes are less. You have to
have something to standardize them by, and I understood you to say
that the limit you proposed was that this currency should be based
upon what you term prime commercial paper?
Mr. U ntermyer. Upon commercial paper.
Senator Reed. O f course, the question arises at once what class
of paper will be called commercial paper; that is, how you are going
to define it. I understood you to want to put a limited meaning
upon that; that is, that it should be paper that represents actual
purchases and sales of goods?
Mr. U ntermyer. O f a commodity of some kind that is going into
consumption.
Senator Reed. Y ou do not know how much that is?
Mr. Untermyer. N o ; you can not know definitely.
Senator Reed. And you could not tell us any way in the world by
which it could be determined, when a piece of paper was offered to a
bank, whether it actually represented a commercial transaction, unless
it had a bill of lading attached to it ?
Mr. Untermyer. Oh, yes. We discussed that the other day.
Senator Reed. Y ou said the other day you had formed some judg
ment as to how you could tell A h emitted the paper, and in that way
vo
a banker could tell something about it, and yet I think you frankly
admitted the other day that if a piece of paper was emitted by
Armour & Co., it might be for a purchase o f cattle that were on
their way to the market, or it might be for something else, and the
Danker might not know which.
Mr. Untermyer. That is within the range of possibility, but, as
I said the other day, there are means of determining with fair ac
curacy what is commercial paper. They do it all over the world,
and there is no reason why we should not be able to do it.
Senator Reed. Without going into the question as to whether that
is a proper limit or not, you can not tell us of any human being who
has ever undertaken to tell us what the aggregate of that commercial
paper is in this country, or what it was throughout the world, at any
one time?
Mr. U ntermyer. I can not tell you. I do not know what statistics
there are available on that subject.
Senator Reed. Y ou have never seen them?
Mr. Untermyer. It does not follow that there are not any in
existence.
Senator Reed. I want to put this to you as a prudent man, and
assuming that you had the responsibility of writing a currency sys
tem for 100,000,000 people, if you would ever base that currency
system absolutely upon an unknown quantity?
Mr. Untermyer. I do not think the laws of commerce are an
unknown quantity..
Senator Reed. The amount is unknown.
Mr. U ntermyer. I would base it unhesitatingly upon the amount
of genuine commercial paper that would be proper for currency, with
the safeguards of this bill, and I should not do anything that ex
perience has not demonstrated to be wise.
1308
BANKING AND CURRENCY.
Senator R e e d . Y ou say you would do nothing that experience had
not demonstrated to be wise. Has any country in the world ever gone
to a system which proposes that you can take every piece of com
mercial paper that is extant, and setting aside a 33J per cent gold
reserve, issue money against that paper, and then, when you have
issued that money and loaned it out and gotten more money for it,
you can again issue money upon the paper thus received, setting
aside 33^ per cent, and that system continued until the 33^ per cent
gold reserve has equalled the original capital. Has any country in
the world ever done that?
Mr. Untermyer. I do not concede the accuracy of your premises.
Senator Reed. Whether you do or not, just let me know, if you
will, whether any country has ever done that?
Mr. Untermyer. The particular thing that you are talking about
no country has done, but other countries have done and are doing a
far less conservative thing in the way of issuing currency.
Senator Reed. Possibly; but I am talking about this bill. I am
talking about whether we have an experience just like what I under
stand this bill to be. You say you do not think that what I say is
possible under this bill. I do not care to dispute that with you, be
cause my mind on that is irrevocably made up, that what I have said
is within the possibilities of this bill, not necessarily within its prob
abilities.
Mr. U ntermyer. But you have the experience of countries as to
the value of commercial paper as a basis for currency. You have not
any country in which they set precisely aside 33i\ per cent of gold—
that particular proportion—against commercial paper, and when
you ask a question based upon a premise of that kind there can be
only one answer to it.
Senator Reed. Mr. Untermyer, do you think that any country
having a fairly satisfactory system, under which it has made more
rapid advancement than any other country in the world in wealth, in
population, in all that tends to upbuild the race of man; do you think
that it is ever safe to just completely revolutionize that system ? You
have got to deal with an unknown quantity, and that unknown quan
tity to be the very basis for the circulation of the country. Would it
not be wiser and more prudent to at least get somebody who could
make a reasonable guess, within a few hundred millions of dollars, of
the amount of commercial paper you are going to issue your money
against ?
Mr. Untermyer. We know or ought to know what the amount of
commercial paper is in the banks to-day.
Senator Reed. But we do not.
The Untermyer. The statistics of the banking department would
show what commercial paper is in the national banks.
Senator Reed. Taking the commercial paper, taking the notes in
the banks that are signed by individuals or by one or more individuals
it would be equal, as I ran over the figures somewhat hastily, to some
thing over two billion and a half of that class of paper. Of course,
you know and I know that money could be issued against that par
ticular class of paper and banks could convert their other paper into
that particular class, and if you call that commercial paper we might
have a currency here of six or seven billions of money.
BANKING AND CURRENCY.
1309
Mr. Untermyer. Only a fraction o f outstanding paper is strictly
commercial paper within the meaning of that term as I understand it
and would apply it.
Senator Nelson. D o you call these stock loans, call loans on stock
or bond collateral— do you call that commercial paper?
Mr. Untermyer. Certainly not; that should be rigidly excluded.
They are rigidly excluded by the bill.
Senator Reed. I do not care very much for the present to pursue
this particular line of inquiry, but I do want to invite your thought
and attention to another proposition, and that is to the very effect
of this bill when it first becomes operative. I am going to take some
actual figures.
Mr. Untermyer. I thought we were going on first with this subject
of the so-called Hitchcock plan. Or would you rather that that be
interrupted here? I had just begun to state what my objections
were to the Hitchcock plan.
The Chairman. Senator Reed was not present this morning when
it was agreed that you should continue uninterruptedly with your
statement.
Senator Reed. There is one phase of this bill which has not been
inquired into very much, and I thought you could throw some light
on it. I think you ought to be able to give us some light upon it.
Senator Nelson. On this particular question I want to call your
attention to the fact that neither in England, France, or Germany,
or any other of the great countries, is the circulation based upon the
theory you advanced—that is, upon the volume of commercial paper.
In England it is founded partly on the national debt, and the rest is
provided for, dollar for dollar in gold. In France it is limited by
law, and so in Germany, and the same in the Scandinavian countries,
which have a pretty good banking system. I do not know of a
country where they base the volume of their paper currency issued,
as it is proposed to be issued, on what you call commercial paper. It
is is fixed by other rules than that.
Mr. Untermyer. In France and Germany the currency is issued
upon commercial paper, but there is a limit to the amount that may
be issued.
Senator Nelson. But there is no limit in this country?
Mr. Untermyer. There is a limit in those countries, and that limit
was established after many years of trial, and when they knew the
factors that would enter into it they knew how much commercial
paper would be available, and they fixed an expanding limit, con
stantly increasing it as the increase of the business seemed to re
quire it.
A s this bill was first drafted, it contained a limit of $500,000,000
of this currency.
I was opposed to that limit for only one reason, that
it seemed to me that as soon as a demand was made for the issuance
of currency, and, perhaps, half of that limit was reached, the banks
would come in to get currency, even though they did not need any,
because they feared the limit might be reached, and in that way it
looked as though you might be encouraging inflation, by putting on
a limit.
Senator Nelson. Just look at this situation, Mr. Untermyer—just
imagine that all the State banks and trust companies and national
1310
BANKING AND CURRENCY.
banks should enter this system. You would have 25,000 banks over
the country with their great quantities of commercial paper walking
up to the reserve bank, and throwing their notes, their commercial
paper, on the counter and saying give me this new currency. Where
would your limit be?
Mr. X ntermyer. In the first place, if it was all genuine commer
J
cial paper, of a character entitling it to discount under the rigid rules
as to what is commercial paper, the needs of the community, the fact
that there was that paper would be a demonstration that that money
was needed.
Senator Nelson. Let me stop you right there. How much of that
commercial paper that the banks would come up and tender is sub
ject to check on the books of the bank? How much of that is subject
to check, and how does the reserve bank know that? You know how
most of these deposits take place in these banks of commerce. The
borrower gives his note for $10,000; he does not get the cash; he is
given a credit as a depositor on the other side. Now, the bank owes
him $10,000, and they walk up to the reserve bank and say, “ We
want $10,000 in currency on these notes.”
Mr. X ntermyer. The answer is that it is the business of the reserve
J
bank, when it takes that note, to know for what it was given. That
is what this board is there for, to sift that note and find out whether
it is a kind of note that is entitled to be the basis of currency issue.
Senator Nelson. Does not every bank stand in this position: First,
it owes $10,000 to its depositor?
Mr. X ntermyer. Yes.
J
Senator Nelson. Then it gets $10,000 currency from the reserve
bank. It will owe $10,000 to them upon the same credit—$10,000 to
the depositor and $10,000 to the regional reserve bank. Is that not
inflation ?
Mr. X ntermyer. This regional reserve bank is there for the pur
J
pose of protecting the issue of currency against that sort of thing.
That is the great safety of it.
Senator Nelson. I simply brought these things up in connection
with this question, and I think it is a most important question, this
question of the inflation of our currency.
Mr. X ntermyer. I agree with Senator Nelson that the most diffi
J
cult thing in finance and the banking business is to determine what a
commercial bill is without investigation. That is where the Euro
pean countries have had their difficulties.
Senator K e e d . Mr. XJntermyer, I want to see if I understand one
other matter that is pertinent to this inquiry we are now immedi
ately considering. I understand that your theory is that a vast pro
portion of the business of the country is done upon credit, the ex
change merely of credits, and that that relieves us of the necessity
of a large proportion of money that would otherwise have to be used.
Mr. X ntermyer. Yes; and the more you can do on the basis of
J
credit the less currency you need.
Senator Reed. Yes. So that every commercial transaction does
not necessarily mean that money is passed, because it may be simply
credits that have carried that transaction through.
Mr. X ntermyer. That is true of the bulk of all transactions.
J
Senator R eed. What proportion do you think is done by credits in
which the money is not actually handled ?
BANKING AND CURRENCY.
1311
Mr. U ntermyer. I do not remember those statistics at this time.
In the clearing house at New York, as I remember it, over 90 per
cent is done by credit in the form of clearances or exchange of
checks; 95 or 96 per cent.
Senator R eed. N ow , Mr. Untermyer, if 96 per cent of the com
mercial business is done upon credits and only 4 per cent with the
actual cash, you propose to coin those credits into money or make it
possible to coin them into money, and in doing that you have made
it possible to get out 9.6 times as much money as is actually needed,
have you not?
Mr. U ntermyer. N o. In the first place, I did not say that 96 per
cent of all the commercial business of the country was done in credits.
I said in the Clearing House Association of New York that was true.
Senator R eed. I wanted to get back to the reason of that rule that
we are speaking about concerning the issuance of money upon com
mercial paper because it refers to actual transactions. Now, I want
to find out if that is a set rule. Notice that under that proposition
every bit of commercial paper can be coined into money; it is possible
to do it.
Mr. U ntermyer. It would not last over 60 days-----Senator R eed (interposing). But it is possible to do it. And yet
that would probably be 10 times the amount of money actually used
under the present condition, because now the check of the customer
and the draft of the customer takes its place. So have you not based
your currency upon a quality of commercial paper which is 10 times,
in its volume, the amount of money necessary to be used?
Mr. U ntermyer. On the contrary, Senator Reed, that is a most
violent and it seems to me unsubstantiated assumption, for this rea
son, that this bill does not propose to substitute money for credit;
this proposes to increase the use of credit. You do not mean to say
that everybody who has a piece of commercial paper now in a bank
is going to try to get currency for it ?
Senator R eed. Why not ?
Mr. U ntermyer. Because there is no such necessity; there is no
such implication possible.
Senator R eed. I am talking about the possibilities of it.
Mr. U ntermyer. There is no such possibility. For instance, where
a man now has to go to his bank and get money in order to settle the
transaction, if the bank can give that man an acceptance that accept
ance will pass current instead of money. This will substitute credit
in a large number of instances for money.
Senator R eed. Y ou are talking about what happens under it. I
am talking about your yardstick; your yardstick by which you are to
measure the amount of currency m the country that may be issued
is 10 times as long as the currency need be. That is a mixed meta
phor, but it will express my idea.
Mr. U ntermyer. I do not agree with you as to the idea at all.
Senator R eed. Y ou do not agree with the idea?
Mr. U ntermyer. N o.
Senator R eed. Let us see. We are trying to get a system that will
not expand unduly, and you have been telling us that the reason it
would not expand unduly was because there was a limit to commercial
paper.
Mr. U ntermyer, Yes,
1312
BANKING AND CURRENCY.
Senator R eed. N ow , I call your attention to the fact that while
there is a limit to commercial paper, still the volume of commercial
paper is 10 times as great as the volume of money, and therefore the
limit which you propose is a limit 10 times greater than the needs
of commerce, as at present engaged, and therefore you have not got
any limit at all, for all practical purposes.
Mr. U ntermyer. But just consider the assumptions in which you
are indulging, Senator Reed. In the first place, you assume that
every check is commercial paper; that because balances at the clear
ing house are adjusted by exchange of checks, instead of money, that
these exchanges represent commercial transactions. Those checks do
represent commercial transactions, but they do not represent commer
cial paper in the sense of unmatured paper at all. They have noth
ing to do with the subject in which we are dealing.
Senator R eed. Eliminate the checks.
Mr. U nterm yer. You based your hypotheses upon the fact that
the New York Clearing House exchanges checks instead of money.
Senator R eed. I have not base my hypothesis upon it, except as to
degree. Is it not a fact now, that the commercial paper which is in
circulation in this country to-day vastly exceeds the amount of
money that is actually in circulation?
Mr. U ntermyer. Certainly.
Senator R eed. Then the limit which would be placed, and the cur
rency to be issued being limited only by the amount of commercial
paper, would be vastly in excess of our present circulation ?
Mr. U ntermyer. N o ; not necessarily so, because you are assum
ing in your question that all the banks are going to tumble out all
their commercial paper onto the reserve banks, and that the reserve
banks are going to tumble out all their commercial paper onto the
Government and get currency for it. You are assuming that there
are no checks on the loans that may be made or that the reserve bank
is going to use its own capital, and that it is possible to take all the
commercial paper of the country and dump it into the United States
Government and say give us currency for it. You could not base
any system upon such a succession of hypotheses.
Senator R eed. There has been no succession of hypotheses at all.
I am simply talking about the possibilities of the system; that is,
I am talking about the fact that your yardstick or your circum
ference is so far extended that almost anything can happen within
these limitations; by which I mean the commercial paper of the coun
try, being so vast in amount and the amount of currency that may
be issued being equal, therefore there is in fact no limitation upon
the amount of paper which may be issued arising from the limitations
upon the amount of commercial paper. You say there are other
restrictions, and when you come to treat of the other restrictions of
course the question arises what they are or what they may be. We
might say by law that not more than a certain amount should be is
sued, but that would be a restriction by law and not by virtue of the
commercial paper proposition. We might say that the interest rate
should become high, but that would be a restriction in interest rate,
and not a restriction by virtue of the amount of commercial paper.
We might say that a board of bankers might say you must stop, but
that would be a restriction by human agent and not by the amount
of commercial paper. We might imagine almost any kind of re-
BANKING AND CUKRENCY.
1313
striction. The only thing I am concerned in is to demonstrate that
limiting the circulation by the amount of commercial paper is in
fact no real limitation. I wish that you or some human being could
tell me the amount of commercial paper there is.
The C hairman . I would call the attention of the Senator to the
report of the Comptroller of the Currency for 1912, in which, on
pages 5 to 7, it gives the aggregate of the national-banking loans,
and it shows that on June 14, 1912, on time paper there were 1,973
millions with two or more individual or firm names; and on time
paper, single name, there was 1,198 millions. It comes about as near
to an approximation of the paper handled by the' national banks as
could be given; but of that, of course, there would only be an ap
parently small part of it that would come under the description of
commercial paper.
Senator R eed. I would like to call the attention of the Senator and
of Mr. Untermyer to the further fact that there is also demand paper
with one or more individual or firm names-----Mr. U ntermyer (interposing). That is not discounted.
Senator R eed. Wait just a moment; 571 millions, and I will put
all the figures in now. On demand, secured by stocks, bonds, or other
personal securities—which is a very broad term—985 millions; on
time paper, with two or more individuals or firms, 1 billion 973 mil
lions; on single-name paper, one person, firm, or individual, without
other security, 1 billion 198 million; on time paper, secured by stocks,
bonds, and other personal securities, and on mortgages and other
real estate security, 1 billion 275 millions. And I would like to call
your attention also to the fact that nearly all of that paper could be
readily converted into paper that would meet the requirements of this
bill.
Mr. U ntermyer. What makes you think so?
Senator R eed (continuing). And it undoubtedly would be so con
verted in a very short time. Even those facts are of no real value.
I think so, Mr. Untermyer, for this reason, that if I were the banker
and expected to use this system at all, and I should put in a note that
was signed by two men, I would say to the gentlemen who had signed
the paper, individually, “ Give me another indorser. I do not care
much who he is, but you need another name on this paper, because I
won’t use it in a different form.” I would say to the men that had
hypothecated it, “ Give me two indorsers and I will let you put this
up to the man that indorses it and let him hold it instead of my hold
ing it myself.”
Mr. U ntermyer. What are the banks going to do meantime with
their billion of capital, and what are the reserve banks going to do
with their capital and deposits?
Senator R eed. What did the Bank of France do? They kept on
loaning it out and kept on booming things until the miserable bubble
burst and there was universal ruin.
Mr. U ntermyer. But it has been generally conceded that the se
curity for this issue is unexceptional and is probably the strongest
security ever known in any country.
Senator B ristow. “ Generally conceded.” Please do not include
me in that general concession.
Mr. U ntermyer. I did not say “ unanimously conceded.”
9328°— S. Doc. 232, 63-1— vol 2----- 23
1314
BANKING AND CURRENCY.
Senator B ristow. I think the present national-bank currency is a
great deal better than anything else that has been suggested.
Mr. U ntermyer. I do not think it furnished anything like the
security that this assures.
Senator B ristow. This has the obligation of the Government of the
United States behind it.
Mr. U ntermyer. True; but so has the currency proposed to be is
sued, and it has, in addition, a vast amount of security that the other
does not possess. May I go on, Mr. Chairman ?
Senator B ristow. There are some other points I would like to take
up with you.
Mr. U ntermyer. Will you take them up a little later, Senator
Bristow ?
Senator B ristow. It would be a little out of order to take them up
after you have gone on to another question.
Mr. U ntermyer. I would like just to say what I have been trying
to say for three days and have not yet had the chance to say.
Senator P omerene. I want once more to ask that the witness be
permitted to make a statement and that he be cross-examined after
wards.
The C hairman . That was the sense of the committee as expressed
in the beginning, but we have departed from it. Mr. Conant comes
in in the morning by express agreement, and Mr. Untermyer has now
been here three times from New York, and I think it would be
better to give him a chance to say what he has to say.
Senator B ristow. I am perfectly willing to do it.
Mr. U ntermyer. This statement will not take me long.
The C hairman . Y ou may make your statement and then we will
take it up further.
Mr. U ntermyer. I want to summarize the recommendations which
I have to suggest in respect to this bill, some of which have already
been stated by me and some of which have not been stated. First,
that the reserve banks should have wider powers of rediscount than
those enumerated in the bill and that the right to rediscount paper
and get currency should be more restricted than is now suggested in
the bill. That is, when paper is brought by the reserve bank to the
Government for rediscount and for the issue of currency, that it
shall be strictly commercial paper, and that commercial paper shall
be defined differently from the way in which it is defined in the bill,
as paper which a reserve bank can itself discount. I have no par
ticular quarrel with the definition of the character of paper that a
reserve bank may discount for a member bank except that I think it
is rather loose and inaccurate in its definition and includes obliga
tions that are not commercial paper; but when you come to provide
that the Government shall issue currency on that character of paper
thus defined, I think the definition is entirely too loose and that the
Government should only issue currency upon commercial paper de
fined to be paper that represents an actual transaction in the pur
chase and sale of merchandise intended to go into consumption—
paper that automatically in the course of trade discharges itself.
The C hairman . Will you read that last description of commercial
paper once more ?
BANKING AND CURRENCY.
1315
Mr. U ntermyer. I think I have described it a little better in this
article contributed by me to the October number of the North Amer
ican Review:
Commercial paper, as I understand it, is that which represents an actual trans
action in the consummated purchase and sale of merchandise intended for
resale and consumption. It must answer the test of being an obligation that
automatically discharges itself in the ordinary course of business.
The next suggestion I have to make is one that I think ought, to
some extent, to be enlarged upon; that State banks shall be required,
in order to become members of this system, to conform to the restric
tions of national banks in the powers that they may exercise. That
is to say, by way of illustration, that a State bank, when it becomes
a member of the system, shall not be permitted to have branch banks,
and that it shall be limited to the powers possessed by national banks.
Otherwise you can not keep the national banks in the national sys
tem. You are now taking away from them practically the two only
advantages they have over State banks—the right to Government
funds on deposit and the right to circulation. Having withdrawn
those two rights, they should be on a par with State banks that come
into the system; otherwise, they would be likely to reorganize as
State banks, and under this bill will get all the benefits of the system
without the restrictions of a national bank. I think that branch
banks in this country, especially in the larger cities, are not to be
encouraged; they should be very much discouraged, because they
tend to centralization of the control of money and credit and do away
with independent banking. It would mean that in the great cities
the powerful banks would monopolize the business to the exclusion of
the small ones.
I have next to suggest that the stock dividend to the member banks
on their stock holdings in the reserve bank should be increased from
5 to 6 per cent, and that they be given no participation in the ultimate
profits of the reserve banks.
Senator N elson. In lieu of the ultimate profits that the bill pro
vides ?
Mr. U ntermyer. Yes, sir; in lieu of the ultimate profits that the
bill provides. That is in lieu of the distribution in the ratio of 40
per cent to the banks and 60 per cent to the Government as now pro
vided; that the banks be given a prior claim for 6 per cent in divi
dends out of the earnings and no contingent interest in the profits.
It seems to me if they are allowed a contingent interest in the profits
it means that the reserve banks are likely to be operated in competi
tion rather than in cooperation with one another and for the public
good. In that connection I suggest also the Government should not
be allowed interest on its deposits if it is going to get all of the profits
over and above the dividends to the shareholders. It will get its
interest in the way of those profits. There is an apparent unfairness
in giving the banks no interest on their deposits and giving the Gov
ernment interest. Senator Reed’s suggestion on that point that the
Government should not be compelled to deposit all its funds in these
reserve banks, ought also to be taken into consideration in this con
nection. The Government certainly ought not to be required to de
posit its own stock of gold in these banks; it ought to have its stock
of gold on hand in its own possession.
1316
BANKING AND CURRENCY.
Senator R eed. I am very glad you and I have agreed on one propo
sition. [Laughter.]
Mr. U ntermyer. I think we agree on quite a number—if you
would only say so. [Laughter.]
Senator R eed. I will score this one and wait for another.
Mr. U ntermyer. The next suggestion I have to make is that the
reserve bank be accorded the right to buy domestic bills in the mar
ket; first, because that is the only way of really regulating the dis
count or interest rates, and secondly, because there "are I0112: periods
when the reserve banks will not be called on by the member banks
to any extent, when money will be easy, and they must have some
way of utilizing their idle funds. It is inconceivable to me how you
can regulate the discount rates unless you are able to go into the
market and buy paper. I f the banks in Kansas City, we will say,
choose to get together—and I believe they have done "such things in
some cities—and say, “ We will charge so much for money,” the re
serve bank is not going to be able to regulate the rates of money in
Kansas City unless it can go into the market and buy bills of ex
change and acceptances and in that way fix the rate.
Senator S hafroth. D o you bear in mind section 15?
Mr. U ntermyer. Yes, I do; but I also bear in mind sections 14
and 16.
Senator S hafroth. That section reads:
That any Federal reserve bank may. under rules and regulations prescribed
by the Federal reserve board, purchase and sell in the open market, either
from or to domestic or foreign banks, firms, corporations, or individuals, prime
bankers’ bills and bills of exchange of the kinds and maturities by this act
made eligible for rediscount and cable transfers.
Mr. U ntermyer. Yes, sir. That seems rather meaningless, taken
in connection with other provisions of the bill. In the first place,
they can only buy in the open market bills that are made eligible for
rediscount under this act; and the only bills thus made eligible for
rediscount are bills indorsed by a member bank. But there is an
other clause at the end of section 16 that shows that reserve banks
can not buy domestic bills in the open market.
Senator R eed. Where is that?
Mr. U ntermyer. At the end of section 16:
All domestic transactions of the Federal reserve brinks
count operation or the creation of deposit accounts shall
Government and the depositing and Federal reserve banks,
of the purchase or sale of Government or State securities
bullion.
involving a redis
be confined to the
with the exception
or of gold coin or
Senator S hafroth. It was suggested that the words “ prime
bankers’ bills ” be stricken out and the words “ commercial bills ” be
inserted in lieu thereof.
Mr. U ntermyer. Where is that ?
Senator S hafroth. In this section that I just read. Would that
remedy the objection which you have?
Mr. U ntermyer. N o, sir; it would not.
Senator S hafroth. Y ou would have to strike out the words “ made
eligible for rediscount ” ?
Mr. U ntermyer. “ Made eligible for rediscount,” and then you
would have to strike out the last paragraph of this section 16. Un
der this bill it is plain that whatever may have been the intention of
BANKING AND CURRENCY.
1317
the framers, the reserve banks can not engage in the purchase of do
mestic bills; they can engage in the purchase of foreign bills. That
is specifically permitted, and they should be permitted also to buy
domestic bills.
Senator S h a f r o t h . In order to control the rate of discount ?
Mr. U n t e r m y e r . In order to keep down and control the rate of dis
count, and in order to use their idle funds. There are times when it
will not pay the member banks to borrow from the reserve banks.
Senator S h a f r o t h . D o you think that that would create a rivalry
between the ordinary banks and the Government?
Mr. U n t e r m y e r . I think it would create at times a moderately
healthful rivalry, to a limited extent, but the banks could offset that
by going in and borrowing themselves, unless they abuse their mon
opoly of the market by getting together and jacking up the rate, and
then te reserve bank could come in and stop that abuse. It ought
to have that right. O f course the European government and quasi
government banks buy in the open market in competition with the
individual banks.
Senator S h a f r o t h . But the books have criticized very much the
position, claiming that there is a great deal of feeling upon the part
of the bankers; at least, one or two books that I have read in regard
to the Bank of England. They said that it was a source of a great
deal of discontent among the bankers of London.
Mr. U n t e r m y e r . I have no doubt that they would rather have
the market to themselves.
Senator N e l s o n . Here is another clause in connection with what
we have been discussing, on page 25, commencing at line 11:
Upon the indorsement of any member bank any Federal reserve bank may dis
count acceptances of such banks which are based on the exportation or importa
tion of goods and which mature in not more than six months and bear the
signature of at least one member bank in addition to that of the acceptor.
Mr. U n t e r m y e r . That refers to foreign transactions; we are
speaking of domestic exchange, domestic bills; foreign bills are
covered in both those clauses.
Senator N e l s o n . Yes; they are well covered.
Mr. U n t e r m y e r . There is no doubt about that. My criticism
went to the failure to give power to the reserve bank to buy domestic
bills.
Senator S h a f r o t h . One difference between our banks and the
European banks would be the profit that was made to the bank to
the extent of 6 per cent. It would go really to the parties who put
up the capital.
Mr. U n t e r m y e r . So that they would get the money anyway.
Senator N e l s o n . There is another, if you will allow me, in connec
tion with this discount business, to call your attention to it. It is
on page 30:
Such application shall be accompanied with a tender to the local Federal
reserve agent of collateral in amount equal to the sum of the Fedei*al reserve
bank notes thus applied for, and issued pursuant to such application.
That presupposes that they are to get circulation up to the face
value of the paper, does it not?
Mr. U n t e r m y e r . Yes.
1318
BANKING AND CURRENCY.
Senator N e l s o n . Would it not be safer, and act as a brake, i f you
applied the same rule as you do to the discounting, that they should
get currency for the discount value of the currency ?
Mr. U n t e r m y e r . That is, the face of the paper?
Senator N e l s o n . N o ; not necessarily; oh, no. In amount equal
to the sum of the Federal reserve notes. That would mean, if you
construe the word “ amount,” not only the face of the note, or prin
cipal, but the interest that has accrued.
Mr. U n t e r m y e r . I think the fair construction of that, Senator-----Senator N e l s o n (interposing). Would it not be safer to apply
the same rule as you apply for discounting and say, “ In amount
equal to the sum of the Federal reserve notes applied for and issued
pursuant to such application ” ?
Mr. U n t e r m y e r . Deduct the interest, of course?
Senator N e l s o n . Well, to the discount value of the paper. That
would cover it.
Mr. U n t e r m y e r . That would be a better term.
Senator N e l s o n . The discount value of the paper; because in that
way it would be regulative, to a slight extent, as to the issue of the
paper, if the discount rate was high; so it would be a sort of a brake.
I illustrated it the other day to another witness in this way, Mr.
Untermeyer: Supposing you are a Federal reserve bank and I am a
member bank. I come to you w ith a bundle of papers and want a
7
discount. You say to me, “ I can not discount your paper and give
you bills for it at a less rate than 8 per cent.” 1 say, “ I f that is the
case, I do not want your paper.”
I come again next week and say, “ I want some paper on these
notes” ; and you say, “ I will do it for 3 per cent.” And then I accept
it. In that way the discount rate could be a sort of a brake upon the
issuing of this currency.
Mr. U n t e r m y e r . Except this: You only lend the value of the
paper less the unmatured interest—that is your idea, is it not?
Senator N e l s o n . It is just what you get if you discount it.
Mr. U n t e r m y e r . Except that the member bank expects to make
a profit on the paper. It may have a rate of 5 per cent and may be
getting from the reserve bank a rate of 2 per cent-----The C h a i r m a n . The chairman must remind the committee that we
are breaking over our rule again.
Senator N e l s o n . I am sorry. I wish you would call me to time.
I forgot all about it.
Mr. U ntermyer . My next suggestion, Mr. Chairman, is that we
ought to abolish this advisory council; the banks have entirely too
much representation in this system, as it seems to me.
The C h a i r m a n . I announce another agreement with Senator Reed.
[Laughter.]
Mr. U n t e r m y e r . We shall eventually agree all along the line. The
advisory council, if it is to have no power, is a mere pretense. I f it
is meant as an entering wedge on which to get power when the aus
picious moment arrives it seems to me that the inducement ought not
to be there. There is so much power already in the banks, under this
bill, so much more than one can find in any other system, that there
seems little excuse for this advisory council, except as an entering
wedge. I see it has already been availed of in the formal suggestion
BANKING AND CURRENCY.
1319
at some of the bankers’ meetings held lately, that two of the advisory
council shall sit in Washington—in a way, supervise the acts of the
Federal reserve board.
Senator N elson. I s it not on the same principle as you gentlemen
who come here to advise us?
Mr. U n t e r m y e r . I do not think it will work out that way. It is
more like a suggestion from the railroads that they have two nomi
nees to supervise the work of the Interstate Commerce Commission
affecting them. There is no objection to the banks having as many
advisory councils as they please. They can get up as many associa
tions or committees as they choose; but why give them a legislative
and official status in this system? The Government is entitled to pass
upon the currency that it will issue without the advice or assistance
of those who are applying for it. The banks are on one side of the
table and the Government on the other in that transaction. The banks
come along, through their reserve banks, and say, “ We want currency
for this paper.” And the Government is to say whether it shall give
them currency. Why should the banks be represented on both ends
of that bargain? Why should they be so represented either officially
or unofficially or in an advisory or any other capacity? This idea
of an advisory council was a compromise born of weakness. The
framers of the bill started out with sound, well-defined principles of
absolute Government control of the issue of currency, but did not stick
to them. I f there is any sincerity in the bankers’ claim that they do
not now want any power (it was very different not so long ago but
times have changed) except to look on and see what the Federal
board is doing, they can do that just as well without having any
official relation to the system as with this aimless provision. It has
either an ulterior purpose or none at all.
The next suggestion on the subject of control is one that we took up
a little out of order; that is, as to the power of the reserve board to
remove directors of the reserve bank. Practically, they can not be
removed, if you are going to leave these provisions under the present
control. The three directors elected by the banks in class A are irre
movable. The three of class B are all nominees of the banks, and
if they are removed the member banks, and they alone, may substi
tute others in their place. Why should it be necessary to show that
they have been guilty of a proven misconduct before they may be
removed by the Government? The latter must rely upon these
directors for information as to the character of the paper on which
currency is to be issued, and it ought to have considerable to say
about their selection. It ought to be able to remove directors of class
B whenever, in the judgment of the board, they do not perform the
functions that they were intended to perform. I do not think sub
division F, limiting the power of removal to incompetency, derelic
tion of duty, fraud, or deceit, should be in the bill. The limitation
on page 8 is sufficient. It is as follows:
The reserve board shall have power at its discretion to remove any director
of class B in any Federal reserve bank if it should appear at any time that
such director does not fairly represent the commercial, agricultural, or indus
trial interests of his district.
The next suggestion I have to make on the question of control re
lates to the election of the chairman. In one part of the bill it is
1320
BANKING AND CURRENCY.
provided (p. 8) that the chairman shall be desi^piated by the
board—that is, the Federal board—and further on it is made doubt
ful whether he may not be put out at any time by the men elected
by the bank.
On page 10 it is provided—
but the chairman of the board of directors of each Federal reserve bank desig
nated by the Federal reserve board, as hereinbefore described, shall be re
movable at the pleasure of the said board without notice.
Whether that means the Federal reserve board or the board of
directors is a little doubtful.
The C hairman . Yes; the Federal reserve board.
Mr. U n t e r m y e r . Does it not mean the Federal reserve board?
The C hairman . That is not the intention.
Mr. U ntermyer. “ But the chairman of the board of directors of
each Federal reserve bank designated by the Federal reserve
board------”
The C hairman . The Federal reserve board.
Mr. U ntermyer. D o you think that means the Federal reserve
board ?
The C hairman . Yes.
Mr. U ntermyer. I think it ought to state so more clearly.
The C hairman . It should state so.
Mr. U ntermyer. The next suggestion I have to make is that the
banks be not allowed one year in which to join the system. It is far
too long and quite unnecessary, and is fraught with great peril and
uncertainty to business.
Senator N elson. What is that?
Mr. U ntermyer. Under this bill the national banks have one year
in which to elect whether they will join this system. The things
that may happen in that time and the things that may be done to
discredit and almost destroy this system are almost innumerable.
What is the reason for allowing a year for a national bank to deter
mine whether it will go into the system or not? Why is not 90
days enough? You may expect that the system will not go imme
diately into effect; naturally, the banks wili hang back and see what
is going to happen, and in the meantime you will have a great deal
of uncertainty in the financial world, and unnecessary uncertainty.
I can not conceive of any good reason why a year should be neces
sary for the banks to find out whether they want to go into this
system or whether they do not.
I suggested the other day that there should be express power given
to the Federal board to buy gold and to issue securities in order
to do so, for the purpose of making good the obligation of the
Government to redeem these notes in gold. As I understand it, under
the present law they can buy gold and issue bonds in order to main
tain the parity of gold with respect to the currency now outstand
ing. I do not understand that they have any power, under this bill,
to buy gold for the purpose of making good their obligation to re
deem these currency notes. On the contrary, this bill expressly pro
vides that the currency notes can only be issued for commercial paper.
Section 17, on page 29, provides:
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 authoized.
BANKING AND CUKRENCY.
1321
And on the following page you will find that the only other pur
pose is for the making of loans on notes and bills accepted for redis
count under the provisions of section 14 of this act; so that they can
not, and there is no power, as far as I can see here, to make good
the obligation of the Government to redeem these notes.
Senator H i t c h c o c k . That is. to have power to issue bonds?
Mr. U n t e r m y e r . Yes. I think I referred at a previous hearing
also to the fact that the bill provides no central point for keeping
the gold reserve and no practical way, therefore, of making good the
obligation to pay in gold, and the suggestion that was made by me,
and which I now repeat, in that connection is that the gold reserve
of the several reserve banks should be kept at a central point, say,
in Washington, credited to the different banks.
Senator N e l s o n . In the Treasury?
Mr. U n t e r m y e r . In the Treasury Department. It should belong
to each reserve bank.
Senator N e l s o n . And deposited here?
Mr. U n t e r m y e r . Deposited here, where the Government can make
good the obligation of the Federal reserve bank to redeem its note in
gold.
Senator N e l s o n . That would save the Government from procuring
the gold supply?
Mr. U n t e r m y e r . As long as the Federal reserve bank had the
money. The demands upon it might be too pressing, and then the
Government would have to redeem the notes anyway.
Senator S h a f r o t h . That might tend to discontinue the competi
tion of bidding for gold in 12 different centers.
Mr. U n t e r m y e r . Yes. My next suggestion relates to section 23.
The bill provides for a very comprehensive system of bank examina
tions, which is very wise, but it does not provide in that connection
against the abuse that was developed in the hearings before the Pujo
committee of clearing-house associations undertaking to have their
own bank examiners, and in that way to find out all the affairs of
their competitors and know where loans were located, who were
debtors, and how they could be dislodged, and where the collaterals
were to be found.
Bank examinations should be limited to those conducted by the
reserve banks and the Federal reserve board. I f any clearing-house
association wants any further examination, it can pay for it and get it
through the Comptroller of the Currency, but the names of borrow
ers and the collateral that they hold should not be disclosed to com
peting banks through their clearing-house committees.
It is prolific of abuse, and it was very fully exploited in the testi
mony before the Pujo committee; that is one of the recommendations
of that committee, which seems to be germane to this currency bill.
There are two or three of such recommendations that bear upon
sections of the bill directly. There are many others that seem to
me could be more advantageously taken up when you come to revise
the banking laws and as a part of that system of revision rather than
to engraft them upon this bill or to attempt to do so, such as that of
interlocking directorates and other matters that would appear to be
more legitimately a part of the banking-law revision.
It was for that reason, and also because of my anxiety to see this
bill pass without delay, that I suggested that the legislation recom-
1322
BANKING AND CURRENCY.
mended by the Pujo committee should not be taken up in connection
with this bill. There are only two of them that are intimately ger
mane to sections of the bill. This one in which you are dealing with
bank examinations is one of them, and the other is where you deal
in this bill with the powers of the Comptroller of the Currency. In
the latter connection my suggestion would be that you insert, on
page 20, an amendment to the banking bill which was introduced
at the last session of Congress and passed the House of Representa
tives and is now in the Senate, to the effect that the visitorial powers
over banks shall not be possessed solely by the Comptroller of the
Currency, but may be exercised by either branch of Congress or any
committee of Congress.
Senator N e l s o n . Or b y the courts?
Mr. U n t e r m y e r . Or by the courts. We found in the Pujo in
quiry that when the committee wanted to find out about the conduct
of the banks, the loans to officers and other abuses, for the purpose
of determining what legislation should be suggested by way of
amendment to the banking laws, they were met by the bankers with
the objection that the Comptroller of the Currency is the only officer
of the Government who is subject to no sort of restriction whatever;
that Congress, it was said, had delegated the visitorial power over
its own regulation of the banks to the Comptroller of the Currency,
and had no longer any power to investigate its own creatures. That
is the extraordinary situation created by that provision of the
banking law. The visitorial power over the banks is vested solely
in the Comptroller of the Currency, and Congress can not investigate
the banks and find out what they are doing as a basis for remedial
legislation. My suggestion is that that amendment which passed the
House at the last session should be inserted here on page 20 of the
bill, so that if the Congress wants to examine into the powers of its
own creation it may be permitted to do so. The present situation is
intolerable.
Senator N e l s o n . Y ou put that at the end of section 11?
Mr. U n t e r m y e r . At the end of section 11.
Senator N e l s o n . On page 2 0 ?
Mr. U n t e r m y e r . Yes, sir.
I suggest further that the Government be not required, as under
the bill at present, to apportion the Government deposits equitably
and ratably between the reserve banks, but that it have a discre
tion—
The C h a i r m a n (interposing). What page have you there?
Mr. U n t e r m y e r . I have not the exact page.
The C h a i r m a n . Under the heading “ Reserve board.”
Mr. U n t e r m y e r . I think that is on page 28— “ distributing them so
far as practicable equitably between different sections.” That is lines
24 and 25, on page 28.
Senator N e l s o n . That would simply be a suggestion to the board.
It would still be in their discretion.
Mr. U n t e r m y e r . Y ou mean to the Government?
Senator N e l s o n . It is simply laying down a sort of a moral rule.
Mr. U n t e r m y e r . It seems to be laying down something that they
would almost be bound to follow, as the provision now stands, and
they ought not to be required to follow it, because the Government
BANKING AND CUBBENCY.
1323
should have the power to help out the reserve bank in any particular
district by depositing its funds there.
Senator S hafroth. I regard your suggestions as very valuable, but
I am afraid they will not be of advantage at all unless you take one
of these bills and just mark out exactly where these changes are and
label it “ suggestions made by Mr. Untermyer.” I would be very
glad to have you do so. That will be of great assistance.
Senator N elson. Send us such a bill, and then we will have it
printed with these amendments for the use of the committee.
Senator S hafroth. I think that is a good suggestion.
Mr. U n t e r m y e r . I have the further suggestion, Mr. Chairman,
that you insert in this bill alternative directions for public stock offer
ings in these reserve banks. That is to say, that if within a given
time the national banks do not subscribe to its stock and come into
the system, then the committee of organization named in the bill
shall have the right to make public offerings of this stock, giving to
it a preferential 6 per cent dividend, and that in that event the voting
power shall be among the shareholders who take their interests in
the bank, and that the bank shall have the right to take deposits and
make discounts and go into the banking business, as the European
banks go into the business, in competition with other banks. In
other words, the national banks should have the first opportunity of
going into this system, and if they do not want to go in, there is no
reason why the Avork should halt on that account.
Senator N e l s o n . Might not some big bank in that way secure a
control or monopoly of the reserve banks? Take two or three big
banks in New York City: I f there was no limit as to what they
could buy, would thej' not get a control of the banks?
Mr. U n t e r m y e r . No; because the voting power A’ould be arranged
A
as it is in these European banks. For instance, in the Bank of Eng
land and the Bank of France and the Bank of Germany no holding
of over 500 shares in a single interest has any vote on his excess hold
ings. He has 4 votes up to 500 shares. The voting power is so ar
ranged that the small shareholders control the banks. I f you offer
this stock to the public it will prove a very attractive security. The
bank being under Government control, with 6 per cent return practi
cally assured to the stockholder, with the control of the bank reserves
and Government deposits, it will, in my opinion, be subscribed many
times over. No corporation should be eligible as a stockholder and
no one person should be permitted to oAvn more than 1,000 shares.
Senator H itchcock. Guaranteed by the Government ?
Mr. U n t e r m y e r . Oh, no; I should not guarantee 6 per cent; I
should not make any guaranty. It will not be necessary. It would
be worth 200 if guaranteed. The bank will ha\T the reserves any
e
way. The national banks will have to put their reserves in there. It
will have the Government funds and its share of capital, and it will
be larger than any single bank; at least, some of the reseiwe banks
will be larger than any single bank. The banks should have the alter
native of going in, and it seems to me they will be more likely to avail
themselves of the opportunity if it can be made plain that the bank is
going to be organized; with them as shareholders if they prefer, but
otherwise without them.
Senator C raavford . Give them first 90 days?
BANKING AND CURRENCY.
1324
Mr. U n t e r m y e r . Ninety days in which to subscribe this stock, and
if they do not subscribe it I should allow the public to subscribe it.
O f course, you will have to have rather elaborate provisions as to
voting if the public subscribes. It would require quite a careful draft
ing of these additional provisions of the bill.
I have no other suggestions to make at this time.
Senator N e l s o n . There is one point to which I want to call your
attention. I was in hopes you would mention it yourself. I want to
call your attention to section 16, page 28, as follows:
That all moneys now held in the general funds of the Treasury shall, upon
the direction of the Secretary of the Treasury—
be transferred to these banks. Would not that take all the gold that
the Government has? I do not mean the gold that represents the
gold certificates; but would it not take all the other gold ?
Mr. U n t e r m y e r . I think I did cover that, sir, at a previous hear
ing. I think I suggested that I thought that these funds should not
be required to be deposited.
Senator N e l s o n . There is a reserve of $150,000,000 of gold for our
greenbacks. That money ought to be kept in the Treasury and not
transferred to these regional banks, and the bill ought to be amended
in that respect.
Mr. U n t e r m y e r . That is what I intended to say. I thought that
that had been covered. The gold that the Treasury has ought not to
be deposited in these banks.
Senator N e l s o n . None of it gold outside of the gold certificates?
Mr. U n t e r m y e r . I did not say that that should be deposited in the
reserve bank now. They have nothing to do with it. The Govern
ment is a warehouseman for that.
Senator N e l s o n . It is a warehouseman, and it should not transfer
its bailment to these bankers.
Mr. U n t e r m y e r . That is quite right.
Senator W e e k s . Mr. Untermyer, will you tell the committee why
you think it preferable for the Government to issue Treasury notes
and loan them to the banks rather than for the reserve board, by
proper regulations, to issue these notes and make them a bank note
instead of a Government note?
Mr. U n t e r m y e r . In the first place, the security of the note is very
much promoted by its being a Government obligation.
Senator W
eeks.
I s not that security sufficient to hold it?
Mr. U n t e r m y e r . There may be some differences of opinion as to
that. Some of these reserve banks will be weak and some will be
strong; and if you are going to have two different forms of obliga
tions out, in the way of these notes, you may have one weak bank
that will discredit the notes of all the banks. The Government is
really a guarantor of these notes. You can not get away from the
proposition that it would have to pay in the end.
Senator W e e k s . What is the difference between a proper bank
note and a credit on the books of the bank?
Mr. U n t e r m y e r . It depends on the way in which it is issued. I
should say the difference was that the Government is really morally
obligated to take care of the note, anyway.
Senator W e e k s . I should say so, too, but is that desirable or requi
site?
BANKING AND CURRENCY.
1325
Mr. U ntermyer. I think it is requisite. I think it is desirable,
because of the fundamental principle that the issue of the currency
of a nation is a governmental function.
Senator W eeks. I s it a governmental function in itself, or simply
a supervisory function?
Mr. U ntermyer. It seems to me that it is essentially a govern
mental function.
Senator W eeks. What other Government issues currency?
Mr. U ntermyer. The other Governments issue it under cover; that
is about all; because they have a vast debt, and are on the verge of
war all the time, and they do not know when their own Government
obligations may be discredited, and they do not want the two inter
mingled. We are not in such a precarious situation.
Senator W eeks. I s that a reason why we should impose on the
Government something which does not seem desirable, under more
favorable conditions, in other countries?
Mr. U ntermyer. I think it is a choice of systems. I f you are going
to have one central bank in this country, with all the power and
strength that that represent^, you might have the notes issued by
that bank; but if you are going to have local bank government, such
as you have under these reserve banks, some weak and some strong,
the credit of the Government has to go back of the notes in order to
keep the obligation beyond question. It might as well go directly
back of them as to go back in the form of a guarantor.
Senator W eeks. Then why not go further, and let the Govern
ment issue the currency of the country?
Mr. U ntermyer. That is what it is doing, under the terms of this
bill.
Senator W eeks. I know, but without any connection with the
banks.
Mr. U ntermyer. Y ou can not mobilize the reserves without the in
terposition of these banks.
Senator W eeks. I think there are still people who believe in issu
ing greenbacks.
Senator S hafroth. With a good reserve of 50 per cent.
Mr. U ntermyer. I do not think it makes any difference what color
they are, if they have the requisite gold reserve behind them.
Senator W eeks . W hen I speak of greenbacks I mean, of course-------
Mr. U ntermyer (interposing). You mean fiat money. I do not
know but that there are people who believe in that.
Senator W eeks. Are we not making a mistake in not looking
ahead ? We are doing something that is going to last 25 or 50 or
100 years, very likely much longer than that.
Mr. U ntermyer. I hope so.
Senator W eeks. I hope so, too. But are we not making a mistake
to do anything that has a circulation fundamentally involved that
is probably wrong from the experience of others?
Mr. U ntermyer. O f course if one concedes these premises, that it
is probably wrong, we need not go further. We ought not do it.
But we think it is probably right, those of us who are advocating
this bill. It is right because it is not going to put any strain upon
the credit o f the Government. The notes are amply secured by
collateral and have so many checks upon them; the collateral is so
1326
BANKING AND CURKENCY.
good that the Government credit is not going to be hurt by having
that obligation outstanding in addition to its other obligations, whilst
it will assure the absolute stability of the currency that is being
issued. It is the only way of providing a stable, safe currency with
out the perils and pitfalls of a central bank.
Senator W eeks. Y ou just said a few moments ago that there might
be some question about the security.
Mr. U n t e r m y e r . I am speaking of the responsibility of the reserve
banks. You will get reserve banks here, perhaps, one or two of
them, with not much over $5,000,000 of capital-----Senator W eeks (interposing). We ought not to.
Mr. U n t e r m y e r . But you will. Under this bill you may, as I say,
get reserve banks that have not over $5,000,000 of capital and that
will have currency notes outstanding. It is likely to lead to dis
crimination after a while by cautious people as to which notes they
will take and which notes are doubtful, and you will get into a condi
tion where your currency will not be regarded as absolutely safe and
beyond question, as it ought to be.
Senator W eeks. Let me ask that question in another form. What
harm would result if we arranged to issue these notes through the
reserve board by some kind of machinery without the Government
having anything to do with it ?
Mr. U n t e r m y e r . The first harm would be that the banks would
immediately say, “ We are issuing these notes and we ought to have
control of the system.” That would be their first demand.
Senator W eeks. I am not in favor of that.
Mr. U n t e r m y e r . But it would be pretty hard to stop that demand.
They are very ingenious and very resourceful, as you all know. They
are plausible, and sometimes they are right and often very wrong.
Senator W eeks. I would put it the other way—often very right
and sometimes very wrong.
Mr. U n t e r m y e r . We will compromise and say that they are wrong
as often as they are right.
Senator W eeks. What have you to say about the number of banks,
Mr. Untermyer?
Mr. U n t e r m y e r . That is a very debatable question, Senator Weeks.
It has been, to my mind, a question as to whether there should be 12
banks or less.
Senator W eeks. I s there any advantage in 12 over 8?
Mr. U n t e r m y e r . Yes.
Senator W eeks. What?
Mr. U n t e r m y e r . This, that you would get the directors of the
bank in closer relation to the member banks and to the paper that
they are to pass upon. The more banks you have the more intimate
ought to be the knowledge of those directors of the business of every
member bank and of their customers. There is that advantage, and
that is a very important one.
Senator W eeks. I f that was serious, there ought to be 20 or 30 ?
Mr. U n t e r m y e r . Y ou can carry that proposition as far as you
please. There must be a limit, so that these banks will have strength
and so that you can mobilize your reserves. I f you have too many
banks you can not do that.
Senator W eeks. I intended to call to your attention something that
was discussed in connection with what was known as Senator Hitch-
BANKING AND CUBBENCY.
1327
cock’s plan, about some man at the subtreasury who could pass on
the paper presented by 800 or 900 banks. That was the suggestion
that was made. Is it not probable that such a man would be imme
diately sent for, if he was competent, to go to the head of the largest
bank m the country? Is it possible that any man could do that, in
other words?
Mr. U n t e r m y e r . Not if he were passing on the paper presented by
800 or 900 banks. I do not believe any man could do that; but under
this system, all we are passing on is the responsibility of the banks;
not of their customers so much as of other banks.
Senator W e e k s . I was talking about the Hitchcock plan.
Mr. U n t e r m y e r . That was one of the imperfections that seemed to
me to exist in connection with that plan. But the chief objection to
that plan is that it does not utilize the reserves of the country. It
leaves that subject in the hopeless and helpless condition it is now in,
where centralization of the control of credit can go on. It has
already gone much too far for the comfort and safety of the country.
