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BANKING AND CURRENCY.
1459
Aldrich central bank, than to have the same thing operating secretly with
“ black hand” methods, beyond the reach of the Government or the people,
using its dozen regional money trusts to work its will on the defenseless small
banks and the business of the United States?
Congress surely has the wisdom to devise a plan that will avoid these dangers,
be patriotic as well as safe, and protect and preserve instead of undermine
and destroy our independent banking system, that has been one of the chief
factors in the country’s wonderful industrial, commercial, and agricultural
development. Instead of the law forcing the banks of each region to confeder
ate for mutual profit and advantage it should prohibit their doing so. Every
bank, independently of every other bank, should be amply protected and safe
guarded and allowed as a legal right, and not as a favor, sufficient currency and
support for any emergency, same to be obtained direct from the currency
issuing agency of the Federal Government. Of course it will be properly safe
guarded. This relief should not be strained through the itching fingers of
private monopoly in the form of a regional bank that may be dominated by a
clique interested to embarrass or even destroy such bank, because it refuses to
yield to the unjust demands of such clique as against the welfare of its stock
holders, depositors, and customers.
The presence of the minority directors selected by the Federal reserve board
in the Federal reserve banks no doubt will have a wholesome moral influence,
and the Federal hoard, by publicity or otherwise, will be very useful if kept
free from bank influence and control. But so long as the regional Federal
hanks have absolute power and discretion of rediscounting for any hank or
refusing to do so and fixing interest rates, these regional central bank trusts
exclusively will wield the life-and-death power over all banks and business that
necessarily is possessed by those who can at will inflate and contract the
country’s supply of money and credit. At least the Federal board’s i>ower is
secondary, and can largely be vetoed in practice by the Federal banks. Presi
dent Garfield said that whoever controls the supply of money and bank credit
will in large measure control the business and activities of all the people.
The incorporated “ middleman,” the Federal reserve banks, the regional cen
tral money-trust system between the Government board and the local banks
should be stricken from the administration’s bill as unnecessary, useless, and
dangerous. The Government board should be enlarged and further safeguarded,
and a reasonable share of the legal reserves of all banks merged and placed
under the control of this Government agency to be used along with the public
currency and revenues to establish currency and credit elasticity and protect all
banks and business against panics, substantially as is excellently provided in
other sections of the administration’s bill.
The demand being made by the big city banks that the banks be given the
right instead of the President to appoint part of the Government officials com
prising the Federal board that is to regulate the banks, and that such persons
be bankers is hold and rather impertinent. If the railroad should demand the
right to appoint railroad presidents as members of the Interstate Commerce
Commission that regulates railroads the cases would be parallel. It is not
prejudice against bankers or desire to harm banks that inspire opposition to this
strange demand that bankers be made a preferred class by law and allowed to
comprise the jury and court that is to hear and determine their own cases.
If a banker will sever his connection with banks, and has the character and
standing satisfactory to the President, and when appointed takes the oath of
fidelity required of fill Government officials, he will make a very useful member
of the hoard and will not be barred or discriminated against because he was a
banker. But the big banks will not trust the President, and they ask Congress
to authorize private banking corporations to perform part of the President’s
constitutional duties of appointment, and this for the avowed benefit and profit
of such corporations. Of course no self-respecting administration or Congress
could comply with such a demand.
A R T IF IC IA L ST RIN G E N C Y.
The banks of the country should be able to see the rising spirit of these pro
gressive times and realize that genuine and unmixed Government control of the
public currency and public regulation of their quasipublic banking corporations
is inevitable. They should join in helping to make such control impartial,
honest, efficient, intelligent, unselfish, and patriotic, for they can only delay but
not prevent that ultimate result.
1460
BANKING AND CURRENCY.
If the big banks controlled by Wall Street are trying to influence Congress,
legislation, and public sentiment by increasing interest rates and contracting
bank loans unnecessarily, artificially, and in concert and discrediting the credit
of the Government and its bonds, as recently intimated by the Secretary of the
Treasury, one of the most important objects of banking and currency legislation
should be to provide means to prevent banks being used for such purposes and
punish those who cause financial stringencies and menace the country with
panics by such lawless means.
The whole country was never more prosperous or in better condition than
now, so far as natural conditions go. Crops are bountiful and prices good. Up
to recent weeks the volume of general business equaled any former year and
was highly profitable. Factories were all running full time or overtime. Labor
was fully employed at the highest average wages ever paid. There was plenty
of money and available bank credit at moderate rates. This condition of gen
eral prosperity has been checked and is being impaired by somebody by artifi
cial means. Why is this being done? With more money than ever in the banks,
interest rates are higher, and the supply of bank credit available for business
much less than at any time in recent years. This harmful and dangerous result
lias been caused by the banks, and no other persons or interests could do it.
Banks have the power to put quick and effective pressure on business men by
suddenly and unexpectedly calling loans in large volume and refusing needed
banking accommodations. They can, if they will, carry the process to an ex
treme that may cause general stringency or even panic and paralyze everything.
That is the way every panic was caused, by the wholesale calling of loans by
the banks acting in concert, whether such action was unavoidable or planned;
and it is the only way a panic can be caused. If another panic occurs, the
country should understand that the banks and only the banks did it.
All banks can not be blamed, even where the stringency may be planned and
instigated by powerful, selfish interests that seek thus to force the country to
make Congress pass currency and banking legislation or other laws of a kind
desired by such interests.
The men who manage a large share of the 25.000 banks of the country, par
ticularly the smaller banks that compi’ise three-fourths of the total, are in
telligent, reasonably unselfish, patriotic; and they are more or less identified
with industries and business enterprises that are harmed by any shock to pros
perity. But these banks are part of a great system that binds all banks to
gether by means of interlocking reserves and other agencies, apd the seat of
power of those dominating this intricate and nation-wide system is in Wall
Street. The big banks of New York hold a large share of all bank reserves,
and in many ways have a powerful, if not controlling, influence with the country
banks. When these big banks suddenly go to calling their loans and raising
interest rates and alarming reports and predictions from more or less intangible
sources are published by the press and sent broadcast, country banks naturally
take alarm, and in self-defense and because of the mystery and uncertainty all
go to calling loans and putting the screws on business. Thus, without their
fault and because of the bad system most of the 25,000 banks are made to help
lessly play an important part in the great and easy game of strangling pros
perity by the wholesale calling of bank loans by the banks acting in concert to
further the political or legislative schemes of the powers of privilege.
No banking and currency measure should be passed that does not completely,
effectively, and permanently emancipate the banks of the United States and the
business customers of such banks from such a continuous and deadly peril to
their interests. Unless the country bankers and the business men of the country
are so paralyzed by fear of the big banks that they can not think or see the
obvious, they will prefer to intrust their welfare to the supervision of a dis
interested and law-controlled agency of the Federal Government, backed by
the entire credit and taxing power of the Nation, rather than to those whom
the powers of privilege are certain sooner or later to install to manage in their
interest any system of private control of the public currency.
PROGRESSIVE CU RREN CY P L A N .
At a time when constuctive aid instead of mere obstructive criticism is so
much needed, it seems proper and necessary, in justice to those struggling with
the problem at Washington, that I supplement my rather hurried discussion
of other bills with the attached draft of a measure suggested as a compromise
on which it is hoped the progressives of all parties can unite; for I realize the
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1461
importance of early action on the question. But we must remember that it is
more important to be right than to get quick action on a matter of such grave
importance. No doubt this bill will need some modification and editing, be
cause only a few days were available for its preparation. This bill, instead of
being a patch upon or a new crutch under our decrepit and thoroughly dis
credited monetary and banking system or a mere temporary makeshift, is a
conservative, scientific, complete, yet simple, ideal plan, by which the independ
ent banking system can be preserved and strengthened and amply protected and
the country’s monetary policy reorganized on an elastic and sound gold basis.
W H A T T H E M EASU KE PBOVIDES.
A department, instead of a mere board of the Federal Government, called
“ United States Monetary Council,” created with supreme and exclusive control
of all banking and currency matters. It consists of 16 persons appointed for
eight years by the President, with the advice of the Senate, part to retire each
two years, and all former Presidents, each to receive a salary of $10,000, except
that 4 of the 16, the Secretaries of the Treasury, Agriculture, Commerce, and
Labor, shall be ex officio members. This body shall employ financial experts
of the highest standing as advisers and to serve as governor and deputy gov
ernors. It shall take charge promptly and organize the system, $5,000,000 being
appropriated for the purpose.
If some time an amendment to the Federal Constitution to that effect is
adopted, the council shall become a coordinate branch of the Government on a
par with the executive, legislative, and judicial branches. The council may
establish branches, using post offices where convenient, and employ agents. This
completes the organization, but a final section is added creating the “ United
States Monetary Congress,” a public Federal body of 72, one elected by the
people of each State for four years, half each two years, and 24 appointed, half
each two years, by the President, with the advice of the Senate.
This body, to be chosen in 1914, shall thereafter select all members of the
United States monetary council, which is the executive body managing the
business. The monetary congress meets once each year, membership being
honorary, each member receiving only his expenses.
If the creation of the monetary congress is deemed unnecessary, that section
can be stricken out, leaving the council in full and supreme control.
As every State is vitally interested in an adequate supply of currency and
has its own special local needs, as well as the Federal Government, and in
view of the “ farm-credit bank ” feature of this bill and the interest therein
of the rural communities of each State, the establishment of a United States
monetary congress representative of all sections and keeping the power of
ultimate control of the public currency in the people themselves would seem
to be wise and the best method of insuring public responsibility on the part
of the council and for keeping the whole system on a high and dignified plane,
free from partisan politics and Wall Street influences. It seems to be the
best way to make the system permanent.
The council needs no capital stock, because the cash reserve of every bank
is made 15 per cent of their deposit liabilities, and two-thirds of such legal
reserve must be kept permanently deposited with the council. This merges
nearly a billion of dollars of actual cash in one “ central reservoir” under
public control, provided all State banks also come in, as they no doubt will do
to escape a tax of 1 per cent imposed on their total deposit liabilities if they
stay out. This plan also will defeat the threat of big national banks to convert
their institutions into State banks.
The council may use these bank reserves and the public currency and
reserves in rediscounting for the banks, chiefly commercial paper, or rather
loaning same to banks on such collateral in order to get it into circulation
among the people for the general welfare. The council fixes its general dis
count rate or currency tax, same to be uniform throughout the country. This
plan keeps the Government out of the banking business and the banks
out of Government’s business of issuing currency and regulating its
volume. The chief purpose of the council is to get the public currency into
circulation among the people, and it uses the banks because they are ready
and safe agencies for such purpose. The banks are allowed fair compensation
for the actual service they render, but they must pay for currency what it
is reasonably worth, and the profits all belong exclusively to the Federal
Government.
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B A N K IN G
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All kinds of currency, including gold certificates, greenbacks, and bank-note
circulation, is to be gradually called in and canceled. In its place shall be
issued new national currency of just one kind in convenient denominations.
This will be paper money that is an obligation of the Government, a full legal
tender in the United States for the payment of any debt, public or private,
redeemable in gold, and secured by a reserve of at least 33J per cent of actual
gold coin or bullion held by the council. The Government now holds enough
gold to completely reorganize the Nation’s entire money supply on that basis,
practically without expense.
Half of the cash reserve to be deposited by banks with the council may be
2 per cent United States bonds. This will retire half of the bank currency
and enable the banks to at once market half of their 2 per cent bonds at par.
The council is authorized to gradually buy from the banks at par the balance
of their 2 per cent bonds as bank currency is retired, paying for such bonds in
the new national currency. This saves the banks from all loss on 2 per cent
bonds and avoids the big interest expense that must be paid by the Govern
ment year after year if 2 per cent bonds are refunded into 3 per cent bonds or
are allowed to run on indefinitely as security for bank currency.
No one will question the soundness of this reorganized currency, for every
body must accept it at par; it is redeemable on demand in gold and secured by
a reserve of actual gold, conceded in the Aldrich bill to be ample even without
Government guaranty behind the currency and also in the administration’s
bill; and behind every dollar will be the entire faith, credit, and taxing power
of the richest and greatest Nation on earth.
The Government is as well protected against loss in the attached bill as under
the regional-reserve plan. The council always will know the condition of each
bank. If not sound, it can borrow no currency; if sound, it can borrow a lim
ited amount on collateral believed to be ample. Then the council has a first
lien on all the assets of the bank and upon the legal cash reserve deposit of
the bank in the hands of the council at all times and which may exceed the
amount of currency borrowed. Finally, if losses occur during the year the coun
cil apportions such losses and they are paid by all the banks of the country in
the system. This practically puts 25.000 banks, if all join, behind each loan
made to any bank. This plan gives the Government better protection against
loss than any other proposed plan. If this be true, the cumbersome new ma
chinery— the suggested regional reserve central banks— are unnecessary, and it
will be more simple, easy, and practicable for each bank to deal with the Gov
ernment’s council direct or with its branches. A bank then will get as a legal
right and not as a favor whatever its condition and need justifies and without
asking the permission of other competing banks or a regional private money
trust standing between it and the Government, the source of all currency, with
power to block such aid.
As this plan provides a safe, scientific, deliberative, dignified, law-governed
public body behind which is the responsibility and good faith of the Federal
Government, a currency conceded to be sound, a plan for getting it into circula
tion that guards against any loss, and provides ample currency and credit elas
ticity that will protect all banks and make money panics impossible, what more
do we want?
If there is serious objection to the guaranty of bank deposits, the mutual
guaranty by all banks of the solvency of each bank by a fund created in the
hands of council for that purpose, that section can be eliminated. But why
should not this be done? This section authorizes the plan, but does not make
its adoption by the council mandatory. Deposits are enticed into banks partly
because the Government by its course leads the people to believe banks to be
safe and sound. It has the power of examination and the responsibility of
keeping the banks sound. Why, then, should not the council provide means by
which under all circumstances the depositors will be protected against loss, the
risk and slight cost to be apportioned among all the banks according to total
resources, respectively? Would not that course put all banks at work purifying
bank management to avoid losses?
Transfer of the management of the postal savings system to the council puts
postal savings deposits immediately back into circulation through the council
and the banks. It provides a ready-made organization that can be more or less
used by the council— every city having a centrally located post-office building
with ample room for a branch or sub office of the council where it will be
handy for the banks to clear their checks and arrange for currency and redis
counting. In time every important post otfice can be connected together, and
B A N K IN G
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CURRENCY.
1463
with the council and its branches and with the Federal Government, with a
telegraph and telephone system owned by the Government. A mailing and ex
press system will be established that will fac’litate and cheapen the cost of
doing the banking business of the country and increase its safety and efficiency.
If the banks will study this bill without prejudice. 90 per cent of the 25,000
banks, all but the big banks in various sections affiliated with Wall Street,
will support it, because it will benefit the banks as much as anybody.
This bill makes raids on the public gold reserve to’ injure the Government’s
credit a felony. Who objects? It makes it a criminal offense for banks in
concert to call in bank loans and injure prosperity, pinch business, cause strin
gency and perhaps panic for the purpose of forcing political or legislative action
for the benefit of conspiring powers of privilege and against the general wel
fare. Who objects?
It requires a bank to treat its customers fairly and without discrimination
as to inlerest. rates The trust that borrows at 1 cr 2 per cent while its weaker
competitor must pay the same bank 6 per cent may object, but the average
business man will not.
This bill makes it unlawful for any qualified bank to charge over 7 per cent
on either time or call loans. Wall Street will object because its chief means of
enticing the money of the whole country away from legitimate local business
and into its great gambling game is the running up of interest rates on call
loans to 10, 50, 100, 200, and once to 1,000 per cent. This is one of the chief
means used to start panics, and should be stopped by law. The best way to
prevent panics is to remove the causes, making banks safe in a panic is not
sufficient. Panics must be stopped altogether by removing the causes if the
business and prosperity of the country is to be made safe and permanent.
The Government can do these things better than anybody else, because it has
power. It can change the laws and invoke the criminal code to protect the
people against these evils if necessary. Only the Government can create a
financial power greater than Wall Street and its allies and emancipate the
25,000 banks and all business from the expensive, sinister, and dangerous domi
nation of high finance. And this bill will accomplish that result easily and
quickly in the only way it can be doue. Why not uow make a complete and
thorough reform of the country's banking and monetary systems on these ra
tional and conservative lines?
The “ farm credit banks’’ authorized by this bill will be a great blessing ro
the farmers. It will facilitate the .movement of crops and help reduce the cost
of living. It provides the only safe and legal plan by which currency owned
by the Government can be made available for the use of the farmers direct at
moderate interest rates and without risk of loss to anybody. In this way the
surplus revenues of the Government can be made to help move to market the
cotton, wheat, corn, and other crops in precisely the same way that such money
in the past has helped industries in the cities through the banks.
There is no favoritism in this bill to any class, clique, or interest. Everybody
is put on a plane of absolute equality, including the banks. That should be the
policy and practice of Government always.
The permission granted to banks to make safe farm loans will help the
farmers as well as the banks, and the plan for allowing national banks to open
and conduct branches in foreign countries, under proper restrictions, will
create powerful support for the important work of extending our foreign trade.
No honest banker or law-abiding bank should fear the severe penalties imposed
on those who knowingly break the law or rob their customers and banks by
exacting for themselves secret commissions in transactions with the banks of
which they are trusted officials.
GOT-.D s t a n d a r d .
The act of March 14, 1900, established in this country the single gold standard
of value. No doubt it will be the permanent policy of this Government. Inter
national balances always are settled in gold
The balance of trade in our
favor each year now is about $500.000,000; that is, we export or fell that much
more than we import or buy. This has enabled us to accumulate in this
country nearly $2,000,000.000 of the $7,000,000,000 comprising the world’s entire
stock of gold.' We have enough actual gold to put behind every dollar of the
$3,000,000,(KK) constituting the entire stock of all kinds of money in the United
States, a 50 per cent reserve of actual gold. Our monetary position is the
strongest of any nation and would be impregnable if we had a sound and scien
tific system such as proposed in this bill, instead of the ridiculous patchwork
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B A N K IN G
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now in use. With a good monetary and fiscal system our foreign trade can be
multiplied and the United States ultimately enabled to dominate the finances
and the trade and commerce of the world. If our exports fall or imports in
crease unduly, so that the annual balance in our favor is less than the total
of what each year we pay as interest and dividends to foreign holders of Ameri
can securities and that is spent by our citizens in foreign travel, our stock of
gold will begin to shrink and go abroad. This causes a corresponding shrink
age in the cash reserves of the banks and forces the banks under the law to
reduce the volume of their loans to business men several times the amount of
such shrinkage of bank reserves caused by the exportation of gold. In other
words, the borrowers from banks must, on the average, curtail their business
operations and pay up $4,000,000 to $10,000,000 of their bank credit loans for
each $1,000,000 of gold sent out of the United States. It is, therefore, vital
to American prosperity to hold or increase our stock of gold. This can only be
done by increasing our exports or reducing imports or purchases abroad or by
buying gold in foreign countries with American securities or Government bonds
on which we must thereafter pay interest annually.
The tariff can and should be made an effective “ governor” or instrument
for regulating international commerce from day to day, month to month, and
year to year so as to absolutely insure that we always will sell more than we
buy abroad, and thus obtain a balance of trade in favor of the United States
at least large enough to hold our gold. Some time the tariff must he taken out
of politics and away from party graft and favoritism and administered strictly
as a fiscal matter by a department of the Government in close, daily cooperation
with the United States monetary council. It can give protection to our in
dustries and agriculture, not to help this man or that corporation make a profit,
but chiefly to insure general industrial and agricultural prosperity so that
exports and imports will be so regulated that our gold will be retained and our
financial and commercial position always be sound and prosperous.
Instead of a protective tariff or a revenue tariff, the United States needs a
progressive tariff of the character and for the purpose indicated, more than it
needs anything else, excepting only an ideal money and banking system.
The said act of March 14, 1900, imposed upon the United States Government
the duty and whole burden of maintaining the gold standard and providing a
gold reserve and for the redemption of all its currency in gold; and it was
required to issue its interest-bearing bonds without limit when necessary to
buy abroad gold with which to accomplish these mandatory requirements.
While the banks get a large share of the benefit, the law imposed on them no
share of this burden and did not even reqiure them to cooperate with the Gov
ernment in such matters.
In fac', in the past, national banks existing under Federal laws granting to
them such special privileges have actually helped organize deliberate, treason
able raids upon the Government’s gold reserves for the purpose of injuring the
public credit and forcing the Government to issue, for the profit of the con
spirators, long-time bonds bearing high rates of interest to buy back the very
gold that such interests had thus improperly taken away from the Public
Treasury. The at'aehed bill makes such treasonable raids a felony, punishable
by fine and imprisonment. It also obligates the banks to cooperate with the
Government in maintaining the gold standard and public reserves by author
izing the council to require the banks to pay their obligations to the council in
gold when the public interest requires it, and by requiring the council to appor
tion among all the banks, according to their total resources, respectively, onehalf of any expense incurred by the council and the Government in maintaining
the gold standard and gold reserve, if any such expense ever is necessary.
The present system tends to range the banks in opposition to the Government
whose laws give them life, power, and profits. The bill herewith reverses this
condition and makes P for the interest of every bank to guard and protect the
credit of the council and the National Government, and will greatly strengthen
the Republic and its institutions at the foundation by making 25,000 banks
scattered throughout 48 States, and the business interests dependent upon such
banks, all active and interested allies of the Federal Government, through the
United States monetary council, in the supreme work of establishing and for
ever maintaining a sound and healthy national prosperity that will bestow its
impartial blessings upon all the people of the United States.
Very respectfully, yours.
A lfred
C ollege
H il l , C in c in n a t i, O h io ,
A u g u st 20, 1913.
O w en
C r o z ie b .
B A N K IN G
AND
E x h ib it
An
1465
CURRENCY.
A.
I d e a l M o n e y P la n .
[ A d e fin it e p la n f o r b a n k in g a n d c u r r e n c y r e fo r m , p r e p a r e d b y r e q u e s t , f o r p r e s e n t a
tio n t o th e c u r r e n c y c o m m it t e e o f th e H o u s e C o m m itte e o n B a n k in g a n d C u r r e n c y a t
W a s h in g t o n , b y A lf r e d O w e n C r o z ie r , o f C in c in n a t i, O h io , a u t h o r o f t h e fin a n c ia l b o o k s
T h e M a g n e t a n d U n it e d S t a t e s M o n e y v . C o r p o r a t i o n C u r r e n c y .]
M arch
2, 1913
: Responding to your kind invitation, I will venture to outline an
ideal system and machinery for accomplishing monetary and banking reform,
and for thereafter regulating the volume and disposition of the public currency
to secure elasticity and other needed improvements in the interest of all the
people. Then a definite plan for reorganizing the country’s entire money supply
on a sound gold basis will be suggested. The aim has begii to eliminate the
objectionable and utilize the valuable portions of other proposed plans, and thus
construct a compromise that conservative business men, as well as the masses,
will consider reasonable, fair, and just to all concerned, and yet safe, patriotic,
and economically sound.
G entlem en
PU BLIC CONTROL.
It is assumed that private control of the public currency now is impracticable
and impossible. The Democratic and Progressive Parties in their platforms
oppose the private-control plan, and two-thirds, and possible 90 per cent, of the
voters favor Government money and object to corporation currency.
As public control is inevitable, it should be the best attainable. The plan
adopted must absolutely bar out so-called Wall Street influences and partisan
politics. The public body or Government agency controlling the country’s 3
billions of cash and over 15 billions of bank credit based on such cash will to
a large extent have supervision and direct control over the 25,000 banks and,
through the loans of such banks, indirect power over the business activities of
every individual and corporation.
President Garfield once said that whoever controls the supply of currency
and bank credit will largely control all American business. Thomas Jefferson,
when opposing the issuing of public currency by a private central bank, de
clared that a private bank issuing and controlling the volume of the public
currency would be more dangerous to the country and the liberties of the people
than a standing army. Andrew Jackson when President took the same position.
That, historically, is the Democratic policy. It is now the view of the progres
sives of all parties.
Authorities agree that the prices of all securities, property, and human labor
can easily be raised and lowered simply by increasing and decreasing the vol
ume of money in circulation or the general discount rate, thus vitally and con
stantly affecting the material welfare of all the people. Therefore it is impera
tive that the public body wielding this life and death power over the prosperity
of the country and the welfare of all banks and individuals be honest, disinter
ested, efficient, intelligent, independent, deliberative, businesslike, patriotic, and
law governed.
That is too much power and discretion to put into the hands of one public
official or a small appointive commission or the executive committee or board
of directors of one private corporation run for profit, like the proposed Aldrich
central bank. Even a lawful misuse of such power by intentionally or igno
rantly inflating and contracting excessively the volume of currency or improp
erly manipulating the general discount rate may unjustly increase the interest
burden on all business and the living cost of every American home, or, on the
other hand, wreck prices, demoralize industry, close factories, plunge millions
into idleness and distress and perhaps cause panic and general ruin. The
forced or voluntary wholesale contraction of bank credit— bank loans— exces
sively by the big banks acting in concert will always quickly create a general
financial stringency that may precipitate a panic. In the wrong hands this
power of elasticity may be a dangerous engine of destruction, but properly
safeguarded and in wise and patriotic hands it will be the most useful and
beneficent means for regulating and stabilizing prices and promoting a sound
and steady and permanent prosperity for the good of all the people of the
United States.
The Treasury Department is part of the executive branch.
So are commis
sions like the Interstate Commerce Commission. These are under the Presi
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dent and subject to bis power of appointment and removal. There is danger
that this great power over the banks and country sometime might be improperly
used for partisan purposes or be secretly bartered to the powers of privilege for
campaign funds or support if exercised by the Treasury or an appointive com
mission. When it thus became a football of politics and an instrument for
granting favors and practicing unjust discrimination the aroused people soon
would abolish the system. No plan will be permanent unless it is right, sound,
patriotic, scientific, just, and impartial as well as efficient What is most
needed is a scientific and sound system that satisfies all the people as well as
the banks and business men. Then it will be permanent.
REPRESENTATIVE BODY NEEDED.
No system will long satisfy the people unless they have a reasonable voice in
it. Therefore this power should be in the hands of a representative body. At
least a majority of the members should be chosen by popular vote. The people
of each State should elect one representative, because every State has its own
special currency and credit needs. And it is wise to be sure that no section of
the country ever will feel that its rights and interests are being ignored.
The States have the right to demand representation to guard the welfare of
State banks and trust companies and those business interests dependent upon
such institutions, for over two-tliirds of all banks are State banks. Also, because
States legally can authorize the issuing of currency, but now are prevented by
a prohibitory 10 per cent Federal tax on such State currency.
On the other band the Federal Government should be well represented. It
has a constitutional right to issue currency and exclusive right to coin money
and regulate its value. For 50 years practically all currency has been issued
under its exclusive authority, and this plan has proven more safe and sound
than any other. And it has the means of detecting and punishing counterfeit
ing. The States will be willing to have currency issued exclusively by Fed
eral authority, provided their citizenship can help choose the members of the
public body that is to regulate, control, and have the disposition of their entire
money supply and regulate the volume of bank credit.
A body in which the Federal Government and each State is represented should
best fit the needs of the present emergency. To make it permanent and su
preme over its functions it should be a coordinate branch of the Government.
This will require an amendment to the Federal Constitution. Ultimately such
amendment can be adopted. Meantime Congress has power to create such a
body and put it to work at once. It should do so without unnecessary delay,
for the present system is defective and dangerous. The following plan is tenta
tive and of course subject to such modification of details as discussion and
thought may prove to be wise.
u n it e d
states
m onetary
c o u n c il .
A new branch of the Federal Government shall be created by act of Con
gress. It shall be called the “ financial department.” Ultimately it shall be
made a fourth coordinate branch by amendment to the Federal Constitution. It
shall have the same supreme and exclusive control of all matters of banking
and currency and other matters committed to it by Congress that the execu
tive, legislative, and judicial departments have over their respective functions
and no more.
The financial department shall consist of the United States monetary council
and its appointee subordinates. The council shal1 be composed of 75 members
called “ councilors.” One of these shall be elected by the qualified electors
of each of the 48 States, subject to recall by vote of such electors. The other
27 shall represent the Federal Government. Of these the Vice President,
Speaker, Secretary of the Treasury, Secretary of Commerce and Labor, and At
torney General shall be ex-oflieio members, the other 22 to be appointed by the
President without regard to party affiliations with the advice and consent of the
Senate. Any appointed councilor can be recalled by the President and Senate
on the initiative of either. The term shall be four years, but half of the
elective and half of the appointive councilors shall be chosen every two years.
Council shall meet regularly in February of each year and specially when
called by its governor, managing board, or on request signed by a majority of
the councilors. It shall elect from its membership a governor and two deputy
governors. After the first adjustment each deputy governor shall serve as such
B A N K IN G
AND
CURRENCY.
1467
four years and then automatically become governor for two years. Council
shall select from its membership 12 councilors, three each to serve four years.
These, with the governor and two deputy governors as ex officio members, shall
comprise the managing board of 15. Such 15 appointees at all times shall be
subject to recall by the council.
The United States monetary council shall have authority to adopt ordinances,
civil and criminal, pertaining to all matters within its jurisdiction, same to have
the status, character, force, and effect of laws passed by Congress and be
enforced in the same manner.
The managing board shall have full charge and conduct from day to day of
all the business and affairs of and for council, subject to supervision, approval,
or revocation by council The managing board shall not adopt ordinances, but
it may make, alter, and repeal rules and regulations for the conduct of the
business, guidance of its agents and employees, and the control of individuals and
corporations subject to the regulation or supervision of council. The board
shall appoint, discharge, and fix the compensation of all agents and employees
and direct their work. It shall employ seven advisers, who may or may not be
members of council, to be “ business managers.” These shall be financial and
business experts of the highest skill, knowledge, and ability, paid whatever
salary their valuable services may be worth. The business managers are to ac
tively manage the business of the council, under the direction of the managing
board.
The business managers and members of the managing board must divorce
themselves from all outside business and entanglements and give their whole
time to council affairs. Each shall take the usual oath of public servants.
They and all agents and employees, on or before February 1 every year, each
shall file with council a sworn declaration that during the preceding fiscal year
he has faithfully and honestly discharged his official duties free from all par
tisan and improper influences, and that he has not sought, received, or been
offered any pecuniary or other consideration or benefit other than that paid by
council for any act or omission pertaining to his official duties or given out
any information about council’s business or proceedings without express au
thority to do so A false declaration shall be made perjury, punishable as such.
The compensation of the councilors shall be fixed by Congress in the law. Pref
erably no salary shall be paid. Each councilor might be allowed, say, $25 per
day during council’s sessions, and actual railroad fare. This would remove the
position from the scramble of ordinary partisan politics and insure councilors
of the highest character, standing, and business experience; men who will serve
for the honor and as a high patriotic duty. It should not take more than a
month’s time in any year.
Council shall fix the salaries of its officers and of members of the managing
board.
The managing board shall fix the salaries of the business managers and all
other agents and employees.
All salaries, compensation, and expenses shall be paid by council from funds
under its control. Council will be entirely self-sustaining, and also will pro
duce a large, steady, annual revenue for the supi>ort of the Federal Government.
c o u n c il ’s
f u n c t io n s
and
pow fbs.
No doubt the country would consider it perfectly safe to leave, without re
serve, to a dignified and representative body of such high character and intelli
gence the whole duty and authority of devising and executing in the public
interest a progressive and practical system of banking and currency. No other
plan yet suggested proposes an agency so representative, responsible, disinter
ested, and competent or a system so safeguarded and scientific.
But there can be no objection, if Congress deems it wise, to imposing upon
the council in the act of Congress or otherwise certain specific duties as well as
granting to it the necessary powers, such as, say:
1. The existing gold standard shall be maintained.
2. All money shall be kept at a parity with gold in value and guaranteed by
the Federal Government.
3. All money shall be full legal tender, each dollar always good anywhere to
lawfully pay a dollar’s worth of debt or purchase.
4. All currency shall be redeemable in gold.
5. All currency shall at all times be covered by a reserve of at least 50 per
cent of actual gold, except that for purposes of elasticity and to meet temporary
emergencies the gold reserve may be reduced to not less than 33J per cent.
1468
B A N K IN G
AND
CUBRENCY.
6. It shall be the policy gradually and as soon as practicable to retire all
kinds of money except subsidiary coin and substitute just one kind of goldsecured, legal-tender national currency in convenient denominations.
7. Silver not needed for subsidiary coin may be held as part of the reserve
at its current gold value.
8. As bank-note currency is gradually retired and canceled by council it shali
purchase at par from the banks the 2 per cent United States bonds used to
secure such currency.
9. All bank reserves shall be merged into one general fund for the protection
of all banks and be deposited with the United States monetary council, except
that any bank may retain in its own vaults not exceeding two-fifths of the mini
mum legal cash reserve, which minimum cash reserve for every bank shall be
equal to 15 per cent of its total deposits.
10. Council may use portions of such deposited reserves and other money
under its control to rediscount for the banks under strict safeguards shorttime genuine commercial paper; also in emergencies to otherwise protect the
banks and relieve the legitimate business of the country through the banks.
11. Council from time to time may fix its general discount rate, which shall
be uniform throughout the United States.
12. Council shall not be a bank or do a general banking business in competion with banks. It shall accept deposits only from banks and the Government.
13. Council shall not unfairly discriminate or indulge in favoritism in the
administration of its business. Each sound bank shall be entitled to equal
treatment as a legal right and to adequate relief in time of trouble on applica
tion to council direct. This right shall extend to State banks and trust com
panies, including savings banks, so far as practicable, on some basis to be de
vised by council.
14. The Government shall deposit with council as received its public revenues
and funds, including postal savings bank receipts, and shall make its disburse
ments through council.
15. Council may issue United States exchange and authorize banks to sell
such exchange against their free deposit balances with council.
16. Council may establish and maintain such branches and agencies as it
may deem necessary.
17. Council shall have the custody and administration of the Federal mints,
gold reserve, and trust funds, and exclusive charge of all currency and mone
tary matters and of the authorization, supervision, and regulation of banks.
18. Holders of national currency shall be entitled to exchange it for all
gold needed for any legitimate purposes, but the organization or execution of
deliberate raids on the gold reserve for the purpose of embarrassing council
or forcing the Government to issue bonds shall be made a treasonable felony
punishable by severe fine and imprisonment.
19. The private disclosure of confidential information about the business or
action of council to unauthorized persons in advance of official publication,
made by any officer, agent, or employee of council, shall be punished by fine or
imprisonment, or both.
20. Any attempt improperly and privately to influence any officer, agent, or
employee of council to do or omit any act pertaining to his official duties, by
offering reward, benefit, or otherwise, shall be made an offense punishable by
fine or imprisonment, or both. And it shall be a like offense with the same pun
ishment for any officer, agent, or employee of council to accept or solicit any
such reward or benefit.
21. No officer, agent, or employee shall while in the service of council buy or
sell or cause to be bought or sold for himself or others any securities or property
quoted on any stock exchange or board of trade, or privately advise others as
to any stile or purchase of such securities or property. Violation of this shall
be an offense punishable by fine and imprisonment, or both.
22. Council shall annually prepare and publish to the country a full report
showing the monetary condition of the Government, and such other information
as council may consider necessary to keep the people informed. Except in ex
treme emergencies, weekly changes in the discount rate and other acts likely
to influence the range of prices or the course of private business shall be made
public at 4 p. m. on Saturdays, and not before.
C A U SE OF H IG H PB ICES.
Since 1890 the country’s stock of gold has increased from about $600,000,000 to
over $1,800,000,000. The total volume of money of all kinds has increased from
B A N K IN G
AND
CURRENCY.
1469
$1,700,000,000 in 1890 to $3,600,000,000 in 1912. But the banking power of the
United States, chiefly loans of bank credit, has grown from $6,000,000,000
(7,909 banks) in 1890 to $25,000,000,000 ( 25,195 banks) in 1912.
It is conceded by all economic and financial authorities that an increase of
the purchasing power of the people by increasing the volume of money of any
kind in circulation tends to raise prices of commodities, securities, and other
property by increasing the demand. Also that reducing the quantity of avail
able money produces the opposite effect. It is immaterial whether such in
crease is gold or good paper currency. It is also conceded by all that an equal
increase or decrease of the volume of bank credit (bank loans) available for
business produces precisely the same effect on prices and to the same extent as
inflation and contraction of the supply of money, and for the same reasons.
Such “ credit ” is used as a substitute for money. The demand price for a
horse is increased when two want to buy, notwithstanding only one has money,
provided the other has bank credit against which he can draw a good check,
even if his bank account was created solely by discounting his promissory note.
And over 15 billions of bank deposits were created that way, without deposit of
any cash, the total cash owned by the 25,000 banks being only one and a half
billion dollars.
Since 1S90 the volume of money (including the gold increase of 1,200 millions)
has increased 1,900 millions, while the volume of bank credit or “ banking
power” has been inflated 19,000 millions of dollars. Whatever advance in the
general range of prices has been caused by increase of the supply of gold
and other money, the enormous inflation of bank credit has caused 1,000 per cent
greater effect in increasing the cost of living.
The 46 nations of the world together possess only 13 billions of all kinds of
money, of which less than 7 billions is gold.
The world’s banking power, chiefly bank credit in the shape of business loans,
is about 60 billions. The United States has 20 per cent of all the money in
the world, but 40 per cent of the earth’s “ banking power,” much of it inflated
bank credit.
Since Columbus discovered America in 1492, the whole world has produced
only 13 billions of dollars of gold. Yet during the 22 years since 1890 the banks
of the United States alone have created and put into circulation 19 billions of
bank credit that is used as a substitute for money and often in place of gold.
Thus bank credit, mere financial wind, is coming to largely subvert, if not sup
plant, gold as the measure and regulator of all values. It is destroying the gold
standard, which is good in theory but growing useless in practice. While 23.22
grains of gold under the law is a dollar, that dollar and that quantity of gold
will buy little more than half as much commodities or property as it did before
bank inflation raised prices, or, in other words, cheapened money and gold by
reducing its purchasing power.
Indirectly through the international channels of credit, finance, and commerce
this American bank inflation has largely caused the increase of prices through
out the world. Because wages have not increased as fast as commodity prices,
the United States is chiefly responsible for increasing the burden on the entire
human race by increasing relatively the cost of living.
The monetary experts and economists of the world largely hold that rising
prices and disturbed values are chiefly due to increase in the output of gold.
It would seem that in thus blaming gold and ignoring the tenfold greater in
crease of bank credit they are “ straining at a gnat and swallowing a camel.”
Some even propose as a cure-all that gold be “ watered ” like stocks, by increas
ing the proportion of alloy or the charge for coinage.
BRIDLE T H E
BAN KS.
The need of the hour is some effective means for putting a reasonable check
on this wild and reckless and dangerous inflation of bank credit. It has been
shown that banks will not check themselves and lose the chance of increasing
their interest profits for the good of the country and to maintain sound and
stable prices. The blame can not be fixed upon any one bank, so all go on
inflating their credit to the utmost legal limit, and new banks are being organ
ized constantly. It is the duty of Government to gradually put on the brakes.
It can stop further unhealthy inflation, even if it may be difficult to safely re
duce the present volume of bank credit. This must be done quickly, or the
wildest financial crash in the world’s history will gather and break and engulf
all. Only the National Government has sufficient power, and it is powerless
1470
B A N K IN G
AND
CURRENCY.
until Congress provides the necessary machinery. The council plan is best
suited to this purpose. No harm will come to the legitimate interests of the
banks, but banks must be restrained so they will not harm everybody else to
unnecessarily increase their own profits.
The only legal limitation on the inflation of “ deposits ” of bank credit by
discounting paper is the requirement that each bank must have a reserve of
cash equal to 25 per cent of such deposits if in a reserve city and 15 per cent
elsewhere. The volume of credit loans of the 25.000 banks now is 10 times
their aggregate cash, because some money sustains a volume of inflated credit
in two banks. Country banks may lawfully deposit three-fifths of their cash
reserves in central reserve banks.
The United States monetary council by contracting the volume of currency
could thereby at once automatically shrink the cash reserves of the banks and
force them to reduce the volume of their ciedit loans at least 10 times such
shrinkage of cash reserves; and when legitimate business expands and requires
more bank credit, the council, by increasing the currency available, will cause
a corresponding increase of bank cash reserves and thereby increase the loaning
power of the banks 10 times such increase. It all will be very simple and easy
and effective as soon as Congress empowers the Government to create and use
the necessary centralized machinery for doing it scientifically and safely. It
can be accomplished by increasing and decreasing from time to time the quan
tity of commercial paper rediscounted for the banks by the United States
monetary council.
PRIVATE CONTROL DANGEROUS.
It was this imperial power over all banks and business that was sought by
the powerful interests promoting the Aldrich private central bank plan, for
with it they could at will force all banks to do their bidding, and for the specu
lative profit of such interests arbitrarily and automatically put prices up and
down over and over by inflating and contracting the corporate currency and
raising and lowering the rate of discount. In the hands of a central bank
owned and run by the banks this dangerous credit inflation would be certain
to get worse instead of better, for further expansion would increase bank
profits. Safety can be had only by absolute and exclusive public control by a
Government body in charge of the whole public currency, with practical scien
tific machinery for using the power of currency elasticity to promote safe pros
perity and check dangerous speculation and improper increase of prices by au
tomatically regulating the aggregate volume of the credit loans of the 25.000
banks of the United States.
There can be no reasonable objection to one centralized agency handling the
situation if it be a public instead of a private agency, provided control of these
great power is not centralized or sectional, but is widely distributed by being
vested in a large, deliberate, representative body composed of influential men
from every one of the States. A centralized power under the decentralized
control seems to be the only way to obtain both popular control and business
efficiency. Without popular control the plan will not be permanent, and with
out business efficiency it will be impossible to cure the dangerous defects of the
present evil system.
CO M M ER CIAL PAPER.
When banks increase their deposits by discounting genuine commercial paj>er
it is healthy and sound and not improper inflation, no matter how great the
volume may be. It all represents legitimate commercial transactions, and such
paper when due will be paid and the triangular deal finished. But bank loans
of credit instead of cash to customers to use for purchasing stocks and bonds
and other permanent investments is improper and unsound credit inflation. No
one knows when such loans will be liquidated. For these reasons council
should largely require genuine commercial paper as security for currency sup
plied by rediscounting for the banks in a guarded and restricted way. As the
volume of commercial paper rises and falls automatically with the volume of
legitimate commercial business, this plan will establish a sound, wholesome,
and useful currency elasticity for the good of the people and all business.
Such rediscounting is not ordinary banking. The chief object is to get public
currency into circulation. The plan uses commercial paper instead of United
States bonds as security for currency loaned to the banks to get out among the
people.
BANKING AND CURRENCY.
1471
A special distinguishing form of blank promissory note can be prepared and
furnished by council for the use of those having genuine commercial paper
discounted at banks, and council shall rediscount only such marked paper.
Severe penalties can be provided against any person or corporation using such
a blank note except for genuine commercial transactions. The interest or dis
count rate charged by banks on this high-grade paper soon would be much
reduced, probably to 4 per cent, because the banks could rediscount it with
council. This has been the result in Europe. It would greatly reduce the bank
tax on business and lighten the burden on consumers and their cost of living,
for such interest is an expense that is added to the cost of commodities. The
use of United States bonds to secure bank currency reduced in like manner the
interest rate on nearly a billion dollars of Government bonds to a 2 per cent
basis. The banks will lose nothing by this reduction of interest rates, because
they will handle more paper with less risk. Because interest paid on other
paper, discounted for investment or speculation purposes, is largely only a tax
on the person giving his note, the General Government, in its monetary policy,
should, in the interest of the general welfare, discriminate in favor of com
mercial paper. If all banks permanently merge three-fifths of their $1,500,000,000 of present cash reserves and deposit same with council, that body will
have for its steady use nearly a billion dollars of actual cash, a sum equal to
half the total stock of the 25,000 banks.
PROFITS OF B A N K S .
The inflation of bank-note currency has been 100 per cent since 1900. Such
currency now is about $750,000,000. Banks easily could make the volume elas
tic if they would. The increase and decrease of bank currency is largely op
tional with banks. That is one of the chief objections. It is private control
of the public currency. The law allows contraction of bank currency $9,000,000
per month, or $108,000,000 each year. The banks will expand and not contraet
such currency, because that course is the most profitable for the banks. Banks
can be expected always to do whatever is most profitable irrespective of its
effect on the range of prices or the general welfare. That is one good reason
why regulation of the volume of the public currency and the national discount
rate can not safely be left to the banks or a central corporation owned and run
by the banks.
Banks have their rights and should be fully protected. But they are
not suffering for lack of profits. This valuable law-given special privilege
(denied to Individuals and other corporations) of inflating and loaning credit
that costs relatively nothing for interest profits, largely explains the fact that
the 25.000 banks with an aggregate capital stock of but $2,000,000,000 are
getting interest regularly on nearly 25 billions. Not every bank, however, can
equal the record of the First National Bank of New York that in 50 years, on
an original investment of $500,000, has made over $80,000,000 of net profits.
B A N K S AID W A L L STREET.
There is direct relation between this enormous inflation of bank credit and
the still greater inflaton of trust and other corporate securities. Trusts could
not be formed and floated without this bank inflation. Inflation of watered
securities has raised prices only because inflation of bank credit (bank loans)
has enabled the public to buy such securities. The stock exchange, assisted
by the banks of the country, now is able to keep the prices of billions of dollars
of listed securities far above intrinsic values. The country would be astonished
if it could learn the number of billions of such securities owned or held by the
banks as security for loans made to assist the purchase of such securities.
That is not legitimate commercial banking and it is dangerous.
The evils of the present system are growing at a compound ratio. Unless soon
cured they can not be at all. They may get beyond even the power of Govern
ment to remedy. No temporary expedient will answer. A patchwork makeshift
may delay the crash a little but it will be worse when the inevitable comes.
These are the warnings of conservatism, not an alarmist. The official figures
speak for themselves, and so plainly all can understand. The price-raising
inflation of the volume of available bank credit during the one fiscal year end
ing June 30, 1912, was $1,200,000,000. This is exactly equal to the total increase
in the country’s entire stock of gold during the 22 years since 1890.
1472
BANKING AND CURRENCY.
The bridle of law must be put on the banks so that they may be restrained
and guided for the good of all, including tlie banks. The public currency is the
only effective means, and its control must be public instead of private. A
United States monetary council of the character herein outlined would be the
best machinery for handling these powers with justice and safety to all and for
the general welfare.
This plan if adopted would also greatly strengthen the foundations of the
Republic by increasing the dependence of the most powerful financial interests
on the Government and its patriotic institutions.
N EW M O N EY PL A N .
An ideal monetary system now is possible. For the first time in its history
the United States is in position to make the change. Never before was there
sufficient gold in its possession. The Government now has more than a billion
dollars of the yellow metal, nearly a fifth of the world’s entii’e stock of gold.
A conspiracy of events, political, financial, monetary, banking, international, and
national, after a century of shifting uncertainty and repeated monetary chaos
have culminated in 1913 in a perfect condition for reorganizing on a sound and
permanent basis the monetary system of the greatest of all nations. This oppor
tunity may never again occur. Therefore the situation should be promptly
handled with courage, intelligence, and progressive statesmanship.
The entire public money supply should be reorganized on a permanent, sound,
scientific basis. All kinds of money except subsidiary coin should be gradually
replaced by just one kind of currency. This should be full legal-tender Govern
ment money, in convenient denominations, redeemable in and secured by gold.
Every dollar of this national currency should have behind it the faith and credit
and the entire taxing and borrowing power of the Federal Government and
whatever gold reserve may be necessary to make it safe and sound. It must
be legally good for the payment of any debt or purchase. No one ever can
question the soundness of such a currency. It never could depreciate. And one
of the highest duties of Congress is to provide the people with an ample quantity
of currency that always will be worth par in gold. That is an obligation of
sovereignty. It is one of the Government’s greatest constitutional functions.
Gold certificates and bank currency comprise over half of the country’s entire
money supply. Yet both are mere optional currency that anybody can lawfully
refuse when tendered for any private debt or purchase. Such currency is not
made legal tender by law. Why? Of the money in actual circulation among
the people, it is believed that less than 10 per cent is lawful money—legal
lender. Most people are unaware of this fact so vital to their interests. Some
have lost valuable property by foreclosure, because through ignorance or over
sight gold certificates and bank currency were at the last moment offered to
redeem, the tender being legally refused. The Government is a party to this
fraud on the rights of the people. Every dollar put into circulation under any
act of Congress should be real money, a full legal tender, “ lawful money.”
Gold should be used as collateral security, in the Government’s currency
reserve, and paper based on such gold for circulation purposes. This will be
more practicable and convenient and save the great loss by coin abrasion. It
is a nuisance to the banks to handle and store actual gold, and to the people
who tote it for pocket use. No one desires to carry the heavy gold, but all want
to be sure their paper currency always will be equal with gold in value and
purchasing power.
Currency elasticity is needed to facilitate business and protect the banks in
times of panic. That is a detail easily arranged if selfish interests will stop
trying to gain control of the public currency for private profit and special
advantage at the expense of all the people.