Senator W e e k s . D o you think that there should be any tax on cir
culation ?
Mr. U n t e r m y e r . Y ou mean the currency that is to be issued here?
Senator W e e k s . Yes.
Mr. U n t e r m y e r . There should be an interest rate on it.
Senator W
eeks.
I s not'that a direct tax on business?
Mr. U n t e r m y e r . N o ; it does not seem so to me. It is not a tax on
business at all, because banks would not be able to get the money but
for this currency issued to them, and it is an aid to business. The
bank will get, we will say, 5 per cent on its loans and it will pay 2 per
cent. The bank makes 3 per cent.
Senator W e e k s . Would not that have the effect of making money
higher ?
Mr. U n t e r m y e r . I should say not; on the contrary, it would make
money cheaper, because there will be more of it. I f the bank did not
have this means of getting the currency, it could not lend this addi
tional money. Inasmuch as it is really lending the Government’s
money, it is only entitled to the difference between what it has to pay
for the money and what it farms it out at.
Senator W e e k s . I f it did not pay anything for taking the money,
but farmed it out at a low rate, would that be to their benefit ?
Mr. U n t e r m y e r . It would not necessarily, and there is no reason
why banks should be given money without interest to lend as they
choose.
Senator W e e k s . I am not so sure about that.
Mr. U n t e r m y e r . It gets deposits now for nothing, and it does not
lend money out any cheaper on that account. It does not pay interest
on all its deposits. The rate will always depend on the demand, and
not on what the money costs the bank.
Senator W e e k s . Well, but when it pays 2 per cent, or when 2 per
cent is required, under present regulations of the Treasury Depart
ment, the banks do not take the money.
Mr. U n t e r m y e r . Yes; but when you come to measure .the alterna
tive between the two conditions, not having money to loan at all, or
having a place to get it by paying something for it, surely it is better
for the business of the country that the banks should be able to get
I
1328
BANKING AND CUKKENCY.
immediate money, even though they pay a modest interest rate on the
money. I think it is a relief to the business interests of the country,
and a very important relief.
Senator W eeks. I think the business interests of the country ought
to be relieved, and ought to be able to get currency, but my opinion
is that taxing circulation is unscientific and imposes an additional
obligation upon the borrower.
Mr. U n t e r m y e r . But on the other hand, if you charge nothing on
this currency, the banks will turn over everything they have.
Senator W eeks. Oh, not necessarily. You can restrict the amount
that the banks can use, and I personally am in favor of restricting
the amount. While I do not think it is scientific, exactly, still I think
when we are starting a new system like this you have got to do it in
a moderate way, and my impression now is I would be in favor of re
stricting the amount of rediscounts to the capital of the bank.
Mr. U n t e r m y e r . Y ou mean the amount of discount at the reserve
banks or the amount for which it can get currency ?
Senator W eeks. The amount for which it can get currency.
Mr. U ntermyer. Don’t you think there is a sufficient restriction
now in the discretion vested in the Federal reserve board and in the
gold-reserve requirement? I f you restrict it further, for instance,
if we put an arbitrary amount that may be issued, the time is going
to come when you will simply be inviting banks to take out currency
just for the purpose of safeguarding themselves without really need
ing it.
Senator W eeks. I very much doubt that, and, furthermore, I am
opposed to leaving that kind of regulation to the Federal board. I
want to help the bank in Kansas, New Hampshire, or any other place
that has paper that comes under the requirements of this act, so that
it will be able to go somewhere and get accommodations by right of
law and not by the say so of some board in Washington.
Mr. U ntermyer. But is that really ever practically possible?
Senator W eeks. I think so.
Mr. U ntermyer. Somebody must always pass on the character of
the paper.
Senator W eeks. Yes.
Mr. U ntermyer. Then they will get very exacting as to the char
acter of the paper when they do not w ant to lend. I would put a
T
centain amount of discretion somewhere. There will always be a
way found for not issuing paper when it is not wise to issue it.
Senator W eeks. My judgment is the discretion will be based on
the raising or the lowering of the discount rate. I think the raising
of the discount rate even a quarter of a cent is going to be so great
that it will compel the banks to limit their own loanmgs, and there
fore their asset rediscounts.
Mr. U ntermyer. Then, if you raise the rediscount rate, you are
taxing the country right straight along. That is the very tax we
are talking about.
Senator W eeks. Y ou do not raise the discount rate permanently;
you raise it temporarily.
Mr. U ntermyer. That is a tax on the currency.
Senator W eeks. Raising the discount rate is a charge on the public
money.
BANKING AND CURRENCY.
1329
Mr. U ntermyer. Y ou would charge something on the currency
and keep raising it. Why is not that taxing the currency ?
Senator W eeks. That is taxing the borrower to that extent. It is
restraint.
Mr. U ntermyer. Yes; but it is a tax all the same.
Senator W eeks. N ow , have you defined commercial paper as you
think we should in the provisions of this bill ?
Mr. U ntermyer. I have defined commercial paper as it is defined
in the markets of the world; but if you were to limit the issue of cur
rency to that kind of paper you would not get very much currency
issued. It seems to me you have got to have currency issuable for
one or two other purposes. One would be to a limited amount for
grain and cotton in warehouses and staples that go into consump
tion. I think that whilst that is not commercial paper in the strict
acceptation of the term, it is the very best kind of security for which
currency could be issued that I know of.
Senator N elson. I want to suggest to you here, if you adopted
Senator Hitchcock’s plan you would practically get the same amount
of currency as developed by the last statement—of this kind of cur
rency—as the amount of bank notes now outstanding. Your proposi
tion was three-quarters of the capital, was it not?
Mr. U ntermyer. With a third or 50 per cent of it set aside in
gold.
Senator N elson. N ow , if you followed Senator Weeks’s idea, and
measured it by the amount of capital of the banks, the circulation
it might extend to is $1,000,000,000 in round numbers, or not much
more than that. I f you base it on commercial paper, outside of real
estate loans, the statement of the comptroller shows that all the
banks—national, State, and trust companies—have outstanding loans
and discounts of about $11,000,000,000. I f you base it on that, you
do not know where you are going to land.
Mr. U n t e r m y e r . I do not think you will find any $11,000,000,000.
Senator N elson. Yes.
Mr. U n t e r m y e r . Not eligible for discounts.
Senator N elson. I do not say all of it. But I say the loans and
discounts; even if you assume only half of it, you would have
$6 ,000 ,000 ,000.
'
Mr. U n t e r m y e r . I would not assume there would be over a bil
lion dollars of it; but the Federal board can put the brakes on when
ever it sees fit.
Senator N elson. I f you limit it so they could never take out cur
rency in excess of the capital of the bank, you have some fixed limita
tion. And you would have then a great deal more paper currency
than you have now. You could lend out a billion dollars and a little
over, and you now have something over $700,000,000.
Mr. U n t e r m y e r . $746,000,000 of bank-note currency, as I recall
the figures.
Senator W eeks. I should have said I would require a 50 per cent
gold reserve behind that.
Mr. U n t e r m y e r . S o that really we would only get $500,000,000 of
currency by that process.
Senator W eeks. My judgment is that the maintained reserve would
regulate the amount of circulation that would be issued.
9328°—S. Doc. 232, 63-1—vol 2----- 24
1330
BANKING AND CURRENCY.
Senator Nelson. There is another difficulty, Mr. Untermyer. You
speak about commercial paper of a certain kind. In Europe, where
most of their commercial paper, nearly all of it, is in the form of
bills of exchange and drafts, it is more easily regulated; but how
can you tell when a member bank goes up to the counter of the
regional reserve with a bundle of notes—how could you tell by in
spection of those notes they are given for a commercial transaction
instead of some other transaction?
Mr. U ntermyer. We went into that very fully the other day, Sen
ator Nelson, while you were here, if I remember rightly. I think we
spent the whole afternoon discussing that.
Senator N elson. Yes; but I do not see how you can tell it. There
is one kind of paper, a bill of exchange drawn against a shipment
of commodities of one class or another; in that case you can always
determine it, but that is only a limited amount of paper, and that
comes in the form generally of drafts and bills of exchange—in land
bills of exchange or foreign bills of exchange. But when you come to
the great mass of our paper—promissory notes—how difficult is it to
determine whether those notes are given for a commercial transac
tion or for a stock-loan collateral or for bonds or for something of
that kind, or given for any other matter; given not for trade or
commerce, but given for other purposes?
Mr. U ntermyer. That is what'the directors are there to investigate.
Senator N elson. Suppose a company comes in. They want to put
up a lot of buildings and secure the machinery for it. They give
their note for it. That is tying it up.
Mr. U ntermyer. Certainly. It is not commercial paper at all.
Senator N elson. But how can you tell by a mere inspection of the
security ?
Mr. U n t e r m y e r . That is what the directors are there for. That
is what they do in other countries. They investigate; that is their
problem.
Senator N elson. Y ou can see what a difficult problem it is under
our system. I f we had the system they have in Europe of having it
in the form of bills of exchange——
Mr. U ntermyer (interposing). With an acceptance.
Senator N elson. With a drawer and an acceptor, followed by the
bills circulating with a lot of indorsers; that is a simple thng, because
there, first the acceptor is liable and then the indorsers and then
the drawers.
Mr. U n t e r m y e r . H o w long would it be before the banks would
insist on that form of bill instead of the other? I f they knew that
was a more liquid asset than the other, it would soon come around.
Senator N elson. That would revolutionize our whole system of
commercial paper.
Mr. U n t e r m y e r . It would soon come around.
Senator N elson. I only suggest these things to you, Mr. Unter
myer.
Mr. U n t e r m y e r . We discussed that subject the other day, Senator
Nelson, very fully w
rith Senator Reed.
Senator B ristow. Mr. Untermyer, when Senator Hitchcock was
interrogating you, you spoke of referring to the plan of each bank
gong direct to the Treasury to get the currency and having an agent
in each one of the reserve cities. You said you thought it would be
BANKING AND CURRENCY.
1331
giving too much power to leave it to the whim of the Treasury
official.
Mr. U n t e r m y e r . O f one individual; yes.
Senator B r i s t o w . I think Senator Hitchcock very plainly brought
out the idea that I have heard suggested in these hearings, that if
this be left to the whim of one Government official, or, as you would
suggest, six or seven-----Mr. U n t e r m y e r (interposing). Nine.
Senator B r i s t o w . Nine.
Mr. U n t e r m y e r . Yes; to do the work of passing on this paper.
Senator B r isto w . The law prescribes what kind of paper may be
used, and then the Government official determines whether or not the
paper complies with the law, and that is all that he w
rould do.
Mr. U n t e r m y e r . Oh, but a law could not provide that John
Smith’s paper was good and John Brown’s was not. You certainly
would not have a law that would compel the issuance of currency for
paper that conformed to certain legal provisions without regard to
the responsibility of the man. You must have an investigation. In
the very nature of things you could not have any rigid law. The
mind of man could not compass any such subject.
Senator B r i s t o w . D o you not think the law could define what
kind of securities—municipal bonds, State bonds, county bonds, and
commercial paper— fixing a certain per cent of it?
Mr. U n t e r m y e r . Certainly; but when you come to commercial
paper, some of it is not worth the paper it is written on, and there
is some that is good. Somebody must pass on the responsibility of
these people. It is not as though you had behind you all the com
bined strength and responsibility of dealing with the reserve banks.
I f you let down the bars and have to rely on the single bank and
its customers, you must investigate the paper. That impossible task
would then fall upon the Government. It would mean chaos.
Senator B r i s t o w . Seasonable investigation.
Mr. U n t e r m y e r . Who is there to do that but this Treasury official?
Senator B r is t o w . Well, that investigation would be made by the
Treasury official and he will give the bank a standing, whatever
standing it is entitled to, and finally the board of directors—you
do not expect any one of the directors to investigate the condition of
the banks, do you?
Mr. U n t e r m y e r . What I expect is this: I expect these nine direc
tors will have behind them the responsibility not only of the indi
vidual bank and of their own reserve bank and of their shareholders
and all the assets of this reserve bank, but they will be in touch with
the banks in their region and their customers in a general way so as
to know about this paper; and you will have nine men’s minds in
stead of one man’s mind, so that when the paper is offered to the
Government it will be fully secured and thoroughly sifted.
Senator B r is t o w . That is a beautiful theory to one that is not
acquainted with the vast region this territory will cover.
Mr. U n t e r m y e r . I am acquainted with it, Senator Bristow.
Senator B ristoav . Of course, you feel you are.
Mr. U n t e r m y e r . I have traveled over it a number of times, have
had intimate business and professional relations with many sections
of it, and I think I know something about it.
I
1332
BANKING AND CURRENCY.
Senator B ristow. I f you think it will be unsafe to trust the respon
sibility of one bank, why would it not be practicable to take a group
of banks—the bankers in this country ? The bankers in this country
have State organizations, and those State organizations are organized
into groups.
Mr. U ntermyer. Yes; I know.
Senator B ristow. Suppose that those groups of banks should be
authorized to form an association and let these individual banks,
grouped through the group officers which can be provided under a
statute we might frame, ask the Treasury for this currency and have
the group of banks stand behind each individual bank in the group
and go direct to the comptroller or to the Federal board here if you
wanted a board instead of the comptroller himself?
Mr. U ntermyer. That is the principle of the regional reserve
bank as provided by this bill, but without the virtues of the original
bank. In other words, it is the principle of a union of the banks in
a locality without the advantage of being able to mobilize or utilize
the reserves of that locality, and it leaves undisturbed the control of
these reserves in New York for purposes of stock speculation.
Senator B ristow. T o express it in a different form, that is the
principle of the regional bank without the opportunity for control
of the regional bank by certain interested parties.
Mr. U ntermyer. I do not see why not. It invites such control,
because you get the same control over your association that can be
gotten over the regional bank, except it is much easier to get. Under
this bill a small bank has as much say as a big bank, and therefore it
would be much more difficult to get the control of this association
than it would be of your local association.
Senator B ristow. Now let us see if it is. In the State of A r
kansas—
Mr. U ntermyer (interposing). You know, of course, that this bank
stock is not assignable; you know that under the terms of this bill
one bank can not sell its stock to another bank, or to anybody else ?
Senator B ristow. Yes; I understand that.
Mr. U ntermyer. H ow, then, would the interests get control?
Senator B ristow. Well, I will indicate soon that it is easy. The
State of Arkansas, we were told this morning, has seven of these
groups of banks, the State of Minnesota, we were told the other day,
has nine. I do not know how many there are in Kansas. Do you
know how many there are in Nebraska, Senator Hitchcock?
Senator H i t c h c o c k . My impression is they correspond to the con
gressional districts.
Mr. U n t e r m y e r . D o they not correspond to the clearing-house
associations ?
Senator H itchcock . N o ; not in the Western States, because we
have a very few.
Mr. U ntermyer. There are 262 clearing-house associations in this
country. There are a great many of them in the Western States, are
there not, Senator Hitchcock?
Senator H itchcock . Very few. There are not over four in my
State, in my opinion.
Senator B ristow. I do not think we have any in Kansas.
Mr. U ntermyer. Oh, yes.
BANKING AND CURRENCY.
1333
Senator S hafroth. Have you not one in Kansas City, Kans. ?
Senator B ristow. Kansas City, Mo.— it is all the same.
Mr. U ntermyer . My recollection is—I know there are 262 in the
country, and I thought there were a great many in the West.
Senator B ristow. These groups, I think, conform approximately
to the congressional districts. In these groups provision can be made
for the choosing of the officers by these groups, and these groups
would deal directly with the Government; and if it is one for each
congressional district there would be 440 of them. Now, I think you
will conceive that it would not be at all practicable for any New
York financiers to control all of these various groups.
Mr. U ntermyer. No; I do not think it would be any more possible
than for them to control all the regional banks.
Senator B ristow. It would be easier to control 12 than to control
440, would it not?
Mr. U ntermyer. N o ; it depends on the organization. I think it is
just as impossible, and more so, to control these 12 banks as it would
be to control 440 institutions-----Senator B ristow (interposing). Just a minute. You say it would
depend on the methods of organization. Suppose the system of
electing officers and directors were the same for the 440 as for the 12,
would it not then be more difficult to control the 440 than it would be
to control the 12?
Mr. U ntermyer. Yes.
Senator B ristow. N ow , you think that it will not be possible for
these financial interests—the Wall Street interests—to control these
reserve associations? O f course, I think it will be easier. I think,
when they come to elect this board of directors they have such a tre
mendous power in this reserve bank that you can name a half a dozen
bankers in the region where Senator Reed and myself live that would
name these directors.
Mr. U ntermyer. But suppose there were 2,000 banks in that re
gional reserve bank?
Senator B ristow. But there are not 2 ,0 0 0 banks; there are only
about between 6 0 0 and 70 0 .
Mr. U n t e r m y e r . There are over 2 4 ,0 0 0 banks in the country. Now,
assuming those banks are going to be equally distributed between the
12 regional reserve banks, and they are all coming in, that would make
an average of 2,000 banks in one system.
Senator B ristow. But you must remember the board of directors
are elected for this regional bank by the national-bank directors.
Mr. U n t e r m y e r . N o ; I think the State banks will become members.
Senator B ristow. But the State banks will not have an opportunity
to become members under this bill before the board of directors is
elected.
Mr. U ntermyer . I s that so.
Senator B ristow. I think it is, under the provisions of the bill.
Mr. U ntermyer . I think the State banks may become members at
any time.
Senator B ristow. I may not be able to comprehend what the bill
means, but-----Mr. U ntermyer (interposing). I did not mean to imply that, Sena
tor. I mean we differ on that.
1334
BANKING AND CURRENCY.
Senator B ristow. (Reading:)
The national banks in each Federal reserve district uniting to form the Fed*
eral reserve bank therein, hereinbefore provided for, shall, under their seals,
make an organization certificate, which shall specifically state the name of such
Federal reserve bank so organized, the territorial extent of the district over
which the operations of said Federal reserve bank are to be carried on____
Mr. U ntermyer. What page are you reading from ?
.
Senator B ristow. Page 4:
* * * the city and State within which said bank is to be located, the
amount of capital stock and the number of shares into which the same is
divided, the names and places of doing business of each of the makers of said
certificate, and the number of shares held by each of them, and the fact that the
certificate is made to enable such banks to avail themselves of the advantages of
this act.
And then in section 10, on page 15, it is provided__
that from and after the passage of this act any bank or banking association or
trust company incorporated by special law of any State, or organized under
the general laws of any State of the United States, may make application to the
Federal reserve board hereinafter created for the right to subscribe to the
stock.
Senator S hafroth. Would not that be cured by striking out the
word “ national ” and putting in the word “ member ” ?
Senator B ristow. That may be.
M r. U ntermyer. Y ou must assume every bank is going to have a
vote.
Senator B ristow. N o ; it is ideal to assume that every bank in the
territory will come into this system, because the provisions would bar,
in the territory in which I live, more than half of the State banks,
and in the South the provisions will bar fully half or more thau
half of the State banks.
Mr. U ntermyer. Of course I refer only to those that have the
right to come in by reason of their capital.
Senator B ristow. But there is nothing like 24,000 banks that would
have a right to come in under their capital, because about 6,000
banks have not the capital that would make them eligible.
Mr. U ntermyer. Then we would have 1,800 in each reserve bank.
Senator B ristow. That is purely a theory; I do not think we would
have 500.
Senator P omerene. D o I understand from that remark that this
bill has a limitation on the capital?
Senator B ristow. $25,000.
Senator P omerene. Before they can come in here?
Senator B ristow. Yes; a State bank has to have $25,000 capital
before it could become a member.
Senator P omerene. I did not know it had to have that much.
Mr. U ntermyer. Yes; a State bank must have the qualifications
of a national bank in that locality.
Senator P omerene. Yes; that is right.
Senator B ristow. N ow, of course, we might sit here and argue
whether or not from our points of view 600 or 700 or 800 banks that
may be incorporated in this regional bank—as to whether at the elec
tion for the board of directors it would not be easy for the inter
ested parties to control such election. From my experience in pri
maries and conventions and elections of various kinds, I know—at
BANKING AND CURRENCY.
1335
least I feel confident in my own mind—that it is an easy thing to do,
and I believe in your efforts to avoid the centralization and control
which the central banks have you are making it possible, and it is
altogether probable that they will control a majority of them or ulti
mately all of them.
Mr. U n t e r m y e r . I f I supposed so, Senator, I think I would run
very far from this scheme. To me the main virtue of this bill lies
in its promise of relief in that direction.
Senator B ristow. Yes; I think you and I agree as to the dangers
of this control.
Mr. U ntermyer. Yes.
Senator B ristow. I think you and I have the same opinion as to
that, only you believe you have obviated that control and I think that
will be the result of this system.
Mr. U ntermyer. I think we are decentralizing this control. That
is what we are after.
Senator B ristow. Yes.
Mr. U ntermyer. I should like to be convinced of it.
Senator B ristow. Nothing will convince you that they will be
controlled except experience, and that, in my judgment, you will get
if this bill becomes a law; and nothing will convince me that there
will not be this control except experience, and I expect the experi
ence we will have if this bill is enacted in its present form will
demonstrate my theory is right and that in 10 years you will be
saying so.
Mr. U ntermyer. D o you not think that the fact that each of these
small banks has as much of a vote and as much voice as the largest
bank is a great source of safety?
Senator B ristow. My dear sir, the small banks are influenced by
the large banks.
Mr. U ntermyer. But when they realize that they have under this
bill-----Senator B ristow (interposing). We must realize that the powerful
banks of the commercial centers now—I can name the banks in
Kansas City that will control the majority of the banks in Kansas
in selecting these directors, and will do it through the methods that
are well known in the selection of such responsible officers.
Mr. U ntermyer. D o you not think that the fact that the Govern
ment names three of those directors and that three more would be
removable at the will of the Government would go far toward avert
ing that danger?
Senator B ristow. T o be frank with you, Mr. Untermyer, I think
that there are two banks here—one is the central bank—that will
control if there is just one bank.
Mr. U ntermyer. I agree with you about that.
Senator B ristow. And I am opposed to that.
Mr. U n t e r m y e r . S o am I.
Senator B ristow. I believe the central bank would dominate the
business of the country and control the credits of the country fully
as much if not more than they are now controlled.
Mr. U n t e r m y e r . I think it would be a great peril.
Senator B ristow. N ow that is not possible; it is not possible to
have a central bank. I do not think public opinion would tolerate
1336
BANKING AND CURRENCY.
it in this country; but it is possible—I hope not probable—we may
have these regional reserve banks, and I think they will be controlled
by the same interests that would control the central bank. Now, if
it is not possible to control it that way the sinister influences which
you have noticed for some years will seek to control in some other way.
They are not going to give up, are they ?
Mr. U n t e r m y e r . They won’t give up if they see a chance-----Senator B ristow (interposing). They will wait until they see a
chance, and then they will take it.
Mr. U ntermyer. Sometimes it does not come.
Senator B ristow. It is not often it does not come, is it ?
Mr. U ntermyer. I would not like to say that.
Senator B ristow. Suppose they get control of the Federal board;
then, where are you?
Mr. U ntermyer. Suppose they get control of the Federal Govern
ment; where are you?
Senator B ristow. That is exactly the point I am coming to. I f
they get control of the Federal board, they would control the Gov
ernment so far as the banks are concerned, would they not ?
Mr. U ntermyer. I am not apprehensive that any great public
officials having such responsibility and position, operating as he
would be compelled to operate in the fierce light of public opinion,
will not conduct this institution in the interests of the public. I
have sufficient faith in the patriotism of the country. We have, on
the whole, done pretty well with our public officials and public
bodies. We must have some agency to carry out a system of this
kind, and I think we can trust the agency that has been set up by
this bill. You have a certain number of safeguards, and if there
are any more possible they should be added. You have a certain
number of safeguards against control by any concentration of finan
cial interests. In the first place, you have this vote accorded to each
of the banks. In the second place, the stock is not assignable. It
should be indorsed in blank and deposited in the archives of the
Government. They should not be able not only not to assign it, but
the banks should not have possession of it. It should be indorsed
over and held for them, so that nobody would be able to get it,
whether it was assignable or not assignable. Then you have the fact
that these smaller banks throughout the country are no longer de
pendent for accommodations on the great centers as they were.
Senator B ristow. They are dependent absolutely upon the 12
regional banks.
Mr. U ntermyer. Yes. Each bank is dependent on its own reserve
bank.
Senator B ristow. Yes; absolutely.
Mr. U ntermyer. But it has no longer, as now, close relations with
the great cities, and you are removing and breaking up the concen
tration of control that is getting worse and worse all the time.
Senator B ristow. I will not discuss with you as to whether or not
this Federal board might be controlled; I will not discuss with you
the question as to whether or not these interests have not in periods
in our history controlled high officers of the Government.
Mr. U ntermyer. I think the days are fast passing when they
can do it.
BANKING AND CURRENCY.
1337
Senator B ristow. But if they did control—you say it is impossible;
I may not have that view—but if they did control, then they would be
in a far more powerful position than if we had a central bank, would
they not?
Mr. U ntermyer. No.
Senator B ristow. Why not, if the Government is controlled?
While, if you had a central bank, you would have a Government
that would control or undertake to control the central bank ?
Mr. U ntermyer. N o ; if you had a central bank, it would have such
an impetus of power that there would be far greater danger and less
checks than with the proposed system of these 12 scattered reserve
banks with a Federal control. I do not think this system would be
nearly so dangerous.
Senator B ristow. There is room there for a difference of opinion.
Mr. U ntermyer. O f course, that is too problematical. We can not
know as facts what we are talking about on such a question; we are
all guessing.
Senator B ristow. We are all guessing; I think that is true. We
are all guessing as to whether or not this control would be greater in
the central bank or whether if they once got control of the central
board it would be greater in the central board. Now, do you believe,
with the tremendous importance to the country that attaches to this
measure, that we ought to take any chances and depend on this guess
that you and I are making?
Mr. U ntermyer. I do not think we are taking any chances. I did
not mean to say we were guessing as between these two systems, be
cause you have the regional bank, where the discounts originate, and
I do not see any possibility of the control of those regional banks, no
matter who sits on the Federal reserve board. The Federal reserve
board does not come very actively into the matter, except where cur
rency is required. The regional reserve board rather is really the
independent body, except when currency is to be issued.
Senator B ristow. I f the Federal reserve board has not anything
much to do with the running of these banks, why not leave that out ?
Mr. U ntermyer. I did not mean to say it did not have anything
much to do with i t ; I said it had only a supervisory power.
Senator B ristow. Why not leave that then with the Comptroller
of the Currency ?
Mr. U ntermyer. Because, when it comes to currency, then it has
a very important function.
Senator B ristow. What function does it perform in the issuing of
currency that is so important that that alone would necessitate its
organization ?
Mr. U ntermyer. That is the most important function it has to
perform. It has all sorts of discretionary power as to the issue of
currency, and ought to have.
Senator B ristow. Y ou would give that board the control of the
volume of the currency? You would let it depend upon the judgment
of four men—a majority of the board—would you?
Mr. U ntermyer. I would vest the powers in that board that it has
under this bill; yes; and a few more, perhaps.
Senator B ristow. Don’t you think it would be a great deal better
if that volume o f currency depended upon the normal operation of the
1
1338
BANKING AND CURRENCY.
business of the country independent of the judgment or financial
theories of this board ?
Mr. U ntermyer. Who is to determine what is the normal operation
of business? You must have somebody determine it. It does not de
termine itself automatically. Somebody must determine that—some
board or individual. No system is self-executing; you have to have
human beings.
Senator B ristow. But you can make certain provisions of the law
that will authorize the issuing of currency when certain conditions
exist.
Mr. U ntermyer. I f you generalize, yes; but it is one thing to
generalize and another to come down to cases and try to draw a bill.
We can all generalize very liberally, but it is a very different thing
to put up a workable scheme.
Senator B ristow. I f you can organize these 12 regional banks and
they can do business with the Government, you could organize these
groups of bankers and they could do business with the Government,
could you not ?
Mr. U ntermyer. Yes; they could; but you would have 262 differ
ent institutions dealing with the Government-----Senator B ristow (interposing). You mean 440?
Mr. U ntermyer. Oh, yes; 440 different institutions dealing with
the Government instead of 12, and you would have no intermediate
authority passing on this paper, no intermediate security or re
sponsibility, and you would not mobilize or utilize your "reserves.
The greatest difficulty about this scheme, but not by far the only
insuperable one, lies in the fact that it does not mobilize your re
serves; it does not give scope for a discount market. You can never
make your credits liquid until you establish a discount market.
Senator B ristow. Oh, yes; they can discount. The Government
discounts.
Mr. U ntermyer. I am talking about creating an open market for
the discount of bills and acceptances, which is quite another matter
and one that seems to be strangely and persistently ignored in this
entire discussion, and yet that is the crux of this whole business.
Senator B ristow. I have another idea I want to suggest to you
when we get to that. But you say that the 440 would not be so
responsible—the currency would not be so good as if it were issued
through the 1-----Mr. U ntermyer. I did not say the currency would not be good,
because it is Government currency. The currency would be all safe
in any event. I am talking about the security behind it, so that the
Government is safeguarded.
Senator B ristow. The security behind it; yes. Now, we could
have the resources of all the banks in the group—their entire re
sources—could we not?
Mr. U ntermyer. I suppose, if that were workable, in theory you
could, yes. In practice it might be difficult.
Senator B ristow. Y ou have behind the currency now the resources
of the individual banks plus the backing of the regional bank, do
you not? And that does not carry with it anything but the 10 per
cent of the capital stock, and 10 per cent demand, or 20 per cent of
the capital stock of the banks?
BANKING AND CURRENCY.
1339
Mr. U ntermyer. And the pro rata share of all the assets of the
bank—each individual bank—that the debtor enjoys. That is in ad
dition to the 20 per cent. I f a bank fails and you have its indorsement
and you do not get your money out of the regional bank, you are a
creditor of the member bank.
Senator B ristow. Well, I say you have the assets of the member
bank backed by the regional bank and its resources, and the re
sources of the regional bank consist of 20 per cent of the stock—10
per cent cash and 10 per cent on demand of the member banks.
Mr. U ntermyer. And of all the deposits?
Senator B ristow. All the deposits of what?
Mr. U ntermyer. The regional bank.
Senator B ristow. Its resources?
Mr. U ntermyer. Yes; you have a prior lien on all those resources.
Senator B ristow. N ow , you have a prior lien, not on 20 per cent
of the capital of the banks in the group, but on all the capital of the
banks in the group, and that is in addition five times as much as you
would have behind the currency of the regional bank, so far as that
group is concerned, to all of the assets of the banks in the group.
Do you believe there is a district in the United States where that
would not make ample security to the Government?
Mr. U ntermyer. I do not know; perhaps it would.
Senator B ristow. N ow, would it not be perfectly practicable to
have a tax that would go into a reserve fund, a guaranty fund, to
make good to the Government any losses that it might accidentally—
the chances are extremely remote in my judgment—any losses which
it might have on any of this currency ?
Mr. U ntermyer. I should not like to discuss the bank guaranty
plan at this time.
Senator B ristow. I am not asking you about the bank guaranty
plan. 1 am asking you if you do not think it would be possible to
have such a fund to make good to the Government any losses that
it might accidentally sustain on the currency.
Mr. U ntermyer. Anything is possible.
Senator B ristow. Don’t you think that would be possible ?
Mr U ntermyer. O f course. Some insist that it is a premium upon
reckless banking.
Senator B ristow. I am speaking of the currency. I am not speak
ing of guaranteeing bank deposits.
Mr. U ntermyer. That is practically the same thing. I f a bank
fails, if it owes for the currency, the other banks have to make good.
That is another form of bank guaranty, is it not? I do not mean to
say that I either favor or am opposed to bank guaranties, but I know
there are serious objections to it.
Senator B ristow. We have heard the objection from New York
for many years that it places a premium on reckless banking.
Mr. U ntermyer. I come from New York. That is no reason why
I should agree to that, however.
Senator B ristow. That is true. New York is the center of this
hostility to the bank guaranty plan.
Mr. U ntermyer. D o you include me in that? I have not yet ex
pressed myself on that subject.
Senator R eed. Perhaps Senator Bristow means to suggest that you
are from them but not of them.
1340
BANKING AND CUBKENCY.
Senator B ristow. I am perfectly willing to let Mr. Untermyer de
termine whether he is from them, or part of them, or against them.
That is a matter between him and New York, and not between him
and me. But I can not help but interject here that the bank guar
anty system as practiced in the State of Kansas, which I have some
familiarity with, is not a premium on reckless banking, and it has
worked so well with State banks that the national banks have organ
ized an independent insurance society for the performance of the
same functions for them, except that it is controlled by a corporation.
Mr. U ntermyer. I think that is a very legitimate and proper
thing for the banks to do, because they will be looking out for the
operation of it. When they have their own corporation and do their
own guaranteeing they will watch one another.
Senator B ristow. Experience has demonstrated that it is not any
better system than the guaranteeing under the supervision of the
banking department of the State. Now, you spoke of the mobiliza
tion of reserves. Why not require the banks to keep all the reserves
in cash?
Mr. U ntermyer. Because it locks up too much of the money of
the country.
Senator B ristow. What is the use of a reserve that they can not
use in an emergency if it is in New York or Chicago banks? What
good is it ?
Mr. U ntermyer. I do not think it is any good. I think the present
system, as I have said, is a great humbug-----Senator B ristow (interposing). Why not abolish the reserve cash,
except the cash in the vaults-----Mr. U ntermyer (interposing). Because, I think, by keeping up a
fair reserve and putting it in these reserve banks it will keep reason
ably liquid.
Senator B ristow. Would it be any more liquid if deposited some
where than it would be if the banks had it to use ?
Mr. U ntermyer. N o ; but if the banks have to lock it up then it is
not liquid, but if you deposit it in these reserve banks you can loan
two-thirds of it back to them on certain kinds of paper that are
shortly maturing, and it becomes liquid.
Senator R eed. There would cease to be a cash reserve.
Mr. U ntermyer. It should be invested in short-time paper that
is almost cash. It should be strictly commercial paper, so that re
liance could be placed on its automatically discharging itself at
maturity.
Senator B ristow. Short paper is not paid much better than long
paper.
Mr. U ntermyer. I f we had commercial paper instead of a lot of
paper secured by speculative stocks, I think it would do us a great
deal more good.
Senator R eed. Commercial paper in 1907, when you could not get
money on Government bonds, would not have been of very much use,
would it?
Mr. U ntermyer. Except that the merchant, as his paper matured,
would find ways of paying it.
Senator R eed. He would even cease to pay if he could not get any
money.
Mr. U ntermyer. Part of our commerce, you know, is with foreign
countries, and our money is coming in from there, too.
BANKING AND CURRENCY.
1341
The C hairman . I s it not true that the paper of which yon speak
has the peculiar and extraordinary characteristic of extracting from
the pockets of the people ready money?
Mr. U ntermyer . That is its main qualification.
The C hairman . I s not that the real reason why it is used for re
serve purposes ?
Mr. U ntermyer. And the reason why it is the highest quality of
reserve.
Senator R eed. The Senator speaks of it extracting from the
pockets of the people. But suppose that the money in the banks
where it habitually is at all times as we know—suppose that the
banks have substituted for that money commercial paper until they
have not any money left. Then imagine a condition such as existed
in 1907. How are you going to extract it from the pockets of the
people? You can get it, I understand, from foreign commerce, but
when you have locked up the banks of this country for want of cur
rency, the fact that you have good paper does not do you much good.
Mr. U ntermyer. Yes; it does, because that paper has been issued
as commercial paper for an actual purchase and sale of merchandise
that has gone into consumption and the merchant has got back his
money, or should have had it with which to pay in the ordinary
course of trade.
Senator R eed. But he does not get it back when the country banks
close their doors, and when the country merchant can not coilect be
cause the farmer and the mechanic out in the little towns and in the
big towns-----Mr. U n t e r m y e r (interposing). But you are assuming that every
savings bank and every big bank in the country has gone to smash.
Senator R eed. I am assuming this, that this scheme proposes to
substitute for actual cash paper notes, bills of exchange, etc., and I
simply asked the question whether it did not, to that extent, limit
the ability of the bank to pay cash in the hour of trouble.
Mr. U ntermyer. It does not subtsitute paper for actual cash. It
substitutes reserves in its own region for reserves that have been sent
to the East and have been loaned out in all sorts of ways. In other
words, its present reserve is not cash, is it ?
Senator R eed. Its present reserve-----Mr. U ntermyer (interposing). Nine per cent of it is not cash.
Senator R eed. We constantly, instead of discussing a principle, are
discussing a principle applied to a certain condition. At the present
time I grant you to the fullest extent that when a bank is required
to keep 2 5 per cent reserve, and then is allowed to put half of that
25 per cent, or 12-J per cent, in another bank, and that bank is then
allowed to redeposit that very reserve in another bank, only holding
out 12£ per cent, that that makes the 12£ per cent so deposited a
very uncertain thing in the hour of danger—in fact, an element of
danger. Now, I agree with you on that; but, under the present law,
a bank must keep in its own vaults a certain percentage of cash.
Under the proposed bill it takes one-half of what it is required to
keep in its own vaults in cash, and therefore constantly available in
case of liquidation but not available in case of trouble-----Mr. U ntermyer (interposing). I do not think that is so, Senator
Reed. I think it is only the difference between 5 per cent and 6 per
1342
BANKING AND CURRENCY.
cent in cash. Under the present law the country banks have to keep
6 per cent, and under the new law 5 per cent, in cash in their vaults.
Senator R e e d . Yes; the average is 12^ per cent.
Senator N e l s o n . It is 12 per cent now for country banks.
Senator R eed. Take half of that 12 per cent, or 6 per cent, which
is now required to be kept in cash, and put it over in a regional bank.
I f it w
rere kept in the regional bank in cash it would be a very
available fund, but it can immediately be replaced by the notes of the
banks. Thus the bank no longer has cash on hand, and in addition
to that has become a debtor to the reserve bank.
Mr. U n t e r m y e r . It gets the cash back from it.
Senator R e e d . It gets the cash back and loans it out.
Mr. U n t e r m y e r . Yes.
Senator R e e d . I call attention to that. Is not that actually re
ducing the cash on hand in the country in the aggregate which has
to be kept in banks, and is not that substituting paper for it, and is
not that reducing our reserve?
Mr. U n t e r m y e r . I do not think it is reducing our reserve, except
to the extent of the difference between 5 per cent and 6 per cent. As
I understand it, under the present law 6 per cent of the 15 per cent
reserve must be kept in the vaults of the bank. Under the law that is
now proposed, 5 per cent must be kept.
Senator R e e d . Y ou are speaking of country banks?
Mr. U n t e r m y e r . Yes.
Senator R e e d . But how about the banks in the reserve cities?
Mr. U n t e r m y e r . A s I remember it, you have 12£ per cent now
that you have to keep, and under the new law—I forget what the
amount is. It is not 6; it is more than 6-----Senator N e l s o n . It is 9 . When the system is completed it is 18
in all, and they are required to keep 9.
Senator H i t c h c o c k . Before you resume, Mr. Untermyer, along
the line of what Senator Reed w as saying, I noted down an expres
T
sion which you used which is rather significant. You said that what
we want is less money and more credit. Does that mean expansion ?
Mr. U ntermyer . What I mean is that we want to use our credit.
I do not mean that we want less money than we have now. I mean
that wherever we can substitute credit for money we want to sub
stitute it.
Senator H i t c h c o c k . Does that mean expansion?
Mr. U n t e r m y e r . N o ; that does not mean expansion, where you
can use credit instead of money. It does not mean expansion of the
currency, but I think we have now too little credit and too little
money.
Senator B r i s t o w . The reserve we have now of 6 per cent for coun
try banks is no more than they need in the prosecution of their
business.
Mr. U n t e r m y e r . I do not know anything about that.
Senator B r i s t o w . The testimony before the committee of all the
country banks that have appeared before us is that they carry more
than fi per cent in addition to what it is necessary for them to carry,
so any reduction in the amount of cash from 6 to 5 is of no conse
quence whatever to them. Now, if these country banks have a place
to which they can go in time of stress, what is the use for them to
have any reserve other than that in their vaults?
BANKING AND CUBBENCY.
1343
Mr. U ntermyer. What is the use of their putting any money in
the reserve bank?
Senator B ristow. Yes; what is the use of their carrying any re
serve except that in their vaults if they have a place where they can
go and get money on their assets in time of stress?
Mr. U ntermyer. They can not go and get money on their assets
unless they first put it there.
Senator B ristow. I say you are compelling them to do it. Why?
Mr. U ntermyer. Because it makes it a safer system to have these
assets that are practically liquid—unless you assume they are going
to do business without any reserve except what they have in cash.
Senator B ristow. And then if they have a place to which they can
go and get currency in a crisis, if they have the assets that are good
they ought to have that opportunity, so that a bank that was con
ducted along proper lines could not be closed up; and if it were
conducted along improper lines, it ought to be closed up. So I was
trying to find out why it is necessary to have any reserve other than
cash, provided there is a place provided where the bank can get relief
when it is necessary.
Mr. U ntermyer. I think conservatism would dictate a reasonable
reserve. You have reduced the reserves under this bill materially,
and it is a question of judgment whether they ought to be reduced
any further.
Senator B ristow. N ow, you loaned back the money to the banks.
This reserve which you require and this subscription you require the
country banks to put into this regional bank, you say, will not con
tract their loaning power at home, because they can go and borrow
it back?
Mr. U ntermyer. They can borrow two-thirds of their reserve and
all their capital. And it is not borrowed back on the general class
of paper that the bank carries, but short maturities of a given kind
that are supposed to be liquid, while the general business of a bank
is only liquid in a certain proportion.
Senator B ristow. It selects out the best security and takes it down
there, and then it can borrow back a part of the money which it
gets—and, for my life, I can not see what is the use.
Senator N elson. It seems to me, there is an opportunity for infla
tion.
Mr. U ntermyer. Somebody suggested contraction. I have not
been able to see where the contraction comes in.
Senator B ristow. We have had that up extensively.
Mr. U ntermyer. I read Mr. Forgan’s testimony, and I could not
understand his point of view, and I challenge the accuracy both of
his figures and his deductions.
Senator B ristow. Mr. Forgan, I understand, is a great man, and
Mr. Reynolds and all that delegation; but I am more interested in
what some man out on the prairies who is running a bank tells me
about how this will affect him and his patrons than I am in the
opinions of Mr. Forgan, Prof. Sprague, Prof. Fisher, or anybody
else. I want to know how this thing is going to work when it
touches the commercial affairs of the country, regardless of the
theories of these writers on finance. That may seem somewhat crude
in me and indicate that I am a good deal of a bore, but nevertheless
1344
BANKING AND CURRENCY.
I want to know how this affects the man that is the bone and sinew
of the country.
Mr. U ntermyer. That is the wise and practical view.
Senator B ristow . N ow , the regional bank pays no interest-----Mr. U ntermyer. N o.
Senator B ristow . But the country bank, when it borrows back the
reserve upon which it gets no interest, is compelled to pay interest
on it?
Mr. U ntermyer. Yes.
Senator B ristow . D o you think that is right to the country bank,
and fair to it?
Mr. U ntermyer . Why, certainly.
Senator B ristow . I can not agree with you on that.
Mr. U ntermyer . I f it were to get the money for nothing, you
know, there would not be any limit to the amount it would take.
Senator R eed. The only limit on the capacity of these banks, after
all, is interest.
Mr. U ntermyer . N o ; that is not the only limit.
Senator R eed. That is one.
Mr. U ntermyer . The bill creates other limits.
Senator R eed. That is one limit.
Mr. U ntermyer . That is one.
Senator R eed. Y ou concur, then, in our theory here that interest
charges may tend to keep down inflation ?
Mr. U ntermyer. I f it is assumed you were going to charge some
thing.
Senator N elson . Mr. Untermyer, take a case like this: We will
suppose that Senator Hitchcok is a member bank and Senator Bris
tow goes to him and borrows $10,000 and gives his note for it. Sen
ator Hitchcock, as a member bank, says, “ Very well, I will give you
a credit for it on the deposit side of the ledger.” That leaves a
checking account of $10,000 open to him. Then you, Senator Hitch
cock, take his note and you go to the regional bank with it and dis
count it and get $10,000 in currency. Then you take that currency
and you loan it out to Senator Reed on his note. Is not that a big
inflation of the currency?
Mr. U ntermyer. You can not do any of those things under this bill.
Senator N elson. Senator Hitchcock, as a local member bank is
liable, first, to Senator Bristow on the checking account, as one of the
depositors of his bank; then he is liable to the regional bank on the
notes that he has discounted, and he has got the note of Senator Reed
for it.
Senator R eed. And he is busted. [Laughter.]
The C hairm an . And then where are you?
Senator N elson. Then he might go on and repeat the operation
and discount Senator Reed’s note and give Senator Reed a credit
on the ledger for a checking account of $10,000. So you can have
two accounts on your books there: $10,000 deposited by Senator Bris
tow, for which you have a note; and $10,000 deposited by Senator
Reed, for which you have his note. You see, the process could go on
without limit.
Mr. U ntermyer. It could not begin at all, Senator Nelson, if you
have the qualification that this shall be commercial paper. You
BANKING AND CURRENCY.
1345
could not start it, you could not continue it, you could not get the
currency or the discount from the regional bank.
Snnator N elson. Suppose Senator Bristow wanted that money to
finance a corn deal out in Kansas.
Mr. U ntermyer. I f Senator Bristow had bought corn in Kansas
and wanted that money with which to pay for it, and if the man
who sold him the corn drew on him, and he accepted that draft and
turned that over to the bank—in the course of time when that corn
was sold that draft would pay itself.
Senator N elson. I f it was in the form of a draft-----Mr. U ntermyer (interposing). Whether it were in the form of
a note or a draft it would pay itself, if he made the note payable
to the man from whom he bought the corn, and the man indorsed that
note and turned it into the bank. Then when that corn was sold
Senator Bristow would automatically have the money with which to
pay that note. You would have a commercial transaction repre
sented by a note for a commodity that went into commerce and there
would be no inflation. But as soon as you begin kiting notes and
assuming that currency will be issued for that sort of paper you can
get anywhere.
Senator N elson. The note is deposited with the regional bank and
the regional bank has issued currency on it, and that currency has
been loaned out again to Senator Reed.
Mr. U ntermyer. Yes. But Senator Reed must also have some
legitimate commercial transaction with respect to which that cur
rency was used; and that would pay itself automatically.
Senator R eed. Oh, no, Mr. Untermyer. No bill has proposed that
when you get that money into your bank you shall only loan it out
on commercial security. You can loan it to anybody.
Mr. U ntermyer. But you got it on commercial security and there
fore it is going to be paid back out of that .transaction.
Senator R eed. That is what you say, but here is what you mean:
It may be paid back out of that transaction. There is a great deal
of difference between what may be done and what must be done.
AVhat I mean is this—and I think we all ought to discuss this bill
fairly, and if there is danger of inflation we must guard against it.
Mr. Untermyer. I think everybody is agreed to that.
Senator R eed. I grant you that if you propose to issue money
based upon commercial paper, and in addition provide that com
mercial paper should only be bills of lading or drafts accepted by
absolutely responsible people and representing a purchase and sale of
goods, you would have a condition that would rapidly liquidate the
drafts. But it has been agreed here that we have no such system in this
country at present as would enable us to issue upon it any sufficient
amount of paper to transact the business of the country. And that it
would take some time to establish such a system is manifest, of course,
to everybody. So we have been talking now about commercial paper
in another sense; that is, it is not a note with a bill of lading at
tached, but it is a note o f a merchant—and, I suppose we might say,
the note of a man engaged in raising cattle or sheep.
And we get down at last to a promissory note, and somebody’s dis
cretion is exercised as to whether or not it is a note of a merchant or
the note o f a man engaged in a commercial transaction, and we put
9328°— S. Doc. 232, 63-1— vol 2----- 25
1346
BANKING AND CURRENCY.
that up. The distinction between that and the bill o f lading is this:
The bill of lading absolutely brings the money into the bank; this
brings the money into the pocket of the borrower, and he may and
he may not use it to take up and discharge his debt, and I think that
is a very important matter.
Mr. U ntermyer. Very; but I do not think that we should be con
fined to cases where the bill is accompanied by a bill of lading; that
is not necessary.
Senator R eed. Y ou say that. I say if you put that in you
a system that may be circumscribed; it may be limited, but
and does liquidate itself. W hen you go outside o f that you
into the question that I stated a while ago, not that it
liquidate itself but it may.
have got
it is safe
have got
may not
Mr. U ntermyer. The Government must see to it that it does.
Senator R eed. Very well.
Mr. U ntermyer. They must not renew this paper for which cur
rency is issued.
Senator R eed. Then, if they do not renew it, you have a system of
currency that expands and contracts every month, which I believe
you think might be desirable?
Mr. U ntermyer. I f it helps the commerce of the country.
Senator H t c h c o c k . And see how it works out?
Mr. U ntermyer. Certainly.
Senator H itchcock. Senator Bristow accepts a $10,000 draft at 90
days to pay for corn which he has bought. The bank discounts it.
The bank then rediscounts Senator Bristow’s note with the reserve
bank, which loans the proceeds to Senator Reed on 90 days accept
ance, as he has bought the corn from Senator Bristow. Is there any
reason that that can not be done?
Mr. Untermyer. D o what?
Senator H itchcock. He has bought Senator Bristow’s corn from
him—bought it, within a week after he bought it. Then he redis
T
counts Senator Reed’s note at a reserve bank, and gets $10,000 more
which it may loan to some one else. Is there any reason why a bank
can not rediscount several bills on a single transaction, and thus
produce an inflation of credit?
Mr. U ntermyer. Let us see. We will have to figure that out. In
the first place, the first transaction "was not a commercial transaction
at all?
Senator H itchcock. Yes; entirely.
Mr. U ntermyer. N o. He borrowed the money with which to pay
for corn that he has already bought, did he not ?
Senator H itchcock. No ; he did not. The man who sold the corn
drew upon him and he accepted.
Mr. U ntermyer. He accepted that draft.
Senator H itchcock. And the draft was gold at the bank.
Senator S haeroth. There could not be any inflation if the bill o f
lading were attached.
Senator R eed. That ends the transaction.
Mr. U ntermyer. I f you are going to limit the issue of currency
to transactions accompanied by bill of lading, you are not going to
have any considerable elasticity or expansion of the currency. It
is not necessary that the bill of lading should be attached.. The
transactions of that character are not of sufficient volume.
BANKING AN C R EN Y.
D UR C
1347
Senator R eed. Y ou might not have enough to do the business of
the country at the present time.
Mr. U ntermyer. I assume not.
Senator H itchcock. I am assuming the case of one of the model
transactions that you exploited the other day of a draft. Here is a
draft on Senator Bristow, and he accepts 90 days’ sight, and pays
for the grain.
Mr. U ntermyer. That is supposed to go into consumption and he
sells it to Senator Reed?
Senator H itchcock. Yes.
Mr. U ntermyer. That is another transaction in that same grain?
Senator H itchcock. Within five days after-----Mr. U ntermyer (interposing). I do not consider that inflation
at all.
Senator H itchcock. Senator Reed accepted for $10,000, so that in
five days you have five acceptances at $10,000 to pay for $10,000
o f grain?
Mr. U ntermyer. Yes; but they are all genuine transactions in
merchandise that has changed hands, and the point o f the whole
transaction to make it commercial is that the grain will some time or
other, in the course of business, get into the hands of the consumer
and then the money will come back with which to discharge those
obligations.
Senator R eed. But, in the meantime, you had been able to turn
that currency over five times and have out in currency the value of
five times the value of the corn?
Mr. U ntermyer. That is not possible.
Senator S hafroth . It can not remain out long, however.
Senator R eed. When you get this system established you will have
about so much paper coming in every day that can be renewed and
so much going out.
Mr. U ntermyer. But in 90 days that transaction is going to
liquidate itself all along the line.
Senator S hafroth . And centered it right back in the reserve
banks.