But it is vastly more important right now to reorganize the character of
all public money so that it will forever be scientifically sound as well as
elastic. If Congress will go ta the root instead of tinkering to mend some of the
branches, it will work a complete and lasting cure of the acknowledged glar
ing defects of the country’s monetary system. This question never will be
settled at all until it is settled right. The plan does not change the existing
gold standard. It only simplifies and improves it, so our Government will be
master instead of victim.
BANKING AND CUKRENCY.
ALDR ICH
, 1473
M O N EY P L A N .
The Aldrich money plan ultimately would take out of circulation and hoard
in the reserve of one private corporation—the central bank named national
reserve association—all public currency. Under the provisions of the pending
bill every dollar of Government money—gold, silver, gold and silver certificates,
greenbacks, and bank-note currency—could be permanently taken away from
the people and put beyond their reach. That corporation could and would
take from the Government and convert to its own use the entire public gold
reserve of more than a billion dollars without the corporation paying or the
Government receiving a single dollar of actual benefit. The corporation’s
entire expense, practically, would be the cost of ink, paper, and printing
of the corporate currency that it would run off on its printing press to the
extent of $2 or $3 issued against each dollar of gold or Government money
until all public money was thus gathered into its private reserve. The banks
owning all the stock of the central bank could deposit a billion dollars of their
billion and a half of cash reserves with the central bank. Against this cash
(say, gold certificates) the central bank could print and issue two billions of
corporate currency. This handed over to the banks and put into bank reserves
would increase the credit loaning power of the banks over $10,000,000,000 with
relatively no extra cost to the banks. The banks then could permanently
redeposit their reserves at interest in Wall Street, for the Aldrich bill allows
it. The central bank takes the billion dollars of gold certificates to the Gov
ernment and demands and receives in exchange a billion of actual gold, the
certificates being permanently canceled. Thus the corporation acquires and
the Government forever loses the biggest stock of actual gold in the world.
The Government and the people gain nothing. All this can be accomplished
in one week if the Aldrich bill should become law. In place of all this hoarded
public money will be substituted corporate currency not guaranteed by the
Government. It will not be full legal tender. It will be optional currency
that anyone legally can refuse when tendered for a private debt or purchase.
Yet it can be issued practically in unlimited quantities, billions of dollars,
by a corporation with but $200.000.<X>0 of net capital. Only a 50 per cent gold
reserve is proposed and 33J per cent is legalized. And there is no penalty
if the gold reserve is run down to 5 per cent, or to nothing. Moreover, section
41 of the Monetary Commission’s bill now before Congress authorizes “ a reserve
of gold or other money of the United States which the national banks are now
authorized to hold as a part of their legal reserve.” This makes all kind-!
of coin and currency except bank notes available for use as a substitute for
gold to “ secure” the corporate currency. While present bank currency can
not be counted as part of bank reserves, the corporate currency to be issued
by this coporation owned by the banks can be so counted. The $505,000,000
of silver, worth intrinsically about 53 cents on the dollar, would be a lawful
reserve, without a dollar of actual gold, to sustain $1,130,000,000 of corporate
currency on a 50 per cent basis, or $1,695,000,000 on a 33J per cent basis.
The $346,000,000 of greenbacks and no gold legally would secure on a 50 per
cent basis $692,000,000 of corporate currency and on a 33i per cent basis
$1,038,000,000. Instead of a genuine gold reserve as represented, the bill
legalizes the inflation of corporate paper currency to $1 .S22.000.000 on a 50
per cent basis, or $2,733,000,000 on a 33J per cent basis by using silver and
greenbacks in the central bank's reserve, without a single dollar of actual gold.
If the $1,057,464,264 of paper gold certificates also were drawn into such
reserve the corporate currency could be swelled (without a dollar of gold in
the reserve) to $3,936,000,000 on a 50 per cent basis, or $5.S94.000,000 on a
331) per cent basis. It is only a question of time when such optional corporate
currency will become discredited and depreciated and cause ruinous losses to
the people and all business.
The present paper currency (except gold certificates secured by 100 per cent
of gold) is only $346,000,000 greenbacks (secured by $150,000,000 of gold).
$480,000,000 silver certificates (secured by an equal amount of silver), and
$744,000,000 of bank-note currency (secured by an equal amount of United
States bonds) ; total, $1,570,000,000.
The Aldrich money plan is wildcat inflation and not “ reform.” Those who
contend that its possible unlimited issues of cor]>orate currency with that kind
of doubtful reserves and no Government guaranty would be sound will not
challenge the soundness of a limited issue of public currency guaranteed by the
9328°— S. Doc. 232, 63-1— vol 2-----33
1474
BANKING AND CURRENCY.
United States, made full legal tender by law for all purposes, redeemable in and
secured by actual gold in adequate volume.
The American Bankers’ Association and distinguished financiers now officially
committed to the Aldrich corporate currency can not successfully attack the
safety and soundness of this proposed gold-secured Government money. No cry
of “ rag baby,” “ irredeemable greenbacks,” “ unsound inflation,” “ unlimited
paper currency,” or “ fiat ” can be raised to prejudice the people against this
patriotic plan, for all currency will be founded on, redeemable in, and limited
by actual gold. And it also will help maintain the existing gold standard.
OUB BIG STOCK OF GOLD.
The United States Government had in its possession June 30, 1912.
$1,207,464,264 of actual gold. Of this $1,057,464,264 is held to protect an equal
amount of gold certificates (a 100 per cent gold reserve) and $150,000,000 to
“secure” the $346,000,000 of greenbacks. Besides this there is $623,818,171 of
gold in banks and in circulation. Our total stock of gold October 1, 1912, was
$1,841,382,435.
During the fiscal year 1912 orignal deposits of gold with the Government in
exchange for gold certificates aggregated $151,929,883. Of this the mines of
the United States produced $96,890,000. As the industrial consumption of new
gold was $31,439,347 and $151,929,883 was sold to the Government for monetary
uses, total $1S3,369,230, there must have been $86,479,230 of gold from abroad
or sources other than the year’s production of our own mines. If there is no
further increase in the yearly gold output and the 1912 average production and
industrial consumption is maintained, our mines each year will add $65,450,653
to our monetary gold reserve without a dollar of gold coming from abroad.
This gold would enable a yearly currency increase of $130,000,000 on a 50 per
cent gold reserve basis, or $256,000,000 on a 334 per cent basis. But if the same
amount comes from abroad each year and our increase of monetary gold con
tinues to he $150,000,000 annually, this put into the reserve would permit an
annual currency increase of $300,000,000 on a 50 per cent or $450,000,000 on a
334 per cent basis. If gold increased faster than the need for currency the
gold reserve can be raised above 50 per cent.
The actual increase in the general stock of money of the United States during
the fiscal year 1912 was only $92,911,673. the total stock of money of all kinds
now being $3,648,870,650. This indicates that without issuing bonds or resorting
to any unusual effort or expense, the Government will get enough gold simply
by exchanging at par therefor its gold-redeemable paper currency to enable it
to increase the public currency much faster than the growth of population and
still always maintain behind all currency a reserve of actual gold of 50 per cent
or more.
WORLD STRUGGLE OVER GOLD.
This will put the United States in a stronger monetary position than any
other Government in the world. It has a fourth and soon will have a third
of all the gold in the world. It will be impregnable, with practicable means for
defending the commerce and business of this country if in future years a de
clining gold production should cause a titanic struggle between the great nations
of the earth for physical possession of gold with which to settle international
balances and pay the interest on government bonds and other gold obligations.
It is possible if not probable that such a contest will occur. It may be years
ahead or very soon, according to future conditions. Gold mines are being
worked out and abandoned every year. It is considerable of a gamble whether
new discoveries will keep pace with the exhaustion of known bodies of gold ore
On the other hand, the demand for gold for both industrial and monetary uses
is steadily and enormously increasing.
China, with a quarter of the world’s population, soon will change from silver
to a gold basis. Other countries will likely do the same. The volume of in
ternational commerce that is settled for with gold is growing prodigiously.
There are 39 billions of the bonds of various governments all payable, princi
pal and interest, in gold. The gold-payable State, city, country, school, and
corporation bonds greatly exceed this volume of Government bonds. Wars and
rumors of wars are constantly increasing the total of the world’s bond obliga
tions. The 46 naVons of the earth together possessed in 1908 but $6,604,000,000
of gold. The total now is ness than 7 billions. Much of this is hoarded in Gov
ernment reserves and is not available for current commercial use. The yearly
BANKING AND CURRENCY.
1475
interest on all kinds of bonds that are payable in gold nearly equals the world’s
entire stock of gold. Besides this, probably more of the principal of such bonds
mature each year than all the gold in existence. What will happen if at some
future time payments, principal and interest, are demanded in actual gold,
according to the provisions of such bonds?
When that day comes, if ever it does, the United States will be in the best
position of any country, provided its monetary system is reorganized and per
fected on a practical basis that will enable it to hold and use its vast gold accu
mulations in an effective and rational way. Its resources, increasing wealth,
large international trade balance in its favor, and its comparatively low expense
for military establishment all tend to strengthen its relative position year by
year. But it should develop and improve its monetary defenses now in time
of financial peace before any crisis comes. Particularly so because the gold
standard law of March 14, 1900, granted the power and imposed on the Govern
ment the obligation to issue its interest-bearing bonds, in unlimited quantities
whenever necessary to get gold with which to maintain the gold standard and
make gold payments for currnecy and other obligations. As the Government is
now legally liable to an unlimited extent to maintain the gold standard and all
kinds of money on a par with gold, it would seem wise that it be equipped
without delay with the best possible machinery for protecting itself and the
people against such liability in the possible event of future trouble. As this
liability is on the Government itself, the machinery for dealing with the situa
tion should be absolutely and exclusively controlled by the Government for the
common good. To put the currency machinery under the control of private
interests and still leave the Government liable for maintaining the gold standard
and gold payments would be unbusinesslike, a reckless and inexcusable folly.
If such control, even indirectly, ultimately fell into the hands of American
representatives of the great private and corporate international owners of the
billions of maturing gold bonds of the world, they would have in their own
hands a perfect instrument for forcing the United States into debt countless
millions of dollars and saddle upon the people an annual interest burden of
enormous proportions, all without the slightest benefit to the Government or the
people. By demanding gold payments they could in time force the Government
to issue bonds to buy back from them at high prices the same gold. And this
could be worked again and again, an endless chain, a great bond trap
baited with gold. But so long as the Government retains in its own hands
exclusive control of the gold reserve and the public currency it is safe, provided
it reorganizes the system in the public interest instead of for the benefit of
selfish special privilege. The plan adopted should give the Government power
to compel the 25,000 banks to aid the Government in maintaining the gold
standard and the gold reserve. Otherwise the Government always will be in a
dangerous position.
MONET
REORGAN IZATIO N
PLAN .
Congress should by law provide for the gradual cancellation of all gold
certificates, silver certificates, greenbacks, and bank-note currency as such
currency comes in from time to time, and the substitution of one kind of Gov
ernment money issued against a gold reserve of at least 50 per cent. On
June 30, 1912,'the Government had on hand $1,207,464,264 of gold. By June
30, 1913, it will have $1,350,000,000. This does not include the $623,000,000
of gold in circulation, most of which soon would flow into and swell the gold
reserve. On a 50 per cent reserve this will enable an issue of $2,700,000,000
of Government currency, or more than enough to retire all kinds of paper cur
rency (including gold certificates), which now totals about $2,600,000,000.
And when the exchange is completed the Government will own the $744,000,000
of 2 per cent United States bonds now owned by the banks and used to secure
an equal amount of bank-note currency. The banks will be paid par for the
bonds in the new national currency. The Government will have converted most
of its interest-bearing bonds into noninterest-bearing currency. All these things
can be done in a relatively short time and practically without expense to the
Government. And it will save the people more than a billion dollars of future
interest expense that would have to be paid if the 20 per cent bonds were
refunded at 3 per cent and run for 50 years, as proposed by the Aldrich plan,
besides final payment of the principal of the bonds.
The only thing that stands in the way of the adoption of such a patriotic
and simple plan for practical and scientific reorganization of the Nation’s
1476
BANKING AND CURRENCY.
money supply is the selfish desire of private interests to get control of the
public currency away from the Government and into their private hands for
their own special profit and advantage. They pretend to fear that if the
people control they some time might overinflate the volume of money. There
is greater danger to the country from panics or stringencies due to sudden,
excessive, and repeated contraction of the currency under private control than
from inflation under public control. And with a fixed minimum gold reserve
provided in the law there can be no danger of any excessive currency inflation.
If the law permits the running of the gold reserve down to not less than 33$
per cent (a basis considered entirely safe in European countries) the difference
between 50 and 33$ per cent will also provide a splendid special emergency
circulation of $1,350,000,000 that can be used when necessary under proper safe
guards to impart the desired elasticity to the public currency and protect the
banks and all business in times of panic. This besides a billion of bank
reserves.
A law thus reforming our present currency and banking systems on a pro
gressive, permanent, and sound basis in the interest of all the people would be
a great national blessing second only to the Constitution. If we play the game
right the United States, with its grip on a big share of the world’s gold, soon
will largely control in the interest of all its inhabitants the world's finances
and commerce.
E x h ib it
A
B IL L
B.
T o p r o v id e f o r th e e s t a b lis h m e n t o f t h e U n it e d S t a t e s m o n e t a r y
d e fin e i t s d u t ie s a n d p o w e r s , a n d f o r o t h e r p u r p o s e s .
B e it e n a c te d b y th e S e n a te
S t a t e s o f A m e r ic a in C o n g r e s s
and H o m e
a sse m b led :
of
R ep resen ta tiv es
c o u n c il
of
th e
and
to
U n ite d
U N ITE D STATE S M O N ET AR Y CO U NCIL.
That a department of the Federal Government to be known as “ United States
monetary council ” (hereinafter called “ council ” ) is hereby created and granted
discretionary power and full .and exclusive control for the Federal Government
of all matters, pertaining to banks and banking and the authorization, super
vision, dissolution, taxation, and regulation thereof and the creation, issuing,
cancellation, custody, and disposal of the public coin and currency of the
United States and regulation of its volume and the interest or tax charged
for same, and the coin, currency, and bank reserves and the establishment
and maintenance of the gold standard of value as now provided by the laws of
the United States, and in the manner provided in such laws or otherwise, and
such other powers and duties as the Congress in this act or in subsequent acts
may authorize, subject only to the limitations of the Federal Constitution and
the provisions of this act. And the council shall become a coordinate branch
of the Federal Government on a par with the executive, legislative, and
judicial branches and have the same supreme and exclusive control
over its functions and the matters within its jurisdiction whenever an amend
ment to the Federal Constitution constituting the council such a coordinate
branch is lawfully adopted.
Sec. 2. The council is hereby granted perpetual corporate existence and powers,
and the right to make and perform contracts, its charter being the provisions
of this act, subject only to the limitations of the Federal Constitution, but it
shall be a public corporation and not a private vested right, and all its
franchises, privileges, and property shall be owned exclusively by the Federal
Government forever. But to preserve an orderly business procedure all busi
ness transactions between the Federal Government and the council shall be
as if they were entirely separate from each other.
The business and affairs of the council shall be conducted in the name
“ United States monetary council,” or, for brevity, “ U. S. monetary council,”
by which name it may sue or be sued in any Federal court and in such courts
only, and have a corporate seal, but no action for damages against the council
shall be lawful, nor against any of its officers, agents, or employees on ac
count of their official acts.
Sec. 3. The council is hereby granted authority to make, alter, suspend,
repeal, and enforce any and all general ordinances for the regulation of all
BANKING AND CURRENCY.
14 7 7
persons and corporations subject to its regulation, and such specific orders as
it may deem necessary for the administration of the matters within its juris
diction, and rules and regulations for the government and guidance of the
council, its officers, agents, and employees, the conduct of its business, and
the actions of those subject to its regulation, such ordinances, orders, rules,
and regulations not to be inconsistent with the Federal Constitution or the
provisions of this act.
Any Federal court of the United States on the application of the council
shall, with or without hearing, by order, injunction, mandamus, decree, or
otherwise, enforce the ordinances, orders, rules, and regulations of the council;
and the council is hereby granted authority to enforce its ordinances, orders,
rules, and regulations itself through its own officers, attorneys, agents, and
employees as it may determine.
No appeal from any ordinance, order, rule, or regulation of the council shall
lie except to a Federal court, and any appeal made shall be only on the ground
that the ordinance, order, rule, or regulation appealed from is a violation
of the Federal Constitution or the provisions of this act. In any court proceed
ing for or aganist the council the council shall be represented by its counsel,
officers, agents, or employees, and on its request by the Attorney General of
the United States or his assistants. On the request of the Attorney General,
or on their own motion, the Federal courts shall expidite cases to which the
council is a party. Any ordinance, order, rule, or regulations of the council
appealed from shall remain in force and be complied with pending final
decision of the appeal, except while temporarily suspended after preliminary
hearing by order of the court before which such appeal is pending; and when
the court shall decide that such appeal or any case against the council was
a captious appeal or case or not made in good faith it shall require the party
making such appeal or bringing such case to pay to the council not more than
$5,000 in addition to the costs to be fixed by the court.
O RG AN IZATIO N 01' T H E COUNCIL.
S ec . 4. The council shall consist of 16 members and all living former
Presidents of the United States; such former Presidents and the Secretary of
the Treasury, Secretary of Agriculture. Secretary of Commerce, and Secretary
of Labor shall be ex officio members; the other 12 shall be appointed for eight,
years by the President, with the advice and consent of the Senate, with due
regard to their special qualifications, but without regard to their party affilia
tions, and each appointed member and each former President of the United
States shall receive a salary of $10,000 per annum, payable in monthly install
ments. The appointed members shall give their entire time to the council, and
the ex officio members such time as the council may request: P r o v i d e d , That
in the first instance the President shall designate 3 of the 12 appointed members
to serve until March 4. 1916, 3 until March 4, 1918. 3 until March 4, 1920.
and 3 until March 4. 1922; and vacancies shall be filled in the same manner.
Any appointed member may be suspended, with or without salary, for not
more than one year by the President or Senate on the filing of sworn charges
reflecting on his honesty, fidelity, or efficiency, and he may be removed for
cause by the joint action of the President and Senate on the initiative of either
after public trial before a trial commission of two, one appointed by the Presi
dent and one by the Senate, and the filing of the report of such commission
and its recommendations with the President and Senate.
S ec. 5. The council shall, on the order of the President, convene and organize
as soon as practicable after the members are appointed and confirmed. It
shall elect from among its appointed members a president and two vice presi
dents, such offices to be so filled annually at the annual meeting held in the month
of February on a date fixed by the council. The council shall appoint from its
membership or otherwise a governor, to be the executive head of the council and
the director of its business affairs, and two vice governors to assist the gov
ernor, and such deputy governors and assistants as may be deemed necessary
for the management of the business of the council and its branches, and such
other officers, agents, attorneys, and employees as the council may deem neces
sary, with power in the council to suspend or remove, with or without cause,
any of its appointees or employees and to determine and pay their salaries or
compensation; and all officers, agents, attorneys, and employees shall be under
the control of the council and subject to its will and have such duties and
powers as the council may prescribe.
1478
BANKING AND CURRENCY.
S ec . 6. The principal office of the council shall be in the city of Washington,
in the District of Columbia, but the council is hereby authorized to establish
and maintain its branch offices in such places in the United States and foreign
countries as it may from time to time decide to be necessary for the purposes
of its business, and it is authorized to buy, sell, rent, lease, own, and hold real
estate and buildings and personal property in the United States and foreign
countries for such uses and any purposes of its business.
Suitable quarters in the Treasury and Subtreasury Buildings of the United
States shall be placed at the disposal and under the control of the council
without charge, expense, or unnecessary delay, and also in the same manner
suitable space in the post offices of the United States for branch offices of the
council and suboffices where it may desire to open offices, the Postmaster Gen
eral and the council to cooperate in such matter.
APPROPRIATIO N AN D PROFITS.
S ec. 7. Five million dollars is hereby appropriated out of any unappropriated
money in the general fund of the Public Treasury, and same shall be placed
permanently under the control and at the disposal of the council as soon as it
has organized.
All profits realized from the operations and business of the council and all the
property and franchises of the council shall belong to the Government of the
United States, but shall be held and used by the council, at its discretion, for the
purposes of this act: P r o v i d e d , The council from time to time may transfer to
the Public Treasury to the credit of the general fund, for the use and benefit
of the Federal Government, such portions of the council’s accumulated net
profits as it deems unnecessary to hold and use for the purposes of this act.
The council is hereby authorized to incur any expense, obligation, or liability
and to audit and pay the same from any moneys under the control of the council,
hut not otherwise.
S ec. 8. The office of the Comptroller of the Currency is hereby abolished,
and the duties and powers heretofore exercised by that official are by this act
vested in the council. So much of the duties and powers of the Secretary of
the Treasury, Treasurer, and other officials of the Federal Government and of
other departments of the Federal Government as pertains to the matters com
mitted to the care or control of the council by this act or other acts that may
be passed by the Congress are hereby taken from such officials and departments
and vested in the council, to be exercised under the provisions of this act,
subject only to the limitations of the Federal Constitution; the intention being
to separate the power and duty of regulating banking and the coinage and cur
rency from the ordinary financial affairs of the Federal Government and segre
gate the same in the council.
Sec. 9. The council shall be the fiscal agent of the Federal Government with
out charge for its services. All receipts of the Federal Government shall be
promptly deposited with the council, and all disbursements of the Federal Gov
ernment shall be made by checks, drafts, or orders of the Federal Government on
the council or in other manner mutually agreed upon by the Federal Government
and the council.
U N ITE D ST ATE S M O N E T A R Y PO LIC Y.
S ec . 10. It is hereby declared to be the constitutional right and duty and in
tention of the Federal Government, through its council as its agency, to ex
clusively provide the people of the United States with an adequate and sound
medium of exchange in the shape of coin and currency money and means for
getting the same into circulation among the people and imparting elasticity
to its volume; and it is also hereby declared to be the policy of the United
States to maintain the gold standard of value as now fixed by the laws of the
United States, and that gradually and as soon as practicable the entire public
currency of the United States shall be so reorganized that ultimately there will
be but one kind of such public currency, in convenient denominations, namely,
a paper currency that is the unconditional obligation of the United States and
so states on its face, an unqualified legal tender in the United States and
its dependencies for the payment of any purchase or debt or obligation, public
or private, redeemable at its face value in gold at the present legal standard
on the demand of the holder on presentation to the council or any of its
branches within the United States, and secured by a reserve of at least 33$
BANKING
AND
CURRENCY.
1479
per cent of its face value in actual gold coin or bullion at the present legal
standard held for the purpose by the council, which currency the council is
hereby authorized to issue on that basis and cancel and reissue from time to
time in such volume as the council deems necessary to promote the general
welfare, provide the people with an adequate and sound medium of exchange,
and carry out the purposes of this act; and the councli is hereby authorized and
directed to provide an adequate and suitable supply of gold and silver coins
and subsidiary metallic coins, gold coins of the present legal standard to be
a full legal tender, and all silver coins of denominations less than a dollar to be
a legal tender up to $30 and coins other than gold and silver a legal tender up
to $1, and to reorganize as soon as practicable the public currency in accord
ance with the public policy declared in this section, and to that end it may
gradually call in and cancel the United States gold certificates and replace
the same with the new national currency authorized by this section, and use the
gold coin and bullion now held to secure such certificates, to provide a reserve,
and for the redemption of such new currency; and also similarly cancel and re
place all other outstanding United States currency, including United States
notes, Treasury notes, silver certificates, and bank-note currency, using the
gold in the present Federal gold reserve to help create a gold reserve behind
such new currency; and the silver coin and bullion now securing outstanding
silver certificates shall, as such certificates are canceled, be used and counted at
its current gold value as part of the required gold reserve securing such new
national currency and for subsidiary coinage purposes, including silver dollars,
of the present legalized weight, character, quality, and tender value, and redeem
able at their face value in gold at the present lawful standard.
U N ITE D STATE S BONDS AN D B A N K CU RBEN CY.
S ec. 11. Hereafter no national banking association shall increase the volume
of its bank-note currency secured by United States bonds above the amount
now outstanding or above the amount to which it may be reduced, and after
its bank-note circulation is all retired it shall not again issue bank currency
that has the appearance of or is intended to circulate as money, and no other
bank or trust company qualified to enjoy the privileges of the council under
this act and no other bank, corporation, association, clearing house, firm, or
individual shall issue or circulate currency or coin, or certificates designed to
circulate as money, except the currency and coin now outstanding authorized
by any act of the Congress and currency and coin and certificates issued by
the council under the provisions of this act.
The council is hereby authorized to gradually call in and cancel any or all
of the bank-note currrency or circulation now outstanding, and when canceled
it shall not be reissued. As such currency is canceled it may be replaced by
new national currency issued by the council under the provisions of this act.
As such bank-note currency is called in or canceled, the council is hereby
authorized to buy from the national banking association the 2 per cent United
States bonds now used to secure such bank-note currency, paying for same by
issuing to the national banking associations selling such bonds new national
currency authorized by this act in amount equal to the par or face value of
such purchased bonds and the interest then accrued thereon.
The United States bonds so purchased from the national banking associations
shall be held or used by the council as an asset or otherwise disposed of as the
council may determine.
N A T IO N A L AND STATE B A N K S Q U A LIFIED .
S ec, 32. The council by order or rule may qualify any national banking as
sociation, bank, or trust company incorporated under the general laws or any
special law of the United States or of any State of the United States that com
plies with the provisions of this act to enjoy the benefits, privileges, and protec
tion of the council and be subject to the duties, liabilities, limitations, and ob
ligations imposed or authorized by this act.
To become thus qualified each such national banking association, bank, or
trust company shall make written application to the council in form and on
the terms and under the conditions prescribed by the council, accompanied by
satisfactory evidence that the corporation making such application has legally
authorized the same and that stockholders owming at least 51 per cent of the
1480
BANKING AND CURRENCY.
entire outstanding capital stock of such corporation have legally consented to
such application.
Any national banking association so applying shall be so qualified by the
council, and all national banking associations refusing or neglecting for one
year after the organization of the council to so apply to the council for such
qualification shall be dissolved; but such dissolution shall not take away or
impair any remedy against such corporation, its stockholders or officers, for
any liability or penalty which shall have previously been incurred. Any such
corporation other than national banking associations shall apply to the council
for qualification in the same manner and form and under the same terms and
conditions as national banking associations, and shall also legally bind itself in
form and manner satisfactory to the council to thereafter permanently be sub
ject to the regulation, supervision, and examinations of the council to the ex
tent and manner exercised by the council over national banking associations,
including maintenance of a minimum cash reserve of 15 per cent of its total
deposit liabilities and the permanent and continuous deposit of at least twothirds of such minimum cash reserve with the council, subject to the provisions
of this act and compliance with the ordinances, orders, rules, regulations, and
requirements of the council. No corporation so qualified by the council shall
have any legal right to withdraw from such system or qualification or escape
such regulation by the council and compliance with the provisions of this act
except on the formal order of the council allowing such withdrawal and on the
conditions stated in such order; but under no circumstances shall a national
banking association be allowed to withdraw except when such corporation is
legally dissolved or ceases to exist.
Every corporation so qualified shall, as a legal right, enjoy the benefits of
the council so far as practicable without discrimination or favoritism while
such corporation is in good standing with the council and complies with the
provisions of this act, all laws of the United States and the ordinances, orders,
rules, and regulations of the council.
The council may suspend any qualified corporation from any or all of the
benefits, privileges, and protection of the council for such time and on such
terms and conditions as it may prescribe and include in its suspension order
whenever such corporation violates or neglects, or refuses to comply with the
provisions of this act, the laws of the United States, or the ordinances, orders,
rules, regulations, or lawful requirements of the council, or the council under
such circumstances may expel such corporation or impose any other penalty
the council may prescribe within the limitations of the Federal Constitution,
except that national banking associations shall not be expelled, but the coun
cil may for cause forfeit their charters.
It shall be unlawful for any corporation that is, or hereafter may be, subject
to regulation by the council under this act, or otherwise, to violate or fail to
comply with any provisions of this act or aid in such a violation or failure, or
for any officer, director, stockholder, agent, or employee of such a corporation to
violate or fail to comply with any provision of this act, or by any act or omis
sion contribute to the violation of, or failure to comply with any provision of
this act by any such corporation or any other corporation or person; and the
council in its discretion may suspend or forfeit the charter of any such corpo
ration or prescribe such other punishment as it may determine for any offense
against the provisions of this section, and the violation of any provision of
this section by any corporation or person shall be a misdemeanor punishable
by fine of not more than $10,000 in case the offender is a corporation, and a
fine of not more than $10,090, or imprisonment in the penitentiary not more
than three years, or both such fine and imprisonment if such offender be a
person.
S ec. 13. Any bank, banking association or trust company incorporated by
special law of any State or of the United States, or organized, or that hereafter
may be organized under the general laws of any State of or the United States,
and having an unimpaired capital sufficient to entitle it to become a national
banking association under the laws of the United States, may, by the consent
in writing of the stockholders owning not less than 51 per cent of the
capital stock of such bank, banking association, or trust company, and with the
approval of the council, become a national banking association under its
former name or by any name approved by the council. The directors thereof
may continue to be the directors of the association so organized until others
are elected, or appointed in accordance with the provisions of the law. When
the council has given to such bank, banking association, or trust company a
BANKING AND CURRENCY.
1481
certificate that the provisions of this act have been complied with, such bank
or banking association or trust company and all its stockholders, officers, and
employees, shall have the same powers and privileges, and shall be sub
ject to the same duties, liabilities, and regulation in all respects as shall have
been prescribed for national banking associations organized under the laws of
the United States.
S ec . 14 All banking associations, banks, and trust companies that become
qualified to enjoy the benefits, privileges, and protection of the council or sub
ject to its regulation shall be deemed national banking corporations clothed
with a public interest and charged with duty of giving to the public good
service at reasonable rates, and such corporations shall be subject to public
regulation by the Federal Government acting through the council; and only
such banking corporations shall use the words “ national ” or “ Federal ” in
their names or be national or Federal banking institutions. Such qualified
banking corporations shall he eligible and available for use by the council for
the purpose of getting the public currency and coin of the United States into
circulation among the people for the general welfare, on such terms and con
ditions and in such volume as the council from time to time may determine,
subject to the limitations of the Federal Constitution and the provisions of
this act. Any and all charges made by the council to any such national banking
corporation for loans or the use of coin and currency or credit furnished by
the council or for the privilege of obtaining, using, or circulating the same under
this act, or otherwise, may be considered as a franchise tax paid for such priv
ileges, and the other benefits and powers conferred by this act, or otherwise,
whether such charges are called in this act a tax, or interest, or otherwise.
S ec. 15. That from and after the passage of this act the stockholders of
every national banking association and every other bank and trust company
that is or hereafter may be qualified or subject to regulation under this act shall
be held individually responsible for all contracts, debts, and engagements of
such national banking association, bank, or trust company, each to the amount
of his stock therein, at the par value thereof in addition to the amount invested
in such stock. The stockholders in any such national banking association, bank,
or trust company who shall have transferred their shares or registered the
transfer thereof within 60 days next before the date of the failure of such
national banking association, bank, or trust company to meet its obligations
shall be liable to the same extent as if they had made no such transfer; but this
provision shall not be construed to affect in any way any recourse which such
shareholders might otherwise have against those in whose names such shares
are registered at the time of such failure. Section 5151, Revised Statutes of
the United States, is hereby reenacted except in so far as modified by this
section.
B A N K E X A M IN A T IO N S .
S ec . 16. That the examination of the affairs of every national banking asso
ciation authorized by existing law and of every banking corporation, bank, or
trust company qualified to enjoy the privileges of the council or subject to its
regulation shall take place at least twice in each calendar year and as much
oftener as the council shall consider necessary in order to furnish the council
with a full and complete knowledge of the condition of such corporation and
the character and value of its assets, and the council may at any time direct
the holding of a special examination. The person assigned to make any such
examination shall have power to call together the officers and a quorum of the
directors of the institution he is assigned to examine, who shall, under oath,
state to such examiner (in writing when he requests it) the character and
circumstances of such of its loans or discounts as he may designate, and a false
statement so made in regard to such matters shall be perjury and be punished
as such under the laws of the United States relating to perjury.
From and after the passage of this act all bank examiners shall receive
salaries fixed and paid by the council. Rut the expense of the examinations
provided for in this act shall be assessed by the council upon the said institu
tions so examined in proportion to the assets or resources held by such insti
tutions upon a date during the year in which such examinations are held to be
established by the council. The council shall so arrange the duties of bank
examiners that no two successive examinations of any such examined insti
tution shall be made by the same examiner.
S ec. 17. That no banking association, bank, or trust company subject to
examination or regulation under this act shall directly or indirectly hereafter
1482
BANKING AND CURRENCY.
make any loan or grant or offer any gratuity to any examiner of such bank
ing association, bank, or trust company. Any banking association, bank, or
trust company offending against this provision shall be deemed guilty of a mis
demeanor and shall be fined not more than $5,000. and the further sum equal to
the amount so loaned or gratuity granted or offered; and the officer or officers
of such banking association, bank, or trust company making or offering such
loan or gratuity shall likewise be deemed guilty of a misdemeanor, and shall
be fined not to exceed $5,000 and imprisoned in the penitentiary not more than
three years. Any such examiner accepting a loan or gratuity from any bank
ing association, bank, or trust company examined by him, except when done
with the approval of the council to obtain evidence, shall be deemed guiity of
a misdemeanor and shall be fined not more than $500, and a further sum
equal to the money so loaned or gratuity accepted, or imprisoned not more than
one year, or both, and shall forever thereafter be disqualified from holding any
office under the laws of the United States unless pardoned by the President of
the United States.
No officer or director of any national banking association or other bank or
trust company that is or hereafter may become subject' to regulation under
this act shall receive or be beneficiary, directly or indirectly, in any fee,
brokerage, commission, gift, or other consideration for or on account of any
loan, purchase, sale, payment, exchange, or transaction made by or on be
half of :i national banking association, bank, or trust company, of which he
is an officer or director, and any such officer or director violating this provision
shall be punished by a fine of not exceeding $5,000, or a term in the penitentiary
not exceeding three years, or both such fine and imprisonment.
LEGAL C A S H
RESERVES OF B A N K S .
S ec . 18. From and after the passage of this act the minimum legal cash re
serve of each national banking association and of each other bank, banking asso
ciation, and trust company qualified under the provisions of this act or any
future act to enjoy the privileges of the council, or which is subject to regulation
by the council, shall be a sum equal to 15 per cent of the total deposit liabili
ties of such banking association, bank, or trust company, and its cash reserve
at no time shall be below that amount; and that at least two-thirds of such legal
minimum cash reserve shall at all times be kept on deposit with the council
subject to use by the council for its purposes; and the other one-third of said
minimum legal cash reserve shall be kept in the vault of such banking associa
tion, bank, or trust company or on deposit with other banking associations,
banks, and trust companies qualified and subject to regulation by the council;
but no greater amount of such reserve shall be deposited in any banking asso
ciation, bank, or trust company than would equal 10 per cent of the unim
paired capital and surplus of the depositing bank or of the banking associa
tion, bank, or trust company receiving such deposit.
The council is authorized to pay for the use of such bank reserve deposits
and for deposits made by the Federal Government not to exceed 2 per cent per
annum payable semiannually, but averaged and computed monthly. The council
shall accept deposits in the United States from only the Federal Government
and the banking associations, banks, and trust companies qualified and subject
to regulation by the council, and postal savings deposits, which hereafter shall
be deposited with the council or its branches or suboffices as soon as practicable
after they are received by post offices, the council assuming the payment of the
2 per cent interest on such postal savings deposits provided by law; and the
council is hereby granted authority to regulate and control for the Federal
Government the postal savings system established by law, and when prepared to
do so the council shall take charge and exclusive control of and thereafter
conduct such postal savings system and each of the offices thereof in the post
offices of the country or elsewhere, and the Postmaster General of the United
States and his department shall cooperate in the matter and facilitate the trans
fer of such system to the care of the council and the subsequent conduct of the
business by the council in any or all of the post offices of the United States and
its dependencies where the council shall decide to establish or maintain postal
savings branches; and the council is authorized to establish and maintain
branches or offices or suboffices for the conduct of its own business in such
post offices and in connection with such postal savings branches and in charge
of the same i>ersons as agents or employees of the council or otherwise; and the
council shall be furnished without charge ample and suitable facilities in such
BANKING AND CURRENCY.
1483
post offices for the establishment and transaction of such business; the council,
however, in its discretion, may leave the postal-savings system in the custody
of the postmaster and his employees as now provided by law in any post office
except that the postal savings deposits shall be deposited as soon as practicable
after being received with the council or its branches; and it shall be lawful
for the council to commission any postmaster of the United States or its de
pendencies to act as its agent for the purposes of the business of the council
and to require bond or security from such postmaster, whose compensation shall
be fixed and paid by the council.
The council at all times shall have a first and paramount lien on the cash
reserve deposits and any other deposits of any qualified bank, banking associa
tion, or trust company in the hands of the council or under its control to secure
the council for any debt, obligation, or direct or indirect liability of such bank,
banking association, or trust company to the council for loans of currency or
coin or credit, or otherwise, and also upon the assets and property of such
bank, banking association, or trust company, and all securities or other property
put up as collateral security with the council; and the council is hereby authorized to pay itself from such deposits or money or property under its control
belonging to any such institution for any past due debt, obligation, or liability,
direct or indirect, of any such bank, banking association, or trust company to
the council and for any costs or expense due to any default in payment; and
the council may sell at public or private sale, with or without notice, and itself
buy and resell any securities or property, real, personal, or mixed, it holds or
has a claim upon or against to secure any such past-due debt, obligation, or
liability; and any and all deposits or property held by or belonging to or under
the control of the council or any of its branches shall be exempt from seizure
and not subject to attachment, garnishment, or execution under a writ, order,
or decree of any court, whether such securities or property belongs to the
council or otherwise.
Any national banking association may be allowed by the council to deposit
with the council the two-tliirds of its minimum legal cash reserves in install
ments from time to time extending over a period of not more than one year
from the date on which the council organized, and such national banking asso
ciation may deposit with the council 2 per cent United States bonds now used
to secure bank-note currency, on the cancellation of such currency, to an amount
not exceeding one-third of its total minimum legal cash reserve, and such bonds
may be counted as part of that portion of its minimum legal cash reserve to
be deposited with the council under this act; and such bonds thereafter shall
belong to the council as an asset and be used as it may determine.
The council shall have authority to at any time require any banking asso
ciation, bank, or trust company subject to its regulation to pay in gold coin or
bullion at the present legal standard value any debt, obligation, or liability of
such corporation to the council, and when it considers that the public interest
demands it, the council may require such corporations to obtain such gold coin
or bullion in other ways than by the presenting for redemption coin and cur
rency of the United States, and from sources other than the gold reserves and
deposits of the council and the Federal Government. One-half of any cost or
expense incurred by the council or the Federal Go\ eminent at any time in ob
taining gold coin or bullion and making it available for the purpose of maintain
ing the gold standard of value and the coin and currency of the United States
in accordance with the laws of the United States and as provided in the act
of Congress passed on March 14, 1900, shall be paid by the banking corporations
subject to regulation by the council and be apportioned between such corpora
tions by the council in accordance with their total assets or resources, respec
tively, and be paid to the council during the months of January and July of
each year.
S ec. 19. The council may establish and maintain and conduct in connection
with its various branches and suboffices, situated in the United States post
offices or elsewhere, as the council may determine, clearing-house facilities for
the better carrying out of the purposes of this act and the convenience of the
banking associations, banks, and trust companies subject to regulation by the
council and under the conditions and on terms and plans prescribed by the
council.
The council is authorized to contract with any banking association, bank, or
trust company subject to regulation by the council for room or space in such
bank or trust company for use by the council for one of Its branches or sub-
I
1484
BANKING AND CURRENCY.
offices and for the safe keeping or custody of any and all moneys, papers, securi
ties, or property of the council on terms and conditions to be mutually agreed
upon.
The council is hereby empowered to create, establish, and conduct insurance
funds or companies or to authorize and to supervise and regulate the same,
under such name or names and with such rights, duties, and powers as the
council may prescribe for the purpose of insuring the safe storage, shipping, or
transportation of money, securities, coin, currency, papers, checks, drafts, notes,
and other property or things approved by the council, and the guaranteeing or
protection against loss in such matters the Federal Government and its several
departments and officials and employees, the council and its branches and sub
offices and officers, agents, and employees and the qualified banking associations,
banks, and trust companies subject to regulation by the council, and also for
the bonding of the officers and employees and agents of the Federal Government
and its various departments and of the council and the qualified banking asso
ciations, banks, and trust companies, subject to regulation by the council; and
such other persons and corporations as the council may determine; and also
the creation or authorization and supervision and regulation of associations,
funds, or corporations for the purpose of guaranteeing bank deposits and the
solvency of banking associations, banks, and trust companies subject to regu
lation by the council and insuring the same against loss and similarly insuring
any depositor in any such banking institution against loss by reason of making
deposits in such banking institution; all as the council may determine; and the
council may act as trustee or custodian for the funds of such insurance corpo
rations, funds, or associations.
The services of the secret-service officials and employees of the Federal Gov
ernment and its departments and of the United States district attorneys and
marshalls and their assistants and deputies is hereby placed at the disposal of
the council on its request to further the purposes of this act.
S ec . 20. Each national banking association, hank, and trust company incor
porated under the general laws or any special law of the United States or any
State, except mutual savings banks owned by and run for their depositors
exclusively, shall every year pay to the Federal Government an internal-revenue
tax of 1 per cent on the average total deposit liabilities of such national
banking association, bank, or trust company, such tax to be payable in semi
annual installments on January 1 and July 1, but shall be averaged and com
puted monthly: P r o v i d e d , That a sum equal to ten times the amount of the
legal cash reserves of such national banking association, bank, or trust company
on deposit with the council shall be deducted from such taxable total deposit
liabilities and said tax shall be computed and paid only on the amount remain
ing after such deduction is so'made. Authority to so levy, compute, and collect
such tax for the benefit of the Federal Government and to prescribe and enforce
penalties for its nonpayment is hereby granted to the council: and in order that
such tax may be levied intelligently and justly and collected fairly the council
is hereby authorized, at its discretion, to investigate and examine the business
and affairs of all such banking associations, hanks, and trust companies,
whether subject to regulation by the council or not in such manner and as often
as the council may deem necessary, and it may require from time to time sworn
written reports in form and substance satisfactory to the council from each
corporation hereby made subject to such tax. The council shall pay such tax
so collected into the general fund of the Treasury of the United States after
deducting therefrom and retaining its cost of levying, computing, and col
lecting such tax, making such investigations, and getting such reports.
Every unincorporated association, firm, or individual using the word “ bank”
or “ trust company ” in his or its name or the word “ banker ” or “ bankers ”
after his or its name on his or its signs, letters, or advertisements, and who
or which receives demand or time deposits of money or credits shall a like
internal-revenue tax in the same manner and be subject to the same investi
gations and reports required of incorporated institutions by the provisions of
this section.
Any banking association, bank, or trust company, association, firm, or indi
vidual mentioned in this section as subject to such internal-revenue tax refus
ing to permit the investigation or refusing or neglecting to make the report
authorized or required by this section or making any false report shall be
deemed guilty of a misdemeanor and for each offense shall pay a fine of not
exceeding $5,000 and the costs fixed by the court.
BANKING AND CURRENCY.
1485
All money, securities, and other property owned by the council and all coin
and currency and bullion and other property belonging to the Federal Govern
ment and in the possession or under the custody of the council, and all moneys
belonging to qualified banking associations, banks, and trust companies subject
to regualtion by the council comprising part of the minimum legal cash reserves
of such banking associations, banks, and trust companies that is on deposit
with the council shall be exempt forever from taxation under any and all laws
of the United States or of any of the United States.
LO AN S M AD E ON C O M M ER CIAL PAPER.
S ec. 21. For the purpose of getting the public currency into circulation among
the people for the public good and to further the lawful purposes of this act,
the council is hereby authorized:
( a ) To loan any qualified banking association, bank, or trust company from
time to time while it is in good standing with the council and which complies
with the ordinances, orders, rules, regulations, and requirements of the council
public coin and currency of the United States issued under the provisions of
this act and other moneys and deposits under the control of the council and
credit based thereon, in such sums and at such times and on the terms and
conditions fixed by the council. The amount so loaned shall not aggregate at
any one time more than a sum equal to the paid-up capital stock and surplus
of such banking association, bank, or trust company to which such loan or
loans are made; and all such loans shall be secured as provided in or author
ized by this act.
(&) To accept as security for loans described in paragraph ( a ) of this sec
tion notes and bills of exchange arising out of commercial transactions; that
is, notes and bills of exchange issued or drawn for agricultural, industrial, or
commercial purposes, the council to have the right to determine or define the
character, quality, and eligibility of the paper thus offered for such security,
within the meaning of this act; but notes or bills issued or drawn for the pur
pose of carrying or trading in stocks, bonds, or other investment securities shall
not be eligible for such purpose, except notes or bills having a maturity of not
exceeding four months and secured by United States bonds or bonds issued by
any State, county, or municipality, or school district of the United tSates. All
notes and bills admitted for security under this paragraph must when admitted
have a maturity of not more than four months and bear the unqualified indorse
ment of the qualified banking association, bank, or trust company offering the
same to the council as security, and such banking association, bank, or trust
company shall remain liable to the council on such indoisement until such notes
or bills are paid or withdrawn from the council, even if such notes or bills
should not be protested for nonpayment when due; and the council in thus ac
cepting such notes and bills, whether it discounts same or not, takes the same
as collateral security for such loans and shall incur no responsibility to collect
or protest such paper and no liability thereon or therefor, and whatever council
may do in the matter shall be as accommodation agent for such banking asso
ciation, bank, or trust company, but without agents’ liability or responsibility:
P r o v i d e d , That at least 50 per cent of the total of such notes and bills so used
for security by any qualified corporation shall when admitted have a maturity
of not more than 00 days .
(c)
To accept as security for loans described in paragraph (a) of this sec
tion acceptances of such qualified banking associations, banks, and trust com
panies which are based on the exportation or importation of goods and which
mature in not more than 90 days and bear the signature or binding indorsement
of at least one qualified banking association, bank, or trust company in addi
tion to the one presenting such acceptance to the council as security. The ac
ceptances so admitted as security from any banking association, bank, or trust
company shall at no time exceed one-half of the capital stock of the institution
presenting the same to the council, and the said acceptances and the notes and
bills admitted as such security shall at no time together aggregate a sum
exceeding the total paid-in capital stock and surplus of such institution.
The aggregate of such notes, bills, and acceptances bearing the signature or
indorsement of any one person, company, firm, or corporation presented foxsecurity to the council by any one banking association, bank, or trust company
shall at no time exceed 10 per cent of the unimpaired capital and surplus of
such presenting institution, except as to the indorsements of said presenting
institution itself.
1486
BANKING AND CURRENCY.
Any qualified banting association, bank, or trust company while in good
standing with the council may, at its discretion, accept drafts or bills of
exchange drawn upon it having not more than six months sight to run and
growing out of transactions involving the importation or exportation of goods,
but no bank shall accept such bills to an amount equal in the aggregate to more
than one-half the face value of its paid up and unimpaired capital.
( d ) To make to any qualified banking association, bank, or trust company,
whenever in the opinion of council the public interest so requires, a special
emergency loan on the direct obligation of such qualified institution, secured
by the pledge and deposit of securities satisfactory to the council and at special
emergency rates fixed by the council, but in no case shall the amount so loaned
exceed three-fourths of the actual value of the securities so pledged or onehalf of the amount of the paid-up aud unimpaired capital of such qualified
institution, such emergency loan to be independent of the restrictions of para
graphs (a), (&), and (c) of this section.
(e) To fix and from time to time change at will its tax or interest rate for
loans under paragraphs (a), (6), and (c) of this section, such rate to be uniform
throughout the United States.
(/) To fix at will in each case its interest rate on special emergency loans
under paragraph ( d ) of this section and other loans.
( p ) To purchase and sell in the open market, either from or to domestic
or foreign banks or individuals, bankers’ bills, cable transfers, and bills of
exchange of the kinds and maturities of this section made eligible for security,
whenever in the judgment of the council it is necessary to protect its gold
reserve, promote the general welfare, or advance the interests or security of
the council.
( h ) To deal in gold and silver coin and bullion both at home and abroad,
to make loans thereon, and to contract for loans of gold and silver coin or
bullion, giving therefor, when necessary, acceptable security, including the
hypothecation of United States bonds.
(i) To loan upon, invest in, buy and sell United States bonds and shorttime obligations of the United States or its dependencies, or bonds of foreign
governments, or of States, counties, municipalities, or school districts of the
United States, using any deposits, surplus, currency, coin, or bullion under its
control for the purpose.
O') To make loans to the United States on its bonds or otherwise and fix the
rate of interest on same.
(fc) To open and carry on its books a credit deposit account for any qualified
banking association, bank, or trust company, accepting for deposit in such
account any public currency and coin of the United States, and of foreign
Governments when authorized by the council, and such checks, bills of exchange,
and other credit instruments as the regulations of the council may prescribe,
and also to permit such qualified institution to draw its checks or drafts or
sell exchange against its said credit balance as the council shall determine.