Senator B ristow. We will then take up the cattle business and
handle it by the same method.
Mr. U ntermyer. A pays it to B and B pays it to C and C pays it
to B and B pays it to A, and it is going back, if that is a commercial
transaction.
Senator R eed. I want to ask you about another matter.
I think
we have gone into that, and that we now understand it. Mr. Unter
myer, you have given a good deal of study to the question of the
locking up of moneys in the banks of New York; that is, a bank out
West deposits in a bank in the city and then that bank deposits in
another bank, and so on, until finally it gets to New York, and there
is produced there a large sum of money, and money is tied up in
New York, and New York ties up the money through this chain of
banks. I take it that you regard that as a bad part of the system of
this country?
Mr. U ntermyer. Very.
Senator R eed. I want first to get to the degree of remedy. O f
course, part of that comes through the depositing of reserves?
I
1348
BANKING AND CURRENCY.
Mr. U ntermyer. Yes.
Senator R eed. But what proportion of the money actually reach
ing New York and being put in those banks can be counted as re
serves, and what proportion of it is put in there for commercial
reasons ?
Mr. U ntermyer. I have always figured that the banks had to have
for their commercial purposes a sum in excess of their reserves, be
cause they must not draw down their reserves.
Senator R eed. Yes.
Mr. U ntermyer. I f they need $100,000 for their general purposes,
presumably, they will have $100,000 more than their reserves; other
wise they would be constantly drawing down their reserves, but I am
told by a good many of the out-of-town banks that they do frequently
draw down their reserves.
Senator R eed. But the amount that is kept in New York does very
greatly exceed the reserves?
Mr. U ntermyer. Yes, it does; and not only the amount kept on
deposit exceeds the reserves, but when money rates are high in New
York, the banks, in addition to the money that they deposit, send
money there for investment and for purchase of demand loans on
the stock exchange in their own names.
Senator R eed. That is all, with the exception of the reserves, which
they are required to keep, and which they may therefore deposit in
New York because they get an interest upon it. All those other con
ditions which we have spoken of arise from commercial reasons?
Mr. U ntermyer. Yes; but there is something like $800,000,000 or
$900,000,000 of that kind of money in New York—reserves and
money which is put out in Wall Street. We have all of those
statistics collated in the report of the Pujo committee.
Senator R eed. This is only preliminary, but the fact is that if the
banks were not required to keep one cent of reserves in the New York
bank, they would still be heavy depositors in New York banks, and
would use the New York banks as they do now for commercial rea
sons, investments, etc.?
Mr. U ntermyer. Not under this bill, because under this bill you
see they can exchange with the reserve banks; they have a sort of
clearing-house system provided for.
Senator R eed. That is as far as exchanges are concerned, but they
would not necessarily use these banks ?
Mr. U ntermyer . They would use these reserve banks for settling
differences.
Senator R eed. But they would not necessarily do it, would they ?
Mr. U ntermyer. I should think they would, because there is no
charge connected with it ; it is a cheaper process; they would not have
to pay for the exchange.
Senator R eed. Let us see------Mr. U ntermyer (interposing). W ill you excuse me for just a
second ?
Senator R eed. Certainly. [After a pause.] Do you think now
that under this system the country banks will quit depositing their
money in New York banks for commercial purposes and put that
money into regional banks?
Mr. U ntermyer. Largely, because of the system that is set up
there, and the economy of the system by which they can make their
BANKING AND CURBENCY.
1349
exchanges and pay their debts through their own regional bank
under a sort of clearing-house arrangement without the expense they
now have, with this qualification, that they will probably keep some
money in New York because of the interest rate that they get out
of it.
Senator R e e d . They will keep some in addition, because of the
interest rate?
Mr. U ntermyer. Yes.
Senator R eed. O f course, we can not safeguard against what they
do keep in the banks for interest?
Mr. U ntermyer. N o.
Senator R eed. The amount of the thing, as I understand it, is this:
That having provided a regional bank that is charged with cashing
their drafts, they will not longer keep deposits in New York, except
as the New York banks may offer them inducements in the way of
interest which are sufficient to take their money over to them ?
Mr. U ntermyer. I think that is what is going to follow, Senator
Reed, to a large extent, when the system has developed. I inquired
into that this summer when I was in Germany, and found that there
the merchants made their deposits in the Reichsbank, because that
Government bank made exchanges all over Germany without cost,
and it was a cheaper process than to put their money into local banks.
Senator R eed. Let us assume that that would be the way this will
work out. The result would be that the business now done by the
New York banks in the matter of exchange, etc., must be trans
ferred over to the regional banks, and that tax upon commerce would
be relieved ?
Mr. U ntermyer. Yes; to that extent; and also the collection tax.
Senator R eed. S o that this bank in New York, the regional bank
of New York, of course, would be used a great deal for that purpose,
because there is so much business done in New York of that char
acter ?
Mr. U ntermyer . Yes.
Senator R eed. That same thing would be true of all the regional
banks in a less degree, would it not?
Mr. U ntermyer. I think so.
Senator R eed. Let us see how it would work out now. Then the
place where the regional bank was located would be the place where
these transactions would be facilitated?
Mr. U ntermyer. That is where the exchanges would take place;
all the members of that bank would exchange at that place.
Senator R eed. And that would be a matter of convenience?
Mr. U ntermyer . And economy.
Senator R eed. And it would have this sort of effect, if the estab
lishment of a regional bank in New York would transfer the ex
change business from the ordinary banks of New York to the regional
bank very largely, not entirely, but largely—then that would be true
of the banks of St. Louis, provided there was a regional bank lo
cated there, and the same thing would happen—the exchange busi
ness that now goes to St. Louis would be done through that regional
bank?
Mr. U ntermyer. When it got there it would be.
Senator R eed. When it got there, instead of being done by the
individual banks of St. Louis it would be done by the regional bank?
1350
BANKING AND CURRENCY.
Mr. U ntermyer . Well, they would exchange courtesies, that is all.
Senator R eed. And all of the banks in that district in which St.
Louis was situated would begin to send their exchanges to the regional
bank where they would have it done for nothing?
Mr. U ntermyer. O f which they were members.
Senator R eed. O f which they were members. The result would be
that instead of carrying their balances at Omaha and Kansas City,
where they now get accommodations for the banks, they would or
could withdraw those balances and now transact the business over at
St. Louis, some 300 or 400 miles away?
Mr. U ntermyer. They would not be likely to withdraw the bal
ances on which they were getting interest and put them where they
were getting none.
Senator R eed. They would withdraw all those balances that they
now keep for accommodation, and they would do the business in the
regional bank o f St. Louis?
Mr. U ntermyer. Yes; it would be cheaper for them.
Senator R eed. I want to see just how that would affect Kansas
City banks, and I am speaking of that because I am a little more
familiar with it. O f course, what would affect Kansas City would
affect every other city within that territory and that region.
Mr. U ntermyer. I think they would lose the profit on their ex
change business.
Senator R eed. Would not they lose in addition to that? But I
will ask a preliminary question along that line. Is not this abso
lutely the truth in the banking world, that here is a little country
bank; it may not have more than $10,000 capital. It gets some
money on hand; it desires to loan out and does loan out pretty
closely, but for the sake of always being ready to meet any demand
that is made upon it that country bank takes whatever surplus
moneys it has and deposits it with a bank in Kansas City, and forms
an alliance with that bank, and then when it needs money from day
to day it draws drafts against it, and sometimes it calls upon it for
assistance; that is the system that is now in vogue, is it not ?
Mr. U ntermyer. Yes.
Senator Reed. I f you create a bank down in St. Louis that not
only handles the exchanges, but also handles and discounts the paper
o f these banks on favorable terms, they will go to that bank to dis
count their paper, will they not?
Mr. U ntermyer. Y ou mean the reserve bank?
Senator R eed. The reserve bank?
Mr. U ntermyer. Yes.
Senator R eed. S o that you will transfer that business away from
Omaha and Kansas City and the other towns similar to them, down
to the reserve bank in St. Louis, will you not?
Mr. U ntermyer . Some of it. .
Senator R eed. Well, all of it that the banks now carry on for the
purpose of accommodation will be transferred to the St. Louis
regional bank?
Mr. U ntermyer. I think there will always be a large amount of
business done in the central cities with country banks.
Senator R eed. I say, all that they now transact for the purpose
of obtaining these accommodations will go to St. Louis?
Mr. U ntermyer. Most of it.
BANKING AND CUBRENCY.
1351
Senator R eed. That means you can not add anything to the busi
ness of the bank of St. Louis without you take that business away
from some other place, does it not?
Mr. U ntermyer. I do not agree with you about that, because a
large part of the business of the regional bank is that of getting cur
rency and turning it back to the bank, and in that way adding to the
volume of currency you are going to add to the volume of business at
every one of those banks.
Senator R eed. Y ou can not add to the volume of currency unless
you increase the currency.
Mr. U ntermyer. Y ou increase it by issuing currency for commer
cial paper.
Senator R eed. But, when you talk about adding to the volume of
currency—“ adding” means increasing does it not?
Mr. U ntermyer. Yes.
Senator R eed. Increasing means inflating, does it not?
Mr. U ntermyer. N o ; not necessarily.
Senator R eed. It means inflating, with a qualification that you
claim nothing is inflation that may result in a commercial trans
action ?
Mr. U ntermyer. I mean that nothing that is legitimate expansion
is inflation.
Senator R eed. I do not care, however, to go off on that side line,
because we have pursued it already. I w
rant to talk about the effect
on business. I want to give you an illustration. Here is a bank in
my city that has a capital of $3,000,000, a surplus of $874,000, a
circulation of $2,000,000, and deposits of $28,863,000. O f those de
posits $10,000,000 are from country banks. I f this bill goes into
effect, there would be no reason for those country banks to deposit
with the banks of Kansas City, except that a bank in Kansas City
might simply make a deal for the money and pay interest ?
Mr. U ntermyer. That is the Commercial, Mr. Perry’s bank ?
Senator R eed. Mr. Perry’s bank. I have got the bank statement
for it, and it is a good bank.
Mr. U ntermyer. Yes; I know all about it. I went over the subject
with Mr. Perry last night.
Senator R eed. That is the situation, is it not?
Mr. U ntermyer. Yes; very largely.
Senator R eed. That means that $10,000,000 will be taken away
from the business of Kansas City from that one bank alone, and car
ried down to St. Louis, not by virtue of commercial rules or regula
tions and contingencies of business, but by virtue of the mandate of
a law ; that is about where we come out, is it not ?
Mr. U ntermyer. Yes; but I think that bank would be much bet
ter off under that system than it would without it.
Senator R eed. I just want to treat it now with reference to this,
and not with reference to the remedy.
Mr. U ntermyer. I assume that all of those banks will have de
posits; I mean that I do not assume that they are not going to have
any money.
Senator R eed. I think that they will have some, because the bank
will pay some interest, but the risk will be gone.
1352
BANKING AND CURRENCY.
Mr. U ntermyer . And of that $10,000,000 how much do they now
send away to New York?
Senator N eed. T o New York? I can not tell you from the state
ment. They keep some in New York.
Senator S hafroth. I s not there an item “ due from other banks ”
there ?
Senator R eed. N o.
Mr. U ntermyer. I think so, on the other side.
Senator R eed. Not on this statement. This statement is “ re
sources, loans, and discounts, $19,760,000.”
Senator N elson . What is the name of the bank?
Senator R eed. The Southwest National. “ Overdrafts, $4,000;
real estate, $400,000; United States bonds, $2,175,000; bonds and se
curities, $1,425,000; cash and sight exchange, $10,978,000.”
Mr. U ntermyer. There is no way of telling how much of that is
in New York and St. Louis now.
Senator R eed. N o ; but of course if this bank has its money in the
regional bank of New York it would not be in the same case it is
now with reference to the money being absent, although it might be
in a very safe place.
Mr. U ntermyer. It could not have it in the regional bank of New
York.
Senator R eed. Except it borrows.
Mr. U ntermyer. It would put it in the regional bank in St. Louis
and not in the regional bank in New York.
Senator R eed. I want to take up the question of the primary
transaction. I do not mean of an ultimate transaction, and I am
talking about the effect of this bill in the first 90 days after the re
gional banks are organized. This bank has $3,000,000 of capital.
It would therefore have to take out of its vaults $300,000 and put it
in the bank of St. Louis ?
Mr. U ntermyer. N o ; I think it is going to be gradually over a
period of 38 months.
Senator H itchcock. Sixty days.
Mr. U ntermyer. Only a small part of it.
Senator H itchcock. The capital has got to be taken in 60 days.
Mr. U ntermyer. Oh, you are speaking about the capital?
Senator R eed. It has got to be taken in 60 days, $300,000, and cardied down to St. Louis. It has got to take-----Mr. U ntermyer (interposing). Why can not it borrow that back?
Senator R eed. I am just coming to that. It has got to take out of
its reserve 6 per cent, or $1,750,000.
Mr. U ntermyer. Has it to take that right away, or is not that
gradual?
Senator R eed. A s the bill originally sets it out it took it right
away.
Mr. U ntermyer. It is spread over 38 months.
Senator R eed. The first six months? Oh, no; the taking of the
whole of its reserve is spread over that time, but it has to take 6 per
cent at once, as I understand it.
Mr. U ntermyer. I think you are wrong, because, you see. the entire
reserves at the end of the term are 18 per cent.
Senator R eed. The end of the term is 36 months, is it not ?
BANKING AND CURRENCY.
1353
Mr. U ntermyer. Yes; but let us see—five-twelfths, I think.
Senator N elson. Five-eighteenths.
Mr. U ntermyer. Three-twelfths is to go into the regional bank.
Senator R eed. This is a reserve city bank.
Mr. U ntermyer. Reserve city bank; let us see—that is a 20 per cent
reserve, is it not?
Senator N elson. It is to be 18 per cent.
Senator S hafroth. Ultimately?
Senator N elson. Yes; I think after 60 days.
Mr. U ntermyer. Three-eighteenths for one year. It has got to
put three-eighteenths with the reserve bank; that is, one-sixth.
Senator N elson. And after that 5 per cent.
Senator R eed. Then it would have to put in one-half of that amount
right away.
Mr. U ntermyer. Three-eighteenths is not a half of it.
Senator R eed. It has to have a reserve of 18 per cent and it takes
out of that 18 per cent within the first year one-third of 6 per cent.
Mr. U ntermyer. N o ; three-eighteenths is one-sixth—only 3 per
cent.
Senator R eed. It takes that out immediately; but before the year
is over it has taken out three-eighteenths more.
Mr. U ntermyer. Only 3 per cent the first year.
Senator R eed. I have not examined that change.
Mr. U ntermyer. Here it is.
Senator R eed. The original bill-----Mr. U ntermyer. It must keep 9 per cent. [Reading:]
After 60 days from the date aforesaid, and for a period of one year at least
three-sixteenths, and permanently thereafter at least five-sixteenths of such re
serve shall consist of a credit balance with the Federal reserve bank of its
district.
That means 3 per cent that goes to the Federal reserve bank.
Senator N elson. After that it is five-eighteenths.
Mr. U ntermyer. After that it is five-eighteenths. Then there is 4
per cent.
Senator N elson. Nine per cent is kept in the bank?
Mr. U ntermyer. Yes.
Senator N elson. And 5 per cent in the reserve bank, and the other
4 per cent can be kept in either place?
Mr. U ntermyer. Yes; until the end of 36 months.
Senator N elson . And after the end of 36 months 4 per cent can be
kept at either place.
Senator R eed. Coming now to the exact figures, this bank would
have to transport, as I understand it, $1,750,000 of its assets, and do
it within the first 60 days; $300,000 in capital and 3 per cent on its
deposits. That is a good deal of money to take out of one bank in
cash.
Mr. U ntermyer. H ow much do you make it?
Senator R eed. $1,750,000. Its loans and discounts now are $19,760,000. Would that not necessarily compel that bank to call in some
paper?
Mr. U ntermyer. I do not think so.
Senator R eed. Unless it went down to the reserve bank and imme
diately borrowed back this money ?
BANKING AND CURRENCY.
1354
Mr. U ntermyer. That is just what it would and ought to do.
Senator Reed. N ow , that begins a system by which it has to pay
interest upon its own money ?
Mr. U ntermyer. Y ou take the $300,000 of capital; it may borrow
all that back. It gets 6 per cent upon that, borrows it back at 2 or 3
per cent, and makes that difference, and gets its money back. It is
a good business transaction.
Senator R eed. N ow , I am coming to that. This bank never has
this $1,750,000 in cash, and in the event that the bank should happen
to break, that money ought to be there.
Mr. U ntermyer. It does not have it in cash now-----Senator R eed (interposing). It has to keep a reserve in cash.
Mr. Untermyer. H ow much of that is now in New York under the
present system ?
Senator R eed. It can only have 12£ per cent.
Mr. U ntermyer. Think wdiat that is. Twelve and one-half per cent
is over $3,000,000.
Senator R eed. It is in New York, where this bank is getting the
use of it.
Mr. U ntermyer. This bank is getting 2 per cent. The one in New
York is getting the use of it.
Senator R eed. This bank has a chance to count it as a reserve.
Under this system it has got to take that money out of Kansas City
and carry it down to St. Louis and put up its notes for it.
M r.
U ntermyer.
N ow it is carrying it to New York.
Senator R eed. But it has got to send money to New York to do
business anyw^ay.
Mr. U ntermyer. It now has to keep that reserve good in New
York, to keep its business there, and it has now 12^ per cent of its
reserve. Its reserve is 25 per cent of that $28,000,000, which would
be $7,000,000, of which one-half may pe carried in New York.
Under this plan you have only $840,000 the first year to put into
that reserve. It counts as a reserve there as in New York. I f it is
in New York it is being used by the New York bank; maybe they
are borrowing some of it back, and maybe they are not.
Senator R eed. They always have the use of it in case of emergency,
unless the New York bank is tied up.
Mr. Untermyer. They have not the use of the reserve at all. It
has to stay there.
Senator R eed. They use it every day for accommodation or for in
vestment.
Mr. U ntermyer. Not that reserve; they have to have a fund above
that. They have to have an additional amount. This bank, with its
vast deposits, is much better off under this system, and it will have
the use of far more money the first year than it has now.
Senator R eed. I w ant to follow this. This bank now has cash in
T
its vaults. When it carries this money to the reserve bank it will
substitute for that cash its notes, getting it back.
Mr. Untermyer. Senator Reed, it will have more cash in its vault
when it makes this exchange than it has now. It will get its money
back from New York.
Senator Reed. I want to follow this transaction now, and then let
us take up the New York end. I want to be perfectly fair in this
matter.
BANKING AND CURRENCY.
1355
Mr. U ntermyer. I am sure you do.
Senator R eed. This bank takes $1,750,000 and carries it to St.
Louis. It then puts up its note in the bank in St. Louis and borrows
it back?
Mr. U ntermyer. Borrows part of it.
Senator R eed. Sixty-six per cent of it?
Mr. U ntermyer. Sixty-six per cent of the $840,000 and all of the
$300,000.
Senator R eed. It takes that money and loans it out?
Mr. U ntermyer. Yes.
Senator R eed. N ow , in the event of the failure of a bank, if it has
notes in its vaults those notes, of course, can be taken out and col
lected?
Mr. U ntermyer. O f a reserve bank?
Senator R eed. N o ; any bank, regardless of the reserve system. By
this system— and it is because it is thought that cash is better than
notes in the hour of trouble that we have provided for a reserve, and
this bill still keeps a reserve. But this substitutes the notes of a bank
for cash to this extent, does it not ?
Mr. U ntermyer. I do not quite follow you there.
Senator R eed. I am just trying to find out where we get out on the
cash end.
Mr. U ntermyer. I do not see why you say this substitutes notes
for cash, because under the other system you have to put the re
serve—
Senator R eed (interposing). The bank is required to keep this
$875,000 now in cash in its vaults, this particular amount.
Mr. U ntermyer . N o ; that is the money that goes to the reserve
bank.
Senator R eed. I say under the present law it has to keep that in
its vaults as a cash reserve.
Mr. U ntermyer. Yes.
Senator R eed. Under the proposed law it can take that down to a
Federal bank, and the next day put its note up and bring it back
home.
M r. U ntermyer. N o ;
Senator R eed. I s that
Mr. U ntermyer. N o ;
its own vault under this
that it has to keep there.
$875,000 taken by the bank right away?
it has to keep half of the reserve actually in
new law.
Senator R eed. But this $875,000 that I am talking about is over
and above the one-half of the reserve. I believe we are both very
tired, and I think I see a thing very plainly, and it seems we get con
fused, between us, and I know it is quite unintentional.
Mr. U ntermyer. I am sure it is not intentional with you, and I
know it is not with me.
Senator R eed. I am speaking about the system as it now exists.
The bank is required to keep a certain reserve, and now we propose
to inaugurate a new system and to provide that the bank shall take
a part of its present reserve and deposit it in the reserve bank at
St. Louis, and I believe that we are agreed that that amount would
be $875,000.
Mr. U ntermyer. But where we do not agree is in this: You say
under this new law it must take part of the reserve it now carries
1356
BANKING AND CUBKENCY.
in cash and take that to St. Louis. I do not agree to that because
the part it is taking to that bank is that part that now goes some
where else. It is required to have less cash in its own vault under
the new law than under the old law.
Senator Heed. That is just exactly what I am trying to demon
strate.
Mr. Untermyer. It does not need to have it in the reserve bank.
Senator Reed. Under the present law it has to keep a certain cash
reserve, which is very gradually reduced. It is reduced to 9 per
cent in reserve cities, whereas it was 12| per cent ?
Mr. U nterm yer. Yes; 12^ per cent.
Senator R eed. N ow , it takes that 3 per cent and puts it over in the
bank in St. Louis?
Mr. U ntermyer. That is just what it does not do. The money
it puts into the bank in St. Louis is part of the other 12^ per cent o*f
the 25 per cent it sent to New York.
Senator N elson. On that 12£ per cent in New York it was given
2 per cent interest?
Mr. U ntermyer. There is no doubt about that.
Senator R eed. At the present time a reserve bank has to keep 25
per cent of cash either in its own vaults or in New York?
Mr. U ntermyer. Yes.
Senator R eed. It has to keep 12£ per cent at least in its own vaults?
Mr. U ntermyer. Yes.
Senator N elson. Less 5 per cent of circulation ?
Senator R eed. Yes. Now, we propose to inaugurate a new sys
tem, and the first thing we do is to say that instead of requiring it
to keep 25 per cent it can reduce its reserve to 18 per cent. That
reduces the reserve, as to that character of banks, by 7 per cent and
that 7 per cent can be loaned out and handled as the bank sees fit.
To that extent we have reduced the actual reserves of the banks of
the country, have we not?
Mr. U ntermyer. Yes; and increased their capacity to do busi
ness.
Senator R eed. And increased their capacity to do business. O f
course, their capacity to do business is increased also if a man comes
in and pays money over the counter, but we have been holding the
reserve because in the day of trouble cash is always worth its face.
We have reduced, as far as this part of the equation is concerned,
the element of safety by about one-fourth ?
Mr. Untermyer. I do not think so, Senator Reed, because you
have now a fund to which to go, which previously you did not have.
Senator R eed. I am going to follow that thought. That leaves
us 18 instead of 25 per cent reserve. Now, we take, ultimately, that
entire 18 per cent—n o; we take 12 per cent ultimately.
Senator N elson. O f that 18 per cent, under the new bill, 9 per
cent is kept in the vaults of the bank, and during the first year 3 per
cent is kept in the regional reserve, and at the end of 36 months
5 per cent, and then there is 4 per cent over and above that is op
tional with the bank, as I understand it, either to keep in its own
vault-----Mr. U ntermyer (interposing). I do not think so.
BANKING AND CUBRENCY.
1357
Senator R eed. When this bill gets to working the bank must put
into the regional reserve bank, as I understand it-----Mr. U ntermyer (interposing). Three per cent.
Senator R eed. Not ultimately.
Mr. U ntermyer. When it gets working-----Senator R eed (interposing). I mean when it is in full working
order it puts 5 per cent of its deposits in the regional bank.
Mr. U ntermyer. After 3b months.
Senator R eed. It must have that much there. And immediately
borrows back that 5 per cent, less the reserve.
Mr. U ntermyer. That is 33^ per cent.
Senator R eed. Thirty-three and one-third per cent. In other
words, it can borrow back about 3£ per cent. That is no longer cash
in its vaults, nor is it cash in the vaults of the reserve bank. It is
represented by notes and it can be loaned out by this very bank.
That is correct, is it not?
Mr. U ntermyer. It can be cash; if the bank wants it back, it can
get it.
Senator R eed. It can be loaned out?
Mr. U ntermyer. It can be loaned out; yes.
Senator R eed. That is reducing the actual reserve which must be
kept on hand by 10£ per cent?
Mr. U ntermyer. N o.
Senator R e£d. I mean 10£ per cent of the deposits. They have
cut down the actual cash reserve which must be kept in some bank
in some form as cash from 25 per cent by the following process:
First, we have reduced the 25 per cent by 7 per cent, and then we
have provided for the deposit of 3£ per cent in the regional bank,
which can all be borrowed back, which allows for the 33^ per cent.
Mr. U ntermyer. That is cash, anyway. Wlien it is borrowed back
that reserve is there to the credit of the bank.
Senator R eed. It is not cash.
Mr. U ntermyer . Yes; it is; because the reserve bank has to keep
it there.
Senator R eed. But they borrowed it back.
Mr. U ntermyer. But that is subject to demand.
Senator R eed. There is a demand for it. I am talking about the
cash reserve. By this process you have reduced your cash reserve
7 per cent.
Mr. U ntermyer. That I agree to.
Senator R eed. I want to get your mind on this question. When
the banking system of our country is in trouble this trouble arise
through a lack of confidence, in almost every instance. Do you think
that in the hour of trouble a run is less likely to come on a bank
that is required to keep, say, a 50 per cent reserve, than it would be
on one that is required to keep no reserve?
Mr. U ntermyer. No ; I do not think it is less likely. I think it is
more likely, and yet that is just the time you need the use of your
reserves. That has been the trouble.
Senator R eed. We have all been wrong in the idea that a 25 per
cent cash reserve was some element of safety in the hour of trouble?
Mr. U ntermyer. N o ; I do not think we have been wrong. I think
we have been right, because the existence of that 25 per cent cash re-
1358
BANKING AND CURRENCY.
serve ought to inspire confidence, but when confidence is not there,
and you can not use the reserve when the run does come—that is an
element you have to consider.
Senator Reed. I am not talking about just that. We might agree
on some plan to use it, under those conditions. I will assume that a
bank had all its money in the vaults, and everybody knew it; then
there never would be a run on the bank.
Mr. Untermyer. It does not follow when people lose confidence.
Look at the situation in the country. The soundest savings bank
institutions have lost their money-----Senator Reed (interposing). You do not mean to tell me—because
if you do, I am going to quit trying to agree with you—that if the
banks of the country had 100 per cent of their deposits in the banks
that anybody would get frightened at the banks? It has seemed to
me if we had a 100 per cent reserve—which is an impossible suppo
sition—that we would have no trouble; if we had no reserve we
might get frightened, and just in proportion as we have a reserve we
have a certain element of safety, which would tend to steady the
public mind.
Mr. Untermyer. It does not, as experience has shown. Take our
savings banks in New York, which have never failed. They are 100
years old, and they are enormously rich, and every time we have had
panics there have been runs upon those banks.
Senator Reed. Then you do not think a reserve is necessary at all ?
Mr. Untermyer. I do.
Senator Reed. For what purpose?
Mr. Untermyer. I think it is necessary in order to meet the situa
tion when it comes, but it ought not to be there% that you can use
so
it-----Senator Reed (interposing). Why require the banks in this bill to
keep 9 per cent in their vaults that they can not use? Why not put
it all in the regional banks where we can turn it into money?
Mr. U ntermyer. Because experience has shown they have to have a
certain amount of cash to do business.
Senator Reed. But they can not use it if this reserve is o f no
use-----Mr. U ntermyer (interposing). I do not say it is of no use.
Senator Reed. A s tending to furnish stability to the bank, it cer
tainly is not of use to be employed, because they would not employ
it. Therefore, why not wipe out all reserves—that is, as far as the
law requires them in banks, and put a certain reserve in the regional
banks and be done with it ?
Mr. U ntermyer. I do not say it adds no stability to the bank.
What I do say is, in the first place, in the European systems they
have no reserves and require none, because they have this access to
the central bank. The question as to whether people will have confi
dence in a bank seems to me to depend more upon the wealth and the
assets of the bank and the character of the directors of the bank
than upon the mere fact that it may have from 6 to 9 per cent of its
total deposits in cash. I think the general standing of the bank,
the character of its directors, and the general assets are far better
as an assurance than the other factor.
Senator R eed. It is more important to have a bank thought to be
perfectly solvent than to have a bank thought to have a certain
BANKING AND CURRENCY.
1359
amount of cash. I agree with that. But I am surprised that you
do not agree that whatever cash it did have, in so far as it had it,
was an element of safety, and an element that would tend to steady
the public mind.
Mr. U ntermyer. I have not said it was not.
Senator H e e d . I have tried to get that statement from you several
times.
Mr. U ntermyer. Yes; I have said it is not controlling; that in
times of great panics that did not seem to do much good.
Senator R eed. I did not ask you if it was controlling. I asked
you if it was an element?
Mr. U ntermyer. No; I do not think you did.
Senator R eed. Why not? I f we are going to establish these 12
banks, why require a bank to keep 9 per cent in its vaults that it
can not use? Why not allow it all to go to the central bank and be
utilized? Why do we stop at the halfway house?
Senator S hafroth. They can use the reserve, but they have to
replace it. In times of emergency they can use the reserve.
M r. U ntermyer. Y ou mean they can suspend the reserve require
ment under this bill?
Senator N elson. I f they allow their reserve to go below the statu
tory amount the comptroller notifies the bank and it has 30 days to
put it in.
Mr. U ntermyer. The Federal board can suspend the reserve
requirement.
Senator R eed. I do not understand that the bill is intended to
allow them to pay out-----Senator N elson (interposing). I was speaking of the existing
law.
Senator S hafroth. The same law would prevail under this bill.
There is no modification.
The C hairman . There is a further provision that the Federal
reserve board may make rules by which this can be used.
Mr. U ntermyer. They may suspend the reserve requirement. I
think that is only the reserve requirement of the reserve bank. I do
not think it applies to the member bank.
Senator H itchcock. All reserve requirements under this act.
Mr. U ntermyer. Let us see if that is so.
Senator H itchcock. That is corerct. I looked it up.
Senator R eed. So that the result first of this bill is to reduce the
reserves required to be held by practically 25 per cent. The next
proposition is the transfer over to the regional bank, when the bill
is thoroughly working, of 5 per cent; and they can borrow all of
that back except 33 per cent of it, and then they can, under the dis
cretionary orders of the central board, wipe out all the rest.
Mr. U ntermyer. For 30 days.
Senator R eed. For a period of 30 days.
Mr. U ntermyer. And to renew them.
Senator R eed. And to renew them-----Mr. U ntermyer (interposing). Fifteen days each.
Senator R eed. That pretty nearly wipes out the reserve, or makes
it entirely possible to wipe out all the reserves of all of the banks of
the whole country.
1360
BANKING AND CURRENCY.
Mr. U nterm yer . The bill requires that when they are needed they
ought to have some means of using them.
Senator R eed. D o you think that is a prudent thing to do?
Mr. Untermyer. Yes, I do. Our difficulty in times of stress has
been that we have had to keep our reserve intact. As a matter of
fact, the banks repeatedly violate the law with respect to their
reserve.
Senator Reed. Then do you think it is feasible as to this 9 per
cent to make rules which will permit the use of that money in times
of emergency, and do it with safety to the banking system?
Mr. U ntermyer. In times of crises, it seems to me, the power ought
to be there.
Senator Reed. Y ou think it could be done safely?
Mr. Untermyer. I think sometimes it is the only safety valve.
Senator Reed. Why not require a bank to keep 25 per cent of re
serve and allow them to borrow that 25 per cent under the same rules
and regulations, and just cut all this machinery out?
Mr. U ntermyer. Because you can have no system without the
machinery.
Senator Reed. Y ou do not mean to say, do you-----Mr. U ntermyer (interposing). You want to use those reserves.
Why require a bank to keep reserves there and have no use of them ?
Senator Reed. I am proposing to use them. I am proposing that
we require a bank to have a 25 per cent reserve, as we do now, and
require it to keep it in its vaults.
Mr. U ntermyer. Then you could not use it.
Senator Reed. And then provide that a bank could cut into that
reserve under the same kind of rules under which you are going to
permit it to use the 9 per cent and then, perhaps, as it cuts into that
25 per cent reserve, begin to tax it and to make it pay a penalty.
Mr. U ntermyer. On its own money?
Senator Reed. Yes, sir; every time it went below the 25 per cent,
increasing that penalty. Would that not give you a chance to use
the reserves?
Mr. U ntermyer. N o ; I do not think so. It does not give you a
chance to centralize them and use them to best advantage.
Senator Reed. I do not want to centralize them. I am just as
much afraid of centralization in the banking business as I am in
the manufacturing business. I am trying to keep the money in the
individual bank where the individual bank can use it.
Mr. Untermyer. They are using it this way.
Senator Reed. They are; yes; but it is gone.
Mr. U ntermyer. They are getting it back; they are borrowing
it back from a central point. Why charge them for it?
Senator Reed. That comes to an argument on the merits of it.
Your view is that the reserve is of little importance.
Mr. U ntermyer. I would control that reserve by having it in
liquid form. It can only be put out for a limit of 90 days, so that
it is comparatively liquid. The general assets of the bank are not
in that shape.
Senator Reed. That could be done by a rule of the board, could it
not, that when they cut into this reserve they could only loan it on
a certain class of security?
BANKING AND CURRENCY.
1361
Mr. Untermyer. Yes; if you take the position that there is no
advantage in mobilizing the reserves and concentrating them in
these 12 sections, that is true. But I take the position that there is
great virtue in that, that it distributes the money where it is needed
in that section, and I take the further position that if you want to
get a discount market for your paper you must have these central
places.
Senator R eed. I will discuss that question of mobilization with
you for a moment. Then I am through. I fail to understand where
there is any mobilizing—I may be dense about it. The 33 per cent
which is required to be held in the reserve bank is, of course, im
mobile. A bank takes 10 per cent of its capital and puts it down in
its reserve bank, and it takes out 5 per cent of its deposits and puts
it in the reserve bank. One-third of those deposits is set aside in
an immobile position. The balance, whatever it is, can be borrowed
back by that bank at once, and the central bank has nothing now but
the notes of that member bank. Assuming that that is done by all the
banks, the central bank has not a dollar in its treasury it can use.
The 33 per cent is set aside and must be maintained. There is no
mobility in that. It is generally conceded that that is what the
banks will do. Now, where does the regional bank get any money?
The only place it gets a dollar of actual free money is the money that
the Federal Government takes dowm and puts practically in its
vault.
Mr. U ntermyer. I do not agree it is generally conceded that the
banks are going to take back that money. On the contrary, I contend
that the money will be distributed in the various regions where it is
needed. To-day one set of banks can borrow the money, and to
morrow another set of banks could borrow the money, and it will be
ready for use in the section where it is needed. That is what I call
mobilization.
Senator R eed. N ow , assume I am a banker. You bring over to
me $300,000 of money that you can not use. You put it into my bank.
1 am loaning at a low rate of interest; why won’t you borrow it back
at that low rate of interest and loan it out at a higher rate?
Mr. U ntermyer. Because I would not need it. There would be
times when I do not need it, and the reserve bank knows it is needed
somewhere else, and it could get better compensation by putting it out
somewhere else, and presuming it knows the needs of their section,
you will get it when you need it, and somebody else will get it when
he needs it, and that is what I call mobilizing the reserve.
Senator Reed. Do you know of any reason why the member banks
would not want to borrow it back ?
Mr. Untermyer. Yes; there are times when they have no need
lor it.
Senator Reed. And they won’t get any interest.
Mr. U ntermyer. They won’t get any interest.
Senator Reed. D o you know of any banks that are willing to take
money over and put it into the vaults of another bank and not get any
interest on it?
Mr. Untermyer. I know of banks in a condition where they can
not lend their money.
Senator Reed. Perhaps you can not loan it for a few days.
Mr. Untermyer. There are seasons.
9328°— S. Doc. 232, 63-1— vol 2------ 2G
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BANKING AND CUEBENCY.
Senator R eed (continuing). But they won’t deprive themselves
of it.
Mr. U ntermyer . No ; but there are times that will come when they
can not utilize it to great advantage, and there are times that will
come when they can make money on it, and times when other people
could make money on it.
Senator R eed. Mr. Untermyer, do you think—say there is a re
gional bank up in my country or anybody else’s country, and banks
put their money in there and do not get any interest on it—do you
think that they will not want to borrow that money back at a low rate
of interest charge when they can put it back into trade?
Mr. U ntermyer . I think there are times when they will need it
and times when they will not need it, and these nine directors in the
different sections will know when one section needs money and when
another section needs money; and there will be certain banks that will
know when they want a large part of that money, and times when
they are not entitled to very much of it, and they will be satisfied with
the arrangement.
Senator R eed. An arrangement that I must take my money and
put it in a bank, get no interest on it, and the gentlemen over there
determine if I can get it back or somebody else will get it.
Mr. U ntermyer . Yes; some other section.
Senator R eed. And I have nothing to say about it?
Mr. U ntermyer . But you have. Those people are your representa
tives.
Senator R eed. D o you think these people are going to be my repre
sentatives?
Mr. U ntermyer . I hope so. Don’t you think so?
Senator R eed. N o.
Mr. U ntermyer . Who is going to elect them?
Senator R eed. I do not think they will be representatives of any
thing except a few big bankers, and I will tell you why.
Mr. U ntermyer . I would be very much surprised; I should not be
an advocate of this bill if I felt that way about it.
Senator R eed. I can name a dozen banks that will govern out
through my section of the country, that control the country corre
spondents with whom they have business relations. They will be
able to concentrate their funds and elect anybody they please.
Mr. U ntermyer . D o you think that will be so when the country
correspondents know that each one of them has as large a voice in
that bank as the big bank? For instance, where one bank has 500
correspondents, the vote of each one of those 500 will be as big as the
vote of the central bank?
Senator R eed. That is true.
Mr. U ntermyer . The correspondents will be no longer dependent
on the central banks as they are now, and not so likely to obey the
mandate of the central bank.
Senator R eed. I think this is exactly what would happen: These
country banks have got to put their money into certain great city
banks because they make money by putting it there. . You take away
part of that money and that bank will be still be a big bank, it wiil
still have relations with these people, and the same considerations
which led them originally, the small banks, to have confidence in the
management of one bank—the domination of that big banker of that
BANKING AND CURRENCY.
1363
section of the country, his skill and his knowledge all united, will
enable him to control, to a large extent, the funds of those men so that
the big fellows will be the men who are elected.
Mr. U ntermyer . The regional bank will be the big fellow then.
Senator R eed. Yes; but they will control the regional bank. Their
interest is greater, their activity will be greater, they have a great
advantage in location and in knowledge of the situation, and I think
I could name the directors now, in that region, if I just knew where
you would put the limits of the region, and they would be the big
bankers o f that region.
Mr. U ntermyer . I do not think so. And if so, they won’t remain
there long unless they are absolutely just to the small banks, because
the balance of power is 10 or 100 to 1 in the control of these banks—
it is always with the smaller man. They can turn out any manage
ment at any time. It is not just to the small man.
Senator R eed. Certainly. The small bankers are in the majority,
and they could elect anybody. They might get together and elect
some men who were utterly incompetent, and that would be another
danger.
Mr. U nterm yer . That is a danger of all forms of Government.
You can never guard against that in any system.
Senator R eed. 1 notice you go back to that a good deal, and I have
got to finally wrestle with you on that.
Mr. U ntermyer . N o ; it won’t be a wrestle.
Senator R eed. There is just this difference: You have got a sys
tem and compel me to come into it and make me a part of your sj'stem. That is one thing. You give me my rights as an independent
where I am not forced into a system, where I can go where I please,
where I have the courts o f law to protect me, and I can defy you or
any other man as long as I am within my rights, under the law, if
I have the law back of me.
Mr. U ntermyer . What is the practical application o f that? It
is a very fine sentiment to which we all agree.
Senator R eed. The practical application—it is a fine sentiment,
but one we are likely to lose sight of. The practical application is
every banker in this country to-day is an independent banker.
Mr. U ntermyer . I wish that were so. It is not.
Senator R eed. Except as his interest calls him to one point or
another, he is in an independent position. You create this system
and he must surrender that independence to a certain extent and
come into it. You compel him to become a member of the bank, along
with 600 or 800 other banks, and in that system he is not an inde
pendent factor, because the votes of the other men may overrule his
will and his desire, and you have built up a system that I am afraid—
I am not making any final statement about it; I may change my
mind— furnishes the machinery by which the great financiers of this
country can absolutely control these 12 banks.
Mr. U ntermyer . I think it adds so much to the independence
of those banks. That the smaller man would grab it immediately,
because it makes him a factor as big as the biggest man.
Senator R eed. I do not think it does.
Senator H itchcock . Let me ask a question there, Senator, if I
may interrupt. I think Mr. Reynolds, of Chicago, testified before the
committee he had 6,000 country bank deposits.
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BANKING AND CURRENCY.
Mr. U nterm yer . Y e s ; he has.
Senator H itchcock . Six thousand country banks doing business
with him. Now, I would like you to compare the influence of Mr.
Reynolds in this new organization that is to be formed with the
country banker, who is only in contact with 10, 15, or 20 different
banks, with Mr. Reynolds who is in contact daily with 6,000 ?
Mr. U nterm yer . He will cease to be in contact with them when this
bill goes into effect, and he will be just 1 o f 6,001; where he is now
1 to 6,000, he will be 1 of 6,001.
Senator R eed. I wish I could believe that.
Mr. U ntermyer . He is outvoted in the organization?
Senator H itchcock . In the voting power, you mean?
Mr. U ntermyer . The voting power in that organization.
Senator H itchcock . I am not talking about the voting power.
Mr. U ntermyer . Individuality will always dominate. You can
not make one man as big as another man, no matter what his rights
are.
Senator H itchcock . Here are 6,000 banks doing business with
him because they like his style of business, doing it with him volun
tarily. I ask you what his influence with these 6,000 banks will nat
urally be as compared any one with another ?
Mr. U ntermyer . What would you suppose his influence with those
banks would be after this bill is working as compared with what it
is to-day? To-day they are dependent on him for their accommo
dations—all 6,000. After this bill goes into effect he has no more
voice than any one of the 6,000.
Senator H itchcock . Why, didn't you tell us these country banks
will continue to deposit with the city agents, and that was one of the
virtues of the bill—that it would not deprive him of his correspond
ents; that he would still have recourse, if he was turned down by the
reserve bank, to the correspondents?
Mr. U ntermyer . He will have another place now. He will no
longer be under the tutelage and guardianship of Mr. Reynolds.
He will not have anything like the power over them he has now.
Senator H itchcock . The fact is these 6,000 country banks are
doing business with Mr. Reynolds of their own volition. You could
go to a dozen other banks— in fact, you could go to St. Louis, Omaha.
Minneapolis, and a large number of towns there—and they all do
business with him now of their own choice.
Mr. U ntermyer . I understand that.
Senator H itchcock . And the relations are those of friendship.
Mr. U ntermyer . The relations are those of business.
Senator H itchcock . Business friendship ?
Mr. U ntermyer . Business, pure and simple.
Senator H itchcock . It has been argued that these relations are
not entirely broken off. It has been given here as an argument in
favor of the bill, when I put to witnesses this question, What recourse
is a country banker going to have when the reserve bank refuses to
discount the paper or refuses to discount enough of paper-----Mr. U ntermyer (interposing). You have no right to assume that.
Senator H itchcock (continuing). They have said, “ We can go to
the city correspondents, because we have other moneys deposited
with the city correspondent and in his possession, and he will be re
quired to keep up his relations with us.” I f that is true, the city bank
BANKING AND CURRENCY.
1365
is going to continue to have a preponderance of influence in this
organization, as Senator Reed has said.
Mr. U ntermyer . I do not think so, because the man will go to an
other place, and he has a voice quite as loud and potent as Mr. Reyn
olds’s voice in this organization.
Senator B ristow . Suppose in our part of the country, the bank of
Kansas City—there is no regional bank in Kansas City and no re
gional bank in Omaha, but they have got to have deposits there or
to have a Kansas City exchange. Do you think it is going to deprive
the First National Bank of Kansas City of its influence?
Mr. U ntermyer . They can do an exchange business with the re
gional bank.
Senator B ristow . At St. Louis?
Mr. U ntermyer . Yes.
Senator R eed. They would not do it out there ?
Mr. U nterm yer . They can; and that is what the provisions are
made for.
The C h a ir m a n . Mr. Untermyer, I would like to ask you one
question. It is 6 o’clock, and I suppose we will have to adjourn in
a few minutes. I want to ask jrou a question about the liquid char
acter of commercial paper.
Mr. U nterm yer . Yes.
The C h a ir m a n . Which, I think, is the vital and major point in this
system.
Mr. U ntermyer . It is at the foundation of the whole bill and the
whole system.
The C h a ir m a n . The term “ commercial paper ” is well understood
in European countries, where it is used in the character of the trans
action such as you describe in your description of commercial paper.
I want to call your attention to the tables of the distribution of money
in the United States, found on page 51 of the comptroller’s report
of 1912, in which it appears that of the $3,284,500,000 in circulation
in the United States, $1,720,000,000 of it, or 47 per cent, or $17.98
per capita of that money, is in the hands of the average citizen and
not in the banks at all. In the banks, according to the report of 1912,
was $1,653,000,000, and in the Treasury of the United States was
$364,000,000. Now, this commercial paper, against an actual transac
tion in the hands of the Federal reserve bank running with a short
maturity—when it does mature is it not practically paid out of the
pockets o f the people, out of this reservoir of $1,700,000,000 in the
pockets of the people ?
Mr. U ntermyer . I f it is genuine commercial paper it has got to
be, because it represents something that has reached the consumer and
gone into consumption.
The C h a ir m a n . It takes this money from the consumer?
Mr. U ntermyer . Yes.
The C h a ir m a n . That is the gist of this matter, is it not?
Mr. U ntermyer . Yes.
Senator R eed. I challenge the statement that it has gone into the
hands o f the ultimate consumer.
Mr. U ntermyer . Presumably it has.
Senator R eed. Presumably it has; but take the case of a man who
buys $1,000,000 worth of corn. He buys it in the State of Kansas
and gives his note for it; and he ships the corn to St. Louis, and it
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BANKING AND CURRENCY.
goes into an elevator and stays in the elevator for perhaps six months.
It is finally shipped to a mill. It goes out into the hands of the
fellow that eats corn meal probably a year after that. There is no
use in assuming that the transaction is going to be closed up in 45
days and somebody is going to have consumed the product and you
have gotten the money out of his pocket. We do not want to follow
such a will-o’-the-wisp as that.
Mr. U ntermyer . It is not a will-o’-the-wisp; it is an article that
goes into consumption.
Senator R eed. I want to be perfectly fair about it, and I grant
you that where a man buys that corn and gives his note, he is likely
to realize the money on the corn within a short time, and therefore
he may be in shape to go and take up his note. But to talk about go
ing out and getting it out of the pockets of the people—this $17 that
is in their pockets—you have got to have plenty of time to work that
out. You can not liquidate a note within 45 days.
Mr. U nterm yer . That is where it comes from ultimately, from the
pockets of the people. In the case of a man who goes and borrows
money to build a factory or to buy a farm, that note does not liquidate
itself.
Senator R eed. Not so quickly; no.
Mr. U ntermyer . It may never liquidate itself.
Senator W eeks . Does not the same amount of money come back
into the pockets of the people during the same time, so that when
the transaction is completed the people have the same amount of
money as when they commenced?
M r. U ntermyer . N o ; they have the same amount less what they
have spent for corn?
Senator W eeks . But presumably they replenish that?
Mr. U ntermyer . Presumably, but does this get out into consump
tion. That is the point of it.
There is one subject, Mr. Chairman, I would like to refer to, and
that relates to the report of the House committee which accompanies
this bill.
Senator B ristow . I have a lot of questions that I would like to
ask, which I deferred this afternoon.
Mr. U ntermyer . I am very sorry, but I came down with the dis
tinct understanding that I was to be relieved this afternoon.
Senator B ristow . Can’t we finish with the witness now? This is
the second time we have had witnesses here and I have not had an
opportunity to ask questions which I desire. Mr. Hulbert was here,
and he had to go to Chicago, and now I am not going to have an
opportunity of interrogating Mr. Untermyer.
The C h a ir m a n . The Senator from Kansas should know that the
Chair can not control the time of the witnesses before this committee.
Senator B ristow . I know the chairman can not, but I should have
the same opportunity to ask questions as other members.
The C h a ir m a n . The chairman of this committee has only asked
one or two questions this afternoon.
Senator B ristow . The chairman of the committee has not taken
up much time, and neither the chairman nor any member of the
committee has taken up time and wasted it; I do not mean that; but
I have not had an opportunity to ask any questions.
b a n k in g
and
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Mr. U ntermyer . Would it be possible to sit 15 minutes longer?
Senator N elson . Can it not go over until another day?
Mr. U ntermyer . I can not return again I am afraid.
The C h a ir m a n . W ill the committee let the witness conclude this
statement, or does the committee wish to cut him off?
Mr. U nterm yer . I want to be at the service of the committee.
Senator H ollis. I move that we extend the time of adjournment
to 15 minutes.
Mr. U ntermyer . It will only take me two or three minutes. 1 am
referring to the House report, at page 52. accompanying this bill, in
which section 15 is discussed, as follows:
The desirability of opening an outlet through which the funds of Federal
reserve banks might be profitably used at times when it was thought to facilitate
transactions in foreign exchange or to regulate gold movements.
In order to attain these ends it is deemed wise to allow a reserve bank, first
of all, to buy and sell from anyone whom it chooses, the classes of bills which
it is authorized to rediscount. The reserve banker evidently would not do this
unless it should be in a position which, as already stated, furnished a strong
motive for so doing.
I think that is an error, because there is no power that I can see
in the bill for a bank to buy and sell bills or notes from anyone whom
it chooses, unless it is the bills which it is authorized to discount.
The framers of the bill must have meant that the bill gave a right
to buy domestic bills of exchange.
Senator N elson . It does not cover domestic bills, it only covers
foreign bills.
Mr. U ntermyer . No ; it does not, and evidently it should.
Senator H itchcock . Y ou think it ought to?
Mr. U ntermyer . I think it should.
Senator H itchcock . Let me ask you, Suppose it buys bills of ex
change and commercial paper in the open market: Does not that
detract from one of the arguments in favor of this measure? We
have argued that one reason why the notes of these regional reserve
banks are so safe is because they have the indorsement of the mem
ber bank. Those notes they buy in the open market would not have
that indorsement?
Mr. U ntermyer . N o, they would not: but at the same time a cer
tain proportion of such purchases, at different times, might be abso
lutely essential in order to keep down the rate.
Senator H itchcock . Would you base currency on that paper?
Mr. U ntermyer . N o ; I would not base currency on that paper, but
I would give the reserve banks the right and power to control and
prevent very high rates in a community by being able to go in and
buy paper.
Senator N elson . These must be accepted bills of exchange?
Mr. U ntermyer . Yes. They would have to be of very high order.
Senator H itchcock . That would be all right where your 12 reserve
banks are located, but what about the other localities?
Mr. U ntermyer . The 12 regional banks would cover the whole
country.
Senator H itchcock . Yes; but how are you going to buy paper out
in Podunk ?
Mr. U ntermyer . Suppose a merchant comes to them and says that
three or four banks in this town are going to put the rate up to 12
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BANKING AND CURRENCY.
per cent. There is plenty of high-class paper and we want you to
relieve that situation. They ought to be in a position to do that.
Senator H itchcock . Y ou are only going to have 12 centers in the
United States, and you will have people living 200 miles, perhaps,
distant from your reserve bank who will sell paper to the bank ?