But the council shall accept deposits in the United States only from the United
States Government and its departments and agencies and such qualified bank
ing associations, banks, and trust companies.
The legal cash reserve deposits of any depositor may be carried by the
council in an account separate from such depositor’s credit deposit account.
( l ) To open and maintain banking accounts in foreign countries and agencies
to collect, buy, and sell with or without its indorsement, through such corre
spondents and agencies, checks, or prime foreign bills of exchange arising out
of the commercial transactions which have not exceeding 90 days to run and
which bear the signature of two or more responsible parties.
( m ) To make ioans of the character authorized by this section to qualified
national banking associations, banks, and trust companies subject to regulation
by the council and accept as collateral security notes having a maturity of
not more than six months secured to the satisfaction of the council by ware
house receipts for cotton, corn, wheat, or other commodities approved* by the
council, such warehouse receipts to be of a character and comply with the
terms and conditions fixed by the council or secured by notes or bonds with a
maturity of not more than two years when such notes or bonds are secured
by a first mortgage on an improved farm worth at least double the amount of
such mortgage or on other kinds of real estate of like double value approved
by the council.
(n) To devise, design, print, and authorize the printing and require the use
of distinguishing blank forms of notes and other instruments when such notes
BANKING AND CURRENCY.
1487
or instruments are to be used to secure loans from the council under the pro
visions of this section and for the other purposes of this act and to prescribe
tiie purposes for which such blank notes and other instruments can be used and
the manner of using the same.
The use of any such distinguishing blank note or other such instrument
for any other purpose or in any other manner than that authorized by the
council shall be a misdemeanor, and the offending person or corporation shall
be liable to a fine of not exceeding $1,000 for each offense. The council may
reserve to itself the exclusive right to print and furnish such distinguishing
blanks, in which case the engraving, printing, or circulating the same by any
person not authorized by the council shall be deemed counterfeiting and shall
subject the offending person to the same penalty prescribed by the laws of the
United States for counterfeiting the currency or coin of the United States.
(a) To require from any qualified banking association, bank, or trust com
pany, or other borrower, additional satisfactory security for any loan made
under the provisions of this section or otherwise whenever the council shall
deem itself insecure, and to require the reduction or payment of any such loan
whether it is due or not due, and to declare any such loan due at any time.
(p) To devise and put into effect such plan or plans as it may approve for
protecting or relieving any mutual savings bank or institution owned by and
run for the benefit of its depositors in any emergency, the council to be the
judge in each instance as to what is an emergency and what institutions are
entitled to such relief within the meaning of this paragraph.
{( ] ) To increase and decrease at will the volume of the public currency in
circulation and its rates of interest and tax with the view to imparting safe,
scientific, and beneficient currency and credit elasticity and thus help regulate
and steady the general range of prices and interest rates to make the same
more uniform and to discourage excessive or dangerous general speculation
and encourage and protect sound business prosperity and to conserve the gen
eral welfare of all the people.
LO AN S ON FA RM
LA N D S.
S ec . 22. That any qualified national banking association, bank, or trust com
pany subject to regulation by the council may make loans secured by first
mortgage on improved farm land worth at least double the amount of such
mortgage where such land is situated within 100 miles of the qualified insti
tution making such loan, but no such loan shall have a maturity longer than
two years or exceed a sum equal to one-fourth of the unimpaired capital and
surplus of the qualified institution making such loan.
Such qualified institutions may make similar loans so secured on other kinds
of improved real estate approved by the council worth at least double the amount
of such loan and situated within 100 miles of the qualified institution making
such loan, except that no such loan shall have a maturity longer than 1 year or
exceed a sum equal to 30 per cent of the unimpaired capital and surplus of the
qualified institution making such loan.
The aggregate loans on real estate made by any qualified corporation shall
not exceed the unimpaired capital and surplus of the qualified corporation
making such loans, except that they may aggregate a sum not exceeding 50
per cent of the bona fide time deposits of the qualified corporation making
such loan.
S ec . 23. All losses, if any, sustained by the United States monetary council
on its loans or in its transactions with banking associations, banks, and trust
companies qualified under this act to enjoy the privileges of the council or sub
ject to its regulation shall be paid by such qualified corporation in the follow
ing manner, namely, such losses shall be apportioned January 1 and July 1
each year between all of the said qualified banking associations, banks, and
trust companies subject to regulation by the council, according to the size of
their minimum legal cash reserves, respectively, at the time of the last official
report and be collected from them by the council within 30 days after being
so apportioned. No such qualified corporation shall be included in such appor
tionment unless it was qualified five months before such apportionment is
made.
The net amount realized by the council from any claim or item that has
been charged off as a loss and afterwards made good wholly or in part to the
council by any qualified institution shall be applied in reduction of future
1488
BANKING AND CURRENCY.
losses to be made good or paid by such qualified institutions as provided in
this section.
S ec . 24. That so much of the provisions of section 5159 of the Revised
Statutes of the United States, and section 4 of the act of June 20, 1874, and
section 8 of the act of July 12, 1882, and of any other provisions of existing
statutes, as require that before any national banking association shall be au
thorized to commence banking business it shall transfer and deliver to the
Treasurer of the United States United States registered bonds to an amount,
where the capital is $150,000 or less, not less than one-fourth of its capital stock,
and $50,000 where the capital is in excess of $150,000, be, and the same is
hereby, repealed.
S ec . 25. That so much of sections 2 and 3 of the act of June 20, 1874, entitled
“An act fixing the amount of United States notes, providing for a redistribution
of the national-bank currency, and for other purposes,” as provides that the
fund deposited by any national banking association with the Treasurer of the
United States for the redemption of its notes shall be counted as a part of its
lawful reserve as provided in the act aforesaid, be, and the same is hereby,
repealed. And from and after the passage of this act such fund of 5 per cent
shall in no case be counted by any national banking association as a part of its
lawful reserve.
FOREIGN B R A N C H E S .
S ec . 26. Any national banking association, bank, or trust company subject to
regulation by the council possessing a capital of $1,000,000 or more may file
application with the council, upon such conditions and under such circumstances
as may be prescribed by the council, for the purpose of securing authorization
to establish branches in foreign countries for the furtherance of the foreign
commerce of the United States, and to act, if required to do so, as fiscal agents
of the United States. Such application shall specify, in addition to the name
and capital of the banking association, bank, or trust company, the foreign
country or countries or the dependencies of the United States where the bank
ing operations proposed are to be carried on and the amount of capital set
aside by the said banking association, bank, or trust company filing application
for the conduct of its foreign business at the branches proposed by it to be
established in foreign countries. The council may by order reject or approve
such application and authorize the establishing of such foreign branches at the
place or places, under the conditions and on the terms specified in such order,
which branches shall always be subject to the regulation and examination of
the council to the same extent as the corporation of which they are branches.
The costs of such examinations and regulation incurred by the council shall be
paid by such corporation. Every such national banking association, bank, or
trust company having authorized foreign branches shall conduct the accounts
of each foreign branch independently of the account of other foreign branches
established by it and of its home office, and shall at the end of each fiscal year
transfer to its general ledger the profit or loss accruing at each such branch as
a separate item.
BANKS
CALLIN G LO AN S IN
CONCERT.
S ec . 27. That it shall be unlawful for any national banking association, or
other bank or trust company subject to regulation by the council, to increase
or decrease its loans, volume of discounts, or rates of interest or make or call
in any loan for the purpose of influencing or changing the quotation prices of
any security listed on any stock exchange or causing any panic or financial
stringency or forcing the sale of securities or other property or influencing
public opinion or the political action of its customers or others or the action of
Congress or any Member thereof, or of the council or any member thereof, or
any State legislature or member thereof; and it shall be unlawful for any two
or more of such national banking associations, banks, or trust companies or
any officers or directors thereof to enter into any agreement, arrangement, or
understanding, direct or indirect, for the calling of loans or discounts in con
cert or cooperation by such banking institutions. Any violation of any pro
vision of this section by any national banking association shall work an imme
diate forfeiture of the charter of such association, and the council may appoint
a receiver therefor to take charge of such association and conduct the same or
wind up its affairs, as the council is hereby authorized to do when any corpora
tion subject to its regulation shall violate or refuse to comply with the provisions
BANKING AND CTJBBENCY.
1489
of this act and the laws of the United States, and the violation of the provisions
of this section by any other bank or trust company subject to regulation by
the council shall be a misdemeanor punished by a fine of not exceeding $10,000;
and each officer or director of such offending national banking association, bank,
or trust company who shall assent to or coperate in such violation shall be
guilty of a misdemeanor and be punished by a fine of not more than $5,000 or
imprisonment in the penitentiary not more than three years, or by both such fine
and imprisonment.
RAIDS ON U N ITE D STATE S GOLD RESERVE.
S ec . 28. Any person instigating, organizing, or assisting in the organization
or conducting of any raid or “ run ” upon the gold reserves or public currency
supplies of the Government of the United States or of the council for the pur
pose of injuring the credit of the United States or the council or embarrassing
the business or monetary affairs of the Federal Government or the council, or
depleting such gold or currency reserves or the deposits of the council, or forc
ing the issuance of United States bonds, shall be deemed guilty of a treasonable
felony and be punished by a fine of not less than $1,000 or more than $10,000
and imprisonment in the penitentiary not less than 1 year or more than 10
years.
S ec . 29. It shall be unlawful for any national banking association, bank, or
trust company subject to regulation by the council, to directly or indirectly charge
any customer or person or corporation for any time or demand loan or discount
a rate of interest exceeding 7 per cent per annum, and the council may, at its
option, forfeit the charter of any offending institution, and such offending
institution shall be subject to have a receiver appointed by the council to con
duct or wind up its affairs and shall be deemed guilty of a misdemeanor and
be fined a sum equal to the principal and interest of such usurious loan or
discount.
Discrimination between customers in the rate of interest paid depositors
under similar circumstances and charged borrowers for a similar service by
any national banking association, bank, or trust company subject to regulation
by the council is hereby declared to be against public policy and unlawful, and
the council shall have power to punish any offending institution by forfeiting
its charter or otherwise.
S ec . 30. The council is hereby authorized to devise, install, supervise, and
regulate a plan by which any or all depositors in qualified national banking
associations, banks, and trust companies subject to regulation by the council
are guaranteed or made secure against any loss due to the insolvency of any
such institution or its failure to pay its obligations. For that purpose the
council may require the establishment of a fund under the control and ad
ministration of the council sufficient to guarantee all such depositors and pay
all losses due to any such insolvency or failure of any banking association, bank,
or trust company subject to regulation by the council, and the council shall have
authority to require all such banking associations, banks, and trust companies
to make up and maintain such fund, all contributing thereto every six months,
in proportion to their total assets or resources, respectively.
M O N E T AN D CREDIT M ONOPOLY.
S ec . 31. The policy of the Federal Government has been, and is hereby
declared to be, to encourage independent banking by separate corporations
competing with each other without mutual restriction or restraint for deposits
and loans, free banking supervised and regulated by the Federal Government to
increase the efficiency and usefulness of such banks to the public and the safety
of their depositors and stockholders; and it has been and is the policy of the
Federal Government to discourage, and so far as practicable prevent, in the
United States branch banking and the control or domination of two or more
banks or trust companies by the same persons or interests and the alliance or
combination between two or more banks or trust companies, except when there
is a legal merger of two or more corporations into one, and any and all other
devices and practices designed to restrain the freedom of money and credit, or to
increase or maintain interest rates by agreement or understanding or interfere
with the unobstructed play in such matters of the economic law of supply and
demand, or tending to injuriously concentrate the control of the general supply
of money and bank credit available for the use of business, or establish monopoly
9328°— S. Doc. 232, 63-1—vol 2----- 34
1490
or
in
as
as
BANKING AND CURRENCY.
partial monopoly of those life agents of trade and commerce nationally or
localities, and the council is hereby directed to observe such policy so far
practicable, and it is hereby granted authority and power to take such action
it may deem necessary to that end.
FA EM -CR ED IT B A N K S .
S ec . 32. The council is hereby empowered to authorize the formation of
national banking associations, to be known as “ farm-credit banks,” anywhere
in the United States and its dependencies, with the powers and duties and
privileges and under the limitations and conditions provided in this act and as
set forth in this section, as follows:
(а) The words “ farm-credit bank,” preceded by the name of the town,
post office, or locality where it is situated, shall appear in the name of each
farm-credit bank, as, for example, “ Waukesha Farm-Credit Bank,” which shall
be its corporate name under which it shall do business, and may sue and be
sued and have a corporate seal.
(б) The corporate charter issued by the council shall be for 20 years, re
newable for like periods at the discretion of the council, but shall not be a
private vested right.
(c) The authorized capital stock of a farm-credit bank shall be unlimited
as to amount and divided into shares of $10 each, and be purchasable at par
on request to the bank by any person residing within 100 miles of the place
where such bank is located and who owns a farm or is working a farm under a
lease or who is engaged in the business of agriculture or is employed regularly
in or about a farm, or who is a member of the immediate family of any such
person, but no individual shall own more than 100 shares of the capital stock
of any one of such banks, and at least $5,000 of its stock shall be subscribed
and paid in cash before such bank shall begin business, and be outstanding to
enable it to continue business. Each owner of farm-credit back stock shall be
liable to a sum not exceeding the par value of his stock in addition to the
amount invested in such stock for any loss accruing while he owns such stock
or within 60 days thereafter resulting from the failure of such bank to pay its
obligations or debts in full. A farm-credit bank shall at all times have at least
10 stockholders. Farm-credit bank stock shall not be sold, pledged, assigned, or
transferred, except on the books of the bank and with the consent of the officer
of the bank authorized by the directors to grant such consent, and such bank
is hereby empowered to buy in at par its own stock and cancel the same, and
to reissue the same, but shall not so reduce its outstanding stock below $5,000
Such bank may without other security make loans to any stockholder or to
any authorized person or corporation on the indorsement of any stockholder
to a total aggregating not more than 90 per cent of the par value of his stock
in such bank, and each farm-credit bank is hereby given a first and paramount
lien upon the stock of its stockholders to secure such bank for any debt, obliga
tion, or liability, direct or indirect, of its stockholders to such bank, and it
may buy in such stock at par and cancel or transfer the same on its own motion,
and apply the proceeds to the payment or discharge of such debt, obligation, or
liability, with or without notice any time after same is due, or it may sell such
stock at public vendue to itself or any qualified person at such bank after 10
days’ notice, posted in a public place in said bank, and so apply the proceeds
of such sale. Each stockholder in person or by written proxy shall be en
titled to cast one vote for each share of stock he owns at the annual or any
special stockholders’ meeting of such a bank.
(d) Each farm-credit bank shall be managed by a board of not less than 7
nor more than 15 directors, elected annually by the stockholders, and at least a
majority of such directors shall be stockholders. The officers shall be president,
vice president, and secretary, elected by the directors, who may employ a
cashier, tellers, and other employees, with the powers and duties and compensa
tion fixed by the directors and approved by the council. Any officer or em
ployee of a farm-credit bank may be required,by the directors or the council
to give bonds or otherwise secure the bank against loss through personal
dishonesty.
(e) Each farm-credit bank may adopt by-laws, rules, and regulations ap
proved by the council, or every such bank may be required to conform to uniform
by-laws, rules, or regulations prescribed by the council. All by-laws, rules,
and regulations shal be subject to change or repeal by order or regulation of
the council, and the council may make any order, rule, or regulation for the
BANKING AND CURRENCY.
1491
organization and conduct of a farm-credit bank and tbe regulation of its busi
ness and affairs not inconsistent with law or the provisions of this act.
(/) A farm-credit bank shall receive deposits from and make loans to only its
stockholders and individuals, firms, and corporations residing within 100 miles
of such bank anod owning a farm or working a farm under a lease or engaged
in the business of agriculture or regularly employed in or about a farm, and
members of the immediate family of such persons. No loan shall be made by
a farm-credit bank to any individual, firm, or corporation that shall exceed 10
per cent of the outstanding capital stock of such bank. A farm-credit bank may
loan on unimcumbered improved farm real estate within 100 miles of such bank
not exceeding 50 per cent of its cash value and for not more than one year,
subject to extension not more than one year at a time when approved by the
directors. A farm-credit bank may accept as security for loans warehouse
receipts for cotton, corn, wheat, and other agricultural commodities and farm
products, tools and machinery, and other personal property approved by the
council, and under rules, regulations, and conditions prescribed by the council,
and such other security as the council from time to time may authorize. The
rate of interest or discount charged by any farm-credit bank shall not exceed
7 per cent per annum. No farm-credit bank shall discriminate between its
customers, its borrowers, and depositors in the quality of service rendered or in
the interest rates paid for deposits or charged on loans and discounts or in the
charges made for other service.
( g ) Each farm-credit bank shall always maintain a minimum legal cash
reserve at least equal to 15 per cent of its total deposit liabilities, at least twothirds of which shall be kept permanently on deposit with the council and the
balance in its own vault or on deposit with national banking associations or
other banks and trust companies qualified to enjoy the privileges of said council
or subject to its regulation, but not with any other farm-credit bank except on
the approval of the council. Each farm-credit bank shall be subject to the
same examinations, reports, obligations, orders, rules, regulations, requirements,
and supervision by the council as other banking associations, banks, and trust
companies subject to regulation by the council, and while such farm-credit bank
is in good standing with the council it shall enjoy, so far as practicable, the
same privileges and protection from the council as such other banks, including
the right to obtain currency and coin and loans on terms of absolute equality.
( h ) At least one-tenth of the net profits realized each year by a farm-credit
bank shall be carried to surplus until the surplus equals at least 20 per cent
of the outstanding capital of such bank, and whenever such surplus is less than
20 per cent of such capital; and while such surplus is below 20 per cent of
the capital the dividends paid on the capital stock of such bank shall not ex
ceed 6 per cent per annum accumulated. No dividend or part of dividend shall
be declared or paid out of surplus except out of that part of surplus exceeding
20 per cent of the total outstanding capital stock of such bank.
(i) A farm-credit bank may open and maintain and do business with any
other national banking association, bank, or trust company subject to regulation
by the council, or with any other farm-credit bank in good standing with the
council and with the council and any of its branches. But a farm-credit bank
shall not have on deposit with any banking association, bank, or trust com
pany an amount exceeding a sum equal to 10 per cent of the outstanding un
impaired capital and surplus of such farm-credit bank or of such banking
association bank, or trust company, but it may have any amount on deposit
with the council or its branches; and the deposits of a farm-credit bank in
any other banking association, bank, or trust company shall be preferred de
posits and paid before other deposit.
(;') The laws of the United States pertaining to national banking associa
tions and the punishment of offenses by said associations or their officers and
employees or persons dealing with such associations are hereby extended to
include farm-credit banks authorized and formed under this section and their
officers and employees and persons dealing with such farm-credit banks.
(7c) The council may authorize, regulate, and supervise “ farm-credit asso
ciations” of such character and with such powers as the council may deter
mine to facilitate the extension of credit and currency by farm-credit banks
to members of such associations.
U N ITE D ST ATE S M O N E T A R Y CONGRESS.
Sec. 33. A representative Federal public body to be known as “ United States
monetary congress ” is hereby created. It shall consist of 72 members, one
1492
BANKING AND CURRENCY.
elected by the electors of each State and 24 representing the Federal Union,
appointed by the President with the advice and consent of the Senate. The
term of office of the members shall be four years, beginning March 4, half
of the elected members and half of the appointed members shall be elected in
alternate two years, except that in 1914 the entire number shall be chosen,
half for two years and half for four years, provided that of the 24 represent
ing the Federal Union there shall be included all living former Presidents of
the United States, the Secretary of the Treasury, the Secretary of Agriculture,
the Secretary of Commerce, and the Secretary of Labor as ex officio members.
Members of the council shall be eligible for election by States or appointment
by the President as members of the United States monetary congress. All
vacancies shall be filled in the same manner. The members shall receive no
stated salary, the position being honorary, but each member shall receive a
sum equal to his railroad fare from his place of residence to Washington, D. C.,
and return and $25 per day to meet all other expenses while necessarily absent
from his home to attend the annual meeting to be held in the city of Washing
ton in the month of February each year and any special meeting. Members
of the United States monetary congress shall be eligible for election or appoint
ment as members of the United States monetary council and as appointees
or employees of the council. On the order of the President the elected and
appointed members of the United States monetary congress shall meet and
organize by electing a president to preside and three vice presidents and such
other officers as it may determine, and adopt rules for its own government and
guidance; and thereafter such United States monetary congress exclusively,
instead of the President and Senate of the United States, shall have the right
and power of choosing all members of the United States monetary council, ex
cept the ex officio members thereof, and of suspending or for cause expelling
the same, and the filling of vacancies. The United States monetary congress
shall advise and supervise the work of the council, and by an affirmative vote
of at least two-thirds of its members may veto or reverse any action of the
council or require the council to take any action prescribed by the United States
monetary congress by resolution, and by majority vote it may propose to the
council any course of action, but same shall not become operative until ap
proved by the council unless it was adopted by such two-thirds vote.
S’ec. 34. Any existing laws of the United States in conflict with the provi
sions of this act are hereby modified to an extent, and only to such extent,
that they will not conflict with the provisions of this act, and all existing acts
or parts of acts in conflict with the provisions of this act are hereby so modi
fied or repealed.
R eso lu tio n s of t h e K e n t u c k y B a n k e r s ’ A ssociation on t h e G l a s s -O w e n
B il l , S eptember 18, 1913.
The following resolutions were submitted by the committee on resolutions
and unanimously adopted:
“ R e s o l v e d , That we, the members of the Kentucky Bankers’ Association, in
regular State convention assembled, at Louisville, Ky., this 18th day of Sep
tember, 1913, reaffirm our previously expressed desire for a more elastic cur
rency and a better utilization of bank reserves; but we deplore and oppose
the following provisions of the bill known as the Glass-Owen bill now pending
in the American Congress, to wit;
“ First. We condemn the provision of said bill that forces existing national
banks to invest any portion of their capital stock in regional reserve banks, or
compels them to make deposits therein.
“ Second. Feeling that what the country needs is more and not less banking
facilities, and that all banks, both State and National, should be on equal foot
ing, we are opposed to the abridgment of any of the existing rights of national
banks, and to the enactment of any law that tends to depreciate the value of
United States Government bonds held by owners thereof.
“ Third. Whatever note issue or emergency currency is permitted should be
issued by the banks, without the guarantee of the Federal Government, except
as it may act as a trustee for holding the assets which secure such currency,
and the currency thus issued should be so safeguarded as to make it sound
and safe, and it should be so taxed as to cause its automatic retirement when
it has served its purpose.
1493
BANKING AND CURRENCY.
“ Fourth. We are opposed to that section of the pending bill which requires
banks to render the important and often unpleasant and expensive duty of col
lecting checks without charge.
“ B e i t f u r t h e r r e s o l v e d , That we realize the difficulty confronting the Presi
dent and Congress in their present effort to enact into law the will and wisdom
of the American people on the subject of a bank that will serve alike the in
terests of all sections of our common country and bring about the result so
long desired, to wit, a safeguard against financial panics, and we heartily
indorse their efforts in that direction, and sincerely hope that they will lend
an attentive ear to all interests and succeed in giving to the country a law that
will prove a safeguard and benefit to all our people; and we believe that the
present wholesome agitation will lead up to a proper solution of the difficult
problem.”
On motion of Capt. J. H. Leathers, Messrs. J. E. Buckingham, J. N. Kehoe,
and J. M. Atherton were appointed a special committee to deliver, in person,
a copy of the above resolutions to the chairman of the Banking and Currency
Committee of the United States Senate and the chairman of the Banking and
Currency Committee of the House of Representatives, at Washington, D. C.
A copy attest.
>
S e c r e ta r y K e n t u c k y B a n k e r s ' A s so c ia tio n .
(Thereupon, at 5.40 o’clock p. m., the committee adjourned to meet
to-morrow, Wednesday, October 1, 1913, at 2.30 o’clock p. m.)
W E D N E SD A Y, OCTOBER 1, 1913.
C omm ittee on B a n k in g and C urrency ,
U nited S tates S en ate ,
Washington, D. C.
The committee assembled at 2.45 o’clock p. m.
Present: Senators Owen (chairman), Hitchcock, O’Gorman, Reed,
Pomerene, Shafroth, Hollis, Nelson, Bristow, McLean, and Weeks.
STATEMENT OF CHARLES A. CONANT— Continued.
The C h a ir m a n . Mr. Conant, Senator Hitchcock has some questions
he desires to ask you.
Senator H itchcock . Mr. Conant, we were discussing yesterday
whether there should be a limit upon the volume of paper currency,
and as I recall it, you were not in favor of placing an arbitrary limit
upon the issuance of paper credit?
Mr. C o n a n t . No; I do not think any arbitrary limit is necessary,
with the expanding business of this country. You grow up to the
limit, and then you have to change it, as has happened in the case of
the Bank of France. The real limits are factors which keep your cur
rency steady all the time, such as the observation o f the foreign ex
changes. Those things should be the sources of limitation, not any
thing arbitrary or anything determined by any single individual.
Senator H itchcock . I s there any proper volume of money circula
tion which should be established, including paper currency as well
as gold?
Mr. C o n a n t . Y ou mean in the United States, or anywhere else?
Senator H itchcock . Take two countries. Suppose one has a circu
lation of $34 per capita and another has a circulation of $50 per
capita. Is one country better off than the other?
Mr. C o n a n t . Not at all. It all depends upon the methods o f car
rying on transactions. The countries you speak o f are France and
1494
BANKING AND CURRENCY.
the United States, I think, although I am not sure that France has
so large a circulation.
The C h a ir m a n . France has $47 per capita.
Mr. C o n a n t . Approximately, what Senator Hitchcock stated.
The C h a ir m a n . And Germany has $23.
Mr. C o n a n t . Yes. The reason for a large circulation in France—
while it is in some degree an evidence of prosperity, the real reason
is that they use currency so much and checks so little. On the Con
tinent, as you are all doubtless aware, the check system is not used in
anything like the degree it is in England or the United States, partly
because of the fiscal charges, the stamp tax. And then the laws re
garding the use of checks are much more complicated than ours.
Senator H itchcock . Y ou , as I recall it, stated that you thought
sufficient limit upon the volume o f currency would be established if
a certain amount of reserve against the note issue were provided for?
Mr. C o n a n t . Yes; that is the principal determinant of the sound
ness and security of the currency.
Senator H itchcock . But you would permit the Federal board to
allow any volume o f currency within that limit ?
Mr. C o n a n t . Unless the Federal board was satisfied that the mone
tary situation wTas uncertain.
Senator H itchcock . I mean you would allow them to fix it within
that limit?
Mr. C o n a n t . Y ou mean with no limit?
Senator H itchcock . To fix the volume of currency within the
limit made by the reserve?
Mr. C o n a n t . Not necessarily. The Federal board is bound to
study the situation.
Senator H itchcock . I understand that. Suppose the Federal
board fixes the proper lim it; would you allow the Federal board to
fix the limit within the limit called for by the reserve?
Mr. C o n a n t . Yes.
Senator H itchcock . That is, as long as the Federal banks were
compelled to maintain a 50 per cent gold reserve against circulation ?
Mr. C o n a n t . Yes; I should say so, generally speaking.
Senator H itchcock . Y ou would allow the Federal board to issue
any quantity of currency as long as they could maintain that reserve ?
Mr. C o n a n t . A s long as they maintain that reserve I should say
that would be safe.
Senator H itchcock . Y ou admit that while that is the standard
adopted in Germany, the result has been that at times they have ap
proached inflation, and that the inflation has been followed by a
check which has caused a depression, and the depression has resulted
in great commercial loss?
Mr. C o n a n t . I do not say that there has been currency inflation.
On the contrary, I should say not. There has been credit inflation,
and such a locking up of capital in fixed form is the chief precursor
of trouble because of the reduced supply of capital available for cur
rent commercial or productive purposes. The trouble with Germany
has been all the time the ambition of the Government and of Ger
man merchants and financiers to extend trade and to obtain commer
cial or diplomatic advantage all over the world, and they have
strained their capital resources. But the currency factor has been a
subordinate factor. I should not say off hand that the Imperial
BANKING AND CUEBENCY.
1495
Bank of Germany has ever encouraged or permitted the inflation of
currency. In fact, the German law is so very strict that there is no
room for very much inflation.
Senator H itchcock . I just looked up yesterday, after you had
been testifying, and I find that the per capita note issue of theReichsbank was 16 marks in 1880, 20 in 1890, 20 in 1900, 21 in 1902, 21.07
in 1904, 22.07 in 1906, 23.08 in 1907, and that the per cent of cash re
serve against those notes declined steadily from 65 per cent in 1880 to
45 per cent in 1907. Does that not denote an inflation of the currency ?
Mr. C o n a n t . No; I should not say that, quite. In the first place,
an expansion per capita has taken place in most progressive countries,
partly, perhaps, due to the rise in prices, but more particularly to the
increased number of people engaged in commercial business—in other
words, the bringing of the whole community, rural as well as urban,
into the circle of active financial and monetary transactions.
Senator H itchcock . Let me stop you right there. In England
there has been no such inflation?
Mr. C o n a n t . Because England had already reached the stage of
saturation, if you please, and moreover, her system-----Senator H itchcock (interposing). That is really the answer?
Mr. C o n a n t . No ; because she has substituted the check system.
Germany has not done that.
Senator H itchcock . France has been going in the other direction;
she has been increasing the per cent of her cash reserve against her
notes, until it is up to 85 per cent, and she has had none of this
depression following periods of inflation.
Mr. C o n a n t . France, of course, has been in the fortunate position
of having adequate capital for her own industries. She has not been
creating new industries as Germany has, and she has had great
reserves to loan abroad.
Senator H itchcock . Would Germany have inflated her currency
as she has done, if she had not had the power to inflate her currency?
Mr. C o n a n t . I should say she would, probably, but not to exactly
the same degree. I do not consider that the German currency can be
regarded as seriously inflated on the figures you have given there.
There is an element of criticism, however, in that she has allowed her
metallic reserve to run down below 50 per cent.
Senator H itchcock . From 65-----Mr. C o n a n t (interposing). Down to 40. Sixty-five was rather
excessive. It would indicate that in that particular year forces were
in a state of quiescence, and that conditions were slack, just as occurs
after any panic.
Senator H itchcock . Y ou say that is excessive. It is excessive
measured by France or by Great Britain; it is not excessive as meas
ured by the United States?
Mr. C o n a n t . I would like to complete an answer to your previous
question.
Senator H itchcock . I beg your pardon.
Mr. Conant . O f course, if a country can afford to set aside 65 or
100 per cent of gold against its currency it may be a good invest
ment; but even so far as the 50 per cent is concerned, it is a dead
investment, unless it is necessary to secure it. A country should
make a considerable sacrifice of income to secure a sound credit cur
1496
BANKING AND CURRENCY.
rency. I f 75 per cent reserve were effective it would pay the country
to make that investment, even though it involved a large loss of
income.
Nations like Germany, with less accumulated riches than France,
can not afford to make that investment. They can not afford an
investment of 65 per cent, permanently, in their reserves. They
need to invest capital in great productive and commercial enterprises.
What has occurred in Germany has been that the people of Ger
many, stimulated by the Government as well as by the commercial
bodies, have tried to do more business than their capital justified.
But the volume of currency constitutes a very small factor in the
matter. Theoretically, if the currency had been very much more
restricted, it might have put a little more of a curb upon speculation,
but not much, because speculation does not have to be made through
currency—it is made through banking transactions and credit. But
the trouble in Germany, as it was in this country prior to the panic
of 1907, has been the conversion of the productive capital of the
country, the annual product, into fixed forms, to such an extent that
the liquid capital has been reduced to an almost inadequate point.
Now, the German banking system is designed, as far as practicable,
to facilitate transactions, to turn comers, because in Germany, you
know, there are the quarterly settlements, which are occasions when
there is a great demand for currency. But that demand closes in a
week or 10 days, and they can afford a certain currency inflation for
that one week. So that the last amendment to the law in 1911 per
mitted the Imperial Bank to issue 200,000,000 marks (about
$50,000,000) in the wreek ending each quarter, which is considerably
more than they can issue in ordinary times. This does not relate to
the amount that can be issued on deposits of gold. You can issue any
amount, if you deposit gold, mark for mark. Above that you must
pay a 5 per cent tax.
I do not think the monetary experience of Germany can be used
to illustrate the evils of currency inflation. It might be used to illus
trate the evils of credit inflation. The German system is abundantly
conservative, even though the metallic reserve is only 40 per cent.
The real criticism might be made that the German law makes no
requirement for reserves against deposits, and that the great joint
stock banks have gone on locking up capital, engaging in great enter
prises, and holding no reserves or very small cash reserves, relying
upon the Imperial Bank to supply them with currency when they
needed it.
The German system is considered a very conservative system. In
fact, when it was adopted in 1875 the charter of the Bank of Eng
land wTas studied, and an effort was made to conform in a measure
to the theory of the Bank of England, but to get rid of a situation
such as occurred in England when, in times of crisis, when no more
currency could be issued except upon gold, the system was modified
by adding the provision that currency could be issued upon a 5 per
cent tax. Gen. Francis A. Walker, wrho was a strong devotee of the
Bank of England view, said that the tax might better have been 10
per cent. But experience has shown that the 10 per cent tax would
have been unnecessarily restrictive, and I do not believe it would
have had the effect you referred to of checking credit inflation. It
BANKING AND CUBEENCY.
1497
might to a small extent, but the credit inflation has not been influ
enced primarily by increase of currency.
Senator H itchcock. This occurs to me, and I would like to have
your opinion on it. In Germany the Reichsbank is permitted to dis
count the notes of the great banks which they have taken in the
course of business. There are not many of those banks. In this
country we propose to establish either a central bank or 12 regional
banks, which will be called upon to discount the notes possibly of
20,000 banks. Will there not be much more danger of credit inflation
in this country under those circumstances than there would be in
one of those countries where only a few great banks deal with the
central bank ?
Mr. C o n a n t . There probably would be to a limited extent; but it
would be the duty of the Federal reserve bank to control that.
There is another point akin to this relating to acceptances. This,
I believe, authorizes banks to make acceptances, a yery desirable and
proper thing, and, I think, perhaps, a thing which should be re
stricted to the larger banks of at least $100,000 capital, and perhaps
larger than that, because the promiscuous introduction of acceptances
might involve considerable inflation.
Senator H itchcock . D o you believe a bank of deposit ought to
give acceptances in any case?
Mr. C o n a n t . Oh, yes; I think it is perfectly safe business.
Senator H itchcock . That is not the custom in Europe. There the
general financial houses are the ones who give acceptances.
Mr. C o n a n t . I think the deposit banks of Berlin and Paris do so.
Senator H itchcock . I have been told that up to a very small per
centage they will buy and sell them, but they will not loan on them.
Mr. C o n a n t . There is force in that exception. I do not imagine
that in this country acceptances would be introduced with sufficient
rapidity to make the danger a serious one at the beginning. I think
probably the Federal reserve board would frame some regulations
restricting them, and it might be well to incorporate in the bill a
provision authorizing them to do so.
Senator H itchcock . Y ou are in favor of giving the Federal re
serve board tremendous power?
Mr. C o n a n t . I f it is properly constituted.
Senator H itchcock . We do not know anything about that. It
may be composed of seven very good men or otherwise. We are en
dowing them with powers. Do you believe in giving them unlimited
discretionary powers?
Mr. C o n a n t . In certain directions, but I believe that in others
their power should be defined by law. I believe the provisions of the
bill are a little loose as to taxation. I think that should be more
clearly defined by law. That the Federal reserve board shall deter
mine the conditions under which acceptances shall be granted is,
however, a limitation of power, allowing them to say to the banks,
“ You can not grant acceptances, except under certain conditions.”
Senator H itchcock . Would that not probably be turning over to
the Federal board power to legislate in regard to a banking and cur
rency system?
Mr. C o n a n t . I should not say so.
Senator H itchcock . A s it is now, a bank can not lend its credit?
Mr. C o n a n t . N o.
I
1498
BANKING AND CUBBENCY.
Senator H itchcock . T o give an acceptance means the bank goes
into the business of lending its credit, regardless of what its re
sources may be?
Mr. C o n a n t . It should be limited, and with the big exchange
houses which exist in New York it might be possible to forbid ac
ceptances to national banks, except within proper limits.
Senator H itchcock . D o you think the acceptances that a bank has
determines the amount of interest?
Mr. C o n a n t . N o ; it depends on circumstances. The bank expects
a return and it looks into the character of the assets. A man who
indorses another man’s notes usually does it from no commercial
motive, as a rule.
Senator H itchcock . The bank does it because of the profits it
makes in lending its credit?
Mr. C o n a n t . But they are bound to look into the resources of the
parties. Acceptances are based upon the active movement of com
modities. Unless they are fraudulent they are more certain to
represent commercial transactions than loans on commercial paper.
Acceptances usually represent a transaction— a shipment.
Senator H itchcock . I f one man goes to another and asks him to
indorse his notes, the other man, if he is a wise man, will say, “ No;
I will lend you the money.” In other words, he is unwilling to have
his paper out where it might come in upon him possibly in an
unexpected way, and prove an embarrassment to him. Is it not a
little the same way with a bank? I f a bank has the money to lend,
it will lend it; but not give him an extension, which may expire
in 60 or 90 days, and may embarrass them. Is that not a more risky
class of business?
Mr. C o n a n t . N o ; it is not more risky among those who under
stand it. The losses are very rare.
Senator H itchcock . I mean in this way: Suppose a bank of
deposit gives its acceptance for $100,000, which comes due in 90
days. In the meantime the depositors take the money out of the
bank, withdraw their demand deposits. Now, a new condition has
arisen. The bank’s acceptance is due, but the depositors have with
drawn their money, so that it is an embarrassment for the bank to
take up that bill.
Mr. C o n a n t . The prudent bank president is supposed to be on
guard and to look out for matters of that kind.
Senator H itchcock . I s it not a general rule in Europe that banks
o f deposit do not give acceptances, but that business is confined to
financial houses?
Mr. C o n a n t . I think, to a certain extent, that is so. I am not
prepared to say that is an absolute rule.
Senator H itchcock . I will say personally I am against allowing
banks of deposit to give acceptances, and I think this bill does not
allow banks generally to give acceptances, but only to give accept
ances in the case of foreign trade, which, I think, is a discrimination
against domestic trade.
Mr. C o n a n t . We do not use acceptances in domestic trade at
present. They will have to be domesticated in this country before
any dangers begin to develop.
BANKING AND CURRENCY.
1499
Senator B ristow. Mr. Conant, I wanted you to outline about the
kind of bank you would recommend if we had a Federal bank,
governed by a board similar to the one that is provided in this bill,
and the stock owned either by banks or by individuals. About what
kind of a bank would you suggest, if one like that should be thought
wise to organize?
Mr. C o n a n t . Well, I have not sat down to plot out such a measure,
and it would be a little foolhardy to undertake to go into much
detail. I should say you have already defined it in a way. I f it
is under Government control and privately owned, you would avoid
any danger of private control. That is practically the situation in
the Bank of France, and the Bank of Germany, and the Bank of
Belgium, and other institutions in Europe. The Government ap
points the leading officers, and private individuals hold the stock
and are represented on the board.
Now, of course, the Bank of France is the typical and strongest
bank for the conditions which exist in France. We can not use that
particular type of charter without modification. The Bank of
France is a bank for individuals as well as for banks, although its
deposit business from private individuals is comparatively small in
proportion to the note issue. To-day in the Bank of France about
60 per cent—probably 70 per cent—of the outstanding notes are cov
ered by gold, and there is also a considerable amount of silver. As
suggested, I think, by Senator Hitchcock yesterday, the metallic re
serves in both metals is approximately 75 per cent, so that the re
mainder of 25 per cent of the note issue which is not covered by
metal can be protected anyway. We do not need to go quite so far;
in fact, they in France would not do it except that they are so rich
and can afford to invest a large part of the national capital in a big
surplus reserve. I f France needed the money for other purposes,
she could get along almost as well on a metallic reserve of 50 per
cent. O f course, the Bank of France has branches all over the coun
try, and the chambers whenever they have renewed the charter have
made it a condition that it should extend the number of branches.
I believe there are now over 100 branches, properly so called, and
in addition to that there are smaller offices bearing other names. I
can give you the exact figures as they stood a few years ago. In
1907 the number of branches of the Bank of France of all types was
467. That includes not only what are called branches proper, but
auxiliary offices, some of which are manned very slightly, yet are able
to accept deposits and make loans.
There is one feature in particular o f the Bank of France which is
very popular there, and also in the Bank of Germany and the Bank
o f Belgium, and that is the rediscount of small paper. A great many
thousands o f bills—I think I have the figures on that—are for
amounts as low as 10 francs. A little retail tradesman making a
purchase of a wholesaler will give bill for 30, 60, or 90 days for
sometimes as low as $2 and sometimes for as low as 20 francs, or $4.
The Bank of France does not directly discount for those people, but
when the discounts are granted by the joint stock banks the joint
stock banks turn them over to the Bank of France for collection, and
the Bank of France has an equipment of people to make the collec
tions. I forget the French name of the official who does that work,
»
1500
BANKING AND CURRENCY.
but it is something equivalent to a clerk or messenger. He makes
the rounds every day. Instead of making the small people come to
the bank, these collectors make the round of the shops every day and
collect the notes which have matured and which have been redis
counted. I do not suppose it would be necessary or desirable to intro
duce that system here, because our small tradesmen have more money
usually, and they would scorn getting a discount for $2. As I say,
that business could not be done directly in any case through such an
institution, but it could be done indirectly, if it was thought worth
while to establish a system o f that sort.
Senator B ristow. Y ou could leave that to the banks as they are
now organized, but we do not have such conditions as that here.
That would not be necessary in our country, with our banking
facilities.
Mr. Conant . No; our people would not need to go into such small
transactions as that.
I will say this about the Bank of France, which may not be perti
nent to this discussion—and it is true also of several other European
banks—that whenever there was a revision of the charter in recent
years, the conditions imposed have been more onerous. In all the
European banks of issue to-day, outside of England—and we always
leave England out, because their system is not governmental in any
way— in the continental banks there have been renewals of the char
ters from time to time. In the case of France those renewals take
place only once in a considerable term of years. In the case of
Germany there is a rearrangement of the terms every 10 years, with
the result that every 10 years new conditions have been imposed.
Senator W eeks. That is the case in Canada, too?
Mr. Conant . Yes, sir; under the Canadian law there is a revision
every 10 years. In every such revision in Europe the Government
has become a larger partner in the business. They have not inter
fered with the management of the bank as a private institution run
for the benefit of the stockholders, but they have levied what you
might call a special income tax. They have said, “ After you have
paid your shareholders so much, if you have a surplus, it shall be
divided between the shareholders and the Government ; ” and the
ratio of that division is constantly increasing in favor of the Gov
ernment.
Senator B ristow. That is.intended, of course, as a source of reve
nue for the Government?
Mr. Conant . Partly that and partly to meet this theory that the
right of issue ought to be a source of some profit to the Government
and not exclusively a private monopoly. That is partly owing to the
disposition to curb monopoly. O f course it is highly desirable that
note issues should be a monopoly, or at least that notes should be
issued under a uniform system, and that you should not turn every
body loose to issue his own notes.
Senator B ristow. The Bank o f France issues these notes, and
other banks also issue them. Is there no limitation on the earnings
for the stockholders ?
Mr. Conant . I will give you that in a moment. There is no limita
tion, but there is a constantly growing division between the stock
holders and the Government.
BANKING AND CURRENCY.
1501
Senator B ristow. That would be a detail for us to consider ?
Mr. Con an t . Yes.
Senator B ristow. This Federal reserve bank would be the deposi
tary for the Government funds?
Mr. Conant . Yes. I think in every European country, including
England, there are practically no subtreasuries. There are post offices
and places Avhere the Government takes in money, but the money is
deposited with the bank of issue.
Senator B ristow. Yes. That is one reform that has been recom
mended by students of finance for years in this country, is it
not; that the moneys instead of being locked up in these subtreasuries
and in the Treasury of the United States should not be withdrawn
from circulation, but redeposited?
Mr. Conant . Yes.
Senator B ristow. Then you would make this Federal bank a
Federal reserve bank and have it a depositary for the reserves of the
country banks.
Mr. C onant . I suppose under our system that would be necessary.
O f course in France there is no provision of that sort; it is purely
optional. In the first place, banking, outside the Bank o f France, is
now very much concentrated.
The big institutions do practically the whole business of France.
The time was when the local notary, or a family in a small locality
did the banking business there. But the organization of the Credit
Lyonnais, which assumed its present form in 1881, the Societe Gen
erate and the Comptoir D ’Escompte— those are the three principal
ones, but there are two or three others almost equally important—
since the organization of those banks they have established branches
all over France and have so reduced the rate for commercial loans
that they have put the private bankers largely out of the commercial
business. There are lots of houses engaged in floating loans, but that
is rather an independent business.
Senator B ristow. Y ou do not think that is desirable, the concen
tration or mobilization of these by a few large concerns?
Mr. C onant . In France and England it has been carried pretty
far. While it has resulted in a lower discount rate on discount
paper, it has deprived the small man o f the credit which he might
derive from his character. Inasmuch as the managers of the
branches in effect were clerks, employees of the central bank, and not
always residents of the locality, and have little discretion, they have
to make their loans according to established rules, there is not the
flexibility in extending credit to the worthy local man that there was
when a private family practically did the banking and knew the man.
Speaking of the commercial business of the country, probably the
concentration has been beneficial, because it has established a com
paratively uniform rate of discount, enabling the surplus of funds
which are accumulated at the capital in Paris to flow to localities
where they are needed instead of making every locality its own pro
vider of funds as well as its own disburser of them.
Senator B ristow. I f you had a Federal reserve bank, with the
reserves on deposit there, would that not meet that demand in re
discounting for these various country banks? Would not that money
naturally flow where it was needed most?
1502
BANKING AND CUBBENCY.
Mr. C o n a n t . You mean if we retained something like the present
banking system, leaving out the note issue?
Senator B ristow. I would leave the banking system as it is—that
is, the State banks and national banks just as they are now.
Mr. C onant . What is your question?
Senator B ristow. Y ou suggested that the concentration of the
banking business o f France into a few great banks had resulted in
the flowing of money where it was most needed, where the best rates
could be obtained, and that, as a result of that, it had been commer
cially beneficial. Would not this Federal reserve bank, if it redis
counted for any of the banks of the country and was a reserve bank,
could it not perform the functions to a certain extent that these con
centrated banks have? Would not this reserve that is here in mass,
mobilized, be used; would it not flow to the place where it was most
needed; would that not be the tendency?
Mr. C onant . Yes; in so far as that bank handled the commercial
business of the country. O f course, I should say, that a reserve
bank even if as strong as the Bank of France, would not undertake
to do the whole business of the country. In New York the existing
banks would continue to do a large part o f the business.
Senator B ristow' . Just as they do now?
Mr. C onant . Yes; only they could appeal to these Federal banks
when they needed currency.
Senator B ristow. Y ou would not recommend a banking system
that would extend the mobilization of the banking business anything
like it is in France?
Mr. C onant . No ; I think that wTould be impracticable.
Senator B ristow. D o you not think it would be undesirable?
Mr. Conant . Well, it would be undesirable to the extent to which
it has been carried in France. It might be advisable to allow them to
contribute to the very things you suggest, to permit some of the
national banks to have branches in some localities, under certain
conditions. But it would hardly be practicable, even if the laws per
mitted it, for a few New York banks to have branches, say in Arkan
sas and Texas—I mean in every community in Arkansas and Texas.
It might be practicable to allow them to have branches in Fort
Smith and Dallas, but if they undertook to have branches in every
community it would be a very top-heavy proposition. I do think
there would be some advantage in letting banks with a certain capital
have branches in other reserve cities, and, perhaps, within the limits
of their own States.
Senator B ristow. D o you think it would be advisable to have a
big, powerful institution in competition with the local concerns? I
think commercially and economically we are suffering from such
concentration now, not in banks but in business, and I am afraid that
our independent system of banking, which I think is very desirable,
might be broken up to some extent.
Mr. Conant . I do not understand that there is anything in the bill
providing for the extension of branches in the cities of the United
States. I say, I should not consider the question of establishing
branches without restriction on the part of the big city banks as a
practical question at the present time, because there is too much prej
udice against it.
BANKING AND CURBENCY.
1503
Senator B ristow. N ow , to get back to our starting point, as I
understand, you would suggest that this Federal bank be a Govern
ment depositary, that it be a bank of issue?
Mr. C o n a n t . Yes, and a bank of rediscount.
Senator B ristow. And a bank of rediscount and that it be a re
serve bank, and that the reserves which are required by the Gov
ernment be kept in this bank?
Mr. C onant . Y ou mean the reserves required by law from other
banks? Yes; I am inclined to think that would be necessary under
our system. There is no such law in any European country that I
recall requiring banks to keep reserves. They have to keep some
money there for certain purposes, but in this country, with the exist
ing banks in operation. I think it would be desirable to require them
to keep a certain percentage of reserve, ultimately in the central
banks, because that would tend to concentrate the gold reserves there.