Mr. U nterm yer . I think when a situation arose like that the mere
knowledge that relief could be granted and protection furnished
against such oppression would render it rarely necessary to furnish
the protection.
Senator W eeks . I think the proposition to let the banks go into
the market and purchase paper is a very bad one, myself; but I want
to ask you, Mr. Untermyer, if you think it is possible for 12 banks,
with $100,000,000 of capital, to compete successfully with 25,000 banks
having $2,000,000,000 of capital in controlling the rate ?
Mr. U ntermyer . Yes; I think the very fact that they buy a limited
amount of paper in the market will affect the rate.
Senator W eeks . Y ou will have 12 joint-stock banks in this country
with as much capital and as many resources as your reserve banks
will have.
Mr. U ntermyer . I realize that, but I do not think they would be
comparatively so large if you consider the Government funds and the
reserves and the capital of the reserve banks. They will be respect
able banks, especially when operating in cooperation.
Senator W eeks . They will come pretty near to it.
Mr. U ntermyer . Oh, I know they will be very large.
Senator W eeks . And they will have more capital?
Mr. U ntermyer . Yes; but it won’t be so liquid. I realize that
there is that difficulty, and that is one of the arguments in favor of
a less number of reserve banks; but I think the argument on the other
hand that will more than overshadow that is the assurance that you
will have banks freer from financial control and more responsive to
the needs of their member banks.
Senator R eed. Mr. Untermyer, suppose you undertake to force the
banks in here in 60 days or 90 days—the national banks—and the
national banks simply say we will take out State charters or go into
liquidation. That would have a most disastrous effect on this coun
try, temporarily, would it not?
Mr. U ntermyer . Unless you set up this system and go along with
out them; but there are so many advantages to them in this bill I
do not believe you can fairly consider that without the range of prob
abilities. But you ought, it seems to me, and I have suggested it,
to set up some alternative system here.
Senator H itchcock . Y ou are not in favor of giving the banks
the option of coming in or staying out. You believe in compelling
them to do it in 90 days?
Mr. U ntermyer . I think in a limited time. I think if you give
them a year to consider the question they will all simply postpone
their action for a year.
Senator R eed. And if we have a money trust in this country, as
some people suspect, and you have spent some time in proving, in
that year’s time that money trust might be doing some pretty disas
trous things to the business in this country, might it not?
Mr. U ntermyer . I think it would be a very dangerous thing to
postpone the operation of this bill for a year.
BANKING AND CURRENCY.
1369
Senator R eed. And if you postponed it for 90 days, you think a
well-organized and well-equipped money trust could not do some
things of that kind?
Mr. U ntermyer . I f you are going on that basis, you might better
sit down and surrender right away and let the financial interests
write this bill.
Senator R eed. N o ; but had better let the system stand as it does
stand, with a place where every independent banker can go in the
hour of need and not have to trifle with the other banks; and then if
we had a money trust that we will have to attend to as a separate
question.
Mr. U nterm yer . Senator, I do not think it is feasible for the rea
sons I have already stated. It would be much more satisfactory if it
could be made feasible.
Senator N elson . Mr. Untermyer, will you prepare a bill with the
amendments you have suggested and send it to the chairman of the
committee? The committee can then have it printed, and in that
way we can get at your recommendations.
Mr. U nterm yer . I would rather have it printed myself.
Senator N elson . Oh, no; you typewrite it and the chairman can
have it printed for the committee so that every member could have it.
Mr. U ntermyer . Yes; I will endeavor to do that.
FURTHER STATEMENT OF W ILLIAM W. FLANNAGAN,
MONTCLAIR, N. J.
Mr. F l a n n a g a n . Liquid assets are available cash and debts due to
the bank maturing within a short period, which will be, or are sup
posed to be paid when due.
It must be remembered that the business of banking consists of the
exchange of debts; the operation of converting debts into coin con
stitutes actually such a small proportion of such business that it may
be ignored in the definition of banking for all practical purposes, ft
is necessary for the existence of the business that this exchange of
debts shall be continuous. The making of long-time loans exclusively
would be an investment business, not banking. When the conversion
o f bank debts into coin becomes general the normal business of bank
ing ceases. We then call such a condition commercial crises, which,
unless checked, ends in financial panics and general destruction of
values. Hence, in order that the business of banking—or exchange of
debts—shall be continuous the debts due to the bank must have short
maturities. Not only for continuity but from the nature of the busi
ness itself is this necessary.
The banker could not survive if he was confined to the income from
his own capital, for the expenses incident to the business are incurred
in order that he may derive income from the capital of others. This
borrowed capital is represented by his debts to his customers called
“ deposits ” and his debts to the public called “ circulation.” These
debts are payable on demand.
Experience has demonstrated that the creditors or customers hold
ing these “ deposits ” and the public holding these “ notes ” do not
1370
BANKING AND CURRENCY.
demand the payment of the debts they represent all at one time. The
law of average applies, similarly as it does in the business of life
insurance.
Hence, the banker, in order to preserve the continuity of his busi
ness, must produce an average for the debts due to him represented
by his loans and discounts, and this he can do only by having short
maturities. He can not tell at what time his creditors may call upon
him for the payment of his debts beyond the normal average, and
must therefore adjust the maturities of the debts due to him, as indi
cated, so that his resources will be available or liquid. I f he invests
in stocks and bonds—so-called marketable securities—or long-time
loans to a greater extent than the demands on him for payment by
his customers, he is dependent upon finding a buyer before the matur
ity time comes, and “ theres the rub.” The buyer may not be avail
able, and then suspension of payment is forced, or if the buyer is
found he may demand such sacrifice that temporary suspension may
appear preferable.
There is yet another reason considered from the viewpoint of the
general welfare.' These debts due by the banker payable on demand
are accepted by the people as a substitute for coin—i. e., used as
money—and it therefore becomes to the interest and welfare of the
people, not only that the bankers should be encouraged in the con
servatism of retaining at all times sufficient available liquid assets
for resubstitution, but also that restrictions should for the protection
of the people be thrown about this substitution of debt for coin as a
matter of safety. Hence, you limit circulation and require reserves
bv provision of law. Not only are these restrictions needed for the
bankers, but for the people themselves, as both are prone to make this
substitution to an excessive degree by reason of the mutual benefit
thereby arising. This mutual benefit is called “ credit facilities.”
It is most desirable that these “ credit facilities ” should always
exist. The normal interchange of property and service in a highly
developed civilized community can not continue without such facili
ties. That these facilities may always be available, there must exist
some source from which in times of stress or distrust (which times
seem inseparable from the selfish aspirations of human nature) that
credit may emanate. This means some source or place or combina
tion whereby at such times a debt can be created which will be
willingly and generally accepted in lieu of coin in connection with
the interchange of property and service.
Hence you have provided a combination of banks in the Federal
reserve system, with the Government, which is the foundation of all
credit, directly supporting them as the source from which this re
serve credit (or ability to incur debt) may be drawn.
This reserve credit is utilized by the rediscount of paper held by
the member banks, which means the transfer of debts due to such
member banks by its customers to the reserve banks, in substitution
for the debt of the reserve bank, which latter debt, whether in the
form of deposit or circulating note, can continue to be used as a
substitute for coin. The debt thus transferred by the member bank
must be from its liquid assets or short time maturities, which will
1371
BANKING AND CURRENCY.
liquidate themselves by payment, or else you would have to provide
some reserve source o f credit for the reserve banks themselves and
thus have an endless chain.
It should not be overlooked that the restrictions on the substitu
tion o f bank debts for coin, and the facilities provided by law
whereby the banks may exchange the debts due to them for other
bank debts which serve as such substitute, are not made nor intended
to be made for the benefit of the banks, but for the benefit of the
people whom the banks serve. The functions of banking, which are
“ discount,” “ deposit,” and “ circulation,” are only names given to
the different forms in which banks interchange debts, which inter
changes are the growth and development from the necessities of
trade and commerce in supplying the wants of organized society.
Senator N elson . Mr. Chairman, I move we adjourn until 11 o’clock
to-morrow.
The C h a ir m a n . The chair desires to submit for the record certain
tables showing the distribution of money in the United States, the
cash on hand in banks reporting to the Comptroller of the Cur
rency, the classification of deposits in each class of banks, and the
amount and class of loans of all national banks as o f June 14. 1912.
(The tables referred to are as follows:)
C la s sific a tio n
of
d e p o s its
in e a c h
c la ss
of
banks
as
of June
I ff, 1 9 1 2 .
N um ber
o f ban ks.
In d iv id u a l d e
p o s it s s u b j e c t t o
c h e c k w it h o u t
n o t ic e .
S a v in g s d e p o s it s
o r d e p o s it s in
in t e r e s t o r s a v in g s
d ep a rtm en t.
S ta te b a n k s ...........................................................
M u t u a l s a v in g s b a n k s ....................................
S t o c k s a v in g s b a n k s ........................................
L o a n a n d t r u s t c o m p a n i e s ...........................
P r iv a t e b a n k s .....................................................
13,381
630
1,292
1,410
1,110
$ 1 ,6 0 9 ,1 1 7 ,0 6 9 .9 1
1 5 ,9 0 7 ,8 0 1 .7 2
1 7 8 ,1 2 7 ,7 4 8 .3 6
2 ,3 1 9 ,0 5 5 ,9 5 9 .9 5
7 8 ,3 3 9 ,6 0 0 .9 1
$ 6 5 7,47 7,2 20.3 1
3 ,5 9 2 ,5 3 0 ,0 7 0 .3 3
5 7 4 ,8 2 2 ,4 5 9 .5 7
9 1 0 ,8 5 0 ,1 6 7 .6 0
2 6 ,8 6 8 ,8 5 3 .6 8
$ 6 1 0 ,2 0 7 ,5 4 8 .2 5
9 6 ,5 2 8 .6 5
8 7 ,0 9 9 ,9 2 8 .0 2
3 9 5 ,9 8 3 ,4 0 7 .0 2
4 6 ,6 5 1 ,2 9 0 .1 4
T o t a l , S t a t e , e t c ., b a n k s ..................
N a t io n a l b a n k s ...................................................
17,823
7,372
4 ,2 0 0 ,5 4 8 ,1 8 0 .8 5
4 ,1 2 2 ,9 3 7 ,4 4 2 .6 8
5 ,7 6 2 ,5 4 8 ,7 7 1 .4 9
733 ,6 4 3 ,9 3 6 .1 1
1 ,1 4 0 ,0 3 8 ,7 0 2 .0 8
8 1 2 ,7 4 5 ,3 9 1 .8 6
G r a n d t o t a l ..............................................
2 5 ,195
8 ,3 2 3 ,4 8 5 ,6 2 3 .5 3
6 ,4 9 6 ,1 9 2 ,7 0 7 .6 0
1 ,9 5 2 ,7 8 4 ,0 9 3 .9 4
C e r tifie d
ch eck s.
C a sh ie rs’ c h e c k s
o u t s t a n d in g .
C la s s ific a tio n .
C la s s ific a tio n .
$ 3 2 ,2 5 4 ,7 6 2 .1 0
C e r t ific a t e s o f
d e p o s it .
T o t a l.
S t o c k s a v in g s b a n k s ................................................................
L o a n a n d t r u s t c o m p a n ie s ...................................................
7 9 5 ,385 .48
1 6 ,6 5 8 ,0 1 7 .7 7
3 0 4 ,2 3 7 .0 0
* 1 0 ,9 2 1 ,2 9 7 .4 2
123 ,427 .41
2 ,0 5 2 ,3 3 8 .1 8
3 2 ,0 3 0 ,6 8 6 .5 8
3 3 0 ,6 3 7 .1 7
$ 2 ,9 1 9 ,9 7 7 ,8 9 7 .9 9
3 ,6 0 8 ,6 5 7 ,8 2 8 .1 1
84 2 ,8 9 7 ,8 5 9 .6 1
3 ,6 7 4 ,5 7 8 ,2 3 8 .9 2
1 5 2 ,4 9 4 ,6 1 8 .9 0
T o t a l , S ta te , e t c ., b a n k s ..........................................
N a t io n a l b a n k s ...........................................................................
5 0 ,0 1 2 ,4 0 2 .3 5
8 5 ,2 2 8 ,8 6 0 .8 5
4 5 ,4 5 8 ,3 8 6 .7 6
7 0 ,9 0 5 ,5 3 1 .8 6
1 1 ,1 9 8 ,6 0 6 ,4 4 3 .5 3
i 5 ,8 2 5 ,4 6 1 ,1 6 3 .3 6
G ra n d t o t a l .....................................................................
1 3 5 ,2 4 1 ,2 6 3 .2 0
1 1 6 ,3 6 3 ,9 1 8 .6 2
1 7 ,0 2 4 ,0 6 7 ,6 0 6 .8 9
i U n it e d S ta te s d e p o s it s n o t i n c lu d e d .
1372
BANKING AND CURRENCY,
The amount and class of loans of all national banks on approximate dates in
lf)02 to 1910 and 1911 and 1912 are shown in the following table:
N um
ber o f
ban ks.
D a te.
S e p t . 15, 190 2..................
S e p t . 9 ,1 9 0 3 ..................
S e p t . 6, 1 9 0 4 .......................
A u g . 25, 1905. . . .
S e p t . 4, 190 6......................
A u g . 22, 1907.....................
S e p t . 23, 1908....................
S e p t . 1, 190 9......................
S e p t . 1 ,1 9 1 0 .......................
J u n e 7 ,1 9 1 1 ........................
J u n e 1 4 ,1 9 1 2 .....................
O n de
m an d , pa
p e r w it h
o n e or
m o r e in d i
v id u a l or
fir m n a m e s .
4,601
5,042
5 ,412
5 ,7 5 7
6 ,137
6 ,544
6,853
6 ,9 7 7
7,173
7,277
7,372
M illio n s.
$ 23 7.3
283 .1
2 7 9 .8
320.1
3 7 4 .7
4 28 .2
3 95 .9
4 4 1 .5
524 .3
5 2 9 .7
5 71 .3
O n t im e ,
seem ed b y
O n de
O n t im e ,
stock s,
m a n d , se
O n t im e ,
s in g le
bon d s, and
p a p e r w it h n a m e p a p e r
cu red b y
o th e r per
stock s,
t w o or
(o n e p e r s o n
son al secu
b o n d s , a n d m o r e in d i
o r fir m ) ,
r itie s . o r o n
oth er p er
v id u a l or
w it h o u t
m o r tg a g e s
s o n a l s e c u fir m n a m e s . o t h e r s e c u
o r o th e r
r ities.
r it y .
rea l esta te
s e c u r it y .
M illio n s.
1706.9
717.3
8 1 8 .9
854 .1
8 28 .0
8 32 .9
9 2 2 .7
9 57 .3
9 39 .1
9 5 3 .8
9 85 .4
M illio n s.
$ 1 ,1 7 6 .4
1 ,2 6 7 .5
1 .3 1 6 .7
1 ,3 8 2 .2
1 ,5 0 2 .0
1 .6 4 8 .7
1 ,5 8 2 .4
1 , 6 9 8 .4
1 ,8 4 2 .5
1 ,8 8 5 .1
1 ,9 7 3 .4
M illio n s.
$517.1
558 .1
61 1 .0
689 .1
776.1
89 9 .5
852.1
9 7 1 .5
1 ,0 6 8 .3
1, 124.7
1 ,1 9 8 .5
M illio n s.
$642.4
655 .4
6 9 9 .7
753 .0
818 .1
8 69 .2
9 97 .5
1 ,0 6 0 .1
1 ,0 9 3 .0
1 ,1 1 7 .5
1 ,2 2 5 .3
T o t a l.
M illio n s.
$ 3 ,2 8 0 .1
3 .4 8 1 .4
3 ,7 2 6 .2
3 .9 9 8 .5
4i 2 9 9 .0
4 ,6 7 8 .5
< 750.6
5 ,1 2 8 .8
5; 4 67 .2
5 .6 1 0 .8
5 .9 5 3 .9
D ISTR IB U T IO N OF M O N E Y IN T H E U N ITE D STATES.
In the following table is shown the distribution of money in the United States,
giving the amount in the Treasury as assets, amount in reporting banks, and
elsewhere, from 1892 to 1912. inclusive:
Year
en ded
J u n e 30—
1892................
1893.................
1894.................
1895................
1896................
1897................
1898................
1899................
1900................
1901................
190 2................
1903................
1904................
1905................
1906................
1907................
190 8................
1909................
1910................
1911................
191 2................
C o in a n d
oth er
m oney
in t h e
U n it e d
S ta tes.
M illio n s.
$ 1 ,7 5 2 .2
1 ,7 3 8 .8
1 ,8 0 5 .5
1 ,8 1 9 .3
1 ,7 9 9 .9
1 ,9 0 6 .7
2 ,0 7 3 .5
2 ,1 9 0 .0
2 ,3 3 9 .7
2 ,4 8 2 .1
2 ,5 6 3 .2
2 ,6 8 4 .7
2 ,8 0 3 .5
2 ,8 8 3 .1
3 ,0 6 9 .9
3 ,1 1 5 .6
3 ,3 7 8 .8
3 ,4 0 6 .3
3 ,4 1 9 .5
3 ,5 5 5 .9
3 ,6 4 8 .8
C o in a n d o t h e r
m o n e y in T r e a s
u r y as a ssets.1
A m o u n t.
M illio n s.
$150.9
142.1
144.2
217 .4
293.5
265 .7
235 .7
286 .0
284 .6
3 0 7 .8
313. 9
317 .0
284 .3
295 .2
333 .3
3 4 2 .6
3 4 0 .8
300.1
317 .2
3 41 .9
364 .3
Per
cen t.
8 .6 0
8.1 7
7.9 9
11.95
16.31
13.93
11.37
13.06
12.16
12.39
12.24
11.80
10.14
10.24
10.86
11.00
10.08
8.81
9 .2 7
9.61
9 .9 8
C o in a n d o t h e r
m o n e y in r e p o r t
in g b a n k s .2
A m o u n t.
M illio n s.
$586.4
51 5 .9
6 88 .9
631.1
5 31 .8
628 .2
687 .7
723 .2
749.9
794.9
837.9
848 .0
9 82 .9
987 .8
1 ,0 1 0 .7
1 ,1 0 6 .5
1', 3 62 .9
1 ,4 4 4 .3
1 ,4 1 4 .6
1 ,5 4 5 .5
1 ,5 6 3 .8
Per
cen t.
3 3 .48
2 9 .68
3 8 .17
3 4 .96
29.55
32.94
3 3 .17
33.02
3 2 .0 5
3 2 .0 2
32.69
3 1 .59
3 5 .06
3 4 .27
32.92
35.51
4 0 .34
4 2 .40
41.37
43.46
4 2 .86
C o in anc
n o t in
ban ks.
A m o u n t.
M illion s.
$ 1 ,0 1 4 .9
1 ,0 8 0 .8
972 .4
970 .8
974 .6
1 ,0 1 2 .8
1 ,1 5 0 .1
1 ,1 8 0 .8
1 ,3 0 5 .2
1 ,3 8 0 .4
1 ,4 1 1 .4
1 ,5 1 9 .7
1 ,5 3 6 .3
1 ,6 0 0 .1
1 ,7 2 5 .9
1 ,6 6 6 .5
1 ,6 7 5 .1
1 ,6 6 1 .9
1 ,6 8 7 .7
1 ,6 6 8 .5
1 ,7 2 0 .7
o th er m o n e y
T rea su ry or
Per
cen t.
Per
c a p it a .
5 7 .92
62.15
5 3 .84
5 3 .36
54.14
53.13
55 .4 6
53 .9 2
55.79
55.59
55.07
56.61
54.80
55.49
56 .2 2
53 .4 9
49 .5 8
48.78
4 9 .36
46.93
4 7 .16
$15.50
16.14
14.21
13.89
13.65
13.87
15.43
15.51
17.11
17.75
17.90
18.88
18.77
19.22
2 0 .39
19.36
19.15
18.68
18.68
17.75
17.98
I n c ir c u la t io n ,
e x c l u s iv e o f c o in
an d oth er m o n e y
in T r e a s u r y as
assets.
A m o u n t.
M illio n s.
$ 1 ,6 0 1 .3
1 ,5 9 6 .7
1 ,6 6 1 .3
1 ,6 0 1 .9
1 ,5 0 6 .4
1 ,6 4 1 .0
1 ,8 3 7 .8
1 ,9 0 4 .0
2 ,0 5 5 .1
2 ,1 7 5 .3
2 ,2 4 9 .3
2 ,3 6 7 .7
2 ,5 1 9 .2
2 ,5 8 7 .9
2 ,7 3 6 .6
2 ,7 7 3 .0
3 ,0 3 8 .0
3 ,1 0 6 .2
3 ,1 0 2 .3
3 ,2 1 4 .0
3 ,2 8 4 .5
Per
c a p it a .
$24 .60
2 4 .06
2 4 .56
23.24
21.44
22.92
25.19
2 5 .62
26.93
27.98
28.43
29.42
30.77
3 1 .08
3 2 .32
3 2 .22
3 4 .72
34.93
34.33
3 4 .20
3 4 .34
1 P u b li c m o n e y in n a t io n a l-b a n k d e p o s ita r ie s t o t h e c r e d it o f t h e T re a s u re r o f t h e U n it e d S ta tes n o t
in c lu d e d .
2 M o n e y in b a n k s o f is la n d p o s s e s s io n s n o t in c lu d e d .
1373
BANKING AND CURRENCY',
C a sh o n h a n d in ba tiks r e p o r tin g to t h e C o m p tr o lle r o f th e C u r r e n c y J u n e
1!{ , 1912.
N um ber
o f ban ks.
C la s s ifica tio n .
G o ld c o in .
G o ld
ce r tific a te s .
S ilv e r
cer tific a te s .
S ilv e r
d o lla rs .
N a tio n a l b a n k s ...........................
S ta te b a n k s ...................................
M u tu a l s a v in g s b a n k s .............
S t o c k s a v in g s b a n k s ................
L oa n a n d tru st c o m p a n ie s ..
P r iv a t e b a n k s ..............................
7 ,3 7 2
13,381
630
1,292
1,410
1,110
$ 1 4 9,29 4,4 17.7 8
4 3 .4 7 5 .4 7 3 .2 3
2 ,6 1 3 ,1 0 1 .7 4
13,0 9 9 ,1 0 2 .1 1
2 8 .7 2 0 .3 9 0 .2 3
1 ,1 8 6 ,9 0 1 .6 5
$ 4 3 7,08 1,3 80.0 0
5 5 ,8 3 2 ,1 1 0 .0 0
3 .0 4 0 .6 2 0 .0 0
3 .2 9 2 .3 4 0 .0 0
143 ,7 9 7 ,9 4 0 .0 0
5 0 2 ,700 .00
$ 1 2 ,6 3 7 ,2 2 1 .0 0
7 .4 8 3 .8 2 4 .0 0
2 1 ,5 7 5 .0 0
8 0 9 .6 6 0 .0 0
1 .5 7 1 .3 9 1 .0 0
4 3 3 .7 2 4 .0 0
$13 8 ,5 6 9 ,6 2 8 .0 0
2 8 .6 5 9 .2 1 7 .0 0
1 ,5 2 2 ,1 0 1 .0 0
1,445,841.1X1
2 3 .6 9 4 .6 3 2 .0 0
482 ,7 5 0 .0 0
T o t a l ....................................
25,195
23 8 ,3 8 9 ,3 8 6 .7 4
6 4 3 ,5 4 7 ,0 9 0 .0 0
2 2 ,9 5 7 ,3 9 5 .0 0
1 9 4 ,374 ,16 9.00
C la ssifica tio n .
M in o r c o in s .
L e g a l te n d e r .
N a t io n a l
b a n k n o ta s .
C a sh n o t
cla ssifie d .
N a t io n a l b a n k s .................. $ 2 2 ,5 5 5 ,6 9 2 .0 8
S ta te b a n k s .........
9 ,8 8 4 ,2 6 5 .5 0
M u tu a l s a v in g s b a n k s . . .
2 45 ,994 .27
S t o c k s a v in g s b a n k s ____
8 2 8 ,452 .46
L o a n a n d tru st c o m p a n ie s
3 ,9 3 2 ,3 5 1 .8 5
P r iv a t e b a n k s .....................
291 ,251 .53
$ 1 8 8 ,44 0,2 07.0 0
3 5 .3 7 4 .4 7 5 .0 0
1 .3 7 8 .5 6 6 .0 0
2 .5 7 9 .3 1 0 .0 0
2 4 .5 8 3 .3 3 6 .0 0
7 6 6 ,159 .00
$ 4 7 ,5 6 4 ,2 7 7 .0 0
2 4 .5 6 8 .1 6 4 .0 0
3 .3 7 0 .4 1 1 .0 0
3 .4 0 0 .1 1 8 .0 0
2 8 .3 4 7 .1 0 9 .0 0
1 .0 3 1 .6 0 8 .0 0
$ 3 6 ,4 7 9 ,1 9 5 .7 5
3 ,9 9 3 ,6 9 2 .2 8
3 ,8 1 1 ,1 7 8 .9 9
2 7 ,5 0 4 ,3 1 3 .1 8
2 ,7 5 5 ,3 1 0 .2 0
$ 9 9 6 ,1 4 2 ,8 2 3 .4 6
2 4 1 ,7 5 6 ,7 2 4 .4 8
1 6 ,1 8 6 ,0 6 1 .2 9
2 9 ,2 6 6 ,0 0 2 .5 6
2 8 2 ,1 5 1 ,4 6 3 .2 6
7 ,4 5 0 ,4 0 4 .3 8
3 7 ,7 3 8 ,0 0 8 .2 9
2 5 3 ,1 2 2 ,0 5 3 .0 0
108 ,2 8 1 ,6 8 7 .0 0
7 4 ,5 4 3 ,6 9 0 .4 0
1 ,5 7 2 ,9 5 3 ,4 7 9 .4 3
T o t a l ...........................
S c h e d u l e o f l o a n s r u n n i n g 9 0 d a y s o r l e s s f r o m A u g . 9, a s s h o w n b y t h e r e p o r t s
o f c o n d i t i o n o f 7 ,0 9 6 n a t i o n a l b a n k s .
N ew Y ork
C h ic a g o
(36 b a n k s ). (9 b a n k s ).
A . O n dem and
(o n e o r m o r e
n a m e s ) .........
15. O n d e m a n d ,
secu red b y
s t o c k s ,
b on d s, e t c ...
C . O n t im e ( t w o
or
m ore
n a m e s ) ............
L>. O n
t im e ,
s in g le n a m e ,
w t h o u t
o th er secu r
i t y .....................
E . O n t im e , se
cu red
by
s t o c k s ’,
b on d s, e t c ...
P . Secured b y
rea l
es ta te
m o rtg a g e s ,
e t c .....................
S t. L o u is
(7 b a n k s ).
C e n tra l
re s e r v e
c it ie s
(52 b a n k s ).
O th e r
r eserv e
c it ie s
(308 b a n k s ).
C ou n try
banks
(6 ,7 3 6 ).
T ota l banks
i n U n it e d
S ta tes
(7 ,0 9 6 ).
$ 7 ,0 04,989
$6,1 9 6 ,2 4 9
$ 2,412,125
$15 ,613 ,36 3
$79,186 ,55 7
$157,344,961
$252,144,881
128,361,990
19,759,293
5,2 7 6 ,5 3 3
153,397,816
107,692,020
123,493,347
3 8 4 ,583 ,18 3
125,527,742
73,754,071
23,8 1 4 ,1 0 2
223,095 ,91 5
305,571 ,19 6
766,028 ,35 8 1 ,2 9 4 ,6 9 5 ,4 6 9
116,680,948
5 2 ,3 86,018
11,096,501
180,163,467
243 ,326 ,07 8
350 ,301 ,62 9
773,791,174
121,086,821
4 4 ,7 40,103
2 0 ,0 25,680
185,852,604
194,391,557
3 2 1 ,164 ,87 6
701,409 ,03 7
303,812
208,864
12,951
525,627
17,258,736
2 1 ,4 3 1 ,4 1 3
90 d a y s or
le ss......... 498,966 ,30 2 197,044,598
O v e r 90
d a y s ___ 437 ,942 ,14 2 131,979,772
6 2 ,6 37,892
758,648,792
9 3 3 ,814 ,45 8 1,73 5 ,5 9 1 ,9 0 7 3 ,4 2 8 ,0 5 5 ,1 5 7
4 6,524,081
616,445 ,99 5
639 ,924 ,75 6 1,33 7 ,9 8 0 ,6 8 9 2 ,5 9 4 ,3 5 1 ,4 4 0
3 ,6 4 7 ,0 5 0
T o t a l , a ll
l o a n s . . . 936 ,908 ,44 4 329,024 ,37 0 109,161,973 1 ,3 7 5 ,0 9 4 ,7 8 7 1 ,5 7 3 ,7 3 9 ,2 1 4 3 ,0 7 3 ,5 7 2 ,5 9 6 6 ,0 2 2 ,4 0 6 ,5 9 7
S e p t . 2 5 ,1 9 1 3 , O ffic e C o m p t r o lle r o f C u r r e n c y .
The C h a ir m a n . Also the following table showing amount of cash,
loans, individual deposits, and banks deposits held by national banks
1374
BANKING AND CURRENCY
for each call from January 29, 1906, to August 9, 1913, inclusive;
also rates for money in the New York market for the corresponding
month o f the call.
1906.
N o v . 12.
J a n . 29.
A p r . 6.
J u n e 18.
S e p t . 4.
$668,303
4 ,071,041
4 ,0 8 8 ,4 2 0
1 ,595,494
$620,000
4 ,1 4 1 ,1 7 6
3,9 7 8 ,4 6 7
1 ,557,257
$651,233
4,2 0 6 ,8 9 0
4,0 5 5 ,8 7 3
1 ,5 5 5,267
$626,013
4 ,2 9 8 ,9S3
4 ,1 9 9 ,9 3 8
1 ,589,001
$634,550
4,3 6 6 .0 4 5
4,289,773
1 ,599,943
N e w Y o r k c a ll lo a n s :
S tock exch an g e—
R a n g e ............................................................
A v e r a g e ........................................................
B a n k s a n d t r u s t c o m p a n i e s .......................
T i m e lo a n s :
P e r cen t.
24-60
84
4 -5 0
P e r cen t.
2 -3 0
94
4 -6
P e r cen t.
2 -6
3i
24-3
P e r cen t.
2 -4 0
94
3 -6
P e r cen t.
6 -2 7
73
3 -6
60 d a y s ...................................................................
90 d a y s ...................................................................
4 m o n t h s ...............................................................
5 m o n t h s ...............................................................
6 m o n t h s ...............................................................
8-81
4J- 7
44- 6
41- 6
44- 5j
4 4 - 53
4 1 - 53
C a sh ( i n t h o u s a n d s ) ................................................
L o a n s ..............................................................................
I n d i v i d u a l d e p o s i t s .................................................
B a n k d e p o s i t s ............................................................
H a tes f o r m o n e y .
5
5
5
5
5
5
5
- 8
- 74
-64
-6
-6
-6
-54
4 - 43
33-5|
4 -5
41 -5
43-5
43-5
51-53
7 647 6464-
74
8
74
63
63
7 -8
6 4 - 74
61- 7
6-64
6-64
6
C o m m e r c ia l p a p e r :
D o u b le n am es—
4 -5
43- 6
6-64
4 3 - 54
54- 6
43- 6
5 ' - 64
6 -6 4
6-71
S in g le n a m e s —
1907.
J a n . 26.
C a sh ( i n t h o u s a n d s ) ................................................
L o a n s ..............................................................................
I n d i v i d u a l d e p o s i t s .................................................
B a n k d e p o s i t s ............................................................
R a te s f o r m o n ey .
C a ll lo a n s:
S tock exch an g e—
R a n g e ............................................................
A v e r a g e ........................................................
M ar. 22.
M a y 20.
A u g . 22.
D e c . 3.
$695,503
4 ,4 6 3,267
4 ,1 1 5 ,6 5 0
1,6 7 6 ,9 2 6
$656,220
4 ,5 3 5,844
4 ,269,511
1,6 3 7 ,1 5 8
$691,581
4,6 3 1 ,1 4 3
4 ,3 2 2 ,8 8 0
1,6 8 5 ,5 4 0
$701,623
4 ,6 7 8 ,5 8 3
4 ,3 1 9 ,0 3 5
1,5 9 5 ,4 9 3
$660,785
4 ,5 8 5 ,3 3 7
4,1 7 6 ,8 7 3
1,3 8 7 ,8 8 6
P e r cen t.
13-45
5
2 -3
P e r cen t.
2 -2 5
64
3 -6
P e r cen t.
li-3
24
14-24
P e r cen t.
13-6
3
2 -2 4
P e r cen t.
2-25
14
24-34
31-4
3H 4
4 -4 3
44-43
44-43
5 -6
5 -6 4
6 -7
6 -7
64-7
64-7
15-18
8-12
8-12
7- 8
7
6- 8
6- 7
6 -64
8 nom .
6 -64
64-7
8 nom .
T i m e lo a n s:
30 d a y s ...................................................................
60 d a y s .................. ................................................
90 d a y s ...................................................................
4 m o n t h s ...............................................................
5 m o n t h s ...............................................................
6 m o n t h s ...............................................................
54- 7
44- 7
5 -7
54- 64
5 1 - 64
5 4 - 64
6 -8
6-74
53- 7
53- 64
53- 6
54- 6
C o m m e r c ia l p a p e r :
D o u b le n am es—
C h o ic e , 60 t o 90 d a y s .............................
S in g le n a m e s —
P r im e , 4 t o 6 m o n t h s ............................
G o o d , 4 t o 6 m o n t h s ..............................
53- 64
6 -6 4
5 -5 4
53- 64
64- 7
6 -6 4
64- 7
5 -5 4
5 4 -6
1375
BANKING AND CURRENCY,
1908.
N o v . 27.
F e b . 14.
C a sh (In t h o u s a n d s ) ...............................................
L o a n s ..........
I n d iv id u a l d e p o s i t s .................................................
B a n k d e p o s i t s ............................................................
M a y 14.
J u ly 15.
S e p t . 23.
$788,395
4 ,4 2 2 ,3 5 3
4 ,1 0 5,814
1,5 8 4 ,4 2 6
$861,326
4,5 2 8 ,3 4 6
4 ,3 1 2 ,6 5 6
1,692,421
$849,018
4 ,615,675
4 ,374,551
1 ,8 2 2,853
$868,424
4 ,7 5 0,612
4,5 4 8 ,1 3 5
1 ,941,665
$844,759
4 ,840,367
4 ,720,284
1,958,831
P e r cen t.
11-21
P e r cen t.
1 -2
ii
1 -U
P e r cen t.
1 -1 1
11
1
P e r cen t.
1 -2
11
1 -1 1
P e r cen t.
1 -3
11
1 -11
2 -2 1
11
11-11
2 -3
21-31
21-31
31-4
11-21
2 -3
21-31
3 -3 1
31-31
2 1 -3 !
3 -3 1
31-4
31-4
31-4
R a tes f o r m o n e y .
N e w Y o r k ca l! loa n s:
S tock e x ch a n g e —
R a n g e ............................................................
A v e r a g e ........................................................
B a n k s a n d tru st c o m p a n i e s ......................
T i m e loa n s:
30 d a y s ...................................................................
60 d a y s ...................................................................
90 d a y s ................................................................
4 m o n t h s ...............................................................
5 m o n t h s ...............................................................
6 m o n t h s ..............................................................
8 m o n t h s ...............................................................
C o m m e r c ia l p a p e r :
D o u b le n a m e s —
C h o ic e , 60 t o 90 d a y s .............................
S in g le n a m e s —
P r im e , 4 t o 6 m o n t h s ............................
G o o d , 4 t o 6 m o n t h s ..............................
1J-2
3M i
4 -44
44— J
4
4|-5
4J-5
It?
3 -3 1
3J-4
31-4
4 1 -4 !
5 }-6
3M 1
31-4
31-4
31-41
5 -6
5 J -6
31-41
4 -4 1
31-4
4 -5
31-41
41-5
4 -5
41
1909.
F e b . 5.
C a sh (in t h o u s a n d s ) ................................................
L o a n s ..............................................................................
I n d iv id u a l d e p o s i t s .................................................
B a n k d e p o s i t s ............................................................
A p r . 28.
J u n e 23.
S e p t . 1.
$860,117
4 ,8 4 0 ,7 6 6
4,6 9 9 ,6 8 2
2,0 3 5 ,1 6 9
$878,457
4 ,9 6 3 ,1 1 0
4 ,8 2 6 ,0 6 0
2 ,0 4 6 ,7 5 3
$885,915
5,0 3 5 ,8 8 3
4 ,8 9 8 ,5 7 6
2 ,0 3 4 ,6 6 3
$854,071
5,1 2 8 ,8 8 2
5,0 0 9 ,8 9 3
2 ,0 1 8,813
$804,860
5,1 4 8 ,7 8 7
5,1 2 0 ,4 4 2
1 ,8 8 6,260
P e r cen t.
11-3
21
11-2
P e r cen t.
11-21
ll
P e r cen t.
11-2
1J
P er c e n t.'
3 1 -6
41
1H i
i h
!
P e r cen t.
21-3
2*
21-21
21-21
21-3
21-3
21-31
3 -3 1
31-31
21-21
2 1 -2 }
21-21
21-3
21-3
3 -3 1
2 -2 1
21-21
21-3
21-31
31-31
2J-31
3 1 -4
31-5
3|—
5
41-5
41-51
41-51
41-5
41-5
41-5
N o v . 16.
R a te s fo r m o n e y .
N e w Y o r k ca ll lo a n s :
S tock exchange—
R a n g e ............................................................
A v e r a g e ........................................................
B a n k s a n d t r u s t c o m p a n i e s ......................
T i m e lo a n s:
60 d a y s ................................................................
90 d a y s ...................................................................
4 m o n t h s . . . . .....................................................
5 m o n t h s ...............................................................
6 m o n t h s ...............................................................
31-4
C o m m e r c ia l p a p e r:
D o u b le n a m e s —
C h o ic e , 60 to 90 d a y s ............................
S in g le n a m e s —
P r im e , 4 to 6 m o n t h s ............................
G o o d , 4 t o 6 m o n t h s ..............................
3 -3 1
3 -3 f
3 -3 1
31-41
41-51
31 -4
4 -4 1
31-4
4 -4 1
31-4
4 -4 1
4 -5
41-5
5 -6
51-61
1376
BANKING AND CURRENCY,
19 1 0 .
J a n . 31.
C a s h ( i n t h o u s a n d s ) ................................................
L o a n s ...............................................................................
I n d i v i d u a l d e p o s i t s .................................................
B a n k d e p o s i t s .............................................................
M a r. 29.
J u n e 30.
S e p t . 1.
$833,079
5 ,2 2 9 ,5 0 3
5 ,1 9 0 ,8 3 5
1 ,9 6 6,594
$834,895
5 ,4 3 2 ,0 9 3
5 ,2 2 7 ,8 5 1
1,9 8 8 ,0 0 0
$820,773
5 ,4 3 0 ,1 5 0
5 ,2 8 7 ,3 1 2
1 ,9 0 0,135
$851,685
5 ,4 6 7 ,6 3 8
5 ,1 4 5 ,6 5 8
1,943,691
I ’ er c en t.
H .4
41
P e r cen t.
11-31
21
P e r cen t.
2 -3 1
2}
P e r cen t.
11-13
2
3 j - 41
4 - 4f
4 - 4 !
4-41
4 - 4J
31 -4
31-41
31-41
3 f-4 1
31-41
3 -3 1
3 -3 }
31-3J
33-41
4 -4 1
3 1 - 41
4 - 41
41- 5
41- 5
4 i— 5
4
4
4
4
4
4 -i- 5
4 -o
4 J—
0
5 1 - 53
4 3-6
4£— 5
5-51
41—
5
43—
52
43-51
5 -6
51- 6
6 - 6£
5£-6£
N o v . 10.
$816,071
5 ,4 5 0 ,6 4 4
5 ,3 0 4 ,7 8 8
1 ,9 0 6,360
R a te s f o r m o n ey .
N e w Y o r k c a ll lo a n s:
S to ck exch an ge—
R a n g e ............................................................
A v e r a g e ........................................................
T i m e lo a n s :
60 d a y s ...................................................................
• O d a y s ...................................................................
J
4 m o n t h s ...............................................................
5 m o n t h s ...............................................................
6 m o n t h s ...............................................................
C o m m e r c ia l p a p e r :
D o u b le n a m es—
C h o ic e , 60 t o 90 d a y s .............................
S in g le n a m e s —
P r im e , 4 t o 6 m o n t h s ............................
G o o d , 4 t o 6 m o n t h s ..............................
P e r cen t.
2 -4 3
31
-5 i
-5 1
-5 1
-5
-5
4 3-6
1911.
J a n . 27.
C a sh ( in t h o u s a n d s ) ................................................
L o a n s ...............................................................................
I n d i v i d u a l d e p o s i t s .................................................
B a n k d e p o s i t s .............................................................
M a r . 7.
$856,267
5 ,4 0 2 ,6 4 2
5 ,1 1 3,221
1,9 9 1 ,1 8 8
J u n e 7.
S e p t . 1.
D e c . 5.
$908,036
5 ,5 5 8 ,0 3 9
5 ,3 0 4 ,6 2 4
2 ,2 2 4 ,7 1 9
$946,331
5 ,6 1 0 ,7 8 7
5,4 7 7 ,9 9 1
2,1 4 7 ,4 4 1
$895,475
5,6 6 3 ,4 1 1
5,4 8 9 ,0 1 1
2 ,0 8 8 ,1 8 7
$862,794
5 ,6 5 9 ,1 0 9
5 ,5 3 6 ,0 4 2
2 ,0 8 5 ,1 0 6
P e r ce n t.
1H '
31
P e r cen t.
11-21
2J
P e r cen t.
2 -2 1
2|
P e r c en t.
13-21
2}
3
3 -3 |
3 -3 f
3 1 -4
31-4
3 1 -4
21-23
23-3
3 -3 1
3 -3 1
3 -3 1
21 -3
23-3
23-3
3 -3 1
31-31
2 3 -3 !
31-33
3 3 -4
3 3 -4
3|-4
33-5
33-41
3 3 -4 !
4 -4 !
4 -4 }
4 -4 1
31-41
31-41
31-4
4 -5
4 -5
31-41
41-5
31-41
4 j-5
33 -4
4 1 -5
41-5
5 -5 1
41 -5
41-51
R a te s f o r m o n e y .
N e w Y o r k c a l l lo a n s :
S tock exch an g e—
R a n g e ............................................................
A v e r a g e ........................................................
T i m e lo a n s :
60 d a y s ...................................................................
90 d a y s ...................................................................
4 m o n t h s ...............................................................
5 m o n t h s ...............................................................
6 m o n t h s ...............................................................
C o m m e r c ia l p a p e r :
D o u b le n am es—
C h o ic e , 60 t o 90 d a y s .............................
S in g le n a m e s —
P r im e , 4 t o 6 m o n t h s ............................
G o o d , 4 t o 6 m o n t h s ..............................
P e r c en t.
21 -6
4
1377
BANKING AND CUBRENCY.
1912.
%
C a s h .................................................................................
L o a n s ...............................................................................
I n d i v i d u a l d e p o s i t s .................................................
B a n k d e p o s i t s ............................................................
F e b . 20.
A p r . 18.
J u n e 14.
S e p t . 4.
$950,497
5,8 1 0 ,4 3 3
5,6 3 0 ,5 5 9
2,3 8 1 ,2 1 4
S931,689
5 ,8 8 2 ,1 6 6
5,7 1 2 ,0 5 1
2,2 4 8 ,2 1 4
$945,203
5,9 5 3 ,9 0 4
5,8 2 5 ,4 6 1
2,1 7 8 ,1 6 3
$895,950
6,0 4 0 ,8 4 1
5 ,8 9 1 ,6 7 0
2 ,1 7 7 ,4 8 8
P e r cen t.
1 1 -2 }
2i
P e r cen t.
2 -5
3
P e r cen t.
2 -3
21
P e r cen t.
3 -7 }
4}
N o v . 26.
$859,098
6 ,0 5 8 ,9 8 2
5,9 4 4 ,5 6 1
2,1 0 1 ,8 0 5
R a te s f o r m o n e y .
C a ll lo a n s , N e w Y o r k :
S tock exchange—
R a n g e ............................................................
A v e r a g e ........................................................
T im e lo a n s :
P e r ce n t.
( ')
0)
(1)
60 d a y * ...................................................................
SO d a y s ...................................................................
4 m o n t h s ...............................................................
5 m o n t h s ...............................................................
6 m o n t h s ...............................................................
C o m m e r c ia l p a p e r:
D o u b le n am es—
C h o ic e , 60 t o 90 d a y s .............................
S in g le n a m o s —
P r im e , 4 t o 6 m o n t h s ............................
G o o d , 4 t o 6 m o n t h s ..............................
2 }-2 J
2 } -3
3 -3 }
3 -3 }
3 -3 }
3 -3 }
31-32
3 }—1
3 } -4
3J-4
3
3 -3 }
3 }-3 }
31-31
3 } -4
4 }-6
5 -6
5 -6
5 -6
5 -6
oj
(»)
h
0
«
3 } -4
4 -4 }
3 1 -4 }
5 -6
( i)
3 }-4 }
4}
4 -4 }
5
3 1 -4 }
4 -4 }
5 } -6
6 -6 }
( vj
0)
1 N o n e c o m p ile d .
1913.
F e b . 4.
C a sh ( in t h o u s a n d s ) ................................................
I n d i v i d u a l d e p o s i t s .................................................
B a n k d e p o s i t s ............................................................
A p r . 4.
J u n e 4.
$933,417
6 ,1 2 5 ,0 2 9
5,9 8 5 ,4 3 2
2 ,3 1 0 ,5 9 0
$888,283
6 ,1 7 8 ,0 9 6
5 ,9 6 8 ,7 8 7
2 ,1 9 2 ,3 4 5
$913,982
6 ,1 4 3 ,0 2 8
5,953,461
2,1 2 0 ,5 5 1
A u g . 9.
$899,769
6 ,1 6 8 ,5 5 5
5 ,7 6 1 ,3 3 8
2 ,1 0 8 ,5 5 0
R a te s f o r m o n ey .
N e w Y o r k c a ll lo a n s :
S tock exch an ge—
P e r cen t.
2 -2 t
2}
T i m e lo a n s :
3}
4}
5
5 J -6
5 2 -6
C o m m e r c ia l p a p e r:
D o u b le n am es—
6 -6 }
S in g le n a m e s —
6 -6 }
6 J -7
...................
The C hairm an . The committee will stand adjourned until 11
o’clock to-morrow.
(Thereupon, at 6.15 o’clock p. m., the committee adjourned until
to-morrow, Tuesday, September 30, 1913, at 11 o’clock a. m.)
9328°— S. Doc. 232, 63-1—vol 2-----27
I
1378
BANKING AND CURRENCY.
TUESDAY, SEPTEMBER 30, 1913.
Committee
on
B anking and C urrency,
U nited S tates S enate ,
Washington, D. C.
The committee assembled at 11.07 o’clock a. m.
Present: Senators Owen (chairman), Hitchcock, O’Gorman, Heed,
Pomerene, Shafroth, Hollis, Nelson, Bristow, McLean, and Weeks.
The C hairm an . Mr. Conant, the committee will hear you now. I
wish you would state your name and what your experience is.
STATEMENT OF CHARLES A. CONANT, OF NEW YORK, N. Y.
Mr. Conant . I am Charles A. Conant, of New York.
The C hairm an . I would like you to briefly state your experience,
Mr. Conant, for the information of the committee. Under an agree
ment of the committee, I believe,.we will not cross-examine you until
you have finished, unless you prefer to be cross-examined as you
proceed.
Mr. Conant . N o. I will state my experience first and then I will
make my request to the committee in that respect.
I was sent by the Secretary of War to the Philippine Islands in
1901 to prepare the currency plan for those islande— the plan which
was enacted by Congress in March, 1903. I was also invited by the
Government of Mexico to advise them as to their monetary reform
in 1905, which was based practically on the system adopted for the
Philippines.
In 1904 or 1905 I assisted the War Department in preparing the
plan which is in operation in Panama, which gave parity to Panama
money with United States currency. More recently, in 1911 and
1912, I prepared the plan of monetary reform for Nicaragua, which
is now in operation there.
Senator O ’G orman . Will you state whether you are now acting in
an official capacity in any banking institution ?
Mr. Conant . N o ; I have been simply a student of the subject,
and was for a considerable time Washington correspondent of com
mercial papers, which brought me into contact with the Treasury
in matters of that kind. My practical banking experience was for
five years with the Morton Trust Co. of New York, which ended in
1906:
Senator O ’G orman . In what position?
Mr. Conant . My position was that of treasurer, but in that
respect was largely nominal. I had charge of special matters which
came up there. I did not have charge of the routine of the loans, so
much as special matters that came up from time to time.
Senator O ’G orman . Have you been connected with any other in
stitution ?
Mr. Conant . N o ; only in a nominal way with the Bank of Nica
ragua. The bankers in charge of the loan have attended to its affairs
thus far, and I have attended only one or two meetings.
Senator O ’G orman. Y ou have written on the subject of banking?
Mr. Conant . Yes; I have written two books. One A History of
Modern Banks of Issue and the other on The Principles of Money
and Banking.
BANKING AND CURRENCY.
1379
Now, in compliance with the suggestion of Senator Owen, I would
be obliged to the committee if they will defer their cross-examination
and allow me to complete my statement. I am perfectly willing to
answer any questions that may be asked, in due time, but I would like
to make my statement in a consecutive way, briefly, on one point at
a time, and then answer questions pertaining to that when I am
through, because I think, possibly, I may anticipate many questions
as I go along.
Senator O ’G orman . What, if any, are your banking affiliations or
associations now? Are you connected with any banks?
Mr. C onant . None whatever, except, as I say, I am a director of
the National Bank of Nicaragua. But I am not here representing
any organization. It so happens that I was out of the country when
the Citizens’ League was most active, and I am not a member of that
nor of the American Bankers’ Association. I am here perfectly inde
pendent, speaking as an individual from my knowledge and study
of banking problems.
Senator O ’G orman. That is what I supposed, but I wanted that
understood by the committee.
Mr. Conant . Yes. I do not represent anybody except myself. I
would like, first, if agreeable to the committee, to refer to a few of
the underlying principles of banking which I think have been per
haps a little befogged or not elucidated in a manner I would like to
have seen them elucidated by some of the previous witnesses.
The question has been asked here, What harm is there in having
plenty of money and a low rate of interest; and why the volume of
money should be controlled by a central organism ?
I would like to refer to this subject of control and to the reason
why we can not always have plenty of money when we want it.
“ Control ” is hardly the proper word to apply to the supervision
exercised by the central banking organism or by a series of any such
organisms over the money market.
It is simply the exercise of enlightened foresight, and it is highly
desirable, I think, as demonstrated by banking experience during
the past two generations, that there should be such enlightened super
vision and such anticipation of changes in money-market conditions;
there can not be control of an arbitrary sort. And in the working of
the mechanism I will undertake to show how it works in harmony
with market conditions. The banks, if they make rates which are
arbitrary, can not maintain them. That occurs even to-day in the
case of the Bank of England and the Imperial Bank of Germany.
I f they make rates of discount higher than market conditions justify,
the market simply underbids them. This shows that rates for money
can not be arbitrarily controlled. The most that can be accomplished
by one or more central organisms is that these institutions, repre
senting the credit centers of the country, are able, through their
officials, to look ahead and study conditions throughout the world,
instead of being limited, as a little country bank in this country
would, to purely local conditions. They study the conditions through
out the world, and if they see clouds gathering they take measures
to guard against the storm and prepare the market for a gradual
adjustment to the new conditions, instead of having that adjustment
sudden, violent, and disturbing. But if these institutions see fit to
fix a discount rate which is so high that the supply o f capital in the
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BANKING AND CURRENCY.
market is able to underbid it, then such underbidding takes place;
there is, therefore, no arbitrary control which is exercised or can be
exercised—no fixed rates for capital. The most that can be done is
to influence them slightly in harmony with conditions and not to fly in
the face of those conditions.
Now, in the case of the Bank of England, which is very peculiarly
constituted and quite different from its continental banks, the bank
has frequently to take special measures to support the discount rate.
The raising of the discount rate was considered for a long time by
economists and bankers as a very efficient means for controlling the
movement of money and capital, but it has not proved absolutely
efficient, since there has been so much money and capital accumulated
in the great joint-stock banks of England, France, and Germany.
It is efficient so long as the bank stood alone as the biggest institu
tion there was, but it has ceased to be absolutely efficient. The result
is that when the Bank of England believes the rate of discount should
be increased and the joint-stock banks have plenty of money, and
they offer it below the Bank of England’s rate, the Bank of England
brings about a degree of influence upon the supply of capital by doing
what is called “ borrowing from the market ”—that is, they will sell
Government bonds or consols at a certain price to the joint-stock
banks or private banks with the privilege of repurchase. The re
sult of that is, of course, to draw from the market such currency and
credit as the joint-stock banks have had to pay for the consols. In
that w ay the Bank of England gets a certain degree of control over
T
the market. But even though that occurs, they could not maintain
a fixed rate that would be excessive and arbitrary; they can only do
it in dealing with the business of the merchants between one rate and
another rate. In other words, they can only anticipate slightly the
general tendency of money-market conditions.
Now, of course, the reason why money is not plentiful at times,
why we can not have-----Senator H itchcock. Mr. Conant, I do not think the stenographer
will be able to get what you say; you are talking so fast. I can not
understand it myself.
The C hairm an . I wish you would speak a little louder.
Mr. C onant . Yes; I will try to.
Now, I understand it to be the purpose of the pending bill to es
tablish some sort of supervision and foresight in this country; that
it is necessary to protect our international exchanges and to protect
our markets and to hold a sufficient quantity of capital in the country
to prevent the depletion of our gold reserves or the depletion of our
credit resources, such as occurred in 1893 and 1907 and on previous
occasions. O f course the reason for a high discount rate fundamen
tally is the scarcity, not of currency, necessarily, but of capital and
credit. The determination whether loans are easy to obtain is
based primarily upon the supply of capital, free capital, and the
supply of free capital is indicated by the condition of the gold re
serve. Experience shows that certain gold reserves are necessary
to maintain safety against a certain supply of floating capital. You
can not have these gold reserves absolutely depleted and exhausted
without invoking a crisis; the gold reserve is the barometer of the
supply of capital and credit. I f the gold reserve begins to be de-
BANKING AND CURRENCY.
1381
pleted, it is an index that the credit resources are overdrawn; that
the supply of floating capital has already been absorbed, and that
the time has come to proceed more slowly.
The suggestion has been made here, I believe, that any loan made
upon good security was a safe and proper loan. That is true in a
sense, but the number of such loans you can make and the aggregate
amount of such loans is necessarily regulated by the supply of capital
which people have to lend. There are perfectly good loans which can
be made if the supply of credit and capital is available, but you are
governed by the limitations of the supply of free capital, and you are
governed by the index which the gold reserve affords of the quantity
of free capital. Currency, of course, is only one form of the ex
pression of the whole fund of transferable capital. “ Bank deposits ”
are another form—a much larger and more elactic form.
Senator N elson. What do you call “ bank deposits ” ? Do you
call them capital?
Mr. C o n a n t . Not necessarily. There are, of course, different
classes of bank deposits. I f a man brings in currency to be deposited
to his credit, that is different from obtaining a loan and having the
proceeds transferred to his deposit account.
The C h a ir m a n . I must remind the committee that we have agreed
not to interrupt the witness.
Senator N elson. All right.
Senator S hafroth. He requested that w e not interrupt him.
T
Mr. C onant . That is quite a pertinent question, however. De
posits in this country are lumped without regard to their origin or
character. In Europe they are classified according to their character.
I f a man brings in money and deposits it to his own account, that is
what they call a deposit, and that is capital. If, however, he comes to
a bank and gets a loan and it is transferred to his deposit account, it
stands in a different relation and in most European countries the
balance sheets state it differently. It is stated as a current creditor
account of the bank and not as a “ deposit.”
It is, of course, difficult to go into all the ramifications and re
lations between capital and currency, and I only wanted to call
attention to the point that the amount of new loans is limited by the
supply of capital available for such loans and then illustrate that in
another way a little farther along. So that until the supply of
capital in the world is unrestricted, the supply of loans based upon
good collateral must remain restricted. The great danger of mak
ing loans on what appears to be good collateral is the overextension
of credit and the expansion of enterprise which ultimately would
not prove to be required. That is a characteristic of most crises,
that men have found money easy, easy to borrow at the banks. They
put it into new enterprises which ultimately have not proved to be
required. They may seem at the moment to be required, as, for
instance, a shoe manufacturer having a big demand for shoes might
feel justified in extending his plant. I f the banks consider the risk
good, they provide the money and all the other shoe manufacturers
may begin to extend their plants. Then the banks suddenly discover
that the shoe business is overdone; they begin to call their loans, and
the manufacturer having borrowed the money upon a fixed invest
ment of that character—a new building, instead of having borrowed
it to produce more shoes—for shoe leather, for the payment of wages,
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BANKING AND CURRENCY.
for instance, from which he could get money in 90 days or thereabouts,
this shoe manufacturer is in difficulties and he is unable to pay his
loan, and general business confidence is impaired and depression
sets in.
So that the currency system and the banking system are merely
the expressions of this demand for capital and it is their business
to regulate it in a sense. It is their business to exercise foresight
and judgment and discretion in such a way that they will not permit
capital to be locked up too extensively in fixed forms. When I say
“ fixed forms,” I come to another phase of the matter which has
been a good deal discussed by witnesses here—the question of
whether mortgages are good security for current loans by banks.
And I say most emphatically they are not; that so far from being
the best security they come pretty near to being the worst, not be
cause the property upon which they are obtained is not good, but
because it is not readily convertible.
The business of banks is of many types, and the type we are dealing
with here in currency legislation is the type which is quickly con
vertible. A commercial bank is founded to receive deposits payable
on demand. Any institution which is paying deposits on demand
must have its money practically where it can obtain it on demand.
There is no use saying to a man who goes into a bank and wants to
draw $1,000 from his account, and you have not the gold, that you
can give him a share of a good mortgage. He says, “ That is not
what I want; I have got to pay my bills around town here, and I
want to have cash.” To illustrate the point of difference between
the fixed investment of that character, which is perfectly legitimate
in its way, but not related to commercial banking, let us say each of
us gentlemen agreed to put $10,000 into a land syndicate to buy
some lots adjoining Washington, if it were permissible for Members
of Congress to do that.
Senator O ’G orman. Not in these days.
Senator S hafroth. It used to be.
Mr. C onant . We each put in $10,000 and we have $100,000 to buy
our land, and we begin to make improvements, and one of us comes
in and says, “ I believe I would like to take my $10,000 out. I may
want to put it in again by and by, but I would like to use it now.”
He comes to the chairman and wants that money. Where is the
chairman to find that $10,000 he has disbursed for land; or, if he
has not disbursed for land, that he is paying out to laborers and for
material for the improvement of that land {
Of course, steps have been taken to give more liquidity to fixed
investments such as Mr. Wade, of St. Louis, explained, by dividing
them into negotiable receipts. That is one step toward the lique
faction of capital. Even in the case of shares in corporations, how
ever, like the steel stock and stock in the Union Pacific Railway, it
is really capital in fixed form, because the money has been taken by
the steel company and the railway and put into its plant, into its
equipment. O f course, it is competent for a corporation, like any
other borrower, to go to a bank and borrow on short term for the
purpose of current expenses of production, but when it issues stock
and bonds it does it usually to put into fixed form, into buildings and
equipment and machinery. After you have done that—while it is
there it is not so readily transferable. 'Moreover, the amount of
BANKING AND CURRENCY.
1383
such securities is rigid. It is irreducible; and they lack, therefore,
the elasticity which pertains to commercial paper. When business
slackens up the amount of commercial paper contracts of itself. The
man who is selling shoes finds that the demand for shoes is less and
he buys less leather and therefore he gives fewer notes for leather;
he employs fewer laborers and therefore borrows less from the bank,
and is able to pay his commercial paper off from time to time.
The amount of demand for capital of this sort changes with the
volume of business. But with the man -whose securities are stocks
and bonds the only elasticity about them is the rise and fall of
prices on the stock exchange. Leaving out, of course, new creations,
the quantity of stocks and bonds at par value remains rigid. There
is no contraction of business except by bankruptcy or except from
the fall of prices on the stock exchange. There is little elasticity
in that form of capital. It is a hard lesson which bankers have
had to learn, that loans on negotiable securities are subject to ready
convertibility in times of expansion, but they are unsafe in times
when commercial credit is contracted or when the supply of capital
is reduced.
Senator N elson. I am glad to hear you say so. That is the view
I have had.
Mr. Conant . For that reason it is not wise to base the issue of
currency even on negotiable securities, much less on those forms
which are not readily reducible and negotiable. Now, every country
has been through this experience. They have all tried to base the
issue of currency on securities. Belgium, in the middle of the last
century, when this question was not so thoroughly understood as
now, had several big stock banks. They started in swimmingly,
financed all sorts of industries, and gave them the capital to operate;
but after a time, when the supply of capital w as exhausted, when
T
the depositors began to clamor for their money at these banks, the
banks had no money. They said, “ Why, we have some elegant se
curities here. Here is a security in an iron mill, or in a cotton mill,
but we have not any money, because it is all locked up in fixed forms
and we can not collect from these people. We can sell the mort
gages, but we must sell on a breaking market, because it is difficult
to sell securities in a tight money market.” That investment is fixed
and rigid and irreducible, except by bankruptcy, and the only elas
ticity you inject into it is by the fall of prices on the stock exchange.
Therefore, economists and bankers have come to the conclusion,
which is embodied in the underlying principles of this bill, that cur
rency redeemable on demand must be secured by assets that are
practically convertible on demand. That is the principle of a cur
rency based on commercial paper which runs for not exceeding G
O
or 90 days, and of which the bank, of course, always has a consid
erable percentage maturing every day. I f they have a lot of com
mercial paper maturing in 90 days, some of it is maturing all along
through the 90 days and new paper is coming in. On the average,
if commercial paper is 90-day paper, one-ninetieth is maturing
every day, and if it is 60-day paper, one-sixtieth is maturing every
day.
Now, with that paper in his possession and the capacity for redis
count any banker having good assets would have no difficulty where
I
1384
BANKING AND CURRENCY.
the rediscount system exists; and, as the chairman has several times
pointed out, the underlying principle of this bill is to accord a re
discount market, where people with convertible assets and sound
assets can cret accommodation, and where, under the terms of the bill,
loans on fixed collateral are excluded. The principles of the bill
are perfectly sound and the only sound principles upon which cur
rency can be based.
Speaking of issuing notes which are redeemable when some other
property has been realized upon recalls a decision of one of the
Italian courts when specie payments were suspended in Italy. The
court decided that the promise to pay at a particular time in the
future was practically as good as current payment, on which an
Italian economist remarked that the promise of a dinner day after
to-morrow was hardly as advantageous to a hungry man as being
given a dinner to-day.
Now, in regard to the question of supervision, some degree of
control exercised by the reserve associations, as I have pointed out
briefly, is a necessary part of the system. It may not be apparent to
the small banker in the country, immersed in his daily business, that
at a particular moment such supervision is required, but the necessity
for a very strong institution of that sort lies in the need for protection
of the gold stock of the country. As I have already indicated, that
gold stock is a barometer of business conditions and of the demand
for capital. Unless some mechanism—a banking organism of power
and efficiency—exists, we will be as helpless as we were in 1894 and
1895, when gold was flowing out of the country persistently and we
had absolutely no means of protecting that gold stock or of diminish
ing the expansion or contracting the volume of currency except to
sell long-term bonds. Had the Treasury possessed the power to
raise the discount rate on loans, the power to borrow on short-term
notes, and various other banking devices, they could have done some
thing to check that outflow. A suggestion has been made here look
ing to the Treasury doing these things. I regard that as undesirable,
because these devices are only a part of the complete mechanism
which a well-organized series of central institutions can put into
operation. The more you add to the resources which the Treasury
has for this purpose, the nearer you get to a complete bank or
ganization. The Treasury, of course, is not at present, and could
not very well be, a lender on commercial paper. It is not a lender on
commercial paper and has no quick assets. The amount which it
receives over the counter from taxation is required from day to day
for current obligations, and therefore it really has no quick assets
available for banking purposes. It has no power to raise the dis
count rate in the money market, because it does not make loans; it
has no power to do anything in these matters except in a clumsy,
roundabout way. Now, if you see fit to endow the Treasury with all
these powers, you will practically create a bank. It may be owned
by the United States, or the stock may be locked up in the Treasury,
or you can have no stock, but it makes the Government practically a
banker. I f you give only a few powers to the Treasury and leave
the rest to the banks, then you have a divided and doubtful authority;
while if you give all powers to a Government bank, it must either be
a bank in fact, governed by competent business men or bankers, or
BANKING AND CUBEENCY.
1385
must perform its functions in a manner clumsy, roundabout, un
economical, and ineffective.
I am not speaking now in criticism of the provisions of this bill
in regard to the Federal reserve board. I will say something about
that later. I am merely trying to illustrate the principle that you
must either have a bank to do these things or you can not do them
at all. I f you try to endow the Treasury with a few of these powers
you will impair the efficiency of the banks, and you can not endow the
Treasury with adequate powers unless you establish practically
what is a bank in the Treasury.
Now, one reason why (and there are very many) it is not advis
able for you to endow the Treasury with these powers is that the
control of exchanges has become in modern times—in very recent
times—a very complicated system. It was said by one witness, as
to the making of prices, that if money flows out prices will go down
and money will be attracted back again. That theory, while beau
tiful in principle, is controlled by other methods in influencing the
money market to-day. It is the very last step in the influences ex
erted over the money market. To-day the money market is influ
enced principally by the movement of securities. I f the money rate
is high in New York, people will part with their securities or they
can borrow on securities in London. There is a constant movement,
as every one knows who reads the financial columns—the sale and
arbitrage of securities between one market and another. Arbitrage
represents the effort of shrewd, quick bankers and brokers to sell in
one market at a high price and buy in another at a lower price. They
have reduced it to the finest calculations, and it would be utterly im
possible for any Treasury official to enter upon these calculations
or to enter the market unless he was cut off from the Treasury
entirely and its limitations and told to go ahead and be a banker.
Even then there would be a lot of things that he would do with the
very best of purposes which would be the subject of criticism. The
exchange men in New York banks often make grave mistakes, which
cause the bank losses of tens of thousands of dollars, in conducting
this work. What would they say of an official of the Treasury
who should try to conduct such transactions between London, Ber
lin, and New York and should lose $25,000 in a trade? He would
be so oppressed by fear of such an occurrence that he would be ab
solutely paralyzed from doing any such thing. He could not do it
with the money raised by taxation and in the capacity of a Gov
ernment official. He would be liable to instant removal and would
be in a constant state of fear.
Senator S iiafroth. Fear of impeachment?
Mr. Conant . Yes; I think so. Therefore the vast complication
of the modern banking medium makes it essentially a form of busi
ness that is done through banks. It is through that medium that
the money market is controlled. It is not immediately through the
operation on commodities of the Ricardian theory that when prices
are high gold flows out, and prices fall in consequence, and that as
soon as the prices have fallen gold will flow back, because the prices
are low enough. Of course that principle is sound, but I would say
it is almost a negligible factor. It may be in operation under the
surface, but it is a negligible factor to the ordinary banker, because he
1386
BANKING AND CUBBENCY.
studies the rates for money and the demands for credit and the
movement of securities. O f course, the principle comes into opera
tion in this way, that if a banker finds that money is tight he has to
take certain measures—he necessarily has to diminsh his loans,
and that reacts upon the the man who has borrowed from him espe
cially if that man has spread out too fast and is trying to increase
his business beyond the capital resources of the country. As the
influence extends down from the banker to the manufacturer and
to the consumer, it reaches through an indefinite gradation of
factors which it would be impossible for any Treasury official to
undertake to borrow or to anticipate.
That brings me to rather an interesting point, and one which
I think is not generally understood, which relates to the proposal
here to issue Government notes. As I shall say farther on, I regard
the question as largely academic, whether the notes are issued as
Government notes, as provided by this bill, or whether they are
strictly bank notes. My personal preference would be that they
should be bank notes. But in my opinion it is largerly an academic
question. But as bearing upon the argument adduced for Govern
ment notes I would like to ask your attention to this point. It is
commonly said, I think, that the Government should control the
issue of money; that it should and does control the issue of gold
coin, and that therefore it should control the issue of credit money.
I f you will consider the matter a moment you will see that the
Government does not control the issue of gold coin. The Govern
ment, under the system of free coinage, never goes into the market
and bids for gold. The banks do that in Europe, because it is their
business to protect the gold stock for that reason and for other
reasons. The Government of the United States never goes into
the market hunting for gold. Neither does it say that it will not
coin any more gold. The determination how much gold coin there
shall be is made by miners and gold importers who take their gold
to the mint to be coined. Why does the Government intervene at
all? Simply to put the stamp of safety and convenience on its
coins. Why should not the same principle be applied to the issue
of credit money? The Government should impose every condition
to secure uniformity, regularity, convenience, and safety, but it is
not its function to attempt to regulate the quantity. I am willing
to put the two propositions on all fours, that the Government should
exercise over the credit currency the same character of supervision
which is exercised over the gold currency. As to quantity, it does
not exercise such authority at all. It simply sets up certain reason
able safeguards for the security and convenience of the public. The
Treasury does not say that a certain amount of gold money is enough.
The control of the quantity of money is broadly in the hands of the
business community; it is so under free coinage of gold wherever that
system prevails, and it is my opinion, theoretically, barring qualifica
tions, the issue of credit currency should be under the same sort of
regulation to insure its uniformity, convenience, and safety, and not
to attempt to regulate its quantity. The regulation of the quantity
should be through the banks in the way I have already explained,
because it is their business to look ahead and curtail loans if they
believe that loans have proceeded to a point which is exceeding the
BANKING AND CURRENCY.
1387
suPPly of available capital and may reduce the gold stock of the coun
try and curtail its liquid resources.
I do not want to proceed at too great length in a discussion of these
purely abstract questions, most of which are understood in the main,
but sometimes they may be taken up from different points of view,
or from a point on which some illumination may be shed by indi
vidual investigation.
I think, perhaps, I would be willing to submit to questions on
those subjects now, if the committee desires to ask any at this time.
Regarding the details of the bill, I propose to speak about them after
wards, if that is the pleasure of the committee.
Senator N elson. Y ou speak of capital and seem to tie the currency
to the amount of capital in the country.
Mr. Conant . N o; I do not intend to tie currency to the amount of
capital, but only to the particular capital which is not invested in
fixed forms.
Senator N elson. What distinction do you make between capital
and credits?
Mr. C onant . There is a great distinction.
Senator N elson. What has a bank got outside of its capital and sur
plus, except its credits, which it derives through individual deposi
tors?
Mr. C onant . It has no other resources except the power to issue
currency and to obtain rediscounts.
Senator N elson. Is not the capital of the banks of a fixed quality;
that is, a bank is organized with such and such capital, and that is a
fixed thing. They may swell it indirectly by laying aside a surplus.
Mr. Conant . It depends upon what the capital is invested in. As
a matter of fact, the average bank does have part of its capital in fixed
form. Under the present law, requiring the deposits of United
States bonds, a very large percentage of the capital is in such bonds.
Senator N elson (interposing). Where does the increase of capital
come in?
Mr. C onant . From production, primarily.
Senator N elson. Certainly it comes from production, from what
the farmer and the manufacturers produce?
Mr. C onant . Yes.
Senator N elson. And practically, the bankers are nothing but
middlemen ?
Mr. C onant . Yes; that is correct.
Senator N elson. The only ones who bring capital into the country
are the manufacturers and the farmers?
Mr. Conant . That is, physical capital. O f course, we have all
sorts of intellectual pursuits, like the profession of the lawyer and
the doctor, but physical capital is only the result of physical produc
tion.
There is one point, before leaving the purely theoretical aspect of
the question, that I would like to elucidate, and that is in regard to
some questions that were asked, I think, of Mr. Claflin as to whether
commercial paper was always as liquid as some witnesses here claimed
that it is. Now, it may be true, and unfortunately I think it is true
in many American banks, that not all of the paper held is liquid—
that it does have to be renewed, and the bank does not expect it to
1388
BANKING AND CURRENCY.
be repaid; but there is this element of safety, that there is a marginal
supply of paper that is liquid.
First, there is the paper of many solvent merchants, who can and
do pay the paper at maturity, and pay it from their earnings, and
it is the custom of some banking institutions— I can not say how
many—to require their commercial clients to clear up their slate once
a year, at the time when their profits have accumulated to the larges!
extent, probably after Christmas, in the case of retail merchants.
O f course, I do not say there are not ways of evading that by going
to some other bank and borrowing temporarily, but to show the rela
tive liquidity of the resources and the soundness of their clients they
do require them to pay up.
Irrespective of that point, however, this element remains, that even
though you may have a substratum of paper which is not readily
convertible to meet a demand for the payment of a great many out
standing notes you have a margin which is convertible. I f you
choose, you can say to your better class of clients who apply for re
newal, “ I will renew for 75 per cent of your loan.” The result is
that the bank is able to convert at least a part of its assets into cash
and to meet the pressure of large withdrawals of deposits, if they
occur, or to swell its metallic reserves if it has demands for loans.
That clears up a point which I think was not entirely cleared up
by previous witnesses who were asked as to the character of Ameri
can bank paper. It ought to be more liquid than it is, but there is
no serious risk if we have a marginal supply which is liquid, and
if we have a method by which the banks can rediscount that mar
ginal supply as a means of accommodating their depositors.
Senator Nelson. I rather got the impression, and perhaps it was
my mistake, that you would measure the currency by what 3rou call
the capital of the country and by the gold supply. How is that?
Mr. C onant . No; I think that is not quite a correct definition of
my view.
Senator N elson. Y ou measure it by the gold supply; it ought to
be governed by that?
Mr. Conant . I measure the demand for currency by the gold
supply in the sense that the amount of currency which should be
issued is governed by reserve requirements.
Senator N elson. Others have sought to measure it by the volume
of what they called the best kind of commercial paper. They would
measure it by that, and as I understand it you measure it by the
amount of gold reserve. Is that your theory?
Mr. C onant . Perhaps, in a way. I do not know whether you
were here when I was discussing-----Senator N elson (interposing). I missed the first 15 minutes.
Mr. Conant . I think I covered that point. My contention was
that gold is rather a barometer of the supply of free capital avail
able for loans. You can not go on making loans indefinitely unless
you have the free capital. In other words, the contention which
was made by certain English bankers during the suspension of pay
ments in England, that it was perfectly safe to issue notes so long
as you had good commercial paper behind them. That contention
is not sound, because that implies unlimited resources of capital.
You can discount good paper as long as you have capital enough, but
you are limited by the capital, which is the product of the producing
BANKING AND CURRENCY.
1389
power o f the country, and you can not go any further, except on
the narrow margin established by borrowing from the public through
the issue of bank notes.
Senator N elson. In other words, your theory is there must be cap
ital of some kind back of the note issue?
Mr. C onant . Absolutely.
Senator N elson. That it will not do to regulate it wholly by the
volume of commercial paper?
M r. C onant . N o ; not wholly.
Senator S hafroth. Mr. Conant, I will ask you w hether, in your
T
judgment, there is too much money in existence now in the United
States ?
Mr. C onant . Whether there is too much money?
Senator S hafroth. Whether or not there is too much money in ex
istence now ?
Mr. Conant . That is a difficult question to answer, because the
supply of money usually adjusts itself to the demand. I might say
A have too much money, because prices have risen so rapidly. We
ve
could have gotten along with less money Avith a lower scale of prices.
Senator S hafroth. D o you recognize that these prices are world
prices ?
Mr. C onant . Oh, yes; it is a world problem. We could not very
Avell tie ourselves to a different basis from that of other nations, so
long as we are on a world standard.
Senator S hafroth. The amount of money which is in any one
T
country is not a determining factor on prices, either falling or rising,
is it?
Mr. C onant . N o ; not necessarily. O f course, those factors all
play into each other.
Senator S hafroth. Prof. Sprague said that in his judgment there
Avas not too much money, but that the money which Avas in existence
noAv in the United States might be considered a fixed amount which
he Avould regard Avould be needed at all times in the future. D o you
agree with that or not?
M r. C onant . Not quite. I agree Avith a part of it. So far as it
relates to your bill, I am going to say some commendatory words
about that later.
Senator S hafroth. That is what I am trying to get at, as to
whether or not the provisions which have been made in the bill, one
of Avhich has been introduced by myself and one by Senator OAven,
Avith relation to the issuance of a Treasury note secured by a 50
per cent gold reserve, Avith power given to the Secretary of the
Treasury to maintain the gold reserve at all hazards; whether or not
it could be taken as a safe fact that the amount Avhich is authorized
to be issued by that bill, namely, the present United States note and
the national-bank note, could be considered as fixed currency?
Mr. Conant . N o ; I should say not quite. I think the Urofessor
Avas a little sanguine in intimating that the Avhole A
’olume of cur
rency was an irreducible minimum. In case of business depression
there Avould be a considerable contraction, probably, and the contrac
tion would take effect through the exportation of gold. I am not
opposing the bill per se, but in answer to the question Avhether the
present amount is an irreducible minimum, I would say not neces-
1390
BANKING AND CURRENCY.
sarily. There might be contraction drawn to even 90 per cent,.
but there must be some means of protecting the margin.
Senator S hafroth . The theory of that measure would be to have
the present currency fixed, as it were, as much as United States notes
issued could make it fixed, and that then the operations of this bill
would apply to the increase or decrease of currency issued upon such
assets as the bill refers to, and that therefore the elasticity part of the
bill could be performed, and yet not interfere with the currency which
we have now required and have required for years, as a fixed cur
rency.
Mr. C o n a n t . But it has not been fixed for years. It has been
generally increasing from year to year, but the time may come when
it may go down again.
Senator O ’G o rm an . H ow will it go down?
Mr. C o n a n t . Through the exportation of gold, which would be
the result obtained by presenting those certificates for redemption.
That happened from 1893 to 1896. In other words, I should say
you could not take the top limit at a given moment and say that it
is an irreducible minimum. There are other ways of accomplishing
what you want.
But I would prefer to take this up later.
Senator B ristow . Y ou spoke of the protection of the gold stock
of the country. I do not think I quite clearly get your idea as to
how you proposed to do that.
Mr. C o n a n t . Well, of course, it is done in Europe through the
banks of issue. They raise the discount rate. That is the primary
and classical step for protecting the gold stock. Raising discount
rates not only discourages borrowers from coming to get unnecessary
loans, or loans for further expansion, but in practice, where accept
ances prevail and where all kinds of paper is dealt with in the inter
national markets, it affects the situation in a great variety of ways.
Say the Bank of England has had a discount rate of 4 per cent and
it raised it to 5 per cent, and the discount rate in Paris is 4 per cent.
The result is that if anyone in London has a debt to pay in France,
instead of shipping gold from England to pay that bill, he will
probably receive word from his creditors to keep the money for the
present and pay him 5 per cent interest. What would more likely
happen would be that the French creditor would direct the deposit
of that money with a local bank in London, and the outflow of that
particular bit of gold would be checked for the present. Then if
there is an excess of gold in Paris in the hands of the joint stock
and private bankers, they will send it to London, and in that way you
will see the reserve of the Bank of England begin to rise because
they have raised the discount rate. This is one way of protecting
the gold reserve. There are a whole lot of other ways under the mod
ern mechanism of business.
Senator B ristow . I had a slight idea as to how they did it in
Europe, but how are we to protect ours? I thought you indicated
how you thought we ought to protect our stock of gold here in this
country. I did not quite get your views as to how we ought to do
that.
Mr. C o n a n t . By the methods provided in the Owen-Glass bill.
I do not mean to say in every detail, but in the underlying principle
BANKING AND CUBRENCY.
1391
of having some strong institutions which have the power of redis
counts and which can fix the discount rates. The discount rate is
fixed in the bill by the Federal reserve board. I f that board sees
that our gold stock is flowing out they will raise the rate for redis
count. I f that is not adequate, they can take the other steps which
the European banks take. They can borrow from the market; they
can do a great many things, in the discretion of bankers, which
will check the outflow of gold by making it more desirable to leave
it here than take it out.
Senator B ristow . Why could not the Treasury do that by selling
short-time bonds ?
Mr. C o n a n t . I think that would be a very clumsy way. The
Treasury is not in a position to act in anticipation of unfavorable
conditions. The Treasury would be very severely criticized if it
started selling short-time bonds because a few bankers said they saw
squalls coming. The entire function of the central banks of Europe
is to forestall the force of severe blows to credit and not to wait
until you are in plein crise, or full panic, as the French say.
I do not think the Treasury could do that with wisdom or discre
tion or efficiency.
Senator B ristow . What condition would start an exportation of
gold from the United States?
Mr. C o n a n t . Well, overexpansion here and demand abroad,
You know, in 1892 Austria-Hungary was making determined efforts
to establish a gold standard, and Russia was also getting gold at a
premium; they went into the market because they had a special object
in obtaining it, and there was nobody in the United States to protect
our reserve. The banks of Austria-Hungary were taking all the
gold they could get and paying a premium for it.
Senator B ristow . Why could we not do the same thing?
Mr. C o n a n t . We can, through the Federal reserve board.
Senator B ristow . Why not through the Treasury?
Mr. C o n a n t . Because I think it would be difficult and clumsy.
As I said, you can gradually give to the Treasury one banking func
tion after another, but if you do you will then have a complete
Government bank. It will have to make discounts and loans and
protect the gold stock. The way in which big banks do that is by
raising the discount rate. The Treasury can not do that unless it is
loaning money all the time.
Senator B ristow . What criticism have you to make in regard to
the way the gold reserve was replenished in 1893?
Mr. C o n a n t . N o criticism in particular, Senator, under the laws
as they then stood. What else could they do? It was the only thing
that could be done under existing law. The Secretary of the Treas
ury, Mr. Carlisle, recommended to Congress in 1894 the creation of
a more flexible banking and currency system, but action was not taken
by Congress.
Senator S hafro th . The bonds which were issued at that time
elso serve the purpose of covering a deficit in the Treasury?
Mr. C o n a n t . Yes; that was one of the difficulties, of course. I f
you ask for criticisms they are criticisms of conditions rather than
of Mr. Cleveland or Mr. Carlisle. There was a large deficit, and the
proceeds of the sale of notes were not required to be segregated in
1392
BANKING AND CUBEENCY.
the Treasury. Under the gold-standard act of 1900 it is specifically
provided that when bonds are sold to replenish the reserve the pro
ceeds shall be kept in the reserve. When the money was obtained
by the sale of bonds in 1894 it was paid out for Government obliga
tion so that the effect was largely lost, while it would not be lost in
the same way under the act of 1900.
Senator B ristow . I infer that you believe that the best system is
the central-bank system?
Mr. C o n a n t . I should say, theoretically, yes. The end is at
tained in a measure by these reserve associations. I have heard the
criticism made that this country is too big for a central bank; that
Europe is nothing but a combination of small States, each with its
local bank; but it is a curious circumstance that an expert commis
sion which is now considering conditions in India is preparing to
recommend the central bank for the whole of British India, with her
vast population.
Senator H itchcock . Are they not recommending a State bank?
Mr. C o n a n t . That may be. I do not know whether it is owned
by the State or not, but it is a central institution.
Senator B ristow . What objection is there to a central bank in this
country, in your mind?
Mr. C o n a n t . I do not know that I have any serious objection. I
think it is a rather desirable thing, but I think you may obtain the
same object by creating a number of centers. The stronger your
center, in one respect, the better; and in New York particularly, if
the design is to take away some of the power now exercised by the
national and other joint-stock banks, you ought to have an institu
tion there that is strong enough to cope with those institutions. You
will cut your own throats if you set up in New York a $5,000,000
bank instead of a $25,000,000 or a $50,000,000 bank.
Senator B ristow . What would be the objection to the Government
establishing a bank?
Mr. C o n a n t . I f the bank were endowed with every power which
the ordinary bank has, and the managers were free from political
influences, and the bank had functions very much like the other banks
some o f the objections would be removed; but I think there are very
strong objections to putting the Government into the banking busi
ness to that extent.
Senator O ’G o rm an . What are they?
Mr. C o n a n t . Political, largely. I f the banks in this country were
officered by men who were more or less interested in politics, I think
you would find them more lenient to a borrower of their own faith
than upon strictly business principles. That is one objection.
Senator B ristow . Y ou think complete political control would be
less desirable than this semipolitical control that is proposed ?
Mr. C o n a n t . Yes; I should think so. It is semipolitical control
as the bill now stands, authorizing an advisory council, bringing the
two interests, governmental and commercial, into touch with each
other, and experience in Europe shows they usually work in harmony.
In the Imperial Bank of Germany there is a committee representing
the stockholders which has only limited powers and can not vote, I
believe, in the councils of the general board, but which confers with
the general board, with the governor and the deputy governor, and
BANKING AND CURRENCY.
1393
the executive committee and with the great German bankers; and
very rarely have any differences arisen between the two elements.
The question of determining the discount rate, and indeed most finan
cial and commercial questions, are determined by the committee
representing the stockholders. The officers representing the Govern
ment have greater powers. They could veto and override the action
of the stockholders, but they do not find the occasion arising to do it.
In this country, with this Federal advisory council, I think you would
find that the same degree of harmony would come about by degrees,
if not at first, because it would bring the officials representing the
Government in contact with the facts.
The most serious criticism of the original bill was that the mem
bers of the Federal reserve board would not be in touch with those in
timate facts which are known to the banker, which determine whether
lie will curtail his loans or raise the discount rate, or both, and other
things of that sort. When you appoint a committee representing the
Federal reserve banks who are in close touch with those affairs, they
will put the facts before the members of the Federal reserve board. I
am willing to accept the conclusion that the President will appoint
men on the Federal reserve board who will endeavor to perform their
functions with due regard to the business and financial interests of
the country. But they can not do it if-----Senator B ristow (interposing). I f an organization could be per
fected or a scheme devised whereby this political influence you refer
to could be guarded against, what objection would there be to the
Government owning a bank?
Mr. C o n a n t . Only the objections which exist against Government
ownership of any enterprise—that it is apt to be less responsive to
business conditions and less economical and less efficient. You see
it in every branch of the public service, do you not ?
Senator B ristow . Yes. Suppose that this Government bank did
business only with banks; that it discounted their paper and let
them have money issued, and that they run the business of the
country just as they do now, but when they wanted additional cur
rency secure it from this Federal bank?
Mr. C o n a n t . Well, there you are up against the same proposition
I was talking about before, that you must have either complete bank
ing functions and complete freedom to go into the market and do
banking acts, or you have a very clumsy and inefficient mechanism.
I f I understood the first part of your question, you propose to have
a complete bank.
Senator B ristow . Yes.
Mr. C o n a n t . Well, I will confine my answer to that. I f you had
a complete bank and its officers were competent bankers, and author
ized to do anything any bank was authorized to do, I think you
would still find they would not like to do certain things that a banker
would do when he was responsible to his private shareholders, be
cause their acts might be misinterpreted and they might be criticised
and made the subject of political attack. A banker, the president
of a national bank, a Federal reserve bank, or whatever you please,
has to use his best judgment in regard to various things, as, in regard
to buying and selling exchange, for instance. There are a number of
large banks in New York which have to take certain risks. They
may lose in one transaction and make money in another, but do you
9328°— S. Doc. 232, 6 3 -1— vol 2----- 28
1394
BANKING AND CURRENCY.
believe that a man appointed as a Federal official of a bank owned
by the Government would dare take the risk of losing anything
in any one transaction ? While if he did not take any risks his hands
would be tied. When you raise the general question of the pro
priety of Government ownership of an enterprise you raise a very
large question.
Senator N e l so n . That is practically State socialism?
Mr. C o n a n t . It tends in that direction.
Senator B r ist o w . There might be objections to the general bank
ing business, but what objections could there be to a Government
bank performing the functions for the individual banks that are to
be performed by these regional banks ?
Mr. C o n a n t . The objection would be that if you had a Government
bank simply authorized to issue currency upon commercial paper
it would not be able to do anything to protect the foreign exchanges;
that is, anything worth while.
Senator B r ist o w . The regional banks have not any power to,
unless it has been conferred in one House amendment. It was not
intended they should go into the open market and buy exchange.
Mr. C o n a n t . Oh, yes; they have got a number of open-market
functions, according to the bill in its present draft.
Senator B r ist o w . T o compete— section 15 is the section we are all
familiar with.
Mr. C o n a n t . Section 15, in regard to open-market operations,
says:
That any Federal reserve bank may, under rules and regulations prescribed
by the Federal reserve board, purchase and sell in the open market, either
from or to domestic or foreign banks, firms, corporations, or individuals, prime
bankers’ bills, and bills of exchange of the kinds and maturities by this
act made eligible for rediscount, and cable transfers.
Senator B r ist o w . O f course that is foreign business. It seems
to me most of our experts who come here are more interested in
the foreign banking business than in our domestic banking business.
It is not intended—the power may be conferred, but I do not think
it was intended to confer upon the banks authority to go into the
banking business in competition with the member banks.
Mr. C o n a n t . The Federal reserve board will prescribe rules which
will not interfere unduly with the other banks in times of peace and
tranquillity, but they will exercise those powers in times o f business
disturbance or threats against the gold reserve. I f they are not
going to do it, I do not see the use of having any such institutions.
Senator B r ist o w . I f we had a Federal bank authorized to per
form the functions that this reserve bank does in the discounting of
paper, and let the stock of this Federal bank be owned by the public,
banks could subscribe for it.
Mr. C o n a n t . “ Owned by the public ; ” by that you mean private
citizens ?
Senator B ristowl Yes; permit subscriptions by private citizens
or banks. Then the complaint could not be made that the bank was
controlled by some selfish interest, to the detriment of other com
peting interests.
Mr. C o n a n t . Is that not what you are seeking to accomplish by
this bill?
Senator B r ist o w . It will not accomplish it.
BANKING AND CURRENCY.
1395
Mr. C o n a n t . I do not understand that your question involves now
anything more than Government supervision.
Senator B ristow . It is a Government bank; it is absolutely run
by the Government, and the Government sells the stock.
Mr. C o n a n t . T o the public?
Senator B ristow . T o the public.
Mr. C o n a n t . But the Government does not retain ownership?
Senator B ristow . Not of the stock. It retains control.
Mr. C o n a n t . It appoints all officers; in other words-----Senator B ristow . Yes. Now, why could not it perform all the
functions of regional banks, and not disturb the present banking
system so far as the banks are concerned ?
Mr. C o n a n t . For the reasons that I have already referred to in
relation to the exercise of these banking powers. I f the Govern
ment bank, as you would call it, privately owned but officered by
the Government, was limited in its powers to issuing currency-----Senator B ristow (interposing). And discounting papers for banks?
Mr. C o n a n t . Yes; rediscounting; to issuing currency and even
selling Government bonds, I say it would not possess the requisite
powers to protect the gold stock of the country, and it would exer
cise its powers in a very clumsy way.
Senator B ristow . Why could it not protect the gold stock?
Mr. C o n a n t . It could do it by selling Government bonds—as Mr.
Cleveland did—in a very costly way, but it could not do it efficiently.
I do not believe the manager of such a bank—if you look upon him
as a Government official purely, and not as an active banker—I do
not believe he would dare sell Government bonds and subject this
country to a permanent bonded debt simply because he believed, and
was thoroughly satisfied it ought to be done to avert an impending
pressure upon the gold reserve. He might do it after the pressure
had occurred, but he would not dare do it in anticipation. I f he
did, resolutions would come into both Houses of Congress demanding
a full explanation of his acts.
Senator B ristow . You spoke of farmers’ loans being the least
desirable.
Senator O ’G o rm an . The least liquid.
Mr. C o n a n t . For a commercial bank. I did not mean to throw
anv discredit upon them as investments.
Senator B ristow . N o w , the purpose of this security is to protect
the Government which stands behind the currency that is to be issued.
Your theory is that it must be therefore an obligation that pays
itself up in a very short time?
Mr. C o n a n t . That is correct.
Senator B ristow . Why could not a securitv be used to protect
the Government and let the banker handle his liquid paper and pay
out the debt without the Government bothering with the short-time
paper?
Mr. C o n a n t . I do not quite get your idea.
Senator B ristow . Say a national bank had $400,000 in assets and
$100,000 of it was in securities, farm loans, municipal or Government
bonds, and they wanted temporarily $50,000 of currency. Why could
it not take some of these investment securities and put up with the
Government, as it does now, a Government bond and get that cur
rency ?
1396
BANKING AND CURRENCY.
Mr. C o n a n t . Why should it not? Simply because I think our
experience has shown that it is not a convenient and economical and
efficient system of getting proper expansion when it is required. The
bank has to own the securities, and it gets them back when the cur
rency is retired, and experience has shown that a bank does not like
to carry securities for that purpose.
Senator B ristow . Well, we do not allow the banks to hold farm
mortgages.
Mr. C o n a n t . Are you questioning the point as to whether the hold
ing of mortgages would be a good thing ?
Senator B ristow . Yes.
Mr. C o n a n t . Well, my answer to that would be the same as my
original criticism, that they are not readily convertible, and, further
more, the quantity of currency required in the country is not com
mensurate with the quantity of wealth in the country. Currency, in
a sense, is only a tool, and if you permitted every man who had se
curities to go up to the Treasury and get notes, we would simply be
swamped wfith paper. The amount of securities extant in this coun
try to-day is about $87,000,000,000. Our circulation is $3,000,000,000.
We would be wallowing in a mass of paper if every man could con
vert his securities into money; that would surpass the conditions in
the French Revolution.
Senator B ristow . Would it amount to any more it it were one
kind than another? Suppose he had $400,000 deposits in a country
bank. You think that ought to be all short-time paper; that is,
notes ?
Mr. C o n a n t . The larger propoition; yes.
Senator B ristow . That is because it matures rapidly and collec
tions can be made more rapidly?
Mr. C o n a n t . Yes, sir.
Senator B ristow . O f course, you do not anticipate that that bank
will ever want $400,000 in currency?
Mr. C o n a n t . No; I would say not.
Senator B ristow . It would not probably ask for more than
$100,000 in currency, would it? That would be the maximum?
Mr. C o n a n t . Yes.
Senator B ristow . That is an expansion of 25 per cent. Now, in
stead of having this $400,000 of short-time paper, suppose it had
$100,000 farm mortgages bearing 44 to 6 per cent.
Mr. C o n a n t . O f course, a very limited proportion carried in its
assets is provided for in this b ill; and, while I do not like the prin
ciple—
Senator B ristow (interposing). O f course, those short-time farm
mortgages are not worth anything.
Mr. C o n a n t . Y ou would favor a long-term mortgage?
Senator B ristow . I should say five years. I f that bank had
$100,000 of five-year mortgages, bearing a good rate of interest, that
could be used at any time, with the Government as security for ad
ditional currency, and you could take the remaining $300,000 and let
that be used in your commercial business, why could not the Gov
ernment receive those farm mortgages as the security and let the col
lections be made and the currency borrowed by the processes that
would result in its retirement under the system that is suggested ?
BANKING AND CURKENCY.
1397
Mr. C o n a n t . My reply to that is that the quantity of money
loaned on mortgages has no relation to the need for currency in the
country, and the deposit of mortgages is like the deposit of any
thing else, like the deposit of any other long-time obligation, which
does not in itself indicate that there is any demand for currency.
I f that bank has convertible assets, it should deposit those, because
they contract and expand automatically. That is our present trouble,
that the deposit of United States bonds has no relation to the de
mand for currency in the country. Sometimes the quantity of bonds
meets the demand, and sometimes it is less, the quantity of bonds re
maining rigid and the demand for currency changing. There is no
more reason why a man should go up and deposit mortgages than why
he should deposit a horse—in fact, not as much.
Senator B ristow . D o you think a horse can be sold more readily
than the mortgage on a good farm ?
Mr. C o n a n t . I would not say you could not sell the mortgage as
quickly as the horse, possibly, but I would say that the horse usually
is more quickly convertible on the whole. There is no discredit cast
on mortgages in this theory, but they are not a good security for
currency. They are a splendid thing for a man who wants to put
his capital into something where he is going to get a steady return;
but when he puts his capital in it, that does not mean that amount of
currency is locked up. The man takes that to the bank and the bank
debits his deposit account. The main effect it would have would be
that the bank would be able to reduce its reserve a few dollars. In
other words, mortgages have no relation to currency. They are
good investments-----Senator R eed (interposing). What does have a relation to cur
rency ?
Mr. C o n a n t . Why, the current movement of trade.
Senator R eed. That is about 20 times the amount of currency we
need, is it not ?
Mr. C o n a n t . Yes.
Senator R eed. Then it has a very loose and peculiar relation. You
urn not measure the amount of currency by it.
Mr. C o n a n t . Y ou can measure it in this way; by the measure of
demand and supply. You have a certain volume of transactions set
tled by checks, but you find that for certain purposes people demand
currency. The determination of the amount necessary under a sound
system is almost automatic. I f you are running a farm and you have
wages to pay you probably go to the bank and ask for a certain amount
of currency; but it does not mean you have to have an amount of cur
rency representing the whole value of your farm or the whole value
of your operations.
Senator B ristow . N o w , the United States 2 per cent bonds sold at
a premium?
Mr. C o n a n t . Y es; they have sold at a premium.
Senator B ristow . Why did they sell at a premium?
Mr. C o n a n t . Because there was a mandatory law compelling banks
to buy them if they wanted more circulation.
Senator B ristow . N o w , the circulating privilege made the 2 per
cent bonds sell at a premium, did it not?
Mr. C o n a n t . Yes.
1398
BANKING AND CURRENCY.
Senator B ristow . The circulating privilege then lends to the
desirability of a security?
Mr. C o n a n t . Where the quantity of the security is limited. Of
course, if the United States should put out several times as many
bonds we should have such a lot of paper it would not make any
difference. The quantity happens to have been limited, roughly, to
the business needs of the country.
Senator B ristow . But if a national bank were permitted to invest
a part of its deposits in farm mortgages and those farm mortgages
could be used as a basis for an asset currency, when a demand ex
isted for such currency it would make such loans desirable to the
banks, would it not?
Mr. C o n a n t . It would make the mortgages more desirable ?
Senator B ristow . Yes.
Mr. C o n a n t . It might have that tendency if they followed it up.
I doubt if many of them, under existing conditions and banking
opinion, would try to obtain currency on mortgages. I think they
would lose caste with their reserve correspondents if they did.
Senator B ristow . The paper of John Wanamaker that floats
around the country a good deal, or the paper of any concern of that
kind, is regarded as commercial paper that can be used as the basis
for this currency. That makes loans of that character more de
sirable than they would be if it could not be used as such a basis,
does it not ?
Mr. C o n a n t . It may have a very slight tendency in that direction,
but there is so much commercial paper I should not say that it would
have any visible or tangible effect.
Senator B ristow . But it gives a desirable character to that kind
of loan?
Mr. C o n a n t . The paper must be prime, or it would not be accepted
by the Federal reserve association.
Senator B ristow . By “ prime ” you mean good ?
Mr. C o n a n t . Not only good, but the very best.
Senator B ristow . Take the best, then.
Mr. C o n a n t . I do not see that you are going to add any money
value to it. A bank is not going to rediscount that paper above par.
O f course, it might have this influence, that the bank would give a
slightly lower rate of discount, and that, I understand, is what you
seek—to increase the facilities of the country.
Senator B ristow . Why should the merchant who is handling goods
have legislation that induces a lower rate o f interest for him than the
farmer who is producing the food supply of the country?
Mr. C o n a n t . He should not have if the two are upon sound prin
ciples, and I understand that the President of the United States pro
poses to recommend a method of improving farm loans.
Senator B ristow . Yes; we hear a good deal about that, but it
seems to me the time to do a thing is when you are doing it.
Mr. C o n a n t . T o my mind there is a fundamental distinction be
tween loans on convertible paper, which is elastic in quantity, because
it is retired if business slackens, and a rigid security that is converti
ble only after a long period of years.
Experience shows that. You can go through the banking expe
rience of every country in Europe where they have tried to secure
notes on mortgages, and they have all come to grief. Italy came to
BANKING AND CUBRENCY.
1399
grief as recently as 1893. It is not because one class of investment
is not as good as another, but because the investments are of different
types and must be dealt with differently.
Senator B ristow . Senator Nelson asked you about the difference
between capital and currency, I believe, and, if I understood him cor
rectly, he said that as he understood it capital was produced by the
manufacturer and the farmer and the miner. They produce the re
sources or the capital of the country.
Mr. C o n a n t . Yes. I should have added, perhaps, the value of the
existing natural resources, but they are not worth much unless im
proved by human labor.
Senator B ristow . O f course. And you spoke of a lawyer or doctor
producing capital. I do not understand just what you meant by that.
Mr. C o n a n t . O f course, they do not produce physical capital, but
in our complicated modern society they do their share by enabling
other people to produce. The lawyer who shows a man how to or
ganize a corporation that is going to produce shoes cheaper is doing
his share in the production of those shoes, just as the manager of a
mill, while he does not produce capital-----Senator N elson (interposing). Especially if he helps the corpora
tion to issue watered stock.
Senator B ristow . Still, without discrediting the professions in
any way, they are one of the expenses of society.
Mr. C o n a n t . Y ou may call them in a sense parasitic—but not in
an invidious sense.
Senator P omerene . H ow would you class Senators?
Senator H o l l i s . I want editors included in that classification.
Mr. C o n a n t . Everyone, o f course, who does not labor with his
hands, who is simply applying his mind to the formulation and or
ganization o f industry. But they are very essential in the organiza
tion of modern society. They do their part: that is certain.
Senator B ristow . Y ou spoke of liquid capital, and we are hearing
a great deal about liquid capital here. Is it not a matter of fact that
this banking system of ours has developed so extensively that it is
taking the place of what formerly was the capitalist who loaned his
own money and afterwards became a kind of private banker; and
that we have developed now the State and national banks and trust
companies, and they have become the repositories of the surplus
money of the country?
Mr. C o n a n t . Yes; the money that is awaiting investment and not
actually invested. Of course, if a man goes and buys a share of
stock and pays for it with a check on his bank he has transferred his
capital from the bank into the stock or into the plant.
Senator B ristow . And the man who got the money for the stock
puts it back in the bank.
Mr. C o n a n t . He does if the plant is already in full operation; but,
if we assume the case that he buys the stock of a new enterprise, the
money has to go into the new plant and getting it started. Of course,
if you mean that the currency is put back, yes; but currency is only
a factor in the many means of transferring capital.
Senator B ristow . That is true. Now, the result of this develop
ment of the banking system is this: I f a man wants to borrow money
in his community now, he goes to the bank. I am not a very old man,
but I remember when there were men in our community who loaned
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BANKING AND CURRENCY.
money themselves—quite a number of them. They were capitalists.
I f a man wanted to borrow money, he would go to Sam Smith or John
Jones. They do not do that any more. Those men that formerly
loaned this money and had surplus capital that they allowed other
people to use, they either start the banks, or many of them carry
time deposits in the banks, or the banks handle the money for them
and sell them their securities that they get. The result is that now
when a man wants capital for any purpose he goes to the bank. Now,
if you confine that business to this short-time paper you are penaliz
ing the investment of capital in the interest of what you call the
commercial paper, are you not?