The French and other laws do not require reserves from the joint
stock and local banks. We require those reserves, and I think we
should require them, because we have so many banks that we can not
keep them under the scrutiny of competent financiers all the time,
and if we gave a bank freedom the result would be that the bankers
who were the most risky and who kept small reserves would compete
with the more conservative banks, and we should ultimately get
into a very dangerous situation. That being the case, I think with
our 7,000 national banks, and 18,000 banks subject to State laws, and
trust companies we should not abandon the idea of having a certain
required reserve, and if we do have a required reserve, which compels
the banks to lock up currency or credit, it would be desirable that
that reserve should be kept with the central bank. For that reason
I think it would be advisable to require the local banks of this
country to keep a certain percentage of their reserves with the central
bank.
Senator B ristow. D o you think it would be more desirable to have
the stock of this Federal bank subscribed by the banks or by citizens
not bankers?
Mr. C onant . I have not any mature opinion in regard to that.
I do not see why it is not equally satisfactory either way. I see no
reason why private citizens should not be shareholders in the bank
also. I f you have bank subscriptions it knits up the interests of the
banks with the central bank.
Senator B ristow. Would it not be better to have it independent of
the bank and make it useful to the banks in their service of the com
munity who have their relations with this bank—that is, make it
independent?
Mr. C onant . O f course you have this factor to consider, that creat
ing a new institution, as we would be here, they might have no busi
ness at all if you did not knit it up with the other banks, if you
did not make them partners, and did not require reserves to be de
posited.
Senator B ristow. Y ou would have the reserves-----Mr. C onant (interposing). And Government funds, of course.
Senator B ristow. Government funds and your capital?
Mr. C onant . Yes; and the privilege of note issue.
Senator B ristow. The privilege of note issue.
1504
BANKING AND CURRENCY.
Mr. C o n a n t . You can only utilize the privilege of note issue when
you have some assets against it, and make loans and issue your notes.
Senator B ristow. Why not let the note issue rest with the bank,
and let the bank obtain notes on its assets, similar to the provisions
as to the regional bank?
Mr. C onant . But I am saying they would have no assets if nobody
did business wi,th them; if nobody went to them for loans there
would be no occasion for the issue of notes.
Senator B ristow. But if the banks wanted currency on their
assets ?
Mr. C onant . Then they would ask for rediscount.
Senator B ristow. They could only get it from this bank ?
Mr. C onant . The notes would get in circulation in that way.
Senator B ristow. What other functions would you give to this
bank?
Mr. Conant . I would give it pretty wide functions in regard to
foreign exchange, buying and selling bills, and even initiating loans
abroad, which could easily be done by a strong institution. In 1907
some of our New York bankers went to the Bank of France and
asked for a loan, and they said, We will give it to you if it is guar
anteed by the Government of the United States, or if you had a
central bank; but as you have no such institution, and as the Sec
retary of the Treasury says he has no authority to give the guar
antee of the United States, we can not make the loan.”
Senator B ristow. IVliat capital would you suggest?
Mr. Conant . It should not be less than $50,000,000, and perhaps
$100,000,000.
Senator B ristow. Would you put a limit on the dividends on the
capital stock ?
Mr. Conant . Probably some such limit as is imposed in Europe.
Senator B ristow. Five or six per cent?
Mr. Conant . It would not be an absolute limit. I should say after
they had reached 5 or 6 per cent they should then divide with the
Government.
Senator B ristow. A s I understand it, there are three things which
it is desired to accomplish by this legislation. One of the things is
the mobilization of the reserves. Another is a certain place for re
discount, and the flexibility o f the currency.
Mr. Conant . Elasticity.
Senator B ristow. Elasticity of the currency. Could not those three
things be provided for more easily and by simpler processes through
such an organization than through these 12 regional banks?
Mr. Conant . Oh, yes; very decidedly. I should want to study the
question of how a new bank would get its business; whether it was not
advisable for the larger of the national banks to be member banks
and to have some direct relations with the central bank, and if it were
clear that the central bank would get a sufficient volume of business
through rediscounts to issue its notes, then I think the mechanism
would be much simpler and more effective than through the 12 re
gional banks.
Senator B ristow. N ow, the objection to a central bank in the
United States, as I understand it, at least the objection that I have
had, and I think it is a popular objection, is the fear that it places
in the hands of the financial interests, and they might and I think
BANKING AND CURRENCY.
1505
could obtain control of that bank and great power over the credit
of the country and the currency of the country, and that is dangerous.
I think it would be used selfishly, myself, although there is a differ
ence of opinion about it. A Federal bank controlled by a Federal
board could not do this, could it?
Mr. Con a n t . No; I think not. You mean by a Federal bank such a
one as you have been describing, the stockholders being private
citizens and being represented through a committee. That is prac
tically the situation in all Continental Europe. And the officials ap
pointed by the Government are usually men who have grown up in the
public service, not picked out because they have rendered some po
litical service, but men who have grown up in the service in the cus
toms or Treasury, and who are familiar, more or less, with banking,
and there almost never arises any friction or difficulty between those
officers appointed by the Government and the committees representing
the shareholders. As I stated yesterday, in the case of the Bank of
Germany, the committee representaing the r-hareholders is usually
allowed the initiative in determining the rate of discount; that is,
when changes should be made in the rate, and as to what paper
should be discounted, and as to various other points. The power of
the Government officials is supreme, but they very rarely, if ever, exer
cise it.
It would be necessary in this country that the bank should have
some branches; not necessarily a large number, but enough to do its
exchange business in the principal cities of the country.
Senator B ristow. Those branches would be for the purpose of
carrying the banking facilities nearer to the local banking institu
tions and they would be expected to use them ?
Mr. C onant . Yes; that would be their purpose. There would be
very little competition between them and the other banks except in
times of tight money. The Bank of France and several other con
tinental banks let the reins fall out of their hands when money is
plentiful.
Senator B ristow. My idea is that this Federal bank should be
used to strengthen the banks of the country instead of competing
with them. It should be supplemental to what we now have, and
be used as an agency to help them in taking care of the business of
the country, as they do now in times of emergency.
Mr. C onant . That, I think, is a proper view of it. It, is the policy
of most European banks of issue.
Senator B ristow. Could not that be done without disturbing the
present currency which we now have, and let any revolution or radi
cal change in our currency be deferred until this new bank and its
relations to the banking institutions of the country have become
established? The elasticity we give to the supplemental currency
would be through this bank and the national-bank notes could stay
as they are now.
Mr. C onant . That would be practicable, I suppose, except that if
you are going to superimpose a new currency upon the old, and the
old is practically to remain in circulation, the new currency might
represent too small a ratio to the total to be effective in influencing
the market.
9328°— S. Doc. 232, 63-1— vol 2----- 35
>
1506
BANKING AND CURRENCY.
Senator B ristow. Y ou think it might be desirable to retire a small
part of the national banking currency and substitute this for it?
Mr. C onant . That would be a safer step, if you follow such a plan
as you outlined, because otherwise—suppose that your new central
institution had only put out $50,000,000 of notes and it had only
$25,000,000 of gold against it. I f a gold drain should set in, drawing
out, say, $100,000,000 in one year, this bank would not be able to cope
with it. Its magnitude would not be adequate, so it would be rather
desirable to substitute its notes for the old notes. That has been done
in most of the countries in Europe where a central bank has been
adopted.
You know, the history of banking in Europe has been the evolution
toward a central bank. England and France were first, and then
came along Belgium and the Netherlands, about the middle of the
last century, and then Russia. Finally, within a very recent time,
Portugal, Spain, Italy, Switzerland, and Sweden have joined the
procession of central-bank countries. The Balkan States adopted
the central bank soon after their liberation from Turkey in the war
of 1877. The two last countries were Switzerland and Sweden,
Sweden adopting the central bank in 1904. Switzerland did not
adopt the central-bank system until the law of 1905, and the system
went into operation in the summer of 1907 on the very eve of our
panic. And yet, even with that limited time of preparation, the
Swiss central bank was able to cope with that situation and maintain
the credit and prestige of the circulation. But in both those coun
tries— Sweden and Switzerland— arrangements were made for the
gradual retirement of the circulation of the local banks within a
short term of years, and inducements were given to retire the circu
lation within less than that time. As a matter of fact the circula
tion was surrendered very rapidly in both countries.
I think some such step would be necessary to give your central
bank here any effective power. The limitation of time was short
in both those countries—about five years, I think, in both cases.
Senator B ristow. Such a plan as we have just been discussing
could be put in force without disturbing the present banking condi
tions? That is, the banks could go ahead as they are now and avail
themeslves of this new opportunity, and it would not incite any fric
tion or contentions of any kind or tear up any existing business
methods, would it?
Mr. C onant . That is rather a broad statement. I do not know
that I would want to say it would not invite any friction. You
mean it would not disturb existing banking conditions?
Senator B ristow. Yes.
Mr. C onant . I should think not. O f course, in the matter of sub
stituting the new notes for the old-----Senator B ristow (interposing). That is a question of currency
more than a question of banking.
Mr. C onant . O f course, you are asking me all these questions with
out my having an opportunity to sit down and think out any such
plan, and I am only replying offhand. I am not pretending to pre
sent a perfect plan.
Senator B ristow. I am going to ask you, if it is agreeable to the
chairman, to submit to the committee an outline of your suggestions
BANKING AND CURRENCY.
1507
as to such a bank—your recommendations as to how it ought to be
organized and the functions and what its relations ought to be—as
briefly and concretely as you can. O f course, it will take you some
time to figure it out, but for my information, Mr. Chairman, I should
like very much to have Mr. Conant’s views on that.
Mr. Conant . I will do the best I can. O f course, you say an out
line; that is, perhaps, easier than a charter, but I think it would re
quire some study.
Senator B ristow. I want to say to you that I have had in mind
since these hearings began—since I was placed on this committee,
so far as that is concerned—some arrangement whereby each bank
could get the accommodations that it wanted independently of its
right, without being compelled to carry any large amount of stock
or anything of that kind, or without being put under any obligations
to any great private banking concern, so it would feel itself bound
in interest to that concern. I wanted to preserve and enlarge the
independence of the present banking system, and I felt that the
comptroller ought to be vested with some power or authority whereby
an individual bank could go to him and get currency upon its se
curity which it presented, for the purpose of circulation.
But that has not been concurred in by many, I am free to say; it
has been met with the statement that it is not practicable because the
Government would have to have an intimate knowledge of the relia
bility of the 24,000 or 25,000 banks, and that would not be practicable.
Then it was suggested by some that agents of the Government be
located in reserve cities, and that those agents could pass upon the
reliability of the banks, etc. Now, that has been objected to.
Now, when Senator O’Gorman suggested this plan to you yester
day, it led me to wonder if this Federal bank could not be used to
perform the functions that I felt the Treasury Department ought
to perform, and do it much more efficiently, and do other things, as
you suggested yesterday, that it would be necessary for the Govern
ment to do.
Mr. C onant . Yes; undoubtedly a privately owned bank, which
was in fact a bank, could do all these things much more economi
cally, efficiently, and intelligently than any bureau of the Govern
ment, because the motives governing its directors would be different.
At the same time you can have, as they have all over Europe, some
of these officers appointed by the Government. You can have the
comptroller sit on the board, if you like, as is proposed in this bill.
Senator B ristow. I am exceedingly anxious that there should not
be any concentration of power or control in a private board to be
used for the domination of our credit system—our finance system.
Mr. Conant . Y ou mean, under an officer, and not under govern
mental control other than inspection? I do not suppose that it is
practicable or desirable to have a bank so absolutely independent of
governmental control as that. I do not think it is contemplated in
any measure now pending.
Senator M cL ean . Mr. Conant, I have here a letter from the presi
dent of the Merchants’ National Bank, of New Haven, which em
1508
BANKING AND CURRENCY.
braces a suggestion with regard to the character of the paper which
may be rediscounted by the reserve bank. Let me read i t :
T he
Hon.
G
eorge
P.
M
c
L
e a n
M e r c h a n t s ’ N a t io n a l B a n k ,
N e w H a v e n , C o n n ., S e p t e m b e r 3 0 , 1 9 1 3 .
.
U n ited S ta te s S e n a te ,
W a sh in g to n , D . C.
: In reading over the reports of the Senate Banking Committee on
currency reform I notice that one feature in connection with the acceptance of
commercial paper for rediscount has been overlooked, namely, that the volume
of commercial paper of to-day based on the sale of commodities is gradually
growing less through the fact that the average business man prefers an open
account on his books rather than to tie it up in a note for two or three months’
time and thereby preventing free action should by any chance the maker be
come involved in financial difficulties.
I think that the records of business concerns to-day will show that the
settlement of accounts by note has very materially decreased in late years,
and that the successful business man to-day, requiring accommodation, prefers
to put his own note in the bank, which I understand under the proposed law
would not be available by the rediscounting provision except to a small percent
age, and in addition the requirement of the bill of accepting commercial paper
based on the actual transfer of commodities will require an endless detail
through the fact that even notes based upon Ihe sale of commodities are not.
as a rule, paid in full at maturity, but more often are renewed with small
payments. This you will see would necessitate the payment and withdrawing
by the discounting bank from the reserve bank of such notes and the sub
stitution of others therefor; so that, as I look at it, it may be quite possible
that should one of the reserve banks be located in New York, the country
banks in that district would be obliged to employ their New York corre
spondents to take care of this business for them, keeping with their New York
correspondents all such paper as they might have, and who would make the
exchange.
These points may not amount to much, but as they occurred to me, I thought
it would do no harm to call them to your attention. In my mind there can
be no better paper than that made by our leading business men, and so-called
“ accommodation paper.” which is issued for the use and requirements of their
commercial business, and which as a matter of fact in our experience are
paid in shorter time than the average note given in the settlement of mer
chandise purchases.
Very truly, yours,
H. V. W h i p p l e , P r e s i d e n t .
D ear
S ir
Senator N elson. Notes of that kind should be available under this
bill.
Senator M cL ean . But to a limited amount, as I understand it.
Senator N elson. There should be no more limitation upon them
than upon the other paper.
Senator M cL ean . A s he understood it, I think it referred to page
25 of the b ill:
The aggregate of such notes and bills bearing the signature or indorsement
of any one person, company, firm, or corporation rediscounted for any one bank
shall at no time exceed 10 per cent of the unimpaired capital and surplus of
said bank.
Senator N elson. That is of any one concern.
Senator M cL ean . Yes.
Senator N elson. And that is a limitation in the national banking
act to-day, I believe.
The Chairman. It is; yes.
Senator M cL ean . Evidently he did not so understand the matter.
He understood, from page 25 of the bill, they were limiting that form
of note to 10 per cent o f the capital.
Senator N elson. That means that one firm can not loan more.
Senator M cL ean . Yes.
BANKING AND CURRENCY.
1509
Senator N elson. On that kind o f paper he refers to. Is not that
your understanding, Mr. Chairman?
The C h airm an . Limited to 10 per cent of the capital of the mem
ber bank.
Senator N elson. I mean that quality of paper he describes could
not be discounted under this bill ?
The C h airm an . N o ; I do not think it would be.
Senator M cL ean . Oh, yes; a note that a merchant gave------Senator N elson. I do not think it would be unless it was against
certain particular merchandise.
Senator M cL ean . That is evidently his understanding o f it, and
it seemed to me so from the reading of the bill on pages 24 and 25.
The C h airm an . In our country we confuse the two elements of
fixed investment and commercial paper, as understood in Europe. A
bank in this country gives a line of credit to a merchant, and that line
o f credit which is extended to him is in reality a line o f credit not
only against actual merchandise in transit, but against his estab
lished business and against his credit as an entirety, which consists
o f a localized investment and a floating capital in process of con
sumption which passes through his store and is drawn out by the
people. So it is not separately treated in this country as it is in
Europe.
As I understand it, in Europe an acceptance is against a piece of
merchandise which is shipped to the merchant by the manufacturer
say for disposal through his store, and the man who sells it to him
will get the merchant’s acceptance of a draft in payment of those
goods, which is timed as against the period when he will probably
dispose o f the goods and be able to meet the acceptance which he
gave.
Senator N elson. We have not that kind of paper in this country.
The C h airm an . No ; we do not have a great deal of that particular
kind of paper. The paper which we do emit includes transactions
connected with the actual investment of the merchant in his store
house and in his appliances and merchandise, and the generally
included amount is taken as the basis of credit.
Senator N elson. Here is the way it operates in practice: The mer
chant at an interior point goes to New York and buys a large bill
of goods from a wholesale house or a jobber. He takes those goods
home and he gets a line of credit at his bank, borrows money from
his local bank and gives his note for it, and then he sends on his
checks. He checks upon that account, and sends the checks from
time to time in payment of his bill of goods.
The C hairm an . And that particular transaction would come with
in the rule, but the general line of credit which you speak of con
fuses the two things; it would be a mixed transaction.
Senator M cL ean . I should like to have Mr. Conant’s view of the
propriety of making this accommodation paper eligible for redis
count.
Mr. Conant . I do not think there is any harm in making it eligible,
because I think the Federal reserve board in laying down its rules,
and the actual discounting officials of the banks, would decide
whether it was a safe risk or not. A great many ef these questions
can very well be left to the discretion of the officers of the Federal
reserve banks.
1510
BANKING AND CURRENCY.
Senator M cL ean . There should be no restriction against it?
Mr. C onant . I should think not, if it is really a commercial trans
action. There should be every effort to restrict what the chairman
alludes to—the lending of current deposits or notes upon fixed in
vestments.
The C hairm an . There are lines of credit given against a particular
volume of merchandise which is going through these processes and
that kind of paper would be distinctly commercial paper: but the
bill itself provides that the Federal reserve board shall differentiate
that so as to make it perfectly clear what paper would be available.
Mr. Conant . I should say they would adopt safe rules.
Senator M cL ean . Senator Bristow asked you some questions with
regard to the central bank as a substitute for the plan proposed in
this bill. We have heard a great deal about the panic of 1907. The
cash of the country was concentrated in New York where it could
not be obtained by the country banks, and there is a popular feel
ing—as has been expressed by Senator Bristow—against any plan
that will not prevent that as far as it may be possible.
Mr. C onant . The answer to that is that you dower any central
institution, or any chain of central institutions, with the power to
meet the demand for currency by issuing their own notes. That is
the key to the situation.
Senator M cL ean . So the central-bank plan would be in a position
to restrain and restrict the concentration of money in New York
as well as any plan that could be devised, would it not?
Mr. C onant . I would not say it would restrict its concentration,
but it would place it at the command of its owners at any time.
Senator M cL ean . It would be more likely to go where it was
needed?
Mr. Conant . Yes.
Senator M cL ean . Supervision over it would be as complete and
effective as would be possible under any plan ?
Mr. Conant . Yes; and the resources are, in a sense, infinite. That
is, if you require a certain gold reserve, even assuming that that
reserve is rigid-----Senator M cL ean (interposing). So if there is any danger of great
combinations of capital trying to control and dominate credit, this
bank wTould be in a position to anticipate that sort of thing and pre
vent it as far as any plan that has been devised ?
Mr. Gonant . Yes; so far as it affects commercial credit. But I
think the complaints that people make with respect to that are due
to misconception. The credit that people would like to get a share
in is' the credit for permanent improvements. That situation would
not be essentially modified, except in so far as the central bank was
a safeguard against crises.
Senator M cL ean . Would not the situation be better than it would
be under the system of 12 banks proposed in the pending bill—with
one central bank?
Mr. Conant . It would be in a much better position to protect com
mercial credit-----Senator M cL ean (interposing). Than the 12 banks-----Mr. Conant (interposing). In a very much better position; 5
would be stronger than 12.
Senator M cL ean . And four stronger than five?
BANKING AND CURRENCY.
1511
Senator N elson. And one stronger than all of them.
Senator M cL ean . The branch bank is merely a distributing reser
voir—
Mr. C onant (interposing). The branches are the absolute subor
dinates of the central bank. They could not hold a dollar of gold
that the bank ordered shipped to New York or to Oklahoma City-----Senator M cL ean . They could not enter into competition with the
central bank except to help them out?
Mr. Conant . That is all.
Senator W eeks. Mr. Conant, I have not heard you discuss in any
way the question of establishing foreign branches or authorizing
national banks or other banks to establish foreign branches. You
are familiar with the bill, I presume, upon that subject.
Mr. C onant . I know’ there is a provision for it.
Senator W eeks. The provision is the last one in the bill, practi
cally. I wanted to ask you if you thought that provision was ade
quate for the purpose.
Mr. Conant . I think it is a desirable thing to permit national
banks to establish foreign branches.
Senator W eeks. Almost everybody agrees to that.
Mr. Conant . I do not know whether I quite catch the purport of
your question.
Senator W eeks. Let me explain a little. It seems to me that in
order to develop our foreign trade, especially in the newer countries,
it is absolutely essential that we have banking facilities as well as
transportation facilities and other means of doing so. Take South
America, for instance. European countries engaged in trade with
South America have not only transportation lines, but they have
banking facilities there, so that every inducement is offered for those
people to buy goods of the European countries. Now, we have no
transportation lines sufficient, and we have no banks wdiatever, and
we ought to establish them.
It seems to me we ought very specifically in this bill to provide
that sufficient capital be furnished for such purposes, and that such
regulations be imposed in connection with the management of those
branches that there could be no reasonable possibility or probability
of failure, because the failure of an American bank would endanger
trade materially. I do not think we ought to leave it open to loose
management, and I think we ought to insist that sufficient capital be
furnished to compete successfully with the European banks of that
character.
Now. this bill proposes that a bank with a capital of $1,000,000
or more may set aside a part of its capital for that purpose. It does
not seem to me that a bank with a $1,000,000 capital can afford to
set aside sufficient of its capital to warrant its going into any such
business as establishing foreign branches.
Mr. C onant . I should be disposed to agree with you on that.
But the bill says, “ upon such conditions and under such circum
stances as may be prescribed by the Federal reserve board.”
Senator W eeks. But that is quite apart. Can you imagine a con
dition which would warrant a national bank wdth a capital of
$1,000,000 in this country setting aside enough of its capital under
any regulations or restrictions, to properly do such a business?
1512
BANKING AND CURRENCY.
Mr. Conant. Not unless it were the old Chemical, with $300,000
capital and $5,000,000 or $6,000,000 surplus. Really, while I think
this provision is unobjectionable, except perhaps on the ground sug
gested by Senator Weeks, I think the real work of that kind would
probably not be done by national banks, but banks formed especially
for that purpose. National banks, if the law permitted, might
become shareholders.
Take the big German banks. They are all, I think, partners of a
bank in China, but, from a legal point of view, it is an entirely
independent bank, and it is able to do more business, perhaps, and
do business on different lines from what the ordinary bank would
do or what you would permit a national bank to do.
Senator W eeks. Some national banks have been invetigating this
question and presumably for the purpose of entering into that kind
of business, and there was an authorization in a recent appropria
tion bill for the Secretary of Commerce to send two representatives
to South America to examine trade conditions there—one to examine
banking conditions, I think, and one to examine trade conditions. I
do not recall exactly about that.
But, to my mind, it is of the greatest importance that we make
suitable provision for banks in all South American countries, and
I think such provisions would be taken advantage of, and it would
greatly benefit the trade of this country.
Mr. Conant. But it does not necessarily follow that the bank you
referred to would not see fit to found its own corporation inde
pendently.
Senator W eeks. N o ; but we are doing something that is funda
mental and which ought to last for a long time, and it seems to me we
ought to do it right in every particular.
Mr. Conant. Your suggestion is that this $1,000,000 should be
raised to 5 or 10?
Senator W eeks. I think there ought to be sufficient capital fur
nished for a branch bank in a foreign country to compete success
fully with the banks in Germany, England, France, Italy, and other
countries that are in trade with that country.
Mr. Conant. I agree with you thoroughly, but I am inclined to
think you would find in many cases that an independent corporation
would be preferable, because it is necessary, I think, under the laws
of some Latin-American countries to have a national charter in order
to do the kinds of business that you desire.
Senator W eeks. Quite likely.
Senator N elson. Could not that foreign exchange business be
reached through a strong central bank establishing a branch in
England and another at Buenos Aires or at Rio de Janeiro? Now. if
those branch banks could make acceptances that would be regarded
as valuable and as sound as acceptances of the British banks, that
would give us control of it, would it not?
Mr. Conant. It would help greatly in that direction. I doubt
whether it would be advisable for the central bank, if we had one,
to go into the South American business except on a limited scale. It
could have branches in London, Paris, and Berlin undoubtedly, but
in the Latin-American countries I think it would be better to have
private banking institutions.
♦
BANKING AND CURRENCY.
1513
Senator N elson . I had a letter from a wholesale firm in Minne
apolis that imports a large amount of coffee from South America.