M r. C o n a n t . I should not so interpret it. The bank is only the
temporary resting place of capital which is put in a permanent in
vestment. This man you speak of will now presumably put money
into securities, but he, as an individual, puts them into securities and
he does not need to convert them into currency again-------
Senator B ristow (interposing). Now, you take a bank statement
and you will find a great many time certificates. I happen to have
one or two here. Here is a statement of the Planters’ State Bank,
capital $100,000. I notice here that the individual deposits are
$422,000; certificates of deposit, $175,000. Now, those certificates of
deposit bear interest.
Speaking of a personal incident, I know a man who carries $50,000
or $60,000—which is a large amount of money for his community—
in a bank all the time and the bank pays him 4 per cent on it. He
does not bother about it. It saves him the trouble of looking after
investments and he thinks the bank is good. Now, this banking sys
tem, I find, is drawing into it this surplus capital and this bill pro
poses to make these bankers use it in the handling of commercial
paper, and it is taking from the community to that extent the money
that has formerly been used in these permanent investments.
Mr. C o n a n t . I do not so understand it. I understand that the
existing banking system will go on much the same as it does now.
O f course, the rediscount banks will deal only in commercial paper,
because that is the only way to control the supply of capital on the
margin, and it is marginal control they are exercising. When you
have money on time deposits a banker would be justified in going a
little farther in lending on it than in lending on demand deposits.
O f course, you have to have that strictly regulated by law. In New
York we have a law penalizing a trust company which pays a man
a time deposit before it matures, the object being to compel the bank
to keep a reserve against demand deposits which they are not re
quired to keep against time deposits.
Senator B r ist o w . Here is a statement of another bank, a national
bank: Individual deposits, subject to check, $175,000; time certifi
cates of deposit, $325,000. That is evidence to my mind that the
money of the community is being deposited here in these time cer
tificates, because, while it pays a lower rate of interest, it is in fact
making the banker the broker for the loaning of that money and he
gets a percentage.
Mr. C o n a n t . It is deposited at a lower rate o f interest because it
is more readily convertible.
Senator B r ist o w . N o ; it is because it is all in one place, and the
owner of the money is not bothered about it, and he probably gets
BANKING AND CURRENCY.
1401
4 per cent, and it is paid promptly, and the trouble of determining
whether the loan is a good loan or not he puts on the banker.
Mr. C o n a n t . I do not understand that there is anything in this
bill interfering with that.
Senator B r ist o w . Nothing interfering with it, but the loans that
would be made from such deposits as that can not be used, according
to your theory, as the basis for currency, and I think it is a wrong
theory.
Mr. C o n a n t . But we never have had the rule that you could lend
on mortgages, except the United States bond loans.
Senator M cL e a n . Mr. Conant, I assume you intend to discuss the
details of this bill later on.
Mr. C o n a n t . I want to take up a few of the leading features.
Senator M cL e a n . Y ou intend to consider the subject of making
these notes the obligation of the Government ?
Mr. C o n a n t . Yes.
Senator M cL e a n . And how should they be redeemed ?
Mr. C o n a n t . Yes. I am willing to discuss that question now, if
you desire.
Senator M cL e a n . I do not care to interrupt you if you intend
to discuss it later. Has your attention been called to the fact that
serious objection to the bill has been raised by those who consider
that the three-months’ paper will not be obtained in sufficient quan
tities ?
M r. C o n a n t . I have heard that objection.
Senator M cL e a n . And that there is an existing prejudice against
rediscounts on short-time paper?
Mr. C o n a n t . I have heard those objections; I do not consider them
very important.
Senator O ’G o rm an . I would suggest this observation: O f course
the objection is quite general that the rediscount of paper at the
present time is unpopular. It is frequently spoken of as poor bank
ing. The question I have to address to you is this: Is it not likely
that it may become popular and lose the prejudice now existing
against that practice?
Mr. C o n a n t . Oh, I think there is no doubt about it.
Senator O ’G o rm an . I f it be made a feature of this or some other
currency legislation?
Mr. C o n a n t . I think there is no doubt about it. That is the estab
lished practice of the big European banks in which the power is very
much concentrated. In France there are only a half dozen big joint
stock banks, but they rely always in case of need on the Bank of
France. They carry very limited cash reserves, and if they antici
pate a run or demand for money they simply take their best paper up
to the Bank of France-----Senator O ’G orman (interposing). And doing that would not im
pair their prestige?
Mr. C o n a n t . Not a particle.
Senator O ’G o rm an . Why does that prejudice exist in this country,
then ?
Mr. C o n a n t . I suppose the prejudice in this country exists because
a bank has been supposed to be restricted to its own immediate re
sources, its own deposits and capital. I do not think it is anything
1402
BANKING AND CURRENCY.
but a prejudice, except to the extent that rediscounting on too broad
a scale may tend toward inflation. But I think that when the system
is once established it will be availed of. It may not be availed of the
first day the banks are opened, but it will come about.
Senator M cL e a n . I will not press my question now, M r. Conant,
if you intend to discuss-----Mr. C o n an t (interposing). It depends on whether the other Sen
ators desire to ask me any questions on these general considerations.
Senator N elson . I should like to ask you a little later about the
details of the bill.
Senator H itchcock . Mr. Conant, I notice you set a high value
upon that feature o f the proposed legislation which proposes to vest
in the Federal board the right to control the rate of discount, and
thus control the gold supply of the country. Is that right?
Mr. C o n a n t . Yes; but I would rather substitute the word “ influ
ence ” for “ control.”
Senator H itchcock . I think you are the only witness that has
really taken up that phase of the bill.
Mr. C o n a n t . I intended to say a little more on that, and perhaps
I should do so now.
Senator H itchcock . Before you do that I want to ask you a few
questions that occur to me. You speak of the fact that, as it is now,
our gold market is likely to be raided by European countries desir
ing gold.
Mr. C o n a n t . Yes.
Senator H itchcock . They can come here in a free-gold market and
buy gold. W ill you tell the committee how they buy it; what they
pay for gold when they buy it?
Mr. C o n a n t . There are various ways of buying it. O f course, it
depends upon our condition as well as theirs, but the Austro-Hunga
rian Bank at the time I spoke of, and the Russian Bank—of course,
they probably bought most of their gold directly in London rather
than come to New York, but the London bankers would take steps,
through raising the discount rate, to replenish their own gold stock.
They would go to London and, either through the issue of Govern
ment bonds or through the issue of some obligation of the banks, or
through borrowing from some London joint-stock bank, they would
acquire the credits to buy the gold, and they would pay a fraction
of a penny above its market value. There is always buying going
on in the London market-----Senator H itchcock (interposing). In what form do they make
their payment?
Mr. C o n a n t . Oh, in credits or checks or cash. O f course, ulti
mately, I suppose— in the case of Russia, at least, it was necessary to
issue Government bonds.
Senator H itchcock . I w speaking of those who bought gold in
’as
the United States free market.
Mr. C o n a n t . Oh, in the United States-----Senator H itchcock . That is the only way our gold supply can
be raided.
Mr. C o n a n t . I can not speak specifically as to the details of the
operations, but, as I said, I think the gold was bought primarily in
London, but London would replenish her market by raising the dis
count rate and discounting credits in this country. You know, prior
BANKING AND CUBBENCY.
1403
to 1907 the London banks said they would not discount any more
finance bills from New York. A finance bill is simply a loan in a
foreign market which gives you the credit and enables you to keep
your gold.
Senator H itchcock . I s there any way in which any foreign coun
try can get gold out of the United States except by giving an equiva
lent for it and a premium in addition to that equivalent?
Mr. C o n a n t . Whether they give a premium, of course, depends
on money-market conditions throughout the world.
Senator H itchcock . S o that after all it depends on business con
ditions whether Europe can get any gold out of the United States ?
Mr. C o n a n t . Yes; in a sense-----Senator H itchcock (interposing). Is not that absolutely so?
Mr. C o n a n t . Yes; but you do not want your gold undefended.
I f France or England pursued the policy of just letting matters
drift, they would be denuded of their gold, specie suspension would
ensue, and they would find themselves in serious trouble.
Senator H itchcock . Let me call your attention to the great differ
ence between France and England and the United States. The
United States is a great gold-producing country. We produce nearly
a quarter of the gold of the world, and inevitably we must export
some of that gold. We can not absorb it all. France produces no
gold; England produces no gold; no other European country pro
duces gold.
Mr. C o n a n t . Except Russia.
Senator H itchcock . And while it may be necessary for them to
have a central control of the discount rate to retain their gold or
regain it, would the same apply to the United States?
Mr. C o n a n t . S o far as the production of gold is concerned I do
not think that cuts any figure at all. The supply of gold will flow
where it is needed for bank reserves.
Senator H itchcock . Take the matter o f trade. This is a great
country which annually exports much more than it imports.
M r. C o n a n t . Y ou are arguing to the effect that our general
balance will be favorable on the whole?
Senator H itchcock . Yes. In other words, haven’t we for genera
tions got along satisfactorily without any protection of this gold
supply, dependent wholly on natural business conditions?
Mr. C o n a n t . N o ; I do not think we have got along satisfactorily.
Senator H itchcock . Then, let me ask you what the figures of our
exports and imports show. It is an actual fact that our export of
gold is about $20,000,000 or $30,000,000 a year, is it not ?
Mr. C o n a n t . I presume so.
Senator H itchcock . And we are annually producing about $96,000,000 a year?
M r. C o n a n t . Y ou are taking what period?
Senator H itchcock . Any period you choose.
Mr. C o n a n t . It make a difference what period you take.
I f you
take the last 15 years since 1897 the showing would be much more
favorable.
Senator S hafro th . The direct importation of gold since 1878 has
been about $5,000,000 a year on an average.
Mr. C o n a n t . I do not think, as I say, that the question of what
amount you produce cuts any figure in deciding where the gold will
1404
BANKING AND CURRENCY.
find a resting place. O f course, if we are producers we do not have
to import, and there might be underlying that investment a cost of
one-sixth per cent, or one thirty-second, or something; but the cost
of production is not an important factor. I f we never produced an
ounce of gold in the United States we would probably have the same
amount of gold. The import statistics would show larger imports.
Senator H itchcock . Take that horn of the dilemma. We have
attained to-day a certain business position in the world. I wish you
would point out what experience we have had over any period of
years to indicate that we have need of any power to control the dis
count rate for the purpose of making our gold supply adequate.
Mr. C o n a n t . I point to the disturbances and panics.
Senator H itchcock . Y ou point to one or two cases in which it
has been necessary to resort to extraordinary measures, but England
has had those same experiences-----Mr. C o n an t (interposing). But through their concentrated banks
they have been able to protect the general commercial situation. I
understand the purposes of this bill to be to avert those crises.
Senator H itchcock . Y ou say it was the gold supply which pro
duced the crisis in that case?
Mr. C o n a n t . Not the gold supply, but the absence o f adequate
reserves and the lack of a central power to call a halt before those
reserves were excessively depleted.
Senator H itchcock . But that had nothing to do with the gold
supply. Here is a country which has a gold supply of $1,700,000,000.
Now, it is hardly conceivable that the salvation of the country shall
depend on whether $40,000,000 or $50,000,000 is going to be imported.
The crises come from overspeculation and overloaning. That has
nothing to do with the gold supply.
Mr. C o n a n t . I think it has a great deal to do with it. I mean
to say this: That, as I said at the beginning, the whole credit
situation is involved inevitably in the movement of bank reserves.
Senator H itchcock . N ow you are coming to another question.
The question of resources is a different matter than gold supply.
Mr. C o n a n t . I f you mean to say we have to-day an adequate
gold supply I am quite willing to admit it, and if it were not for
our banking laws we could lose $50,000,000 of imports a year and not
feel it. But if we have a law that requires banks to suspend making
discounts when their reserves fall to a certain point $5,000,000 may
turn the scale.
Senator W eeks . Senator Hitchcock, may I make a suggestion
there on that point? I want to ask Mr. Conant if the exportation
and importation of gold are not more important as a signal to the
business of both countries than is the actual effect of the exportation
or importation which may take place, which may be of a very small
amount ?
Mr. C o n a n t . Yes; certainly it is an index of business conditions
and of the condition of reserves, and a central institution should take
note of that before the situation becomes too acute.
Senator H itchcock . I want to call your attention to a statement
in which you said that the Government does not control the quantity
of gold, and for that reason it should not control the quantity of
credit currency. Now, does not this bill provide that Government
officials shall control the quantity of credit currency?
BANKING AND CUBBENCY.
1405
Mr. C o n a n t . Only indirectly.
Senator H itchcock . N o ; directly. They have the power to refuse
to grant credit currency to any reserve bank.
Mr. C o n a n t . Personally, I should prefer to have that board made
up of men representing the shareholders of the banks.
Senator H itchcock . However you make it up it is proposed either
in the bill or by your proposition to grant to 7 men or 11 men the
power to control the credit currency.
Mr. C o n a n t . That is in the b ill; yes.
Senator H itchcock . Y ou do not approve of that, do you?
Mr. C o n a n t . Yes; in a sense. The authority to act must be lodged
somewhere, but, as I pointed out, these men must not act arbitrarily
or wrongfully.
Senator H itchcock . Is it not a fact in France and Germany the
amount of credit currency is limited by law ?
Mr. C o n a n t . The limitation in France is of such a character that
it is really ineffective. Whenever they see the demand for currency
is approaching the limitation they raise the limit.
Senator H itchcock . They raise the limit as the country grows,
but the limit .remains as a permanency from year to year until it is
raised by law. The German Reichstag fixed the limit of currency-----Mr. C o n a n t (interposing). No; in Germany, o f course, you can
get out additional notes by pajfing the tax-----Senator H itchcock (interposing). But even with the taxed notes
there is a limit.
Mr. C o n a n t . What is the limit? There is a limit for the au
thorized circulation which does not have to be covered except by
33 per cent of gold. Then you can issue gold without limit, and in
addition to that you can deposit notes under a tax of 5 per cent
without limit. The suggestion that there is a fixed limit is entirely
novel to me.
Senator H itchcock . D o you believe that there should be no limit
to the quantity of credit currency to be issued, and that that quan
tity should be left to the say so of a board of control ?
Mr. C o n a n t . Under adequate conditions for a reserve and for
taxes on excess issues, yes.
Senator H itchcock . This bill provides that the board of control
can say to a bank, “ You can have currency,” or it can say to the
same bank, “ You can not have currency,” regardless of the reserve.
Mr. C o n a n t . It provides that the bank must have 33£ per cent
reserve.
Senator H itchcock . That is true, but the board has the right to
refuse currency.
Mr. C o n a n t . What is the question you ars asking?
Senator H itchcock . I am asking you whether you think we should
have in this country a board with the arbitrary power of fixing the
limit of the supply of credit currency.
Mr. C o n a n t . I should say that there should be a power; I shall
not say an arbitrary power.
Senator H itchcock . D o you think that there should be an appeal?
Mr. C o n a n t . N o ; let me explain. I do not consider that power
arbitrary, because it can not be exercised in an arbitrary manner
effectively. If, as I pointed out, the governing board of the Bank
1406
BANKING AND CUKBENCY.
of England or the Bank of France fixes a discount rate which is
above the market people begin to undermine it. I f this board should
undertake to refuse to grant currency to meet the needs of the
country, it would be an unfortunate situation, but the remedy is
always at hand—the importation of gold.
Senator H itchcock . By whom?
Mr. C o n a n t . By the banks—by anybody; by a citizen.
Senator H itchcock . H ow would they import their gold? How
would they pay for it ?
Mr. C o n a n t . They would pay whatever the current rate was. just
as they do now.
Senator H itchcock . They would pay for it only in business
credits; they have no other means-----M r. C o n an t (interposing). In business credits and loans.
Senator H itchcock . That is anticipating the future. Whatever
they took during one 6 months would be that much detracted from
the next 6 months.
Mr. C o n a n t . Are you assuming that a board would be appointed
by the President of the United States that would put this country
in that position arbitrarily?
Senator H itchcock . We are not dealing with assumptions; we are
dealing with a law that has been framed here: and the question has
become very large with me whether any body of men appointed by
the President, or anybody else, should be given the power to diminish
or increase the volume of currency and thus raise and lowrer prices.
Mr. C o n a n t . O f course the raising and lowering of prices will
become effective only after some time.
Senator H itchcock . A s the currency expands prices will fall,
and as the currency contracts prices will rise.
Mr. C o n a n t . Not immediately.
Senator H itchcock . I wish you would instance a case where the
currency has contracted without a corresponding fall in prices. I
say contracted; I do not say that it would not actually contract with
business. I am speaking of arbitrary contraction. I will take an
illustration. Suppose the board of control, which may have the
rate of interest fixed at one-half of 1 per cent under this bill, should
raise it to 5 or 6 or 7 per cent. What is a man going to do out West
who has a large bunch of cattle upon which he has borrowed money?
The interest rate goes up and the market is wiped out. Does not
that force a fall in prices inevitably?
Mr. C o n a n t . Not necessarily.
Senator H itchcock . I should like to have you explain how that
could be avoided?
Mr. C o n a n t . Y ou are referring now to a principle of political
economy known as the quantity theory of money, and I am not
denying that the quantity of money does affect prices in some degree.
But there are other things—the state of credit, the state of con
fidence—
Senator N elson (interposing). Supply and demand?
Mr. C o n a n t . Yes.
Senator H i t c h c o c k . We are assuming all those things to be equal.
Mr. Conant, and just saying that this board arbitrarily raises the
rate of interest.
BANKING AND CUKRENCY.
1407
Mr. C on ant . Your first question was as to their absolutely refus
ing to issue currency, and now you speak of raising the rate of
interest.
Senator H itchcock. Take the two of them.
Mr. C onant . Let us take the matter of raising the rate of interest.
I f that were done and the rate were above the normal legitimate
market, and this board refused to issue currency except at that in
creased rate, in my opinion it would do no practical harm at all.
The business of extending credit to the gentleman you spoke of
would be done through the checking system. If, however, the
country had reached a point where reserves were down to the mini
mum and credit had been extended to the very maximum, then their
act would have an effect, and in those circumstances that action ought
to be taken. I f it is taken at a time when there is plenty of free capi
tal, then their act is ineffective.
That is the experience of every European country. I can not
quite see how you can assume that they would be able, in the face
of the financial opinion of the country, to undertake to do a thing
which was obviously unsound. I f it is simply on the margin of
judgment and their judgment is wrong, the surplus capital in the
country will then come to the aid of business. I f they persist in
their wrong judgment and the credit is contracted unduly, those
banks will begin importing gold, and you have increased their loan
ing power. They are only required to keep an 18 per cent reserve,
and you would have five and one-half times the amount of loans,
whereas under existing laws they can only get four times. Such a
supposition would be found to be unworkable. I f they wished to
do that their efforts would be offset by the conditions of the market.
It would be an unfortunate thing to do, of course. The mere
fact that we had a board that undertook to do wrongful things would
be very disturbing, but it would not affect matters materially—a
fraction of a per cent in some transactions. But we have the great
gold stock of the world to draw on.
(Thereupon, at 1 o,clock p. m., the committee took a recess until
2.30 o’clock p. m.)
AFTER RECESS.
STATEMENT OF CHARLES A. CONANT, OF NEW YORK— Continued.
The C hairm an . We will be glad to have you proceed, Mr. Conant.
Mr. C onant . In regard to the bill itself I agree with some of the
statements made by the chairman on a number of occasions, that it
has the merits of providing for a greater centralization of reserves
and for greater elasticity in the currency. Those, of course, are the
fundamental things, as I understand it. which should be aimed at.
I will not say I indorse every detail of the bill as to the carrying out
of those purposes, but it is aimed at carrying out those purposes,
and its provisions are directed to that end, and I appreciate and
approve them.
Now, when it comes to the particulars of the bill, I want to deal
principally only with those questions which have appeared to be
more or less storm centers. The question of the number of reserve
associations, the character of the currency issued, the conditions under
1408
BANKING AND CURRENCY.
which it is issued, and the question of reserves, the amount and dis
position of reserves; those, I think, are the principal questions which
have come in issue between the bankers, merchants, and business
interests generally and some of the supporters of the bill.
Senator N elson. They complain of two other matters, the com
pulsory provision as to joining-----Mr. C onant (interposing). Yes; I want to say something about
that.
Senator N elson. And the compulsory provision as to requiring one
reserve bank to discount the paper of another reserve bank.
Mr. C onant . I will take up now one of those points you mentioned,
because I have very little to say upon it. The power of compulsion
upon one reserve bank to rediscount for another, I think, is of very
doubtful propriety. As a matter of fact, I do not imagine, whether
it is in the law or not, that it will make much difference. The Fed
eral Reserve Association, if it is composed of the right class of men,
will cooperate with the directing boards of the Federal reserve banks,
and the situation would be unusual which would lead the Federal re
serve board, in the manner required in this bill, to direct a Federal
reserve bank to rediscount for another bank when the bank so directed
was opposed to doing it.
I should say that it will work out about the way the thing is man
aged in Europe, as between the Government officers of a bank, who
are almost all-powerful, technically at least, and the board which
represents the stockholders. There is usually a consultation, and in
regard to a great many question the initiative is taken by the com
mittee representing the stockholders, so that I do not believe that
with that provision left in the bill we shall see a great deal of com
pulsion. I f we did, it would be a very unfortunate situation, and one
which would excite a greate deal of distrust in the locality where the
bank was situated. I would rather see that eliminated, but I do not
believe that, practically, we shall find many difficulties arising
under it.
Senator H itchcock. What are you speaking of now ?
Mr. C onant . The provision that the Federal reserve board may
compel a Federal reserve bank to rediscount against its will, and that
it is compulsory and not a matter of banking comity and cooperation.
I think it is an objectionable provision, but I do not believe we would
have a board which would make it objectionable, in fact. I f we had
such a board, it would be a very unfortunate situation. I f such a
situation could arise, it would be because in some section of the
country there had been undue inflation, and a bank in another sec
tion, which was ordered to rediscount for the bank in the other sec
tion, was not willing to do it and distrusted the character of the paper
presented by the bank in the overextended section. It is my opinion
that with an intelligent Federal reserve board, the matter would be
amicably adjusted, that the word would be given to the bank in the
overextended section to curtail its loans, as far as practicable, and
that that would be distributed among other Federal reserve banks
in a limited way.
Senator R eed. May I, without interrupting too much the thread of
your discourse, suggest this, that this bill compels the Government to
put every dollar of its money in these banks? Further, it commands
BANKING AND CUKBENCY.
1409
the Government to put that money there equitably, whatever that
means. No.w, do you not think it would be a peculiar thing if the
Government could not at least move its own money from one bank
to another?
Mr. C on ant . Yes, sir; I think-----Senator R eed (interposing). Now, is not this proposition of com
pulsion really a proposition that covers that question? For instance,
I put all my money into your bank. I have the natural right to take
it out and put it into Senator Nelson’s bank, but by lawT I am com
pelled to put half of it in each of your banks. I f we pass that sort of
law, ought we not also to say that I shall have the right to order you
to help Senator Nelson, or Senator Nelson to help you, or else reserve
the right to put this money where we please and as we please ?
Mr. C onant . I think the Government should probably, if it had
charge of this matter, through any other instrumentality than the
reserve board, have power to transfer Federal funds as its sees lit.
While that power might be legal, it is a power which inheres natur
ally in the Government.
Senator N elson. We would not have that trouble if we had one
central reserve bank?
Mr. C onant . I can not conceive, Senator, that those conditions
would become practical. It would be very unfortunate if any such
condition should ever arise, and I doubt if it would arise. Theoreti
cally, the right thing to do would be to cancel both of those pro
visions.
Senator O ’G orman . A s a substitute for “ equitably” you would
suggest that the reserve board distribute the Government money as
in its discretion the board saw fit?
Mr. C onant . Yes. I am not sure whether the bill places the ques
tion of distributing equitably under the reserve board or under the
Secretary of the Treasury.
Senator N elson. The bill excepts the 5 per cent for the redemption
of bank notes, but it ought to exempt the $150,000,000 of gold.
Mr. C onant . I think there are several points connected with that
which should probably be readjusted. I believe the bill provides a
year for this.
Senator N elson. Yes; within a year.
Mr. C onant . There should be some discretion given to the Secre
tary of the Treasury to proceed with reasonable deliberation about
that, because if it is done before the Federal reserve banks are
properly organized, it might cause considerable perturbation. I
doubt whether there should not be several such funds kept in the
Treasury.
In principle, it is desirable that the Government should keep its
funds in the banks and check against them, but in a transition I
think we should proceed with a little deliberation, or give some dis
cretion to the Federal reserve board, and not be compelled to do a
thing which is drastic and revolutionary, so far as our existing sys
tem is concerned.
Senator N elson. Senator O’Gorman, will you allow me to suggest
that there ought to be a double discretion— a discretion as to the dis
tribution, and also as to the quantity. Instead of making it manda
tory to put in every dollar, it ought to be left discretionary, I think.
9328°— S. Doc. 232, 6 3 -1— vol 2------ 29
1410
BANKING AND CURKENCY.
Mr. C onant . There were some questions raised by the Senator
from Nebraska before recess that I would like to comment upon
further, and they will cover what I have to say in regard to several
features of the bill.
I am opposed to the present draft of the bill in compelling national
banks to enter the sj^stem or dissolving their charters within one
year. I think it is not in accordance with the conservatism of AngloSaxon laws. I understand it is legal— that the Government has re
served the right to modify or revoke charters. But in Massachusetts,
of which State I am a native, and of which State I am prouder at
the moment than that in which I now live, the law which authorizes
the legislature to modify or annul charters is supposed to be in
voked only in case of gross laches on the part of a corporation, or to
make some trifling amendment. The proposition that a corporation
which has a charter for 20 years, and in which shareholders have in
vested their capital, believing it would be a good investment, within
one year should be compelled to accept provisions which it appears
are objectionable to many of them, or be dissolved, I think is drastic
and un-American. That does not necessarily imply that the bill can
not be carried out with some modifications.
I should say that in the case of these country banks, it was not
necessary to make their entrance to the system compulsory. Of
course it may be necessary to take away their power of note issue.
But so far as the average country bank is concerned, or at least so far
as the smaller ones are concerned-----Senator N elson (interposing). You mean those $25,000 banks?
Mr. C onant . Yes. I do not see that a country bank would not be
just as well off outside the system as within it, because they would
get discounts, as they do under the present system, from their corre
spondents in reserve cities, with whom many of them have estab
lished cordial relations. The advantage of this system is that here
after their correspondents in reserve cities can not say to them in
time of pressure, “ We are at the end of our resources, and we can
not help you any more,” because if that should be said the country
bankers can say, “ Why do you not get some rediscounts from the
Federal reserve banks? ”
In other words, you can leave the country banker where he is to
day, not obliged to subscribe capital to the Federal reserve boards
unless he chooses to, and whether he gets all the advantages of the
new system or not, every advantage he does get is added to the ad
vantages he has to-day. O f course if you do that you have to pro
vide the capital of the Federal reserve bank from some other sources,
perhaps. If the smaller banks do not see any benefit in getting into
the system, why should not that proportion of the capital be sold to
the public?
I understand that when the so-called Aldrich bill was framed there
was opposition to it on the ground that some money power would
get possession of it and control it. I f that is a real menace, which I
do not think is very serious, it could be guarded against by limiting
the holdings of any individual Or corporation.
The C hairm an . Limit their voting power?
Mr. C onant . Yes; one or both.
So that I can see no harm, especially during the transition period,
of making the bill less drastic in this respect. The suggestion of
BANKING AND CURRENCY.
1411
Mr. Claflin was, I believe, to extend the time to three years. It is
possible that the advantages of the new system will appear to be such
that they will all come in. There is a very strong indisposition at
the present time to coming in, and I think that you have received
resolutions, or will receive resolutions, from several State associations
of national bankers stating that they are opposed to coming in under
the present conditions. That feeling may or may not change. I f
you have a system which will work and which will operate without
compelling them to come in by force, I think it will be very much
more advantageous.
For the purposes I have in view, as I complained this morning,
the control o f the foreign exchanges, the protection of the gold stock,
and the meeting of crises, it would not be necessary that every little
bank should be a member, provided it can reach a bank at the center
of financial credit through banks which are members.
This whole bill is largely an experiment. There is nobody who
can predict how it is going to work. We can not predict whether
the present banks are going to tumble over each other to get into the
system or stay out. It would be a very unfortunate experience if
three-fourths of them should stay out. Perhaps you can do it, pro
vided that your big institutions in the reserve cities and the central
reserve cities shall be brought in by persuasion or perhaps bv a cer
tain amount o f compulsion, although I do not believe much in com
pulsion in financial matters. I f you have a means o f providing bank
ing capital in your reserve centers the system will go along just as
well without the smaller banks. I f you can sell your capital to pri
vate shareholders, with a 5 per cent interest, with a reasonable ex
pectation of making 5 per cent on the investment, I think you would
have no difficulty in selling it. Then you would be abie to start
the system on a sound-going footing, and the question whether
these other banks should come in would be left to subsequent develop
ments.
In other words, I think all through the bill there should be a good
deal of elasticity in its provisions as well as in providing for an
elastic currency; that the Federal reserve board should have a great
deal of discretion during the period of transition. There are several
points in which the law should be exact after the transition period is
over. Among other things is this matter of the reserve against de
posits. I am inclined to think if the Federal reserve board pro
ceeded to take in the bigger banks in the reserve cities and to organ
ize reserve banks with adequate capital—five millions, more or less,
as may appear desirable—and then if you gave the country banks
three years they would be able to find out whether these new insti
tutions were going to be helpful, whether there was a benefit in com
ing in, or whether they were just as well off in dealing with their old
correspondents, letting those correspondents deal exclusively with
the Federal reserve banks.
This question of proper paper to discount has been distorted a
little, I think. It is not necessary that the country banker should
have the particular paper to discount which is required by the bill
for the reserve banks, but only to have his paper accepted by his
correspondent in the reserve city. The reserve city bank has not
got to take that particular paper and rediscount it. It can take the
best paper it has. I f it is satisfied that the country bank’s paper
I
1412
BANKING AND CURRENCY.
is good, and as it always has been taken heretofore, it can take that
paper and put it in its own vaults, and when it goes to the Federal
reserve bank it can take its gilt-edged paper that has been sold by
big dealers in its own city and district.
The whole question of rediscount and of the securities to be em
ployed is only one of the marginal supply of credit. You have not
got to have every bit of paper payable at maturity, but you have got
to have enough to bring in some cash. You have got to have enough
that will be paid and that will not be extended, but you have not got
to have every bit of it of that character. The more you have of it the
better; but the essential thing is the quantity which is on the mar
gin. This determines whether there shall be expansion or contrac
tion, and it enables the bank to contract, if it finds its reserves im
paired, and to turn its convertible assets into cash.
In pursuing a policy of this kind, in dividing up the holdings of
the stock between the banks and the public, it would be possible to
limit the number of reserve associations, it seems to me, as compared
to the present bill. Perhaps the first plan is desirable ultimately,
but why not start by leaving it so that the Federal reserve board can
form a reserve bank in New York, and one in Chicago, and one in
St. Louis, and one in Denver, if they are needed ? Then, if they later
find there is a demand for more reserve banks, if they find that there
is capital enough in some of the smaller districts to create such a
bank, then let the Federal reserve board go ahead and create more
Federal reserve banks. You might provide that they shall immedi
ately proceed to provide for 5 or 6, and that they could, upon
application, provide for 12, as this bill provides. It seems to me
that with the whole field one of experiment it would be much safer
to start in that way and not undertake to cover the whole country
in one gulp, because with a capital fixed at $5,000,000, if you stick
to the banks themselves, you will find it difficult, if not impossible,
to raise it in some of your districts.
Senator R eed. Why do you say it ought to be more than $5,000,000 ?
In some sections of the country very much less might do.
Mr. C onant . It is possible it might do; but in the New York and
Chicago districts I think $5,000,000 is very inadequate. There are
two banks in New York which alone have capital and surplus funds
of $85,000,000. What attention are they going to pay to a Federal
reserve bank with $5,000,000 capital under those circumstances?
You should have in New York and Chicago, I believe, much more
capital than that.
Senator R eed. I call your attention to this fact, and would like to
have your view upon it. You take a section of the country that
might embrace St. Paul as the center—the commercial center. It
has been stated here that in order to get the capital necessary they
would have to take in an extent of country 400 miles wide.
Mr. Conant . More than that.
Senator R eed. Six hundred miles wide and 1,400 miles long. Un
der such circumstances as that, do you not think there ought to be
discretion vested in this board, or in somebody, to make the capital
less, and thus not be forced to cover so large an area ?
Mr. C onant . I should say they would not need a district there at
all. I am rather inclined to believe that if you provided for only
'
BANKING AND CURRENCY.
1413
four or five or six districts they would serve the permanent needs of
the country. Suppose you had, in addition to the existing three
central reserve cities, additional centers at New Orleans, Denver, and
San Francisco. Geographically that would be a good distribution
of them, though not in proportion to the financial interests involved.
I f those were started, I believe they would prove adequate, because
your little country banks in Montana would be able to go to Chicago,
necessarily, although in that particular case, perhaps, they would
not go there. They would go to Denver, probably, but they would
not be compelled to go to Denver. They could go to St. Paul, and St.
Paul, although not having a central reserve bank, would have banks
strong enough to rediscount very large amounts with the Federal
reserve bank in Chicago.
Why not start on a modest basis, and if you find that, say, two and
one-half million dollar banks are necessary to support the com
merce of those sections and to make the necessary rediscounts, and
they can not be provided for just as readily through your smaller
number o f Federal reserve banks, then provide for them without
leaving it for the future. Let the Federal reserve board start by
organizing banks in the big centers and see how that turns out.
It is very essential, in my opinion, from the standpoint I referred
to this morning, that of foreign exchange, that the New York and
Chicago institutions should have a much stronger capital than
$5,000,000. The Bank of France has a capital of $32,000,000.
Senator H itchcock. More than that now; about $60,000,000.
Mr. C onant . Does that not include the surplus? I think the
capital is about 160,000.000 francs.
Senator H itchcock. It was enlarged.
Mr. C onant . In the revision of the charter in 1911 perhaps. I had
not noted that. That only strengthens my point, that the central
banks of Europe all have large capitals, notwithstanding their de
posits are relatively small. They have large capitals, which have a
good moral effect. A bank with only $5,000,000 capital in New York
would be almost negligible. You would get a good deal more confi
dence in your bank if you made the capital $25,000,000 or $50,000,000.
Therefore I would suggest that those provisions be recast, and be not
made mandatory upon the country banks, and I do not think they
should be made so upon the city banks, but I think you could frame
provisions that would lead the city banks to come in.
There are a good many ways of doing that. It is often said that
it is easier to catch flies with molasses than with vinegar. Practically
in every European banking reform steps have been taken to persuade
the smaller banks to come in, but they have been allowed to retain
their privileges until they expired. In the case of Sweden, where the
central bank was formed in 1904, the other banks, the so-called State
banks, were allowed to rediscount for a term of years at a certain
percentage, 1 per cent, I think, below the established market rate,
provided they came into the system and surrendered their existing
circulation. There was no attempt made to wipe out their existing
rights without compensation, as some critics say there is in this bill.
It is not conducive to financial confidence to apply the club to a
banking institution; it is likely to cause distrust. I f you can frame
a system that will be attractive to the larger banks— I think they are
1414
BANKING AND CURRENCY.
the ones that should be persuaded to come in first> and then if they
do accomplish all that you wish, try to get the country banks, and
form your additional reserve associations. The position of the
smaller country banks would be changed only for the better, in any
case. It could not be made worse, because the bank would still have
its capacity for obtaining help from the bank from which it has
always obtained it—around Chicago they would get it from the First
National or the Continental Commercial, and there would be the
additional advantage that this power of rediscounting would exist,
from which it would profit, indirectly, if not directly.
I do not suppose in any case that the little $25,000 bank is ex
pected to turn up very often at the counter of the Federal reserve
bank and ask for rediscount. I f they do, it is going to impose an
enormous amount of clerical work upon the Federal reserve banks.
We have 7,000 national banks; even if all of them alone were doing
that, you would have to have competent experts at the Federal reserve
banks to pass upon the paper of every one of these banks. It is not
necessary if those banks can lean upon their present correspondents,
who know all about them, and who are willing to help them, and do
help them, except when their reserve falls below the 25 per cent limit.
Therefore I believe you would find in starting a new experiment of
this kind, you had better build it up by degrees rather than try to do
it all at once.
Senator R eed. You think that would be less likely to produce dis
turbance at this time if we started gradually?
Mr. C onant . Very much less likely.
Senator R eed. D o you think there is any danger of disturbance if
we try to apply this system, and do it, if you please, by force?
Mr. Conant . That is hard to say. There is already a distrustful
feeling among the banks. I do not think there is on the part of the
public. I do not think there is very much feeling on the part of the
public upon the subject.
The provision in regard to the transfer of reserves I consider
rather dangerous. You have had calculations, I think, submitted
to the committee showing the amount of rediscounts which would
be necessary to put the system in complete operation at the end of
three years. That is, o f course, a considerable interval, and during
that time the banks would do their very best to meet the require
ments, and under the present proposal the country banks—the
smaller banks—would be compelled to draw very heavily upon their
present reserve deposits in New York, Chicago, and St. Louis and in
the reserve cities. It is possible that spreading that over three years
would avoid trouble, but I am afraid that trouble might come,
especially if we should have a contraction o f credit, because the banks
T
in the reserve cities are bound to make some contractions in some
form—temporarily, at least—if the country banks call upon them, as
has been estimated, for $170,000,000 of their deposits. Those are the
figures I have seen indicated— that the country banks would call upon
the reserve cities for about $170,000,000, and "the reserve cities would,
in their turn, call upon the central reserve cities for $170,000,000,
making a total of $340,000,000. There is a way, of course, o f main
taining the loaning power of the Federal reserve bank through re
discounting, but to make that rediscount compulsory as a mere ele-
BANKING AND CURRENCY.
1415
ment in getting the system on its feet seems to me to be hazardous.
In order to start the system, you have got to get several hundred
millions in rediscounts.
Senator R eed. I s not that the only way we can start it ?
Mr. C o n a n t . Under the bill as it stands I believe it is about the
only way you would have. You would either have to make large
rediscounts or a considerable contraction during the three years. O f
course, it would be adjusted as smoothly as possible, and the banks
in the central reserve cities might gradually shift their loans. Under
the present reserve system in New York they would shift them to
the State banks and trust companies to a certain extent. Every effort
would be made by the banks to make the transition as smooth as
possible, and they might succeed; but I think there is a little danger,
if we should happen to have a period of credit contraction, a period
of pressure abroad, which causes a demand for gold in this country.
The demand for gold here, coming under our present system, with
no defensive methods already in operation, with no defensive system
already established for protecting our gold—that condition exist
ing, if a war should break out in Europe and big Government loans
should be issued, and every foreign house here should decide to sub
scribe, and in the meantime foreigners lending money here— call
ing in their loans—that might result in a gold-export movement
which would impair the reserves of the New York City banks and of
the other big cities, like Chicago, Philadelphia, and Baltimore. I f
that should happen, it might make it very awkward for these banks
in the central reserve cities to meet the withdrawal of the reserve de
posits of the country banks, which the country banks now have w
rith
them to the extent of $170,000,000. I think there should be con
siderable elasticity given to such a proposal, at least.
You would get that elasticity—the proposition which I proposed
to submit was this, in regard to reserves: Taking the bill as it stands,
the House committee, at the very last moment before the bill got out
of the caucus in the House, reduced the reserve requirements of all
classes of banks other than the Federal reserve banks. It reduced
the amounts which the existing banks would have to maintain as
reserves, and that, of course, was a considerable reduction of the pre
existing provisions of the bill. It gave a little more leeway as to the
amount the Federal reserve banks might keep afloat.
But notwithstanding that, I think the danger is not entirely re
moved, and I was going to make this suggestion. This assumes, of
course, that the bill continues to be mandatory upon small banks.
I would make the suggestion that, so far as the requirement is con
cerned that the small banks keep their reserves with the Federal
reserve banks, wide discretion be given to the Federal reserve board.
I prepared a letter to Representative Bulkley, of Ohio, just before
the change was made, which is general in its application, as a substi
tute for section 20, the section which provides for such a reserve. My
suggestion was this:
That of the reserve of 15 per cent required by law to be kept by national
banking associations classified as country banks and situated outside of central
reserve and reserve cities, the Federal reserve boad may, from time to time, in
its discretion, require that a certain percentage, not exceeding in any one year
one-fifth of said required reserve, shall be transferred to the Federal reserve
bank of the district in which it is situated.
I
1416
BANKING AND CURRENCY.
I assume that the Federal reserve board would order those trans
fers as fast as money-market conditions permitted. I believe in the
principle that reserves should be concentrated in the Federal reserve
banks and no interest should be paid upon them. We are not dealing
with a theory entirely, however, but with a condition, and I believe
that discretion should be given in applying the principle of absolutely
concentrated reserves and of not paying interest upon them. Of
course, at the present time many o f the country bankers, I think,
dislike the idea of losing all the interest on their reserve funds in the
reserve cities. Theoretically, they are absolutely wrong. Practically,
they are looking at it from the standpoint of the earning power of
their banks in the existing situation.
Senator R eed. W h at is your recommendation?
Mr. C onant . My recommendation is that of the reserve of 15 per
cent required by law to be kept with the national banking associations
classified as country banks and situated outside the central reserve
and reserve cities the Federal reserve board may, from time to time, in
its discretion, require that a certain percentage, not exceeding in any
one year one-fifth of this required reserve, shall be transferred to the
Federal reserve bank in the district in which it is situated. That is
only in respect to banks classified by the comptroller as country banks.
Senator H itchcock. Instead of placing 5 per cent in the reserve
center, you leave it to the discretion of the Federal reserve board to
order them to do it?
Mr. Conant . Yes; with 3 per cent each year for five years, if they
consider it safe. The transfer ought to be made ultimately.
This is based upon the theory that the bill remains compulsory upon
the national banks, or that it is made so attractive that they ought to
come in.
You would not need this so much if you adopt my other proposi
tion that the smaller banks be not forced in. In that case they would
keep their reserves where they saw fit. But if they are to be com
pelled to come in or be dissolved in a year, then, I think, they should
have this option.
Now, I do not know that I need to say any more on that subject at
the present time. Perhaps it would be pertinent to take up-----Senator N elson (interposing). What about the character of the
notes ?
Mr. Conant . I am coming to that.
Senator N elson. And the character of money they ought to lie
redeemed in ?
Mr. Conant . I am coming to that.
In regard to the question as to whether the notes should be Gov
ernment notes or bank notes, I take very much the same view as
Prof. Sprague, that it is an academic question. Upon all sound
principles of political economy they should be bank notes. The
dividing line, however, which determines whether it is important
that they are bank notes or not, the dividing line between danger and
safety lies not in what you call them, but how they are issued. The
great danger of Government notes is the tendency of the Government
to over-issue. I believe Prof. Sprague said that the time when that
would be done has gone by. That is also my view—that no adminis
tration in this country, unless we go to pure socialism, would ever
find it advisable or necessary to issue greenbacks to meet current dis-
BANKING AND CUBBENCY.
1417
bursements. No matter how great a war we might be involved in
there are so many other ways of raising money that I do not believe
that any administration would be foolish enough to put out green
backs to any considerable extent to pay its obligations O f course, there
is a substratum of comparative safety, just as in England you have
the authorized circulation which is practically a Government note,
in a way, because it rests upon Government security.
A prudent Secretary of the Treasury might, if he was satisfied
that there was no particular disturbance going to be caused, issue
up to, say, $300,000,000 of greenbacks; but I take it that no adminis
tration or party is ever again going to do what was done in the
Civil War—print paper and turn it into the current cash of the
Treasury, and use it as the sole medium of exchange. Whatever jus
tification there was for that at that time has gone by. It is a moot
question whether it was necessary to do it at that time. The New
York bankers said no, it was not necessary; they could find all the
money the Government needed. The situation grew so rapidly criti
cal, however, and the administration hesitated so long that it seemed
to Secretarjr Chase, at least, to be a necessity to print some notes in
order to have current cash. Conditions then were different from
what they are to-day. There was not the enormous sum of saved
capital which exists to-day.
As you all know, the power of taxation was not resorted to
promptly. There was a fear it would be unpopular, and so they de
layed clapping on the internal-revenue taxes which were levied about,
the time the war was over.
Our experience in the Spanish War shows how the public opinion
of the country had advanced. In any future emergency of that kind
an administration would impose all necessary taxation. I do not
mean they would impose taxation to meet all the outgo, but sufficient
to meet a considerable part of the outgo at once, just as quickly as
Congress could be gotten together. I do not believe there would be
a minute’s hesitation, but it would be done just as quickly as it was
at the beginning of the Spanish War.
There has been so much progress in monetary science that I do
not entertain the fear entertained by some bankers who think we
would drift into irredeemable paper. The danger lies, as I started
to say, not in what the paper is called, but in the way it is issued—
7
who determines the amount that is issued. I f it is determined by
business needs, there is no danger of overissue, except the danger
that is always inherent in any growing country that there will be
overexpansion of credit; but the name of the notes makes no differ
ence in that case, whether they are called Government notes or bank
notes. I f the control of the quantity is in the hands of the business
community, you have what is in effect a banking currency, even
though you call it a Government currency, and there may be some
advantages in calling it Government currency. Personally I do not
think the advantages are very great. To some people the stamp of
the Government conveys something, and the fact that the currency
was called Government currency might convey a certain degree of
confidence. Possibly the fact that the currency was practically uni
form would mean something, and I think knowing that the country
was behind it might mean something.
1418
BANKING AND CURRENCY.
T think another consideration is the arguments which lie against
a Government currency would not be so great in this country as in
Europe, because in Europe there is grave danger that if Government
currency was issued, say, by France— issued against a gold reserve—
in case of war and conquest that gold reserve would be immediately
sequestrated by the conqueror. The only reason why the gold was
not shipped to Berlin in the war between France and Germany in
1870 was because the German Government recognized the right of
private property in the shareholders of the Bank of France.
Senator N elson . Even the Commune recognized that.
Mr. Conant . Yes; but it required some diplomacy. I f they had
needed money badly, they could have gotten hold of it.
Now, in this country, that of course is not a serious menace. How
ever serious a war may be, we do not expect our enemy will enter
New York or Washington and ship our gold reserve home. It is
hardly conceivable they would get that far with our modern defen
sive appliances. We might be badly beaten over in the Philippines
or m Cuba-----Senator N elson (interposing). But if we had our money at Chi
cago or Minneapolis we would be all right?
Mr. C o n a n t . Yes; it would be safe at Minneapolis, except if we
had a raid across the border. Consequently, as I say, the question
of name is not vital, in my opinion. The criticism that is made
upon it is based, to a large extent, upon the memory of our very
unfortunate experience during the Civil War. I am absolutely op
posed to any note issue by the Government itself in the form of
greenbackism to be put into the Treasury cash for current disburse
ments.
Now, in regard to the manner of determining the issuing of these
notes, I am not antagonistic particularly to the proposition of the
Senator from Colorado, with some modifications. In response to a
question he asked this morning, I would say it would be very opti
mistic to create a rigid amount of currency exactly equal to the pres
ent amount and say that would never be impaired. That may or may
not be the case, but it would be sailing too close to the wind.
There are two possible theories of carrying out his plan or of sup
plementing it. One theory would be, as he suggested, to superimpose
the elastic element above his rigid Government element and leave
that elastic element in the hands of the banks. That is practically
what the pending bill does by providing for a new form of issue.
The other alternative would be to provide for expansibility and contractibilitv in this Government currency itself.
Senator FIitchcock. Y ou would retire the $700,000,000 of bank
note currency?
Mr. C onant . And put an equal amount in its place.
Senator H itchcock. But what is put in their place is capital asset
currency.
Mr. Conant . N o ; the Government notes.
Senator H itchcock . Y ou just said, practically, it did not matter
what name you called it.
Mr. C onant . N o ; but this currency wmuld not be subject to bank
ing control or influence. It is rigid. I say you should not have your
rigid amount too large. But these notes, under the bill of the Sena-
BANKING AND CURRENCY.
1419
tor from Colorado, as it stands, would be simply a rigid amount,
never increased, as the bill now provides, and never reduced. I f the
country kept growing that rigid amount means no menace, but to
start with the existing measure and with an amount that is now
sufficient you might have contraction, because you might have a con
traction of trade which would compel a considerable redemption of
those notes.
Senator W eeks. Do you mean you can not have the amount too
large— you should not have it too large?
Mr. C on an t . Yes; you should not have it too large.
Senator H itchcock. I understand you are referring to this bill?
Mr. C onant . N o ; I am referring to Senator Shafroth’s bill.
Senator H itchcock. I know; but you are not referring to this one
wholly?
Mr. C onant . N o ; I am not referring to it wholly. He has pro
vided for bringing the gold certificates, the greenbacks, and the exist
ing national bank notes into one form of notes, with a 50 per cent
gold reserve behind them. There is the difficulty, of course, that if
your reserve drops below 50 per cent you have no way of replenish
ing it except by the sale of bonds; but if you have a fund derived
from the interest on the bonds redeemed the idea is not a bad one
to take that fund and employ it to obtain gold. Before Senator
Shafroth introduced his bill I had prepared something along those
lines, dealing with the elastic element in a little different way.
Perhaps I might as well take that up now and have it put into the
record if agreeable to the committee. Instead of reading the tech
nical language I will give the technical language to the reporter, if
you like, and explain simply the general scope of the measure. And
I may say that this combines some of the elements of the idea that
Mr. Ailing presented here, although I prepared this before he was
here—well, I had read his pamphlet; but it combines some of the
ideas of his plan with the plan of Senator Shafroth.
I propose that a fund shall be put in the custody of the Federal
reserve board. I propose that all the funds now kept for redemp
tion purposes in the United States Treasury shall be put in charge
of the Federal reserve board. O f course, it would not exclude the
physical custody of the United States, but its control would be
under the Federal reserve board under the careful limitations of the
bill, and they would naturally take over the powers of the present
Division o f Issue and Redemption of the Treasury, which are really
nothing but clerical powers.
Then the Secretary of the Treasury is directed, with the approval
of the Federal reserve board, to issue from time to time Federal
reserve notes in exchange for gold certificates, which certificates
when thus exchanged shall be canceled and destroyed and not re
issued. Then there is a provision that there shall be a 50 per cent
reserve against that. That. I think, is substantially in accord with
Senator Shafroth's bill. The purpose is not to violate the trust
created by the issue of the gold certificate: the proposition is that,
as gold certificates come into the Treasury from various ports from
day to day, they shall be canceled and Treasury notes substituted.
There is no compulsion. No man holding gold certificates now is
required to give them up or to exchange them for Treasury notes.
1420
BANKING AND CURRENCY.
There are one or two ways of forcing the notes in, to which I will
refer presently. The proposition is that the collector of customs of
New York, or the subtreasurer, or to whoever the Government
money is paid in, and the customs or internal revenue collected, it
shall be their business to send all receipts to the Treasury, and it
shall sort out the gold certificates and substitute new notes. As fast
as the fund of free gold permitted new notes would be issued for the
bonds in the hand of the banks at par. I believe there should be a
premium paid of 102. I will not enlarge on that point but will as
sume for the sake of discussion that bonds are to be purchased at par
at once.
(The proposed suggestions are as follows:)
[Sept. 11, 1913.]
P roposed A m e n d m e n t s to C u rr e n c y P l a n , for P a y in g off 2 P er C ent B onds .
S'ec. 16 (a). There shall be established in the Treasury a fund which shall
be known as the Federal reserve note fund, which fund shall be in the custody
and under the direction of the Federal reserve board, and shall contain all
moneys in gold and silver coin and bullion held for the redemption of. gold
certificates, silver certificates, United States notes, Treasury notes, and Fed
eral reserve notes, together with such notes in process of redemption or issue:
P r o v i d e d , That operations relating to this fund shall be separate and distinct
from the ordinary fiscal operations of the Treasury, and shall not increase
or decrease the general fund of the Treasury except as specifically authorized
by this act: A n d p r o v i d e d f u r t h e r , That the functions of the divisions of the
Treasury provided for in section four of the act of March fourteenth, nineteen
hundred, entitled “An act to define and fix the standard of value,” and so forth,
shall be transferred to the Federal reserve board.
S ec. 16 (b). The Secretary of the Treasury is directed, with the approval
of the Federal reserve board, to issue from time to time Federal reserve notes
in exchange for gold certificates, which certificates, when thus exchanged,
shall be canceled and destroyed and not reissued; and any gold coin or bullion
received by such exchange in excess of the amount required to constitute a
reserve of 50 per centum against said Federal reserve notes issued and out
standing shall be set aside as a special fund, under the control of the Federal
reserve board, for the purpose of constituting a reserve against further issues
of Federal reserve notes under the provisions of this act; but no Federal re
serve notes shall he issued, except as provided in this act, which are not cov
ered by the amount of at least 50 per centum in gold coin or bullion.
S ec . 16 ( c ) . The issue of gold certificates upon deposits of gold coin or
bullion shall cease upon the passage of this act; but the Secretary of the
Treasury shall continue to receive deposits of gold coin with the Treasurer or
Assistant Treasurers of the United States, and to issue therefor, under regula
tions prescribed by the Federal reserve board, an equal amount of Federal
reserve notes, and the coin so received shall be added to the Federal reserve
note fund.
S ec. 16 (d). The Secretary of the Treasury may from time to time, with the
approval of the Federal reserve board, purchase from any national bank ac
cepting the provisions of section two of this act any part of the United States
2 per centum bonds or of the 3 per centum loan payable in nineteen hundred
and eight held by such bank at the price of one hundred and two and accrued
interest, and may issue in payment of the principal thereof reserve notes.
S'aid bonds shall be held in the Federal reserve note fund as a part of the
security for Federal reserve notes issued and outstanding: P r o v i d e d , That the
amount of Federal reserve notes outstanding, issued in exchange for gold cer
tificates or in the purchase of United States bonds under the provisions of
this section shall not at any time exceed the amount of gold coin and bullion
and of United States bonds, valued at par, held in the Federal reserve note
fund.
S ec. 16 (e). Section six of the act of July fourteenth, eighteen hundred and
ninety, entitled “An act directing the purchase of silver bullion and the issue
of Treasury notes thereon, and for other purposes,” is hereby repealed; and
BANKING AND CURRENCY,
1421
the balances standing with the Treasurer of the United States to the respective
credits of national banks for deposits made to redeem the circulating notes of
such banks, shall be paid in cash by the Treasurer of the United States from
the general fund of the Treasury into the Federal reserve note fund, and all
such deposits thereafter made for like purpose shall be paid into the Federal
reserve note fund and shall be paid out from time to time for the sole purpose
of redeeming the national bank notes of the banks for whose account such
deposits were made: P r o v i d e d , That national banks surrendering United States
bonds to the Treasury under the provisions of section sixteen (d) of this act
may deposit in the Federal reserve note fund such portion of the purchase price,
under regulations to be framed by the Federal reserve board, as may be suffi
cient for the retirement of the national bank notes then outstanding secured
by the United States bonds surrendered; and all acts or parts of acts limiting
the amount of such deposits are hereby repealed. (See sec. 4, act of Mar.
4, 1907.)
S e c . 16 (f). The interest upon United States bonds held in the Federal re
serve note fund may be employed, in the discretion of the Federal reserve board,
for the purchase of gold coin or bullion for maintaining the reserve in gold held
against outstanding Federal reserve notes; for the creation and maintenance of
a guaranty fund for the payment of deficiencies in the assets of any Federal
reserve bank which may liquidate without meeting its obligations in full or any
other losses incurred by the Federal reserve note fund; and for the redemption
of the interest-bearing debt of the United States.
(This section would probably have to be elaborated and some limitations
fixed, if adopted.)
Section 17 of the printed bill: Strike out after the word “ notes ” in line
1, down to the words “ is hereby authorized,” in line 4.
Strike out all provisions requiring Federal reserve banks to hold lawful
money reserves against notes.
Section 19, relating to refunding 2 per cent bonds into threes, should be
entirely stricken out.
Senator R eed. The Government would commence, if it was ready,
to redeem those bonds.
Mr. C on an t . Yes. I will show you in a moment how they might
put some restrictions on that, because of course the Federal reserve
board would not have gold enough at first.
Senator R eed. I mean if it was ready to redeem when presented.
Mr. C onant . Yes; from time to time.
Senator R eed. W ith the right, of course, to refuse.
Mr. C onant . Yes. Now you can see at once the amounts are such
that you could just about take up the outstanding 2 per cents, and I
think you might throw in a quantity o f 3 per cents that matured and
were continued. I think they are the bonds issued-----Senator N elson. During the Spanish War?
Mr. C onant . Yes; issued during the Spanish War. There are a
few of those out, $25,000,000 or $30,000,000. I think you could take
those up and get them out of the way, with this gold.
Now, what the banks have to do it this: They are pledged to de
posit lawful money to redeem the notes against which they have with
drawn the bonded security. The result is, therefore, if they turned
in the bonds and gold was handed to them, then they have got to
turn around and deposit gold with the Treasury or Federal reserve
board.
Senator N elson. Or new notes?
Mr. C onant . Yes; they have got to turn around and deposit some
thing.
The C h a irm an . T o redeem those notes?
Mr. C onant . T o redeem those bank notes which are still in circu
lation. O f course, by that process there is neither contraction nor
I
1422
BANKING AND CURRENCY.
expansion after the process is completed, because whenever a bank
withdraws its bonds and receives the money for them, they must
deposit an amount of money equal to the outstanding notes. The
general public will not notice any difference so far as the money is
concerned; they will only see they are getting a new form of note.
This compulsion could be applied to the banks which showed a
disposition to hoard gold certificates. The Federal reserve board
would be able to exercise discretion when a bank came forward and
said, “ We have here $50,000 of 2 per cent bonds to be redeemed.”
I f it was hoarding gold certificates at that time, the Treasury would
be in a position to ask that it surrender certificates and take notes.
The board would have that power of decision to accept bonds
first from the bank that would surrender its gold certificates.
Senator R eed. When you get this currency out with 50 per cent
on the dollar in back of it, and then the bank has a reserve of 33J
per cent gold, would you accept that money as you now accept the
gold certificates?
Mr. C onant . I am in some doubt about that. I am inclined to
think, however, so far as the banks are concerned, a reserve in law
ful money against deposits is good enough for their vaults. When
it comes to the Federal reserve banks, I think it is desirable there
to require them to keep reserves in gold.
Senator R eed. D o you mean just what you said? Under this
system which you are now discussing—the retiring of gold certificates,
that the Federal reserve banks would not be required to keep any
gold reserves?
Mr. Conant . N o; I intended to say the opposite—that the Fed
eral reserve banks, I am inclined to think, should have a large fixed
percentage of reserve in gold. It would operate this way. You see,
at the present time the banks in central reserve cities are required
to keep a 25 per cent reserve, which, let us assume for the sake of
.argument, is all gold. That is in the banks in the central reserve
cities. Now, under this bill you raise the requirement to 33J per
cent. I would prefer raising it to 40 per cent with certain provi
sions—
Senator R eed. Gold or paper? That is what I want to get at.
Mr. C o n a n t . I f this 40 per cent consisted of Government notes
of the kind I have described, covered by 50 per cent in gold, it would
still be equivalent to 20 per cent gold, and would be four-fifths as
much gold as we have considered sufficient as we have it to-day in
regard to the deposit of reserves in the central reserve cities. I am
not sure whether I would require the Federal reserve banks to keep
all gold or 50 or 60 per cent of their total reserves in gold, but I can
not see that you would get a great impairment if you do not make
any requirement of that sort, because you have raised the Federal
reserve requirements.
Senator H itchcock. After you retire 1,000 millions o f dollars of
gold certificates, which are legal tender, good for all reserves, and
issue in their place 1,000 millions of dollars of notes only good with
reserves behind them, not good either for reserves or legal tender,
you have made a pretty severe contraction.
M r. C onant . Y ou mean in legal-tender money?
Senator H itchcock. Yes.
BANKING AND CURRENCY.
1423
Mr. C onant . I see no objection to their being legal tender. Does
not the bill make them legal tender?
Senator H itchcock. N o.
Mr. C onant . The tendency has been in recent years to give the
character of legal tender to notes issued by the banks.
Senator H itchcock. That legal-tender note is good for reserves.
M r. C o n a n t . Not necessarily.
Senator H itchcock. D o you know of any legal-tender note not
good for reserves?
Mr. C onant . N o ; not under our laws. But you are making laws.
In Europe notes of the Bank of Germany are legal tender and not
good for reserve.
Senator H itchcock. They are good for any other bank except the
banks which issue them.
Mr. C onant . I believe so. But there is no legal reserve require
ment for other banks; they keep what they like—till money.
Senator P omerene. There is no requirement at all?
Mr. C onant . I do not think there is. I know in France the jointstock banks are not required to keep any specified reserves, but with
the little State banks in Germany, that originally issued notes, they
may be required to carry small reserves against notes. They have
small deposits and are small institutions. But the big institutions
have no requirement.
Senator N elson . And there is none in England?
Mr. C onant . N o. Now, what you can accomplish, if jmu wish,
is to separate the legal-tender quality from the gold-reserve require
ment. You can say, just as it is competent for Germany to say, that
they shall keep a certain per cent of reserve in gold coin and the rest
in lawful money. I do not know whether it is necessary, but the two
things are not absolutely and indissolubly linked.
Senator H itchcock. But certainly you could not make it gold
reserve money and not legal tender?
Mr. C o n a n t . N o.
Senator H itchcock. That is a certain bar.
Mr. Conant . Yes.
Senator H itchcock. And it is not legal tender under this bill?
Mr. C o n a n t . I was under the impression it was. It is a Govern
ment note.
Senator H itchcock. Yes; but it is not legal tender.
Mr. C onant . It is a uniform note.
Senator H itchcock. It is discredited currency, in other words.
Mr. C onant . Y ou would favor making it legal tender?
Senator H itchcock. Yes; I think so. I think it drives gold out
o f the country.
Mr. C onant . I am not acquainted with the reserve laws in all
cases, but they have no reserve requirements in most places.
Senator H itchcock. It is left in a condition where the currency
would be based on bank credits.
Mr. C onant . Y ou are speaking of the provision for expansion?
Senator H itchcock. In the bill as it stands now.
Mr. C onant . But under the plan of simply substituting Treasury
notes secured by a 50 per cent reserve, for existing bank notes and
existing gold certificates, there would not be this change of quantity,
14 24
BANKING AND CURRENCY.
that is sure. There might be a change in the quantity of legal tender,
if you like, but not in the quantity of available money.
Senator H itchcock. That is true.
Mr. Conant . I believe that could be worked out and that we could
hereafter, perhaps, assimilate the notes issued under this bill with
the old ones. But, in order to do that, you would have to put some
such plan as suggested by Mr. Ailing, or some modification of it,
into practice— whenever the gold reserve and gold notes fall below
50 per cent either charge an enhanced tax for the issue of other notes,
or compel certain steps to be taken to strengthen your 50 per cent
reserve. I think all those functions should be, as far as possible,
performed by the Federal reserve board and the Government should
not be compelled to intervene to restore the 50 per cent, except in
very extreme emergencies. It is up to the banks to adjust their
affairs— and they will do it if they have proper powers—to protect
the gold reserves and adjust them to the demands of business.
They can do it even if it is issued from the Treasury.
Senator N elson. There is one question now. It may be out of
order, but I would like to ask it just now, and it is this: I f the legal
reserve banks are required to keep 33 per cent in reserve for their
outstanding obligations, including currency, and you made that re
quirement in gold, they would ultimately absorb the gold certificates,
would they not?
Mr. Conant . I do not know just how much gold would be required.
The banks at present, of course, have considerable free gold of their
own.
Senator N elson. There is practically, is there not, Senator Hitch
cock, about a billion dollars?
Senator H itchcock. Yes; about $1,100,000,000 o f gold certificates.
Senator N elson. About a billion dollars?
Senator S hafroth . $1,100,000,000; I think this morning it was
$1,089,000,000.
Mr. Conant . The banks have free gold in actual gold and in clear
ing-house gold certificates amounting to $229,000,000. The amount of
gold they hold in Treasury certificates is $337,000,000. That is the
amount which w
rould be involved in your question—$337,000,000.
Senator N elson. Yes.
Mr. C onant . But you must remember that you have reduced the
amount of reserve requirements for the country banks, and you are
requiring 33 per cent now of the Federal reserve banks.
Senator N elson. Yes.
Mr. Conant . But they would not require anything like as large
an amount in actual money.
Senator N elson. But that is reserve for both deposits and circu
lation and for notes.
Air. Conant . But under Senator Sh afroth’s plan it would not be
converted into gold certificates, and so I think there would be ample
gold to cover the excess.
Senator N elson. I am referring to the bill.
Mr. Conant . Y ou are taking the bill in its present form. I
thought your question related to Senator Shafroth’s bill.
Senator N elson. N o ; I am taking this bill.
words “ lawful money
—
I f you strike out the
Mr. Conant (interposing). And require gold?
BANKING AND CURRENCY.
1425
Senator N elson. Yes.
Mr. C onant . Well, you can tell under the present reserve require
ments just how much that would require.
Senator N elson. It would be 33^ per cent of $105,000,000. That
is, if you base it on your capital.
Mr. Conant . Yes; but if you base it on deposits it would be
many times the amount of the capital.
Senator N elson. Deposits and note circulation, that is what it
is based on.
Mr. Conant . Yes.
Senator N elson. And you could only figure with it at present
taking the deposits and gold reserve.
Mr. C onant . The legal tenders the banks now carry are about
$171,000,000. To substitute gold for that would not be difficult.
Senator N elson. Oh, no.
Mr. Conant . They have got some gold in excess of the reserve
requirements now, and would ge‘
they had to have that amount
the reserve requirements very materially, so I do not think there
would be any trouble about sufficient gold.
Senator S hafroth . Mr. Conant, I have had to be away attending
a meeting of the Committee on Appropriations, and if you can give
me, in a few words, what your comment was on the bill which I
introduced I would thank you very much.
Mr. C onant . Well, I spoke rather favorably of it.
Senator Reed. I was going to tell you, Senator, but Mr. Conant
has already answered. I was going to tell you he thought it was
a very bad bill, but I can not tell you that now. [Laughter.]
Mr. Conant . In addition to what I have already said it involves
a very important feature in persuading the banks to come into the
system. There is very great anxiety among the banks to-day as
to the 2 per cent bonds. There is no market for them, and as there
is no market for them, if the banks begin to throw them on the
market, they would go down to 80 or 75. Now, if you offered them
a sound, just, absolutely sure system of disposing of their bonds
I think you would go some way toward removing hostility to the bill.
Senator S hafroth . It would save the Government about
$14,000,000 a year, would it not?
Mr. Conant . Unless you followed the idea o f Senator Owen-----The C hairman (interposing). About $11,000,000.
Mr. Conant (continuing). To convert them into 3 per cent bonds,
and I think it is a very good idea to turn the interest on those bonds
into the reserve to provide a fund if you are going to make the notes
Government notes. O f course, that has no application to the 50
per cent reserves, but the interest on that fund could be used to
maintain the reserve. It could be used in various ways if the Federal
board had control of it.
Senator S hafroth . That would save, the showing about the bonds
being in there—the only thing is you would have the interest going
to the Government instead of to the national banks.
Mr. C onant . Yes. It would be put in a sort of a sinking fund
to protect the gold reserve. I f the gold reserve kept piling up, as
it would under this plan, until you got 60 per cent, then you might
authorize the Federal reserve board to use some of the assets to re93280— S. Doc. 232, 63-1— vol 2------ 30
1426
BANKING AND CURRENCY.
deem the funded debt. In that way it would be covered into the
Treasury cash.
Senator S hafro th . I f all of the gold certificates were turned into
this retirement fund, there would be a retirement fund in gold of
nearly 6 per cent at the present time.
Mr. C o n a n t . I do not quite follow you.
Senator S hafro th . I mean by that at the present time they are
close to a billion, 100 million of gold certificates.
Mr. C o n a n t . You mean 60 per cent. You said 6.
Senator S h afro th . N o; 60 per cent.
Mr. C o n a n t . Oh, then, I understand you. I thought you were
working on some smaller sums.
Senator S hafro th . N o. There is $178,000,000 of gold in excess
of the amount required for the national bank notes and for the
United States notes at the present time.
Mr. C o n a n t . Y ou would find some hoarding of the gold certifi
cates. Some would never come in. You would find on the part of
some banks and private banking houses a disposition to hold onto the
gold certificates instead of taking new notes. The average man on the
street would never hold onto a gold certificate. He has no sentiment
because it is a gold certificate.
Senator S hafro th . I regard the 50 per cent reserve as adequate.
Mr. C o n a n t . Oh, yes. But you must have some means, not found
in your bill as it stands, to protect your reserve, to protect it against
impairment, and I have suggested that you carry the system even
further than you do and have all the notes issued under the bill assim
ilated, and have a power in the Federal reserve board so as to afford
a means of protecting them.
Senator R eed. What are the means? That is the whole thing.
Mr. C o n a n t . I had a few points jotted down in regard to that.
Senator R eed. I did not mean to interrupt the course of your dis
cussion. O f course we all understand a 50 per cent reserve is ample
if you have a means of protecting it.
Mr. C o n a n t . Suppose you had a provision like this: Whenever the
gold exceeded 50 per cent, additional notes could be issued for com
mercial paper by the Federal reserve board under a tax of 1 per cent;
and when it got below 50 per cent, the banks could not get any more
notes on commercial paper, except by paying a tax of 5 per cent, the
rate that is paid in Germany, Austria-Hungary, and Japan. That
would be pretty conservative, and it would keep the reserve of 50 per
cent uniform. You must have some clumsy method of replenishing
the reserve, by selling bonds, or else you must have some power in
the Federal reserve board o f maintaining the 50 per cent. And then
I suggest that the interest paid on the bonds would constitute a fund
for the purpose, to be used only temporarily. When the gold came
back the money would be at your command again.
Senator R eed. Y ou say the interest paid in on the bonds, by which
I understand you to mean if we were to issue this money 2 for 1 and
use it to retire the bonds, then we would treat that as though it was
paid and continue every year to set aside the 2 per cent we now pay
on the bonds into a fund and to call it an interest fund and use that
fund to buy gold if we needed it.
Mr. C o n a n t . Yes.
BANKING AND CURRENCY.
1427
Senator S hafro th . Senator Owen’s bill suggested a little further
to issue 3 per cent bonds for the 2 per cent and to put those into the
Treasury for the retirement of notes, and the interest would be paid—
I do not know whether the bill provides the interest would be paid,
but it can be paid into a fund. It is a very good suggestion, it seems
to me.
Mr. C o n a n t . I think it is a very good suggestion, and also the sug
gestion of the chairman that the bonds be held. It will be much
more inspiring. O f course it can not be said under this plan that
you are proposing to create fiat money, because you have 50 per cent
gold and 50 per cent covered by bonds. Then it may be fairly said
that the currency is covered by 100 per cent. O f course, ultimately,
as the bonds would not increase, if the gold deposits came in year
after year, the bonds would shrink in their ratio to the whole and
there would be a great excess o f gold.
Senator S hafro th . Then would you advise authorizing the Sec
retary of the Treasury to sell bonds in order to buy gold ?
Mr. C o n a n t . I think he should have that power, something along
the line suggested by Prof. Sprague, to sell short-term obligations,
because then, you know, you would not be paying interest on a perma
nent debt.
The C h a ir m a n . Y ou could borrow gold from the fiscal agents.
Mr. C o n a n t . Yes. I take it, as it stands now, it is possible to sell
bonds in the market with the privilege of repurchase, as is done by
the Bank o f England.
The C h a ir m a n . That is the substance of it.
Mr. C o n a n t . I think the power should be conferred on the Fed
eral reserve board, and, as far as possible, the whole matter should be
left to the Federal reserve board.
Senator N elson . Under tl ’
‘
Federal Government, when
the Federal reserve banks
currency, would give the
greenbacks for the notes outstanding and the national bank notes
and gold certificates, and assuming there was a million of this cur
rency, there would be upward of two billions to be backed by one
billion of gold.
Mr. C o n a n t . Yes; approximately.
Senator N elson . We will assume they all want gold, and they are
going to draw it out and reduce it to 25 per cent.
Mr. C o n a n t . Yes.
Senator N elson . N o w , who is to furnish it, the Government or the
reserve banks?
Mr. C o n a n t . I should say that the function should be thrown, as
far as possible, on the reserve banks, but I think it necessary to have
a reserve power in the Government. Whenever the currency of the
country needed to be increased, there would be only two ways of
doing it—two or three ways: Gold might be imported or gold might
be purchased in this country, and it might be tendered to the Treas
ury and an equivalent amount of Treasury notes would be handed
out. You see in that case the Government would get 100 per cent
of gold, while they are only required to hold 50 per cent, so that the
proportion o f reserve would constantly increase in prosperous times.
And then in poor times, if there was a big gold demand from Europe,
then the gold would either have to come from the surplus above 50
per cent or the defensive efforts made by the Federal reserve board
1428
BANKING AND CURRENCY.
by raising the discount rate. I f notes were needed they would be
obtained by paying to the Government an excess tax on notes issued
while the reserve was below 50 per cent.
Senator N elson . Let me ask: You would have this new currency
under Senator Shafroth’s plan the only paper currency, or would
you have, in addition to that, these notes of the reserve banks?
Mr. C o n a n t . I am discussing now having but one kind.
Senator N elson . But one kind. Then if all of those were Govern
ment notes, backed by a 50 per cent gold reserve, how would the
reserve bank use their rediscount privilege for the issue of currency?
They would be simply naked banks of deposit and discount, would
they not in that case, and the currency would all come from the
Government ?
Mr. C o n a n t . Yes; in a sense they would be, but they would apply
to the Federal reserve board for additional currency, and if the re
serve is 50 per cent or higher they would get that additional cur
rency in the same manner as proposed in the Owen-Glass bill, by
depositing commercial paper.
Senator N elson . Yes.
Mr. C o n a n t . They would get it at 1 per cent, say. Now, if the
reserve was below 50 per cent they would have to pay 5 per cent to
get additional notes. Now, it is for the banks to decide whether they
will purchase it at 5 per cent or go without the money. I f it is
cheaper in Europe they can import gold. They will have that option.
Senator H itchcock . Mr. Conant, do you think there would be any
real value in having the Government of the United States issue a 3
or 4 per cent bond and keep it in its own vault as an asset?
Mr. C o n a n t . There is no great value in it.
Senator H itchcock . Would it not be exactly like mortgaging my
house and carrying the mortgage around in my pocket and saying
that among my assets is a mortgage?
Mr. C o n a n t . N o ; there is a difference. In the bond you have a
definite obligation of the Government to pay money at a certain time,
and would you not rather have a man's note, if he is solvent, to pay
money at a certain time than simply a general obligation for him
to pay it to you ?
Senator H itchcock . I understand your question. Then, if the
mortgage is sold?
Mr. C o n a n t . N o ; but is it not better to have an obligation of the
Treasury upon which they have been paying interest for many years,
and are still paying interest, protected by its faith and credit, than
simply having a general unwritten mortgage?
Senator H itchcock . T o carry my illustration further, suppose I
take out of my right-hand pocket every six months interest on the
mortgage and put it in my left-hand pocket. Would that change
the status?
Mr. C o n a n t . Not necessarily, except if I put it in mv safe-deposit
box I have got that interest laid aside. I agree with you in a
measure.
Senator B eed. This idea comes in here, however: You might con
tract with your creditor that you put this paper aside—this mort
gage— or deliver it to him, and that from time to time you put
aside in a fund the interest, and in that event you would become his
BANKING AND
CURRENCY.
1429
trustee; and if you were an honest man, at the end of the term, if it
was called, the obligation would be there and the accumulated
interest.
Mr. C onant . Yes; and would be very much like a bank-----Senator W eeks (interposing). Mr. Conant, if you are going to
provide a bond or other obligation for emergency, would it not be
better to provide a bond having a long time to run?
Mr. C onant . That would depend on circumstances.
Senator H eed. Mr. Conant, I regret I have not been able to com
prehend fully your plan in regard to this gold reserve. We wish
to take up all our gold certificates and substitute for them 50 per
cent gold certificates. That is what you might as well call them—
50 per cent money. I f we can maintain it at 50 per cent, it is safe.
Now, there is a raid started. The men bring in these notes, and
if there is paid to them a dollar for every dollar of notes it will
more than deplete the gold reserve. In the meantime the Govern
ment is issuing money from time to time of this same character to
the banks.
Mr. Conant . But if it now issues it it gets either 100 per cent
gold or the tax is paid.
Senator R eed. N o.
Mr. C onant . Yes; I do not know that I have made that clear, but
that would be the effect.
Senator R eed. For new issues. Now, the bank wants money for
its promissory notes in its vaults, and it goes to the Government and
says, “ For these promissory notes give us this paper,” which you have
really already down to a 50 per cent gold reserve. How are we
going to give them any paper and maintain that reserve?
Mr. C onant . At first, you can give them the paper if you have a
provision that when the gold reserve is below 50 per cent they
shall pay the higher tax for the new paper. I f that tax is 5 per
cent, which, I think, would be about the right rate, and if the rates
for money are not so high as that in other countries, gold would
be imported.
Senator R eed. H ow would they get it? You pay a 5 per cent
tax to the Government for the money you are going to get out.
Consequently, you say, I will not go there for it, I will get my
money some place else, and then I have got to go over and borrow
gold in Europe.
Mr. Conant . Yes.
Senator S hafroth . Or sell securities to Europe.
Senator R eed. In other words, at the time o f stringency— at the
very time it is intended to give relief under this bill—you make the
tax so high that no relief will be obtained, and you force them to go
to Europe?
Mr. C onant . No ; they have the option of going to Europe only
in case money is lower there than the 5 per cent tax.
Senator R eed. Yes.
Mr. C onant . I f money is plentiful in Europe they go there, and
if it is not plentiful they pay the 5 per cent tax.
Senator R eed. But the great center and kernel of this bill, if it has
a center and kernel, the thing that is attracting popularity to it, is
the fact that when the banks of the country get in distress as they
did in 1907, there is then to be provided a plan by which at that
1430
BANKING AND CURRENCY.
time we expand our resources temporarily. Now. of course, if, under
those circumstances, they can go to the Federal Government freely—
within limits, o f course, of safety—and get the money, they will be
given a speedy relief. They need "$100,000,000 to relieve the situation.
They go to the Federal Treasury and get it for 30, 60, or 90 days.
Very well. But now, when they go to the Federal Treasury, the
Federal Treasury says, “ Why, times are hard; money is scarce; gold
has been going out of the Treasury. Therefore we will charge you
5 per cent. We are already at the danger line ourselves.” Thereupon
the bank says, “ We can not afford to pay that; we will go to Europe.”
Are you not denying the drink of water at the very time when it
is most essential to the patient?
Mr. Conant . No; I think not, Senator. In the first place, we will
not get into the critical situation we did in 1907, when currency sus
pension took place. In the second place, if credit is overextended
and gold reserves are reduced, then there should be a brake put on.
I am afraid that you were not here this morning when I discussed the
relations between the supply of capital and currency. There is a
stringency in the money market unless you have adequate free capital,
and the barometer of free capital is the reserve. A tax of 5 per cent
is not excessive in such a condition. It is the tax which has to be paid
in Austria-Hungary, Germany, and Japan. And, furthermore, if it
seems excessive to the borrower, he does not have to pay it. I f he
wants it badly, he will pay it. As a matter of fact, I am more afraid
of inflation than contraction, because I think our gold will keep
piling up. As you were told this morning, we produce ninety-odd
millions of dollars a year. That goes into the monetary stock, and
with that money going into the monetary stock it increases the re
serve above 50 per cent, because, as I have already said, the Govern
ment gets 100 per cent gold when a new dollar is deposited.
•
Senator R e e d . As I understand, you propose to provide a plan of
levying a tax of 5 per cent or an interest of 5 per cent when we get
down close to the 50 per cent reserve, or below it?
Mr. Conant . Yes.
Senator R eed. Y ou propose, in addition, they won't tax a man
when we have a 50 per cent reserve in gold. T e have that now in
V
our vaults, and it is set aside under Government supervision, and if
they want more money they can get it without paying any interest,
or a very small interest.
Mr. C onant . N o ; that is not exactly the situation.
Senator R eed. I would like to get your proposition on that.
Mr. Conant . The difference is only slight. Probably I have not
made myself clear. In the first place, the existing bank notes and
gold certificates would be converted into the new currency without
changing the quantity, and a reserve of 50 per cent would be set aside.
That is the plan Senator Shafroth proposes. Now, I say when
new gold comes in and the new notes are issued, the bank would not
get $100 in new notes for $50 in gold. It would get notes only to the
amount of the gold unless it paid a tax. O f course, it would work
around pretty nearly the same if the banker said, “ Here is $100
in gold and $100 in commercial paper.” Then I say in addition
that if the bank pays a tax of 5 per cent it can take another $100 on
commercial paper. You see, it divides the tax in half if you put it
at 50 per cent gold. While he would directly get 100 per cent in notes
BANKING AND CTJRBENCY.
1431
he is paying a tax only on the uncovered part. I am afraid I have
not made it quite clear, because it is a little complicated. But after
the conversion has taken place with existing currency, I would not
permit a bank to get any more notes before it deposited gold.
Senator R eed. One hundred per cent?
Mr. C onant . Yes; 100 per cent. Now, the Government would
benefit by that.
Senator R eed. Our banks would not want notes at all if they had
the gold.
Mr. C onant . Oh, yes they would; just as a matter of convenience.
And in effect the gold reserve would be increased 2 for 1. Don’t
you see, they get the additional 50 per cent, and if commercial paper
pays a 5 per cent tax, don’t you see the tax is divided into 2£ per
cent on the paper they get? I think that is a sufficient power of
expansion.
Senator R eed. Then, to put this in my language—and I put it that
way in order to be sure I understand it—your mind inclines to
this sort of plan, that we take all our gold certificates and all other
forms of money we have, greenbacks and bank notes, and convert that
into a currency with 50 per cent of gold held in the Federal Treasury,
or some other Federal agency, in back of it, and we retire the bonds
because we have now retired under this plan the bank notes. Then
we start out with a currency with 50 per cent reserve in back of it?
Mr. C onant . Yes.
Senator R eed. And that is what we propose to do the business of
the country on.
Mr. C onant . Yes.
Senator R eed. N ow , a regional reserve bank being short of money
needs to get currency. I f it gets currency from the Government we
require it to bring down 50 per cent of gold.
Mr. C onant . Not necessarily; no.
Senator R eed. And deposit that and 50 per cent of notes. Then
you charge it on the currency issue 2| per cent.
Mr. C onant . Well, it works out something that way. I do not
know whether you have my idea quite or not. Ordinarily, you see,
there is gold coming into the banks all the time which would provide
:a considerable part of the free gold required for expension. And,
as you see, the banks have got to turn in practically all that gold, be
cause they prefer the paper. It is more convenient.
Senator R eed. Then you add to my system— I think I catch your
idea—that if the Government had a large surplus, above 50 per cent,
it would not charge the banks so much interest when thev came for
help?
Mr. C onant . That is right.
Senator R eed. But when it got down practically to 50 per cent
you would make the interest rate a little higher and stop-----Mr. C onant (interposing). Stop the gold drain, if you choose to
put it that way.
Senator R eed. Y ou stop the gold drain.
In other words, you regu
late the question of expansion in that case by the interest. I f there
is a big gold supply you do not put much of a brake on, if you have
plenty of gold.
Mr. Conant . That is right.
1432
BANKING AND CURRENCY.
Senator R eed. And, second, in case of a gold scarcity being threat
ened you put on a tax sufficient to stop them from taking out so much
of this paper?
Mr. C onant . Yes.
Senator R eed. That strikes me as having a very sound element in
it, but the difficulty I find with it is when the gold reserve is lowered
then the times are hardest and the danger is greatest, and it is at
that time you penalize the banks who must have it, and still that
may be the very thing to do.
Mr. C onant . I think it is the thing to do, if there has been over
expansion, because if there is such overexpansion gold reserves have
already become impaired throughout the country, and it is time to
call a halt. It is important to remember that there are two phases to
a panic. I f there is an overextension of credit and approaching
trouble, before the trouble has been realized, that is the time the con
traction should be applied, but it is not applied in this country, be
cause we have no institution that takes the slightest interest in ap
plying it. On the other hand, when a crisis has actually occurred
and confidence been impaired and there is a temporary period of ex
aggerated distrust, then is when a man, if he has credit impaired by
the general feeling of distrust, is quite willing to pay 5 per cent for a
few weeks. You know the 5 per cent is the annual rate, and he
would not have to pay it for more than a few weeks, and he would
not care whether he paid 5 per cent or G per cent if it saved him from
financial ruin.
Senator S haeroth. I f he had to pay it for two months it would
be less than 1 per cent.
Mr. C onant . Yes.
Senator N elson . Mr. Conant, is not this the very emergency cur
rency proposed in the bill? The bill proposes to allow the reserve
banks to issue these new notes upon rediscounts of paper equal in
value to the new notes with 33£ per cent in gold.
Mr. C onant . Yes.
Senator N elson. N ow this method you propose, if we have to issue
currency, we will say, to the amount of $1,000,000, half of that, 50
per cent, is in gold and the other 50 per cent is in commercial paper.
In that case you only have commercial paper for half of the currency
issued,with 50 per cent reserve in gold, and in the other case you have
commercial paper for the whole face of the currency, with 33J per
cent.
Mr. C onant . Yes; that is true.
Senator N elson. I s not that really what it would amount to?
Mr. C onant . I f I understand you correctly it has 50 per cent gold
and 50 per cent commercial paper.
Senator N elson. In the one case you have certain commercial
paper for the face value of the notes.
Mr. Conant . Yes.
Senator N elson. With 33^ per cent gold reserve?
Mr. C onant . Oh, yes.
Senator N elson. In your case, the last case you put, you have the
new notes issued one half for commercial paper and the other half
gold.
BANKING AND CURRENCY.
1433
Mr. C on a n t . I see your point. You mean, in a sense, there will
be 133 per cent behind the notes under the Owen-Glass bill, 133 per
cent as against 100?
Senator N elson. Yes; either gold or commercial paper. In this
case you will only have 100 per cent.
Mr. C on an t . I see your point. I think the answer to that is on
the commercial paper you receive you would not necessarily lend
up to par on it. I do not think that is the provision of the bill in
that respect. In so far as you would make a loan to a borrower who
carried it to a deposit account it would not affect the requirement
of 33^ per cent against notes at all. O f course, if the man takes the
funds away, that argument might possibly apply, but if they are
transferred to the deposit account the reserve of 33^ per cent would
still be required.
Senator N elson. And if the bank put currency out the infer
ence is if people apply for currency they want to use it and will
take it away from the bank ?
Mr. C onant . O f course borrowers differ as to that. As a rule, the
amount they borrow is transferred to the deposit account, and the
bank would know the funds of that particular borrower would
remain in its hands to the credit of the borrower’s account until he
needed it for wages or other purposes. I do not consider that would
impair the security.
Senator N elson. I do not say it would impair it; I say there would
be that distinction between the paper issued under this bill and the
paper issued under the plan you suggest. Under the bill you have
in gold, legal tender, and in commercial paper 133 per cent.
Mr. C onant . Yes; there is that difference.
Senator N elson. And under your system you have in gold and
commercial paper 100 per cent.
Mr. C onant . Yes; there is a certain difference.
Senator N elson. O f course the gold reserve is greater in the one
case than in the other.
Mr. C onant . Yes.
Senator H itchcock. Mr. Conant, this morning you asked me for
my authority for saying there was a limit upon the issue of notes by
the Reichsbank, and I find it in this interview with Dr. von Glastnapp, vice president of the bank.
Mr. Conant . What does he say?
Senator H itchcock. The question is asked him, “ Is there any
limitation upon the amount of note issue?” The answer is, “ Yes;
it must not be greater than three times the amount of gold in coin,
and gold bullion, silver, copper and nickel, and Government notes
held by the bank; and, furthermore, all notes issued in excess of the
gold coin and gold bullion, silver, copper and nickel, and Govern
ment notes must be covered by bills discounted.”
Mr. C onant . Notes issued upon gold are not subject to limitation.
They may issue certain uncovered notes, but it must not exceed three
times the reserve.
Senator H itchcock. I would call that a limitation.
Mr. C onant . I f you are discussing a proportional reserve as a
limitation, but I thought you were discussing the ratio of gold to
reserves.
1434
BANKING AND CURRENCY.
Senator H itchcock. In this case the percentage is arbitrary.
Mr. C onant . But it is never reached. It is really no obstacle. I
did not suppose you referred to the ratio of limitation; I thought
you referred to an absolute limitation.
Senator H itchcock . The Reichsbank can issue notes to the extent
it holds gold or silver or other coin.
Mr. C onant . I think under the law of 1911 they have limited that
to gold.
Senator H itchcock. We will say gold, then. It can issue notes to
the extent it holds Government paper loans.
Mr. C onant . N o ; I think not.
Senator H itchcock. Yes.
Mr. C onant . Y ou mean as part of its assets?
Senator H itchcock. Yes; as part of its assets. It can issue above
the notes to the extent of what they call their “ kontingent.”
Mr. C onant . N o ; the kontingent is just an arbitrary limit. At
present the kontingent is 550,000.000 marks. That may be increased
to 750,000.000 marks, for the week ending each quarter. In addition
to that, against that, they hold 33 per cent. Above that, they may
issue any amount on gold, but are not allowed to issue more currency
without tax, unless they pay a 5 per cent tax. It is rather compli
cated. You see, there are three different propositions. The kon
tingent, of course, is always far exceeded. The kontingent is 550,000,000 marks. The actual issues show a billion and a half, a billion
more of gold.
Senator H itchcock. I think it is stated here in rather a clearer
way, “ What notes of the Reichsbank are taxed ?” And the answer is :
Notes issued in excess of the aggregate of the following items: First, the
amount of gold bullion and specie— gold, silver, copper, and nickel— held by the
bank; second, the amount of Government notes so held: third, the amount of
uncovered notes authorized by law (the kontingent), 472,000,000 marks; fourth,
the amount of notes of other banks held by the Reichsbank.
Everything above that is taxed 5 per cent.
Mr. C onant . Yes; that is it.
Senator N elson. Which is the German system.
Senator H itchcock. Yes.
Mr. C onant . The kontingent has been increased to 550,000.000
marks.
Senator O ’G orman . Mr. Conant, what would you consider the most
important feature of this proposed currency legislation?
Mr. C onant . Well, the two features of greater elasticity of the
note issue and the concentration of reserves for the purpose o f pro
tecting the gold of the country.
Senator O ’G orman . Y ou consider those the most important?
Mr. C onant . I consider those the two most fundamental things.
O f course, there are other things that are important.
Senator O 'G orman . I gathered from the remarks you made this
morning that you considered the rediscount feature the most im
portant.
Mr. C onant . That is a corollary of the system, of course.
Senator O ’G orman . Is there anything novel in this rediscount
feature ?
BANKING AND CURRENCY.
1435
Mr. C on amt. It is not much used in this country, but, I think, if
it was made easier, it would be used more or less. At present there is
a little prejudice here, but it is used universally in Europe.
Senator O ’G orman . It is used here among the banks?
Mr. C on ant. Yes.
Senator O ’G orman . The principle of the rediscount is largely the
basis of the Aldrich-Yreeland bill now in force. Is not that so?
Mr. C onant . Yes.
Senator O ’G orman . I s that existing provision ample for the pur
pose?
Mr. C onant . The provision of the Aldrich-Vreeland bill?
Senator O ’G orman . Yes.
Mr. C onant . It is rather costly and complicated, and thus far the
banks show a decided indisposition to go into it.
Senator W eeks. Has there been any occasion for them to go into it?
Mr. C onant . N o ; no real crisis. O f course, it is desirable you
should have a system they would avail themselves o f before the crisis
became a crisis.
Senator O ’G orman . O f course, it is understood that the benefits of
the Aldrich-Vreeland bill are to be invoked only in times of stress or
emergency ?
Mr. C onant . In times of more or less monetary stress.
Senator O ’G orman . We have not had such a period since the bill
went into force?
Mr. C onant . N o ; no real monetary stress.
Senator O ’G orman . In your judgment, would that be ample pro
tection in times o f stress— a bill such as the existing bill, or a similar
bill with slight modifications?
Mr. Conant . N o ; I would say not. It would afford a certain de
gree of elasticity in our crop-moving season, but it does not afford
any mechanism for protecting the gold stock. That is entirely lack
ing, I believe, in the Aldrich-Vreeland bill to which you referred.
Senator O ’G orman . I am directing your attention only to what I
understood you to say was, perhaps, the greatest features, the best
features o f the contemplated bill, and that is the ability to redis
count.
Mr. Conant . Yes; it is important, but you must have a means-----Senator O ’G orman (interposing). I am only comparing both bills
with respect to that one point—the right to rediscount.
Mr. C onant . O f course, the Aldrich-Vreeland plan does offer a
means of obtaining rediscounts and obtaining currency.
Senator O ’G orman . O f course you will recognize that if the pend
ing bill were adopted, it would give a facility to rediscount perhaps
not offered by the Vreeland currency bill. In other words, it would
be easier to secure discounts?
Mr. Conant . Under the pending House bill.
Senator O ’G orman . Under the pending bill.
Mr. C onant . Yes.
Senator O ’G orman . Well, would not that in itself present an ele
ment of danger? Would it be possible to avoid the dangers of infla
tion if you provided a system by which you made it easy to increase
the volume o f ready money for use in a business enterprise?
Mr. C o n a n t . I do not think it would be dangerous to increase those
facilities beyond what they are to-day, or beyond what the Aldrich-
l
1436
BANKING AND CURRENCY.
Vreeland bill provides, because the method of the Aldrich-Vreeland
bill is very expensive.
Senator O ’G orman . I s not that the very virtue of that bill ? Does
it not tend to prevent inflation? I f you made it easier to secure
money under the Aldrich-Vreeland currency bill, then would not this
additional danger confront us, that with a greater ease in securing
money you would have the accompanying menace of inflation ?
Mr. C onant . You have the accompanying opportunity for a little
greater extension of credit, but I do not think that necessarily con
stitutes a menace. I understand the whole reason for the AldrichVreeland bill and for this bill is that our present system offers no
opportunity, practically, for expansion.
Senator O ’G orman . Y ou speak of the present system; are you lim
iting it to the currency bill?
Mr. C onant . Yes; limiting it to the Aldrich-Vreeland bill. Under
the existing system, under the Aldrich-Vreeland bill, our only means,
practically, of increasing the currency is by production or importa
tion of gold.
Senator O ’G orman . I would like you (perhaps you have during
the course o f the day), as briefly as you can, to say why you think
the rediscount privilege as embodied in the pending bill, has an
advantage over the existing currency bill.
Mr. C onant . Because, in the first place, it systematizes and makes
legal the rediscount system, whereas the Aldrich-Vreeland bill is of
such a character the banks have never yet seen fit to avail them
selves of it.
Senator O ’G orman . But you admit, as I understand, in that con
nection there has never been a period of stress in the life of the
currency bill, which has been about four and one-half years?
Mr. C onant . There was some stress last fall, in which this bill,
had it been in force, or something like it, would probably have been
availed of and money would have been a little easier. O f course,
there are different schools of thought on that. England, since 1844,
has been practically tied up from such expansion except such as
was derived from the importation of gold into England. The result
was that the act raised grave difficulties at first. England has grad
ually substituted a check system; but, in this country, where there
are large areas of farm land, it is not suited to a check system. I
think you need something more than currency to be used in grave
emergencies, like the Aldrich-Vreeland bill provides, because the
very fact that it is resorted to is a grave danger signal, as that bill
stands.
Senator O ’G orman . Don’t you recognize if we had a law such as
the Aldrich-Vreeland currency act in 1907, you would either not
have had a panic at that time, or its effects would have been very
much minimized?
Mr. C onant . They would have been minimized. It is hard to say,
of course, how far.
Senator O ’G orman . O f course, you would not say that the adop
tion of this banking system, of the adoption of any banking system,
will make panics impossible?
Mr. C onant . I would not say that, exactly. I would say they
should make panics impossible, but not periods of contraction. There
has not been a panic in the principal European countries for many
BANKING AND CURRENCY.
1437
years. There have been periods of contraction and depression, but
there has been nothing since the Franco-Prussian War like the sus
pension of specie payments, for instance, because their banks look
ahead and anticipate emergencies and soften the effects of the blow.
You can not check over-extensions of credit, with the inevitable reac
tion, but you can alleviate the effects of the reaction, and that, I take
it, is the purpose of all legislation.
Senator O ’G orman . What was back of the Great Britain panic
in the Baring failure in 1890?
Mr. Conant . It was a panic that extended only to a small portion
of England. A number of leading bankers got together and raised
a big guaranty fund to protect the market. The Bank of England
was fortunate in having a very strong man at its head in Mr. Lidderdale, and he took immediate measures to form a pool to take over
the liabilities of the Barings.
Senator O ’G orman . Y ou mean to say at that time the English
people did not have a period of depression or contraction ?
Mr. Conant . The condition of a panic ?
Senator O ’G orman . The condition of contraction.
Mr. Conant . I think there was a little, but I do not think it re
acted in England in 1890. The Baring failure, o f course-----Senator O ’G orman (interposing). The general impression is that
the influence of the failure in England was reflected not only all
over the Continent but in this country, and if the influence could be
so great in other countries, the influence must have been much greater
at home ?
Mr. Conant . In England, of course, it became necessary to restrict
credits to some extent, but there was no such panic as occurred here.
The measures taken, so far as the Baring failure itself was concerned,
were effective in averting panic. I do not think the Baring failure
was so much due to overextension at home as to investment in South
American loans. There was some overextension, and there was some
contraction of course required to counteract it.
Senator O ’G orman . Having in mind the provisions of the AldrichVreeland Currency Act, would you wish to be understood as stating
that there is to-day an actual necessity for further currency legisla
tion in this country ?
Mr. Conant . Oh, yes; I should say so.
Senator O ’G orman . And you think the necessity is more than met
by the provisions of the pending bill ?
Mr. C onant . I think with some modifications of the bill, it is
fairly well met. I would not say more than that.
Senator O ’G orman . D o you believe, then, that this plan which you
deem necessary involves the creation of 12 regional banks?
Mr. Conant . N o ; I think the number should be much smaller.
Senator O ’G orman . H ow much smaller?
Mr. Conant . Personally I would like to see it limited to one. I f
that is impossible, I should say five or six.
Senator O ’G orman . W hat would be your plan if it was limited to
one?
Mr. Conant . I think if it was limited to one, then it would be
similar to the Bank of France, with a large power of note issue and
a capacity for rediscount, and therefore the ability to aid the other
1438
BANKING AND CURRENCY.
banks by such rediscount as they required to carry on their business.
I suppose of course in this country, with its many small institutions,
conditions would be somewhat different from those in France, where
banking is now pretty well concentrated in the hands o f a very small
number of institutions with innumerable branches scattered over the
Republic.
Senator O ’G orman . What would be your judgment based upon
your study and investigation?
Mr. Conant . My judgment would be to provide for a single insti
tution.
Senator O ’G orman . Y ou mean you would then concentrate in the
reserve board provided for by this bill all the functions which are
now distributed among the 12 reserve banks?
Mr. Conant . I think, so far as they ought to be conferred, there
are some of those powers to which I object. One of the powers to
which I object would not be operative if we had but one institution.
That is the authority of the board to compel one Federal reserve
bank to rediscount for another. But, speaking broadly and without
committing myself to all the details o f the bill, I think a central in
stitution, with the powers conferred on the Federal reserve board,
would be the best solution.
Senator O ’G orman . Suppose we had a Federal reserve board as
provided for in this bill, allowing every member bank in the United
States that desired to avail itself of the system to make certain con
tributions to the capital o f this reserve board or bank, and then en
joy the advantage of having its discounts and the other advantages
contemplated under this act with respect to member banks in the
regional bank. Do you think that would be a better system than the
one outlined by the bill ?
Mr. Conant . It would be somewhat better, I think.
Senator O ’G orman . Will you state your reasons for believing that
it would be better ?
Mr. Conant . There would be more concentration of power over
the foreign exchanges, primarily. The concentration being greater,
the resources of the central institution would be greater. I am a
little afraid, under the bill as it stands, that the reserve resources of
the country would be so split up-----Senator O ’G orman (interposing). As among the different regional
banks?
Mr. Conant . Yes; that we should not be in anything like as strong
a position as if we had one bank, or even five. Under the bill as it
stands a bank must have $5,000,000 capital. The total capital of the
banks in the country is in the neighborhood of a billion, and they pay
10 per cent, besides being liable to be called upon to pay another
10 per cent. I f you split the first 10 per cent into 12 parts you get
an average of $8,000,000. Probably the New York branch, and very
likely the Chicago branch, too. would have more than $8,000,000.
In my opinion the New York branch should have $25,000,000 at the
very minimum, and better, $50,000,000. I f you take that out and
allow $15,000,000 or $20,000,000 to Chicago, you do not have much
left for your other 10. And I do not think you need the other 10.
But I have made the suggestion that the committee, if it adheres to
the necessity of 12, provide that the Federal board start in in an ex-
BANKING AND CURRENCY.
1439
perimental way with four or five, and not split the country up geo
graphically to provide for every bank. In other words, that we let
such banks come in as want to come in-----Senator O ’G orman (interposing). And, by the same process of rea
soning, you would say that, as the whole matter is more or less
problematical, it would be wiser to start with a single reserve bank,
expanding that if it appeared later on to be desirable?
Mr. Conant . O f course, if you have a single reserve bank it would
have power to establish branches.
Senator O ’G orman . Yes.
Mr. Conant . That, I think, is the preferable plan. You can
start a single reserve bank without permitting banks all over the
country to avail themselves of it directly. They could avail them
selves of it indirectly through their correspondent banks.
Senator O ’G orman . As I understand, it is your judgment that,
under the existing plan or any modification of it, it should be
optional with the national banks whether they come in under the
system.
Mr. C onant . I should think so; yes. The inducements to them
should be increased-----Senator O ’G orman (interposing). And if we should have two or
more regional banks it would be entirely optional with the officers of
those regional banks as to whether they would lend aid from time to
time to the other regional banks.
Mr. C onant . I should say so; yes.
Senator O ’G orman . Y ou have noticed the feature of the bill which
provides for the establishment of branch banks abroad?
Mr. C onant . Yes.
Senator O ’G o rm an . H ave you expressed any view
matter ?
as to that
Mr. C onant . No.
Senator O ’G orman . What is your judgment as to that?
Mr. C onant . It is very desirable that we should have a few branch
banks abroad. I do not know how it would work out under this bill,
but I take it there would be branch offices o f the Federal reserve
banks—perhaps not banks, strictly speaking— to deal in exchange in
the leading European capitals; certainly in London, Paris, and
Berlin.
Senator O ’G orman . Getting back to your previous suggestion, if I
understand you correctly you have no doubt in your mind, based
upon your study o f banking and finance, that the establishment o f a
single bank under Government control would be preferable to the
establishment of those regional banks with divided authority through
out the country.
Mr. C onant . I am inclined to think so, although if the number of
regional banks were reduced the system would probably work pretty
well.
Senator O ’G orman . Y ou mean that if you reduced the number of
regional banks that would be an improvement over the proposed
system ?
Mr. C o n a n t . Yes; over the 12.
1440
BANKING AND CUKRENCY.
Senator O ’G orman . But still not as desirable as having a single
bank in Washington, under Government control, with its agents and
with branches throughout the country?
Mr. C onant . By “ Government control ” you mean there would be
a board appointed in a manner similar to that provided in this bill ?
Senator O ’G orman . As this bill contemplates.
Mr. C onant . Y ou do not mean Government ownership-----Senator O ’G orman (interposing). A board appointed by the Presi
dent, as this bill contemplates, plus an advisory council representing
the views and the interests of the bankers of the country.
Mr. C onant . Yes; I think a single institution would be preferable
on. the whole.
Senator N elson . And giving this board the same control over the
central bank as they would have under this system proposed in the
bill, so it would protect the public against the so-called money power.
That is the idea in your mind, Senator O'Gorman ?
Senator O 'G orman . The idea that I wished to convey to the wit
ness in asking his views as to the apparent advantages of a single
reserve board and a system of 12 banks, as contemplated by this bill—
my understanding is that if there were a single bank, a single reserve
board, that reserve board would exercise the same power and func
tions that it is contemplated here it will exercise if there should be
12 regional banks.
Senator N elson. I understand.
Senator W eeks. Mr. Conant, would not that proposition which
Senator O ’Gorman has just been advancing obviate most of the
criticisms of the central reserve board which have been made ?
Mr. Conant . I understand he leaves the central reserve board as
constituted.
Senator W eeks. True; but the powers of the central reserve board
are very generally excessive.
Mr. C onant . Yes; if you remove those objections, certainly.
The question of dictating by the Federal reserve board to a bank-----Senator N elson (interposing). Would it not solve another ques
tion too— the difficulty of distributing Government moneys? You
would only have one place to put them.
Mr. Conant . I do not think that is a very serious difficulty.
Senator W eeks. I want to ask you one more question. I think
I understood you correctly in saying that you thought there should
be no limitation on the amount of circulation that should be issued ?
Mr. Conant . N o arbitrary limitation.
Senator W eeks. Technically I am entirely in agreement with you
on that, but do you think that under our system of banks—25.000 of
them scattered throughout the country with very many men in con
trol of banks who have not a broad business training or broad bank
ing training—that it will be advisable to report this bill without a
limitation on the amount of circulation that a bank can take out?
I do not mean the total amount in the country of currency of $800,000,000; I mean the ratio to the capital of the bank.
Mr. Con ant . I should think that would be rather a prudent thing
to do. O f course, the argument for that, I suppose, was that the
bigger banks might have bills from all over the country and might
desire to take a good deal more than their capital, based on first-class
BANKING AND CURRENCY.
1441
paper. I do not think it of such vital importance whether you have
a limitation of that kind, because I assume the Federal reserve board
is not going to deal directly with little banks at all with respect to
their requirements.
Senator W eeks. Is it not true that the reserve board is going to
control the amount of paper which should be issued at all times?
Mr. Conant . Yes; it is going to exercise a certain control.
Senator W eeks. Would it not exercise absolute control?
Mr. Conant . I take it the Federal reserve banks will always carry
an excess reserve; that is their business.
Senator W eeks. The amount of excess circulation that could be
issued? Suppose you require 50 per cent. The banks will not de
posit 50 per cent reserve and take out circulation unless they need
circulation.
Mr. C onant . I should say not. I should say, however, that if the
banks are to come in generally, and especially if they are to apply
directly to the Federal reserve banks for notes, there should be a tax
imposed, and the authority is given in the bill to impose a tax.
Senator W eeks. I want to ask you if you know any reason for
issuing a Treasury note for circulation, other than the supposed senti
ment among very many people throughout the country that the Gov
ernment should issue money for circulation or whatever is in circu
lation.
Mr. Conant . N o ; if we had one single central bank I should say
that preeminently the circulation should be issued by that institu
tion. Under this system of Federal reserve banks there may be some
thing to be said in favor of putting the Government credit upon the
uniform issue. Personally, I should prefer that the banks should
issue it and that the Government should not be behind it, but, as I
said, it has become more or less an academic question in my mind.
Senator W eeks. Don’t you think the single bank has another
strong and extremely important justification in that if you have one
bank you are going to have the same rediscount rate throughout the
country ?
Mr. C onant . I am not sure just how that would work out. You
can not, of course, reduce the rate for the loan of capital to a common
rate, except, perhaps, for the very best security.
Senator W eeks. I mean for limited security.
Mr. Conant . For gilt-edge commercial paper, whether issued in
Arkansas, or in Maine, or in Massachusetts, that would sell to a
New York bank the rate could be made the same; but I would not
give the idea that the general rate on loans could be made uniform.
Senator W eeks. O f course, but why could not the bank in Arkan
sas, having paper that came within the requirements of the loan,
obtain rediscount at the same rate that the bank in New York does?
Mr. C onant . They probably should; but, as a matter of fact, I
think they would find it much easier to discount their paper with one
of their correspondent banks, provided it is the right kind of paper.
Senator W eeks. Yes; but that is supposing you have the right
kind of paper. It is proposed in this bill that these different reserve
banks shall have a different rediscount rate. In other words, one
section of the country is going to have an advantage over another
section. It is not national, it is local in its results, and I contend
9328°— S. Doc. 232, 63-1— vol 2------31
1442
BANKING AND CURRENCY.
that the banks in the developing sections of the West and South
having paper that comes within the requirements of the loan should
have exactly the same privilege as the bank in New York City.
Mr. C onant . I suppose the motive which led to putting that provi
sion in the bill was the feeling that if you have a uniform rate and
it is lower in certain sections than the usual comrqercial rate, those
sections will avail themselves to the utmost o f their rediscounting
power.
Senator W eeks. But you are going to limit them in some proper
way, and why should we not try to bring down the interest rate if
we can?
Mr. Conant . Y ou should, and that would be the ultimate tendency;
and I think, so far as paper of the right quality is concerned, the
rate could be made uniform.
Senator W eeks. Would not that tend to make people make paper
of the right quality ?
Mr. Conant . A s fas as they could, of course.
Senator H itchcock. Mr. Conant, a few moments ago you said
the only limitation upon the note issue of the German Imperial Bank
was its reserve; that is, it must maintain a reserve of 33 per cent.
Do you think that is safe?
Mr. Conant . N o ; I should prefer a larger reserve. As a matter
of fact, the German bank has a vastly larger reserve.
Senator H itchcock. A s a matter of fact, have there not been
periods of inflation in Germany under the present organization
followed by periods of depression which have involved great com
mercial losses?
Mr. C onant . Undoubtedly that has been the case, but they have
never reached the point of panic.
Senator H itchcock. That has even occurred in France and in
England where the note issue is very much restricted.
Mr. Conant . I do not think the conclusion follows that that re
lates to the currency policy particularly.
Senator H itchcock . It may not, but the fact is, Germany is one
of the there countries of Europe that we generally contemplate as
having a central bank having no power of note issue, and that 1here
have been in recent years periods of inflation followed by periods
of depression in Germany. Is it not a fact that this bill appears to
be drawn upon the same lines? That is, the only limit upon the
power of note issue is the reserve of 33^ per cent which the banks
are required to carry.
Mr. Conant . O f course, the note issue is only a factor-----Senator H itchcock (interposing). Is there any other limitation
in the bill except the reserve of 33$ per cent?
Mr. Conant . I believe not, but I assume that the Federal reserve
banks will always carry a much larger reserve.
Senator H itchcock. We are not talking about assumptions, and
I am trying to obtain from you the verification of my impression that
in Germany, where the only limit is the 33^ per cent gold reserve,
it is perfectly inadequate to avoid periods of inflation followed by
periods of depression and consequent loss.
Mr. Conant . I do not think that follows, Senator, for this rea
son: The Imperial Bank of Germany has not in recent years had a
BANKING AND CUBBENCY.
1443
reserve as low as anything like 33| per cent. You know many of the
banks in Europe have no reserve requirement, but they always keep
a reserve much larger than our requirements. I do not think it is
proper to assume that cuts any figure in the matter.
Senator H itchcock. The interviews we have had here indicate
that they have been down to 30 per cent several times.
Mr. Conant . I do not think that is a 30 per cent metallic reserve
against outstanding notes-----Senator H itchcock (interposing). No; there have been a number
o f times when the Imperial bank has got down to 30 per cent, and
those have been the periods of excessive extension of credit.
Mr. Conant . Y ou see, their usual circulation-----Senator H itchcock (interposing). And they have been followed
by a pronounced depression, such as we have had in this country,
and large industrial and commercial losses.
Mr. C onant . I can hardly believe you are right as to that state
ment about the percentage of lawful money against notes. I shall
look it up, but my impression is that the metallic reserve so called
has for a very long time, even in periods of stress, been very much
above 30 per cent; because, you see, the contingent circulation against
which the 33^ per cent is required, is onv 550,000,000 marks, against
which 33^ per cent would be only about 200,000,000 marks, or
$50,000,000. Now, superimposed upon that at all times there has
been 1,000,000,000 marks secured by gold in full.
I can not conceive, from my knowledge of mathematics, how it can
be that they have been down to 30 per cent. I think that must refer
to the margin of uncovered notes, or some feature of the deposit
system. You know they are always talking about the limit of issues
which they can make without paying the tax, and I think you will
find the 30 per cent has some relation to that, although I can not say
precisely without looking it up.
Senator H itchcock. In the Interviews on the Banking and Cur
rency Systems of Europe, I read:
Q. Your cash reserves were very close to your line of limitation?—A. It was
about 41.3 per cent.
Q. Was that exceptional, or had it at any time been lower?—A. That is a
very great exception; it has only been lower at one time, namely, at the end of
1906 when it was 40.3 per cent.
This is away back in 1907, and I have not the figures in here to
show it was lower, but my impression is it has been below 40 per
cent, and that they have reached the straining point a number of
times when they have been forced to raise the interest rate very high.
Mr. C onant . That is true, but I do not think the metallic reserve
has been much below 40 per cent.
Senator H itchcock. However that is, thev have had periods of
great inflation followed bv periods of depression and loss.
Mr. C onant . The inflation I should not attribute primarily to the
note issue, because, you see, that is taxed 5 per cent over and above
what is covered by gold. In other words, I think you are singling
out a single cause where there are a great many causes, and this is
a comparatively negligible one. O f course, any country goes through
periods of expansion, and you can have great expansion without any
power of note issue. O f course, note issue facilitates expansion.
1444
BANKING AND CURRENCY.
Senator H itchcock . On the other hand, the Bank of France at the
present time has 85 per cent gold reserve against its notes.
Mr. C onant . Eighty-five per cent gold or metallic?
Senator H itchcock . “ Metallic ” is more accurate, but they are
getting rid of their silver part of it. And the Bank of England has
one that is possibly even larger; that is, all but $90,000,000 is gold,
dollar for dollar.
Mr. Conant . I f you asked me whether I considered 33£ per cent
adequate, I should say no. It should be at least 40 with a tax on im
pairment. I think the suggestion of the bankers at their conference
in Chicago is not bad-----Senator O ’G orman (interposing). Speaking of the recommenda
tions of the bankers at their conference in Chicago, have you read
their report on this bill?
Mr. C onant . Yes.
Senator O ’G orman . Y ou are familiar with it?
Mr. C onant . Yes; generally
Senator O ’G orman . D o you indorse the views of that conference
in criticism of this bill ?
Mr. C onant . In the main; not in every detail.
But the points
they criticize, I think, are the ones most subject to criticism.
Senator O ’G orman . In some statement you made you seemed to
have a distinction in your mind between “ period of depression and
u panic.” What is the distinction ?
Mr. C onant . There is a great distinction. A period of depression
comes about only because, as you and Senator Hitchcock suggested,
credit has been strained and they begin curtailing loans and stop
ping investments in new enterprises. But there never has been in
leading European countries in recent years a panic in the sense that
men who needed help and had good security could not get accommo
dations.
Senator O ’G orman . D o you remember the time of the Hooley
failure in England—9 or 10 years ago?
Mr. C onant . Yes.
Senator O’G orman . D o you remember the disturbance that fol
lowed that?
Mr. C onant . I think that was more in the nature of a stockmarket flurry.
Senator O ’G orman . It began that way.
Mr. C onant . O f course, you will occasionally get a panic in some
wildcat securities, but the kind of panic I refer to is a general com
mercial panic where sound people are deprived of credit.
Senator O ’G orman . Would you say that the financial disturb
ance we had in 1907 in this country was a panic?
Mr. C onant . Yes; I should call that a panic, because it affected
every business man in the country almost. He could not get currency
and his usual accommodation. I should not call it a panic had the
banks not suspended and had there been a slow and gradual con
traction.
Senator N elson . Was not the primary cause of that panic bad
banking practices rather than a contraction of the currency?
Mr. C onant . T o a certain extent.
BANKING AND CURRENCY.
1445
Senator N elson . And unduly granting credits by banks, trust
companies, and many other institutions. Was not that the primary
cause ?
Mr. C on a n t . Yes.
Senator N elson. S o you can not lay the cause of it to our cur
rency ?
Mr. C on a n t . N o; not strictly speaking.
Senator N elson. Y ou can say this, can you not, that the bankers
had set the fire going by bad banking, and if we had had an emer
gency currency they could have put the fire out more easily ?
Mr. C onant . Let me amplify that. Bad banking is not done on
the initiative of the bankers generally. There are cases undoubtedly
where the banker takes the initiative, but ordinarily the bad banking
comes from clients who ask for loans to invest in enterprises which
are not successful.
In reply to your suggestion that the trouble was not due to the
currency system I would agree with you to a large extent, but the
currency system was the cause of the panic, although not, perhaps, of
the conditions which induced the panic.
Senator N elson. That is what I mean.
Senator O ’G orman . Is it not a fact that for a couple of years be
fore the disturbance of 1907 the currency was very expanded? It
was a period o f inflation ?
Mr. C onant . Yes; that is true.
Senator O ’G orman . And that one of the great causes, if not the
real cause, of the disturbance that year was the inflation which pre
ceded it?
Mr. C o n a n t . The inflation o f credit.
Senator O ’G orman . The inflation of credit, and the expansion of
enterprise.
Senator N elson. We were never more prosperous in the West, and
a large proportion of our small country banks never suspended.
Senator S hafroth . During the panic of 1907 there was no run on
the gold reserve o f the Federal Treasury, was there?
Mr. Conant . Oh, none whatever. On the contrary, we were im
porting gold. We imported $100,000,000 o f gold, and we had to pay
for it.
Senator O ’G orman . Returning to the question of the emergency
act— the Aldrich-Vreeland Emergency Act—with your experience in
banking and currency, do you think you would have much difficulty
in taking that act, and, with certain changes which could readily be
made, supply what you conceive to be the existing defects in our
banking system ?
Mr. Conant . The Aldrich-Yreeland Act, whatever its merits or
demerits, is a very incomplete solution of the problem. It might give
us the elasticity, if the banks saw fit to avail themselves of it, to tide
us over a crop-moving season, but I think it provides no means for
protecting against a foreign drain of gold. It simply provides, as I
recall, that currency associations may obtain additional currency
under certain conditions.
Senator O ’G orman . And those currency associations have been
organized.
Mr. C onant . Yes; I know they have been organized, but they have
taken no further action.
1446
BANKING AND CURRENCY.
Senator O ’G orman . Because the necessity has not arisen.
Mr. Conant . I should say, because of the cumbersomeness o f the
act. I f it had been a flexible act and the banks had not run the risk
of seeming to show the white feather, they would have done some
thing last fall. In Canada an act was passed o f a similar character,
but a little more elastic, and the banks have taken advantage o f it
every autumn.
Senator H itchcock. I find here in this volume giving the German
banking inquiry o f 1908 that the specie cover did drop at one time to
37.3 per cent.
Mr. Conant . What year was that?
Senator H itchcock. 1907; so that is getting down pretty near to
the breaking point.
Senator S hafroth . I s not the objection that has been made to the
Aldrich-Vreeland Act that the banks would not permit inspections,
and that they did not join in the associations and become responsible
for the currency which was issued to any bank applying?
Mr. Conant . There probably has been a little feeling of that sort,
especially by the larger banks toward the smaller ones. The cur
rency associations were organized, as suggested by the Senator from
New York, but largely, I understand, at the urgent request of the
Secretary of the Treasury, and not because of any great enthusiasm
on the part of the banks. As far as the matter of inspection goes,
that spirit has been growing among the banks in the cities of late. A
half dozen cities have established systems of clearing-house inspec
tions—
Senator S hafroth . Inspections under their own control ?
Mr. Conant . Yes.
Senator S hafroth . Was there not also a feeling upon the part of
the banks that they did not want to apply for currency under the
Aldrich-Yreeland bill because it would be an indication to the public
that they were in failing circumstances?
Mr. Conant . That is just the reason, I think, or one of the prin
cipal reasons that they have not been disposed to apply.
Senator O ’G orman . D o you not think that if a condition of acute
disturbance arose they would not hesitate to avail themselves o f its
provisions ?
Mr. Conant . Oh, I think that is probably true, that if the situation
became very acute—o f course, the proposition of the Owen-Glass bill
and other similar measures is to prevent its becoming too acute. We
do not want to wait until we have suspended payments before we
have some measure of relief. How quickly the banks will avail
themselves of this in case of an acute stringency is a matter of
prophecy. I believe they would do it in an ultimate crisis, but how
much before is a question that nobody can determine, I think, at
present.
Senator H ollis. It would depend largely on the extent of the
rivalry between the banks in the community where the association
existed. It is not a very complete measure and yet I have alwavs
believed that if that bill had been on the statute books in 1907 the
currency features of our panic would have been eliminated.
Senator O ’G orman . I s that your judgment?
Mr. Conant . I think it is very probable that they would not have
had to suspend currency payments.
BANKING AND CURRENCY.
1447
Senator N elson. Mr. Conant, there is no acute condition now as
to the scarcity of currency. The Treasury Department set aside
$50,000,000 to supply country banks for moving the crops. O f that
$50,000,000 they assigned $3,000,000 to Minnesota, $2,500,000 to the
banks in the Twin Cities, and a half million to Duluth.
We have jpist had the biggest crop of wheat we have ever had in
Minnesota. We have received upward o f $2,000,000 worth of wheat
and other small grain a day in Minneapolis, and yet of that money
the Twin City banks have not taken a penny. Only the banks of
Duluth have taken, I think, $450,000 or $500,000 out of the $3,000,000
that was assigned to Minnesota. That shows that the country is in
a good healthy condition, and that there is no immediate urgency for
any special currency.
Senator O ’G o rm an . I s that your judgment, Mr. Conant?
Mr. C onant . Certainly, there is no emergency at the present
moment, but of course this bill could not be made operative for any
pressure this autumn. It would take months to put the machinery
in operation.
Senator O ’G o rm an . I think it is realized it would take at least a
year to perfect the system under this bill.
Senator N elson. And after you start out it will be another year
before we can see the workings of it.
Mr. C onant . That is why I think you should proceed cautiously
in making it too mandatory.
Senator N elson. H ow would it be to allow the reserve board to
start with one single bank and give them the authority to extend the
system as they see the necessities of the country demand it ?
Senator H ollis. Y ou would never have but one, because nobody
would want it.
Senator N elson. Mr. Conant has not answered the question.
Senator O ’G o r m an . It is fair to Mr. Conant to say that he did
answer that about 20 minutes ago when he said that if you had a
single reserve bank in this city there would be no need for any other
bank, because that bank would have its agents and its branches
throughout the country.
Senator B ristow. Mr. Conant, if we had a central bank, governed
by a board created exactly like this, with the same powers or similar
powers, and the stock owned by private parties instead of by the
bank, and let it be a Federal bank, it would then be similar to the
Bank of France, would it not?
Mr. C onant . Yes; very similar.
Senator B ristow. N ow , any bank in the United States could be
authorized to go to this bank and get relief when needed—redis
counts, etc. Now, it is your judgment, as I understand, that that
would be a better system than the one that is proposed here ?
Mr. C onant . Well, I think theoretically so. I want to put myself
in the position of dealing with actualities, though, and it is my theory
that a single central bank would be preferable, but if that is not
obtainable I think this system of regional banks with a proper limi
tation of the number would be practicable.
Senator O ’G o r m an . Y ou mean it would be better than the plan
proposed by this bill?
Mr. C onant . Yes.
1448
BANKING AND CURRENCY.
Senator O ’G o rm an . Better for the country, better for the com
merce and prosperity of the people?
Mr. C on a n t . Yes.
Senator N elson. Ought we not to get the best when we are legis
lating?
Senator O ’G o rm an . I think we are all in accord, even Senator
Owen, on that proposition.
Senator N elson. Don’t you think we ought to get the best?
Mr. C on a n t . Yes; but you can not always get the best in practical
politics. [Laughter.]
Senator B ristow. What we want to find out is what your judgment
of the best is and whether we can get it or not is for us to determine.
That is up to us, if we know what the best is.
Now, the popular notion of a central bank in the United States is
that it be one controlled by the bankers, and that the Government
would have no supervision over it any more than it has over the
banking system now through the Comptroller’s office and his peri
odical examinations. The bank suggested here by Senator O’Gorman
is entirely different from that suggested heretofore by any of these
propositions, is it not ?
Senator N elson. Different from the Aldrich plan?
Mr. C on a n t . Yes; in some measure.
Senator B ristow. I s it not very radically different?
Mr. C o n a n t . I should have to see more of the details of Senator
O ’Gorman’s plan.
Senator O 'G o rm an . The details are very simple: We simply ap
point a reserve board, substantially as provided in the pending bill,
giving the board all the powers that are conferred by this bill plus
all the powers that are conferred upon the officers of the several
regional banks and concentrate the powers of the 12 regional banks
in the hands of the reserve board, making one central institution
under Government control.
Mr. C o n a n t . Yes; it would be essentially different from the A l
drich plan in the more complete control by the Government.
Senator B ristow. That is all the objection to the Aldrich plan,
that it was building up a money monopoly that was not controlled by
the Government, but by private interests.
Mr. C o n a n t . I do not so interpret the Aldrich plan.
Senator B ristow. That was the interpretation the country put
on it.
Mr. Conant . I can readily appreciate the fact that we might go
further in bringing it home to the country. I have no objection to
the control proposed here, provided you have your advisory council
in close touch with the governing board. I think, speaking of the
details of the bill, that a few changes should be made. I f that ad
visory council is retained it should be authorized to appoint an ex
ecutive committee, and that executive committee should be author
ized, I should say, to sit with the governing board. I f it is not
thought advisable for them to sit at all times let them sit at certain
specified times. But there is no reason why the Federal board should
not be perfectly willing to have the council sit at its meetings when
ever they are held. I understand that is practically the system that
prevails in Germany, and with competent men at the head there
BANKING AND CURRENCY.
1449
would rarely be any friction. So I should say that the advisory
council should be allowed to appoint an executive committee, say of
three; that they should be permitted to receive pay, and they should
be in constant touch with the Federal reserve board.
I object very strongly to a Federal reserve board which is up in
the air, which is not in a position to keep in daily touch with what
is being done in the New York market, etc., with a thousand and one
things which it is not possible for a man to know about unless he is
in touch with the people in the New York market, as well as the
Chicago and New Orleans markets.
Senator B ristow. D o you think it would be better for the stock
of this Federal bank—I will call it that—to be held by banks or by
citizens ?
Mr. C onant . Personally I do not think it makes any particular
difference. I do not care who holds the stock. In the first place,
you put the control in the hands of the Government. The stock
holders, whether bankers or private citizens, would elect this ad
visory committee, I assume.
You are discussing the question of a central Federal bank?
Senator B ristow. Yes.
Mr. C onant . In that case, the stockholders would meet at least
once a year-----Senator B ristow (interposing). And elect the advisory board.
Mr. C onant . Yes; and I do not know that it would make any d if
ference, from my point of view, who held the stock. I f you want to
make some safeguards against its being monopolized you can do that,
but I do not think that danger is very serious.
Senator W eeks. Y ou can make a close corporation of it, which
would limit the transfers of the stock under conditions that would
prevent it.
Mr. C onant . Oh, yes; you can make plenty of safeguards if they
are necessary. I do not think they are really necessary.
Senator N elson. I do not think you have expressed any opinion
upon whether these notes should be redeemed in gold only or in gold
or lawful money, as provided in the bill. Do you not think it would
be better to have them redeemable in gold only ?
Mr. C onant . Probably it would. I do not consider that of so great
importance now that our gold is so large a proportion of the total
circulation. O f course, under the plan I have pointed out there
would be redemption in gold, because you would have a 50 per cent
gold reserve.
Senator N elson. We have in this country now a little over 7,000
national banks, and something over 17,000 State banks and trust com
panies, banking institutions of various kinds, making in the aggre
gate 25,000 of all kinds of banks. Now, do you believe this system
could be a success, I mean the system outlined in the bill, if the State
banks and the loan and trust companies failed to join it?
Mr. C onant . I have not examined that question very carefully.
Senator N elson. I f they in a body failed to join. It is optional
with them. In case they should fail to join it, and a limited number
o f national banks declined to go in, do you believe we could make the
system a success then under those conditions?
Mr. C onant . So far as the joining of the State banks and trust
companies is concerned, I do not think their actual joining is essen-
1450
BANKING AND CURRENCY.
tial. I think they might be permitted to avail themselves of the re
discount privilege without becoming subscribers to the capital. The
point was made here that the Federal reserve board might prescribe
regulations which would be oppressive or would compel the State
banks to be cast into a rut. I do not think that follows at all. Even
though their soundness was of a different degree and based on a d if
ferent class of business from the Federal banks, it is primarily neces
sary only that the paper they present is first-class paper-----Senator N elson. Would not that be giving the State institutions
an unconscionable advantage over the national banks? The national
banks would have to contribute to the capital of the new bank, which
would have to contribute to the reserves, and yet all they could get
would be this discount privilege and the privilege of getting new
currency-----Senator O ’G orman (interposing). And the privilege o f having
their branches abroad also.
Senator N elson. Yes; while the State banks could get all these
benefits under the suggestion you made without incurring any other
liabilities or making any contributions. Do you think that would be
fair and just to the national banks?
Mr. C onant . It depends, of course, on how you have the liabilities
imposed upon the national bank by this bill. I f they are repellant to
them it would constitute discrimination. I f they are attractive, then
I do not think the discrimination could be claimed.
Referring to another point of your question, whether the system
would be a success if only a part of the national banks came in, the
answer must be that it would not if the capital is raised entirely from
banks. I f the capital can be raised by sale to the public, you may
have a very successful start with only a part of the national banks in.
You have to have adequate capital for your reserve association from
some source, and then your little country bank can get its rediscounts,
not by direct application to the Federal bank, but by going to its cor
respondent upon whom it has always relied, and it would there get its
accommodation-----Senator O ’G orman (interposing). Mr. Conant, what would be
your judgment as to this modification o f the bill—whether the plan
contemplates a single Federal central bank or a reserve board plus
12 regional banks: Providing, in the first place, as the bill does now
provide, that the banks will contribute the capital necessary to con
duct either the central bank or the reserve banks, as the case may be;
to confer the power, possibly on the Secretary of the Treasury or
upon some other governmental functionary, to invite the public to
contribute the capital, if he deems it necessary at any time, because
o f the unwillingness or lack of alacrity among the banks to enter?
Mr. C onant . I think that would be a desirable provision.
Senator O ’G orman . So there then would be provided two ways of
supplying the capital.
Mr. C onant . And that would permit to be carried out what I sug
gested this morning, after the establishment of the Federal reserve
board to establish five or six Federal reserve banks at the beginning,
with authority to increase the number as they see fit. It is not neces
sary for them to plot out the whole country and say to every bank,
“ You have got to join this Federal reserve association or this other
one.”
BAN KIN G AND CURRENCY.
1451
Senator O ’G orman . I might say in this connection that that has
seemed to me one of the great advantages, apart from many others,
o f the central bank. O f course, it is apparent now that if we passed
this bill as it is there would be grave doubt as to whether certain of
these 12 regional banks would have enough capital contributed by the
national banks.
Mr. C onant . There is very grave doubt.
Senator O ’G orman . I f we simply have a single reserve bank there
can be no question about that one bank securing enough capital to
operate at once.
Mr. C onant . That is true.
Senator O ’G orman . And to distribute its benefits and advantages
to all the banks becoming a part of it.
Senator N elson. And it would be a bank with a bigger capital than
any other bank in the country.
Senator O ’G orman . It Avould be the difference between one great
governmental function and a small bank with small capital.
Senator B ristow. Then with the plan suggested by Senator O’Gor
man, would it not be practicable for one banking institution to avail
itself o f the benefits of this Federal bank, whether it subscribed to the
stock or not—let the subscription to the stock be absolutely a ques
tion of investment by the man or the institution that subscribes?
Mr. C onant . Yes; I think that is practicable.
Senator B ristow. And let any banking concern, State or national,
that is reputable and complies with a certain standard have the
privileges of rediscount equally to all under similar circumstances.
Mr. C onant . I think that is practicable. O f course, in Europe
there is no restriction even to banks; individuals can go up and get
rediscounts at the Bank of France or the Bank of Germany.
Senator B ristow. Why is not that a good thing?
Mr. C onant . I think it is, only here the provision has been made—
it was made by the Monetary Commission plan and by this plan—to
limit it to the banks, I suppose, for the purpose o f preventing com
petition.
Senator O ’G o rm an . T hat is obviously the only reason for the dis
tinction.
Mr. Conant . The matter of admitting individuals, perhaps, is
not so important.
Senator N elson. We labor under this difficulty here, gentlemen:
In Europe they were not confronted by this condition. We have over
7,000 banks of issue here based on Government bonds. I f we had
the decks clean— if all our banks were simply banks of discount and
deposit— our problem would be simple, but we have these 7,000 banks
with the right to issue currency based on Government bonds, and that
complicates the problem.
Senator S iiafroth. Mr. Conant, Senator Nelson asked you a ques
tion about whether this redemption o f currency to be made by the
reserve bank should be in gold or in lawful money. I agree per
fectly that if it is to be made at Washington, or on a currency such
as I have indicated, it should be gold, but under this Glass-Owen
bill will not the effect o f having the currency redeemable at these
12 regional banks be to create a competition with the Government
in the getting of gold ?
I
1452
BANKING AND CURRENCY.
Mr. C on ant. N o; I think there is gold enough.
Senator S hafroth. Then will it not have a tendency to make each
one of these banks carry more gold than the National Government
would carry for the whole number of banks ?
Mr. Conant . I do not know that I quite understand that proposi
tion.
Senator S hafroth . I mean, that the fact o f having 12 points of re
demption, each bank being afraid that it may not have enough gold,
would naturally tend to cause them to keep a greater reserve than
33^ per cent.
Mr. Conant . I think they should keep 40 per cent, but I believe
there is enough gold anyway.
Senator S hafroth . Some people think it ought to be 50 per cent,
and some think it ought to be dollar for dollar. But will not that
very fact that there are 12 of these banks preparing for any emergency
make a greater drain on the existing gold than if it were all re
deemable here in Washington by the Government alone and not at
at the regional banks?
Mr. Conant . Well, so far as its concentration is concerned, I would
favor its concentration; but so far as the question whether this gold
or lawful money shall be scattered in 12 districts is concerned, I
do not think it is very important. The quantity of lawful money
in the form of greenbacks is now restricted, and it is mostly split up
in $1, $2, and $5 bills in general circulation. I do not think the com
petition for gold that you refer to would cut any figure in that.
Senator S hafroth. N o. N ow , will not the fact that this money is
redeemable in lawful money at the banks in these regional districts
make the banks act as a buffer, as it were, between the Government
and the person demanding the gold in time of emergency?
Mr. Conant . Perhaps; yes. I should think it ought to. It should
be up to the banks to protect the gold stock.
Senator S hafroth . In other words, if there were $100,000,000 of
gold only in the United States Treasury to redeem $100,000,000 of
greenbacks, and then $100,000,000 of this currency issued under the
Glass-Owen bill were out; if they were to take a $1,000 bill to the
regional bank it could give them a greenback, and then they would
have to take the greenback to Washington to get that redeemed
in gold. The currency issued under the Glass-Owen bill, if they
wanted to restrict it, could be held by the regional bank, and con
sequently when a man got a greenback and deposited it in the Treas
ury here they could hold that, and thereby, simply by paying out
$1,000 in gold, practically redeem $2,000 of outstanding currency.
Mr. C onant . Your theory is that the bank would then present it
to the Treasury ?
Senator S hafroth . N o ; my theory is that the individual present
ing this $1,000 currency under this Glass-Owen bill to the bank, the
bank would say, “ We do not have to pay you gold; we will pay you
this lawful money—a greenback.” Then the bank, when it does that,
takes this money issued under the Glass-Owen bill and puts it in its
vault and says, “ Now, if there is a drain on gold, we will not reissue
that.” Then the man that gets a $1,000 greenback goes to the Fed
eral Treasury and says, “ I want my gold.” They say, “ Certainly,
here it is.” And they keep up that $1,000 greenback and hold it
BANKING AND CURRENCY.
1453
until after the time of stress. Would not that really give the Treas
ury the power to redeem $2,000 for $1,000 of gold ?
Mr. Conant . I do not know that I quite follow you. It does not
occur to me that it is very important. Ordinarily, of course, a bank
when it is called upon for currency does not have to pay gold unless
a man says he wants gold. I f a borrower comes in and says he wants
$1,000 in currency and they have $1,000 there in greenbacks, they
hand them to him.
Senator S hafroth. I think this feature is valuable only in times
when they are making a raid on the gold reserve. By making this
payment into the regional bank, the regional bank holding the cur
rency and paying out $1,000 in greenbacks, and the man taking that
to the Federal Treasury and getting his $1,000 in gold, you have im
pounded practically $2,000 in bills.
Mr. C onant . I do not think it is a matter of very great practical
importance. I should prefer that the bill said gold.
Senator S hafroth . I think it would act as a buffer against the
raids upon the gold reserve of the Treasury.
Mr. Conant . They would not have greenbacks enough in their
reserve anyway. They are split up in small denominations.
Senator H ollis. Senator Shafroth seems to have a desire to make
it difficult, under certain conditions, to redeem. Is it not one of the
conditions of a good banking system that redemptions are obtained
easily ?
Mr. C onant . Yes; especially-----Senator S hafroth (interposing). Do you think you ought to in
vite on the United States Treasury a raid on the gold, if it is done,
not for commercial purposes, but for the purpose of the person taking
it?
Senator H ollis. N o ; but the very fact that you do it for the ex
press purpose of delaying redemption-----Senator S hafroth (interposing). You have had that all the time
under the national banks, have you not?
Senator H ollis. Oh, yes; but I am not willing to indorse the
national bank system to the extent-----Senator S hafroth (interposing). To that extent it has operated
perfectly, has it not?
Senator R eed. Has Mr. Conant finished? I do not want to inter
rupt this conversation, but I want to ask a question or two on other
lines. I was going to ask some questions this morning and did not
have time. I do not like to interrupt this colloquy, which was very
interesting to me, but it is getting late.
The C h a ir m a n . The chair wdll remind the committee that there
are several gentlemen here representing various western banks who
are expecting to appear here to-morrow morning.
Senator R eed. To-morrow we will be over in the Senate.
Senator O ’G orman . Mr. Conant, notwithstanding your divided
allegiance between Massachusetts and New York, as a New Yorker
I feel that for the present I must protect you as far as I may.
Personally, I think that the committee might very well refrain from
holding you as a witness any longer to-day. You have sat here
about seven hours and have given us very valuable information.
W ill you be in town to-morrow?
1454
BANKING AND CUBBENCY.
Mr. C onant . Yes; I shall be able to be here to-morrow.
Senator O ’G o rm an . Would you just as soon come in to-morrow
and let Senator Reed and anyone else examine you further?
Mr. Conant . Yes.
The C hairm an . The chair notified these various bankers that
they could be heard, and Wednesday was fixed to hear the Indiana
bankers, Thursday to hear the Mississippi and Texas bankers, and
Friday to hear the Dakota bankers. Whatever the committee sees
fit to do about it the chairman will announce to these gentlemen.
Senator O ’G orm an . I suggest that, subject to other contingencies,
we adjourn until half past 2 to-morrow and request Mr. Conant, if
it is convenient, to come in at that time. He will not be detained
iong.
The C hairm an . I have an article here presented by William Alden
Smith, Senator from Michigan, in behalf of W. Alfred Owen Crozier,
who wants to submit to the record his views on this bill. I have
also some resolutions of Kentucky bankers. I f there is no objection
they will be incorporated in the record.
(The papers mentioned by the chairman follow :)
M em o rial S u bm itted b y S enator W il l ia m A lden S m it h for W . A lfred O w e n
C rozier , C in c i n n a t i , O h io .
T o th e h o n o r a b le S e n a te an d H o u s e o f R e p r e s e n ta tiv e s o f th e U n ited S t a t e s :
G e n t l e m e n : The undersigned respectfully petitions for your consideration of
the following:
Your petitioner was invited by the Senate Committee on Banking and Cur
rency to give his views on the banking and currency question, and by the House
Committee on Banking and Currency to do the same, to which last committee
the paper An Ideal Money Plan, attached hereto a3 Exhibit A. was presented
about March 5, 1913. Various Members of the Congress at different times
have made similar requests. Therefore, it seems proper that this analysis of
suggested monetary plans should be ventured and the draft of a substitute
bill, attached hereto as Exhibit B, respectfully presented for your consideration.
Public control of the public currency, demanded so courageously by the Presi
dent and his advisers, is the chief thing for which your petitioner has been
striving for the past seven years, on the platform, in the public press, in my
two books on the subject, and before the platform committee of each national
convention in 1912. For that reason I desire to be entirely just and even
generous toward the pending currency bill and its supporters and in no way
criticize them personally. They are sincere and patriotic, but some of them so
far seem to have overloked certain things that will establish absolute private
control of the public currency in most dangerous form if the so-called admin
istration currency bill as now drawn becomes law.
The great need of constructive, progressive, patriotic, and practicable banking
aDd currency reform is conceded. Early action is advisable. But it is better
to be right than to rush through an undigested measure that may prove to be
wrong and harmful. This is a new question to the people and somewhat com
plex, and the public should be given time to study and express their wishes
thereon. December and the next session of Congress is only about three months
away. Because this is a public matter of greater importance to the daily
business welfare of all the people than any question of modern times, it should
be discussed without partisanship, fear, or favor. While my views may be of
little importance or value, they must under the circumstances be stated frankly
and plainly.
T H E ALD R ICH P L A N .
The Aldrich plan proposed one central bank owned by the banks exclusively.
It was to issue and regulate the volume of currency. This was to be corpora
tion currency, not United States money. The central bank could have inflated
and contracted at will its currency, made money scarce or plenty, raised and
lowered its discount or interest rates, rediscounted or refused to do so for any
BANKING AND CURKENCY.
1455
bank, all without any effective Government supervision or control. The 25,000
banks and the business borrowers of such banks all would have been at the
mercy of the central bank for a supply of cash or credit. By increasing and
decreasing its outstanding corporate currency and discount rate it easily could
have measurably raised and lowered at its pleasure, for the profit of the private
interests it would serve the prices of all securities, property, and human labor.
If it desired a financial stringency or even a panic it was only necessary to
suddenly and excessively contract its currency. This would quickly shrink the
cash reserves of the banks and force the instant and wholesale calling in of
bank loans to a sum aggregating 10 times such contraction of central bank
currency. The sudden and general sacrifice of securities and commodities for
money to pay up bank loans would of course wreck prices, demoralize trade and
industry, paralyze labor, and perhaps cause panic and general ruin.
As central bank stock was to be owned exclusively by the banks according to
size of capital stock, a group of the larger banks would have owned and run
the central bank largely for the benefit of the great Wall Street interests that
now own or control many of the big banks of the country. The Aldrich plan
was originated by high finance and of course was for the benefit of high
finance.
DANGEROUS POW ERS M AD E SAFE.
It is proper to say that these vast powers, so dangerous if they had been
placed in private hands beyond recall for 50 years as Aldrich proposed, would
be harmless and, in fact, beneficial to all the people, as well as the banks and
business interests if the central bank was made an absolute Government in
stitution, organized, safeguarded, and run in strict accordance with lavf, inde
pendent of partisan politics and Wall Street influences. Those powers can be
used not only to cause panic but to prevent panics, to destroy or bestow general
prosperity, by means of imparting a desired elasticity to the public currency,
using genuine commercial paper as the chief security on which to loan the
public funds. It is a life and death power over all banks and business and
must be patriotically used.
If such a Government institution was given the dignity and safeguards of
the Federal Supreme Court, no one doubts that its administration would be
honest, efficient, and just to all interests and beneficial to all the people in the
highest degree. Therefore the solution of this great and grave problem is not
to avoid political control by abandoning Government control of the public cur
rency and surrendering this Government function to the banks to be used for
the profit of the few at the expense of the many, but the remedy is to organize,
strengthen, and safeguard public control, so as to bar out both politics and high
finance and insure business efficiency and scientific management without rob
bing the people and their Government of all control over their public money
supply.
B A N K CONTROL M E A N S DANGEROUS PO LITIC S.
Turning control of the public currency and the regulation of banks over to the
banks themselves by no means would take the question out of partisan politics.
It is the surest way to put it into politics and keep it there in most dangerous
form. That was the result in the time of Andrew Jackson, and the country
was plunged into a wild and desperate panic before the second central bank
and private control of the public currency was abolished and high finance
driven out of politics.
It was the same with the first private central bank, and caused Thomas
Jefferson to say that a private bank issuing public currency was more dangerous
to the liberties of the peop’e than a standing army. To protect and preserve
permanently the enormous power and rich profits that would now go with
private control of the public currency, most of the 25,000 banks would be
organized into an intangible, invisible, active, and invincible nation-wide politi
cal machine with its itching and crushing tentacles in every congressional dis
trict ready and able to politically destroy any candidate of any party who would
not in binding form in advance secretly barter away the welfare of the
public to the powers of privilege. Every predatory interest woud be allied with
this machine that would be financed and run by Wall Street. Money in elections
would be its instrument and corruption its effective road to success. Every
political party would be prostituted or crushed. Through forms of law the
1456
BANKING AND CURRENCY.
Government would be used to make the people political and financial bond
slaves of the lustful greed of an organized and merciless financial power such as
the world as yet has never seen.
The final result, of course, would be a political upheaval or revolution that
would end in abolition of the system and perhaps the right of private property
and the obligation of contracts— State socialism. The only way to avoid that
end in this country is for men of wealth and power to stop trying to destroy
democracy in favor of a money aristocracy and help purify and strengthen the
agencies of republican Government to make them more efficient, impartial, and
beneficent for all the people, without discrimination or favoritism.
U NITED
STATE S
M O N E T A R Y CO U NCIL.
These were the moving thoughts back of the plan suggested in the pamphlet.
An Ideal Money System, presented on March 5, 1913, to the House Committee
on Banking and Currency, a copy of which I inclose as part of this review. The
United States monetary council therein suggested, and the reorganization of the
country’s money supply proposed, I believe to be the only practicable method
by which this question can be permanently and scientifically settled. Perhaps
all we now can get is another temporary makeshift, an improvement but not a
cure, but some time the plan therein set forth, or some modification thereof,
will be adopted. Until that is done we will grope in monetary darkness,
stumbling over dangerous and unscientific financial pitfalls, our trade and
commerce at the mercy of foreign finance, our Government legally bound to pro
vide billions of actual gold with no effective means for obtaining the same,
or providing itself and American business with an adequate and impregnable
monetary defense. Has the great American people the wisdom and courage
to grapple with and solve the most important question of modern times and to
settle it right? We soon will know.
A D M IN IS T R A T IO N CU RREN CY BILL.
The so-called administration currency bill would create a dozen or more
central banks instead of one, regional banks all owned exclusively by the same
banks that would have owned the Aldrich central bank. The banks, of course,
will control the Federal banks that they will own, because they choose twothirds of the nine directors, three being selected by the Federal reserve board.
The three will have a restraining influence through publicity and appeal to
the Federal board but no power of control or decision as against united action
by the six bank representatives. In law and in fact each Federal reserve bank
will be a regional central bank, a private corporation owned and absolutely
controlled by the banks associated therein.
The limitation of dividends to 5 per cent and paying to the Government all
other profits after a 20 per cent surplus has been accumulated out of profits
may be thought to guard against the use of Federal banks to gain excessive
profits and power for the benefit of the subsidiary banks, and also insure the
Government a large revenue from this source. This expectation is more ap
parent than real. If the Federal bank and not the Federal board fixes its rate
for rediscounting for its constituent banks and does not reduce its rate or
charge so as to leave all excess profits in the pockets of the banks instead of
accumulating them in the Federal bank treasury at the expense of its banks,
to be paid over into the public Treasury, it will be a surprising exhibition of
corporate philanthropy or patriotism, indicating that no longer can it truthfully
be said that a corporation has no soul. If the bill is amended as demanded by
the banks to prohibit the payment of interest for currency and Government
funds deposited in or advanced to Federal banks, and the Federal banks regu
late the discount rate, there is no certainty that the Government will realize a
dollar, and yet it is to provide the machinery, grant great privileges and powers
by law and supervise the whole system, turning over to such private central
banks for deposit as received all public revenues, aggregating three-fourths
of a Inllion dollars annually, and also printing and supplying to such banks
Government currency to the extent of a half billion, and possibly more than
a billion dollars.
If 5 per cent is a reasonable profit for the banks as dividends on their
Federal bank stock, why should the banks own the 20 per cent surplus to be
created out of excess profits? It is proper to create a 20 per cent guaranty
fund to insure regular 5 per cent dividends and meet possible losses. But as
BANKING AND CURRENCY.
1457
most of the profits of Federal banks will be made by use of public revenues and
currency, such excess profits in the event of a repeal of the system or liquidation
should go to the Government and not to the banks.
For 50 years the banks have insisted that the Government print all the money
and then turn it over to the banks free or subject to a nominal tax, the banks,
instead of the Government, getting the profits made with this vast volume
of public currency. The divine right of the banks to rule the public currency,
or at least to annex the profits that otherwise might taint the Public Treasury
and put into the heads of the people the idea that the banks should pay the Gov
ernment a fair price for the use of public currency, is stoutly asserted by the
banks. If the banks were charged a fair and reasonable price for the cur
rency and public moneys, a new and important source of public revenue would
be opened up and relieve the people of considerable tax burden without injustice
to the banks. Two-thirds of the entire national debt now could be paid with
the money the banks would have paid into the Federal Treasury if the little
bill repealing the annual tax of a half of 1 per cent on bank deposits and capital
had not been lobbied through Congress at the instance of the big banks in 18S2.
This wholly relieved national banks from ail Federal taxation on their capital,
assets, or valuable franchises. It robbed the Public Treasury of more than half
a billion of dollars. The fact that the 25,000 national and State banks, with
capital stock aggregating but $2,000,000,000, are tlmough a legalized inflation of
bank credit enabled to steadily collect interest profits on about $25,000,000,000,
shows that bank franchises and exclusive privileges granted by law are of great
value, and should bear some reasonable share of the public burden and the cost
of maintaining the Federal Government. This is a good time to establish a
business “ square deal ” between the banks and the Government in matters of
of this kind.
No honest man desires in any way to deprive banks of their just rights or
harm their legitimate interests. But if they desire justice, they must be will
ing to do justice. If the banks will meet the people, through their Government,
half way in an unselfish attempt to devise a progressive and scientific monetary
system, fair to everybody, the whole problem can be solved and all matters
agreed upon amicably in 30 days. All but the big banks dominated by Wall
Street I believe will do so, for most of them are patriotic. The result would
be the greatest and strongest and most profitable banking system in the world,
serving and promoting general prosperity and enabling American trade and
commerce, with the backing of our banks and Government, to win the markets
of the world for the products of our factories and the fruits of our soil.
FEDERAL RESERVE BOARD.
The redeeming feature of the administration’s bill is the Federal reserve
board. It provides for absolute public control. Four of the seven members
are appointed by the President with the advice of the Senate, the others being
Secretary of the Treasury, Secretary of Agriculture, and Comptroller of the Cur
rency, all presidential appointees.
The cry of politics by the banks has much to justify their fears. Some future
administration, struggling to retain power, may attempt improperly to use for
partisan purposes the vast power the Federal board will have over the 25,000
banks and the central Federal banks and through the banks over all business.
The worst thing is that such action would inflame the country and cause repeal
of the system by Congress, and we then would be back where we are now—
in banking and monetary chaos.
The weakness of this bank cry is the substitute they demand, a larger bank
control of the public currency would be worse than political control. Both
of these evils can easily be avoided.
The greatest danger is that a small Government hoard appointed by the
President some time may mean Wall Street control through politics. Is it not
possible that some future candidate of some party for the Presidency may win
through the secret support of Wall Street and the banks obtained by party
committees in the heat of a campaign binding the candidate if elected to ap
point certain named persons satisfactory .to high finance as members of the
Federal reserve board? Those are the methods of “ invisible government.”
This danger would be greatly reduced if such board has 15 instead of 7 mem
bers. But I believe the only way to completly bar out partisan politics and
Wall Street and thus make the system permanent as well as safe and efficient,
is to ultimately create a new coordinate branch of the Government, a United
0328°— S. Doc. 232, 63-1—vol 2----- 32
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BANKING AND CURRENCY.
States monetary congress, with supreme and exclusive power over all matters
of banking and currency, the membership to be reasonably large and widely
distributed, two-thirds being elected by the people, one from each State, the
balance appointed by the President with the advice of the Senate. A body so
chosen would be most conservative and safe, the members checking and balan
cing each other. The monetary congress meeting once a year would choose the
United States monetary council as its board of managers of 16 to conduct from
day to day the business of the council, employing to advise them financial
experts of the highest standing.
If the banks could be made to realize the value of having this question settled
permanently they would join in this plan and help to properly safeguard it; for
in these progressive times the only way to satisfy the people is to give them a
voice in choosing those who are to regulate their public money supply, the life
agent of all their business and activities.
REGIONAL CEN TRAL B A N K PL A N .
The more the plan for a dozen Federal reserve banks, or regional central
banks, all owned and run by the banks is studied the less it commends itself
as a wise or safe solution of our banking and currency troubles. Would it
not be a long step in the wrong direction?
The vast powers of the Federal Government and courts are being exerted to
the utmost to destroy trusts and combinations as dangerous. Party platforms,
candidates, and speakers have been eloquent in that direction. Public senti
ment seems opposed to further concentration of industrial and financial control
and power. It prefers competition instead of monopoly. In the face of all
this the pending currency bill would have Congress by law create a dozen private
regional monopolies or money trusts all owned by private banking corporations,
and grant to such trusts and their subsidiary banks an absolute and exclusive
and binding monopoly of the bank credit and public currency of the United
States. Each regional central bank will exclusively control the public money
supply of its region, with the right to grant or withhold its favors from any
bank and to promote or destroy local prosperity by granting or denying currency
and credit that is essential to the life of trade and commerce. Each regional
central bank within its exclusive territory has practically the same autocratic
and dangerous powers over banks and business that the Aldrich central bank
would have exercised over the whole United States.
Is there not danger, in fact, certainty, that in time these dozen local trusts,
with complete mastery over money and credit in their several localities that
together embrace the whole country, may combine and dominate the money
and credit supply of the United States, and through this power seek to control
the politics of the country and the Government of the Republic? That is the
tendency when the powers of privilege are given a chance by law to increase
their profits and grip on human affairs. Such a combine to be effective and
dangerous need not be formal or tangible or even visible. It will be more
sinister, bold, and dangerous if it can work in the dark without legal responsi
bility or public observation. That is the precise condition of Wall Street and
the method it employs. No one doubts its effectiveness and evil power.
In fact, the amendment recently accepted to the pending currency bill, creat
ing a bankers’ advisory board of one from each of the dozen Federal banks to
actually sit with the seven Government board members, may be the final union
of these dozen private banking trusts, and in effect complete the formation
of one universal money trust under private control, with influence and power
over all money and credit little short of what the Aldrich central bank would
have had. In fact this bankers’ council will, in effect, be a great private central
bank. All it must do to gain the same power as the Aldrich bank is to
successfully match wits with the seven members of the Federal board or mar
shal Wall Street and the banks in politics with enough money and power to
bring about the appointment of friendly members of such Government board.
I believe I should plead guilty to having first suggested this bankers’ council
plan in a letter to the President as a way to avoid allowing the banks to
appoint members of the Government board, but T also pointed out the danger
of the plan creating a universal banking trust. On more mature thought I now
realize that the suggestion was a mistake.
If we must have in private hands a complete monopoly of money and credit,
would it not be better to have it open, incorporated, known and visible, like the