The way they have to pay for that coffee is this: They have to get a
letter of credit on some bank in England— an accepting house—and
after they have got that letter of credit on that house bills are drawn
against that house in England, and they have to pay that accepting
house for that bill of credit one-quarter per cent. That is the only
way they can do the business, the only way they can purchase the
coffee. After they have sent the letter of credit over to the foreign
bank in London as a basis for that bank accepting the paper, then
they draw on it. The purchaser of the coffee here draws on that
London house, and that bill is accepted and received for the coffee.
That is the modus operandi. I read the letter here the other day to
the committee, and it is exactly the system described by Mr. Warburg
in his pamphlet on discounts. Now. all that business we ought to be
able to do.
Mr. C o n a n t . The central bank could do it, directly or indirectly.
Senator W eeks . There has been more or less said at the hearings—
I think Senator Bristow referred to it in his questions this after
noon—about the distribution of circulation. Is it not true, that the
circulation will go where it is required promptly under any condi
tions?
Mr. C onant . It will go where it is required promptly if the condi
tions are not restrictive.
Senator W eeks . That is, if a dam is not built in some direction-----Senator B ristow. The circulation will go where the greatest re
quirement is.
Mr. Conant . Yes; of course, that is one advantage of the branch
system, that a bank in Montreal, for instance, to take a case in Can
ada. if it finds there is an opportunity to lend heavily in some
remote mining section, can send all the money that is needed there,
whereas if they relied on local banking sources they would be inad
equate. In other words, the branch system offers an unobstructed
sluiceway for the flow of banking credit, free from obstacles.
Senator W eeks . There are some obstacles, but it is, generally
speaking, true under our own system. For instance, if the Secre
tary of the Treasury had seen fit to deposit the $50,000,000, which
has been offered to the banks, Avith these Indiana bankers, is it not
true it would not have stayed there two days unless there Avas a
demand for it? And if there Avere a better demand for it elsewhere,
would it not have gone there promptly?
Mr. Conant . Yes; that Avould tune been the tendency unquestion
ably.
The C hairm an . The committee is very much obliged to you Mr.
Conant. for your courtesy.
(Thereupon, at 4.15 o’clock p. m., the committee stood adjourned
to meet to-morroAv, Thursday, October 2, 1913, at 10 o’clock a. m.)
I
1514
BANKING AND CURRENCY.
T H U R S D A Y , OCTOBER 2, 1913.
%
C ommittee
on
B anking and C urrency,
U nited S tates S enate,
Washington, D. C.
The committee assembled at 10.15 o’clock a. m.
Present: Senators Peed (presiding), Pomerene, Nelson, Bristow,
McLean, and Weeks.
Senator R eed. Senator Williams, will you introduce the speakers?
Senator W illiams . Gentlemen of the committee, this is Mr. Foote,
vice president of the First National Bank of Commerce of Hatties
burg, Miss., who has come here as a delegate from Mississippi. I
have known him for a number of years and he has come here with a
delegation of bankers from Mississippi and desires to address the
committee.
Senator K eed. W ill you give the reporter, so that it may appear
in the record, your full name, place of residence, and your banking
connections ?
STATEMENT OF FRANCIS W . FOOTE, VICE PRESIDENT OF THE
FIRST NATIONAL BANK OF COMMERCE OF HATTIESBURG,
MISS.
Mr. F oote. My name is Francis William Foote and I am vice
president of the First National Bank of Commerce of Hattiesburg,
Miss.
Senator K eed. What is the capital of your bank and its reserve ?
Mr. F oote. $350,000 capital, $70,000 surplus, and $26,000 undivided
profits.
Senator O ’G orman . And deposits?
Mr. F oote. Deposits $1,975,000.
Senator R eed. H ow long have you been in the banking business?
Mr. F oote. Since 1888.
Senator R eed. Where does your bank carry its reserves ?
Mr. F oote. In New York, St. Louis, Chicago, New Orleans, and in
its vault.
Senator K eed. Y ou keep part of your reserves in each of the cities
you have mentioned ?
Mr. F oote. We do.
Senator R eed. It is suggested we inquire why you carry your re
serves in these several cities—have divided the amounts.
Mr. F oote. One reason is to enable us to deal in domestic exchange,
to draw drafts on those points for the accommodation of our custo
mers, and we get a small rate of interest on our average balances at
those banks and get some collection facilities from some of them.
Senator R eed. D o you carry with those banks an account in addi
tion to your reserves?
Mr. F oote. Our balances at these banks usually exceed the required
reserve.
Senator R eed. Would you mind telling us to what extent your
balances do exceed your reserves, ordinarily? I do not mean in
dollars and cents, necessarily, but whether it is half as much more or
twice as much or three times, or what it would run.
BANKING AND CURRENCY.
1515
Mr. F oote. The total cash on hand and due from banks of our
institution averages about 40 per cent more than the legal require
ments.
Senator R eed. And it, of course, almost goes without saying that
your reason for depositing with these various banks an amount in
excess of the reserves you are required to keep, is because it is of
advantage to you in your banking business?
Mr. F oote. It is.
Senator R eed. Are there any other preliminary questions, gentle
men?
Senator W eeks. A s long as Mr. Foote is discussing that I would
like to suggest that he state to the committee how much o f that
money he would have to carry with the banks of Chicago, New Or
leans, and New York, for instance, in order to conduct his ordinary
business, provided he did not count these deposits as reserves?
Senator R eed. H ow much he would carry if there was no reserve
requirement?
Senator W eeks. Yes.
Mr. F oote. We feel, ordinarily, it is necessary to have about 40 per
cent more reserve than legal requirements, to take care of the fluctua
tions o f our business and be assured of being able to meet the de
mands of our customers without encroaching upon required reserves,
and we have to carry surplus with our correspondents in about that
proportion.
Senator W eeks. Y ou mean in about the proportion you do now?
Mr. F oote. Yes; about 40 per cent.
Senator W eeks. Even if you did not count them as reserves?
Mr. F oote. Well, that is to be sure, always, that we won’t run our
reserves down below legal requirements.
Senator W eeks. I think you do not understand me, Mr. Foote. Let
us assume that the bill which is now pending, the House bill, becomes
a law. In that case you will not carry reserves in banks in New York,
Chicago, New Orleans, and other reserve points, but you will have to
carry some deposits there in order to furnish your customers with
exchange and to conduct the ordinary business in which you are in
terested. Now, what percentage of the reserves you now carry there
do you think you would have to carry in order to conduct your ex
change business?
Mr. F oote. T o handle our business just as we are now?
Senator W eeks. Yes.
Mr. F oote. About 10 per cent of our deposits.
Senator W eeks. Y ou think you would have to carry about 10 per
cent o f your deposits?
Mr. F oote. T o get the collection facilities we now obtain?
Senator R eed. I am not sure, Mr. Foote, that I understand you vet.
or that you fully understand the question. Let us assume that there
was no law requiring you to deposit any reserve in any bank except
your own bank. Then, how much money would you have to keep in
St. Louis, Chicago, New Orleans, and New York in order to transact
your business ?
Senator W eeks. The points where he keeps money now?
Senator R eed. Yes.
Mr. F oote. T o get the facilities?
1516
BANKING AND CURRENCY.
Senator R eed. Yes; as a business proposition. Assume that there
was no law requiring you to keep any deposit anywhere, but you were
going to transact business as you are now transacting it. How much
money would you keep in these cities for your own business purposes?
Mr. F oote. About 10 per cent of our deposits.
Senator R eed. H ow much do you have now?
Mr. F oote. We average about 16 per cent of our deposits.
Senator N elson. A s I understand him, Senator Reed, the total
amount—the average amount—he keeps now in cash in his own
vault and in these outside banks amounts to 40 per cent. Is not
that it?
Mr. F oote. No; 25 per cent.
Senator N elson. I mean cash in your vaults and what you keep
with these reserve banks, including the amount over and above the
actual needed reserves?
Mr. F oote. N o ; we are carrying an average of about 25 per cent
reserves. The law requires 15. We are carrying about 40 per cent
above the legal requirement.
Senator N elson. Y ou are a country banker, are you not? You
come under that head ?
Mr. F oote. A country bank; yes.
Senator N elson. Y ou are not required to keep more than 15 per
cent reserves?
Mr. F oote. Yes; and we carry about 25 per cent.
Senator N elson. Y ou are required to keep 6 in your own vault?
Mr. F oote. Yes; 6 in our own vault and 9 with correspondents;
and we are carrying about 25 per cent.
Senator R eed. It would take 10 per cent in these banks to accom
modate you in a business way, and you would have to keep that much
there even though there was no law requiring you to keep a reserve
at all.
Mr. F oote. Yes.
Senator R eed. I understand you now. I f there was a Federal
reserve bank located in one of those cities, let us assume, would
that affect the amount of money you would have to keep in that
particular city?
Mr. F oote. Yes; I do not think it would be necessary to carry a
balance in that particular city unless it was due to the necessity of
providing collection facilities. This bill only provides limited
facilities.
Senator R eed. Y ou think you might, then, have to have arrange
ments with another bank in the same town where there is a Federal
reserve bank located, in order that you wTould have collection
facilities?
Mr. F oote. Yes.
Senator R eed. I believe now we have covered the preliminary
questions.
Senator N elson. Yes; I suggest that he be allowed to go ahead
and make his statement.
Senator B ristow. I would like to inquire (perhaps he has already
stated; but. if so. my attention was otherwise attracted) what per
cent you carry in cash in your vaults, as a rule?
Mr. F oote. A fraction above 6 per cent.
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Senator N elson. Of the deposits?
Mr. F oote. Yes; we do not purpose having more than 6 per cent,
but we usually have a fraction above, probably
or 7.
Senator R eed. Is that all, Senator?
Senator B ristow. That is all.
Mr. F oote. We are interested particularly, gentlemen, in that
feature of the bill which provides that regional banks shall act as
clearing houses and clearing agents for member banks at par. The
country banks all over the United States principally are now earn
ing substantial sums annually in remitting to cover customers’ checks.
In Hattiesburg we charge $1.25 per thousand for remitting to cover
customers’ checks, and our bank is earning at the present time
$11,151.
Senator N elson. Out o f that branch?
Mr. F oote. Out o f that branch. We have that much left in our
exchange account for absorbing the expenses of collecting such items
as we can not collect at par through our correspondents. By placing
our reserves throughout the country with different correspondents
located at certain strategic points those correspondents check a sub
stantial amount o f business through us, collect it, and make no charge.
Some business we can not handle at par, and we have some expenses
in that particular. The law making it incumbent upon regional
banks to receive items at par, the inference being that regional banks
would demand that they be remitted at par, would take from the
country bank all of the earnings in the way o f exchange, and leave
the country bank with the burden of collecting all items the country
bank might receive on banks that had not become members of the
system. For instance, if you have a State bank and, say, it is located
at Brookhaven, Miss., and we have a check for $1,000 on your bank,
you not being a member of the system, you could not collect that
check for us. I f it happened to be Brookhaven, we would have to pay
$2 a thousand to collect a $1,000 check.
As the law is now framed, we have the expense of collecting the
checks we get on State banks who do not become members, which is a
vast majority o f the character of our checks, and we have to remit
everything at par and we earn no exchange. Consequently, we lose
all of the revenues o f that department o f our business and are left
with the expenses of collecting all the items we receive of banks that
are not members. And I suppose three-fourths of the items we re
ceive are on nonmember banks. We have estimated in our bank that
to lose the exchange and to have to pay the charges to collect items
that regional banks could not collect would make a difference in our
annual earnings of at least $20,000. Our bank has averaged during
the past six years a fraction more than 14 per cent per annum net
earnings.
Senator N elson. On the par value of the stock?
Mr. F oote. On the par value o f the stock. I f we had to lose $20,000
a year as a result of this particular provision of the law, the earnings
would be reduced practically 6 per cent per annum.
Senator O ’G orman . What is the capital?
Mr. F oote. $350,000.
Senator N elson. S o that you get, really, more than half of your
profits from this source?
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Mr. F oote. N o. We get 6 per cent out of the 141- It would be
nearly 50 per cent, between 40 and 50 per cent.
Senator R eed. More than that. Six from 14^ leaves 81 per cent?
Mr. F oote. We lose 6 per cent and are earning fraction over 14
now.
Senator R eed. And would lose-----Mr. F oote (interposing). We would lose $20,000 a year at present.
Senator R eed. And what percentage would that leave you ?
Mr. F oote. A fraction over 8 per cent left. We are paying 8 per
cent dividends.
Senator W eeks. N ow, Mr. Foote, how much could you save in the
operation of your banks if you did not have this collection business?
Mr. F oote. I f we did no collection business for our customers?
(A t this point Senator Hitchcock entered the room and took the
chair.)
Senator W eeks. Yes; no collections of the character you are now
referring to.
Mr. F oote. We estimate it costs us $8,000 to do such collecting as
we can not get done at par through our correspondents.
Senator W eeks. That is an answer to the question?
Mr. F oote. Yes. Now, that would leave us a fraction above 8
per cent for the shareholders, and we are paying 8 per cent dividends,
and it would mean that practically all of the earnings of the bank
would be absorbed if we continue to pay 8 per cent. We could not
well afford to pay less than 8 per cent, because the value of our stock
is about $127 per share. The stockholders are only receiving a frac
tion more than 6 per cent on the value of the investment at the pres
ent time. As to how that would effect the banks of the State of
Mississippi at large, if they all became member banks, would be illus
trated by the results obtained, I judge, in the report of the auditor,
showing how much the undivided profits of our banks have increased.
The last examination he made showed that for two years the banks
had averaged an increase o f $475,000 per annum5 and they had that
much profit left after paying dividends. We estimate that the total
exchange earnings in Mississippi are $650,000 per annum, and if the
banks of Mississippi lose $650,000 per annum in the way of exchange
earnings there would be a deficit in the amount of money with which
to pay dividends of $175,000 per annum, and the banks are generally
paying 8 per cent in the State. The stock in the State is worth gen
erally about $150 per share.
We feel that our best interests demand that the regional banks do
not engage at all in the collection of sundry items, but that the banks
be permitted to continue handling sundry items just as they are at
present. A good many communities are supplied with bank capital
by being able to bid for these items. These items flow to the points
now that can receive them to the best advantage, and a great many
cities of the country, particularly the minor cities, have their bank
ing capital largely augmented by the balances of the country banks.
The country banks carry these balances at those particular points
because they get collection facilities, and it not only works out to an
economic advantage to the country banks but it is a great advantage
to many of the minor cities of the country. The country bank can
distribute its reserves about and in return get collection facilities.
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In that way there is a great economy in the business, and at the same
time the country bank is permitted to earn money by remitting to
cover its customers’ checks.
Senator R eed. I want to be sure I understand you. I f I catch your
meaning it is this: That there are small places that can maintain
banks under this present system, because they are enabled to make
these collection charges, and if they w^ere deprived of the profits of
collection they could not maintain themselves in these small com
munities.
Mr. F oote. That is the fact.
Senator R eed. Therefore some small communities which now have
banks, or which might, under the present system, get banks, would be
deprived of them, in your opinion, if this bill wTas enacted in its pres
ent form?
Mr. F oote. Yes, sir.
Senator R eed. Is it a great advantage or a small advantage, or
what kind of an advantage is it, to the merchant and the inhabitant,
generally, of the small place to have a bank? Does it more than
compensate him for the charges he has to pay for collections?
Mr. F oote. It does. The cashier of the bank at Forest, Miss., told
me a few days ago that his bank had earned this year $1,800 in in
terest and $1,200 in exchange.
Senator S hafroth. What salaries do you pay your officers ?
Mr. F oote. In our banks?
Senator S hafroth . Yes; in your banks.
Mr. F oote. The principal salary in our bank is $4,500. The next
highest salary is $3,000. and the next highest is $2,000.
Senator O ’G orman . What position is held bv the person receiving
$3,000?
Mr. F oote. The person receiving $3,000 acts as cashier.
Senator O ’G orman . I s that good compensation for a bank cashier
in your State—$3,000?
Mr. F oote. Yes.
Senator O ’G orman . Some get less?
Mr. F oote. Most of them get less.
Senator O ’G orman. What would be the average pay of a bank
cashier in your State?
Mr. F oote. Considering the large number of small banks, I would
say the average would not exceed $2,000.
Senator H itchcock. Have you stated the deposits of your bank?
Mr. F oote. Yes; $1,975,000.
Senator H itchcock. And the capital ?
Mr. F oote. $350,000.
Senator H itchcock. Have you stated where you keep your reserves
now ?
Mr. F oote. Yes.
Senator H itchcock. D o you rediscount at more than one reserve
center ?
Mr. F oote. At times we do.
Senator H itchcock. And for what length of time do you generally
require rediscounts?
Mr. F oote. We have in the past had rediscounts that ran continu
ously for as long as eight months, but in recent years we have not had
1520
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rediscounts for long periods. We have not borrowed any money so
tar this season. We probably will borrow money within the next
30 days.
Senator H itchcock. D o you find any difference in the terms of the
rediscount at different reserve centers?
Mr. F‘oote. We get very much better accommodations at New York
and very much better rates.
Senator N elson. What is the mode of making your loans? Do you
give your own note with the notes of the bank put up as collateral ?
Mr. F oote. We usually give our own notes secured with the col
lateral of the bank.
Senator N elson. So that you do not obtain your money on a mere
discount of the notes?
Mr. F oote. Seldom. We have discounted some paper, but most of
the money we borrow-----Senator N elson (interposing). Is on your own notes?
Mr. F oote. Yes; on our own notes, secured by collateral.
Senator W eeks. Before you go further, do you have any difficulty
in obtaining accommodations when you need to rediscount?
Mr. F oote. We have never had any trouble at all.
Senator O ’G orman . Where would you rediscount?
Mr. F oote. Principally in New York-----Senator H itchcock. Does your rediscount ever amount to more
than your capital?
Mr. F'oote. We have probably, one season only, borrowed more
money than our capital.
Senator H itchcock. Will you state what your rediscounts cost
you, maximum and minimum?
Mr. F oote. We have in recent years—we have not been able to get
money for less than 4 per cent, and have paid as much as 6 per cent.
Senator H itchcock. For a short time?
Mr. F oote. Yes.
Senator O ’G orman . And what would your average loan carry in
your own State? What would you get from the borrower?
Mr. F oote. Eight per cent is the prevailing rate.
Senator O’G orman . S o you have half of it profit. That is good
money. You get 8 per cent on money which you get in New York
for 4 or less?
Mr. F oote. We lend a good deal at less than 8 per cent. We try
to carry a good deal of commercial paper, and very often that does
not pay more than 5 per cent. But, as a general rule, our local paper
pays 8 per cent.
Senator N elson. That is farmers’ paper and planters’ paper?
Mr. F oote. Yes.
Senator R eed. What do you describe as commercial paper?
Mr. F oote. Paper of nonresidents; paper bought from brokers;
paper that our debtors do not know who holds it; so the people are
not able to treat with you for renewals and extensions, the holder
o f the paper being a secret. We forward the paper for collection at
maturity to the point where it is made payable.
Senator H itchcock. What is your nearest large financial center?
Mr. F oote. New Orleans.
Senator H itchcock. I s there not a city with a large clearing house
nearer than New Orleans?
B A N K IN G
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1521
Mr. F oote. Mobile is a few miles nearer.
Senator H itchcock. H ow far is Mobile?
Mr. F oote. About 85 miles; New Orleans is 110 miles.
Senator H itchcock. Suppose there was a subtreasury of the United
States located in Mobile, where you could go at any time with proper
securities, including commercial paper, and secure" from the Govern
ment an amount of currency, say, not exceeding 75 per cent of your
capital stock, at a certain rate of interest for 60 days, a higher rate
of interest for 90 days, and a still higher rate for 4 or 5 months’
paper, would that be a facility which you could utilize?
Mr. F oote. Yes.
Senator H itchcock. Y ou have national banks?
Mr. F oote. Yes.
Senator H itchcock. H ow frequently does the bank examiner go
through your bank?
Mr. F oote. Twice every year.
Senator H itchcock. In addition to that, you make statements to
the Government?
Mr. F oote. We do.
Senator H itchcock. H ow many times a year?
Mr. F oote. Usually five times a year.
Senator R eed. Are these bank examinations pretty thorough?
Mr. F oote. The examiner in our district is unusually good, is
very thoroughgoing.
Senator R eed. Does he become so familiar with your business that
he is able to tell anything about the character of the notes that you
carry, as to whether the people who make them are financially good?
Mr. F oote. Yes. When an examiner is permitted to remain in
a district he becomes familiar with the character and condition of
the principal borrowers. The examiner who visits us now keeps a
list of all our large loans, and when he examines the bank he checks
up the debts of those particular borrowers to learn whether or not
they are reducing or whether or not they are increasing their debts,
and he goes very carefully into the nature of their accounts. He
requires us to submit the financial statements these concerns make
to the bank, and he examines the executive committee of the bank
regarding the character of the paper.
Senator R eed. I can sometimes ask a question better by making
a statement. It is claimed by some people that a bank examiner
can not obtain such a knowledge of the character of securities carried
by a bank, such knowledge as to enable him to pass upon those secur
ities and be a real check upon the bank’s operations. What do you
think about that, from your experience?
Mr. F oote. Our examiners have always been able to go very defi
nitely into the merits of the large loans, the credit of the bank.
Senator R eed. I suppose the little individual notes that come in
and go out from time to time he would not know so much about ?
Mr. F oote. N o. We usually have 1,500 notes, and the examiner
usually does not pay much attention to loans under $5,000, but he
generally gives loans of $5,000 and above very careful consideration.
Senator R eed. Could he by inquiry learn pretty thoroughly in
regard to these larger borrowers?
Mr. F oote. Yes.
9328°—S. Doc. 232, G3-1—vol 2----- 36
1522
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Senator R eed. H ow would he do that, or how could he do it?
Would he do it by inquiring from other banks in the same city?
Mr. F oote. Very often the examiner is familiar with these loans
by having to pass on the same paper in the other banks.
Senator R eed. So the bank examiner not only knows whether a
man is borrowing from you, but he has the opportunity of knowing
whether he is borrowing from any other bank in his district ?
Mr. F oote. Yes; any national bank. Where they have State-bank
supervision they usually work in harmony with the State bank ex
aminers.
Senator R eed. N ow , do you think if a bank wanted to borrow
money from a central reserve bank or from the Government, and put
up its paper, that the O. K. of the bank examiner upon that paper
would be a reasonable safeguard so that it could be accepted as a
business proposition with reasonable safety? Or would you think
there ought to be some other and further check ?
Mr. F oote. I think there ought to be some other and further check,
unless the examiners take more time in making the examination. I
think if they are going to be required to pass on credits to that
extent they ought to give more time to this work, and if they did I
should think they would be fully competent.
Senator R eed. Suppose a bank examiner’s territory was cut to
one-half of the average so he had twice as much time, you think that
would be sufficient?
Mr. F oote. Yes;. I think he would be thoroughly competent, if he
put in twice the time in a bank he examined, to pass on credits.
Senator O ’G orman. H ow often does the bank examiner visit your
bank?
Mr. F oote. Twice every year.
Senator O ’G orman . And how many days does he spend in your
bank?
Mr. F oote. The last time he examined us he was there two days.
He has spent as many as four days.
Senator O ’G orman . Twice a year?
Mr. F oote. Yes.
Senator O ’G orman . Does he come at regular appointed times?
Mr. F oote. N o ; he usually comes within 60 days of a certain time.
Senator O ’G orman . In other words, you would have no difficulty
in anticipating about the time he was coming around?
Mr. F oote. Usually it would be somewhere within a period of 60
days of his previous visit.
Senator H itchcock . The intention is you shall not know in ad
vance of his coming?
Mr. F oote. We never know.
Senator O ’G o rm an . That is, you never know within 60 days?
Mr. F oote. We were examined in August this year, and the exami
ner had examined banks all round a month or two before he made
our examination. We had been expecting him. but he went to
another part of the territory and came back. They endeavor to
keep that a secret, or try to prevent the bank’s knowing when they
are coming.
Senator R eed. But, of course, if you were examined about twice a
year, you could readily anticipate that some time within 60 days
B A N K IN G
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before or 60 days after the previous examination—I mean the next
year—he would probably be around?
Mr. F oote. Yes.
Senator R e e d . Because that would cover four months of time ?
Mr. F oote. Yes.
Senator R eed. And if you were undertaking to arrange your cash
on hand, if you did not know within 60 days, you would have to
carry it some time?
Mr. F oote. Yes.
Senator R eed. Pardon me for using “ you ” for that kind of an
illustration. I f any bank did not know within 60 days o f when he
was coming, and was going to carry cash into its vaults to make a
good showing, it would have to be prepared for some time ?
Mr. F oote. Yes, sir.
Senator W eeks. D o you not think if a bank examiner established a
reputation as a thoroughly competent credit man, that some bank in
New Orleans would be taking him on and paying him $10,000 a year?
Mr. F oote. There would be a strong demand for that sort of man.
Senator R eed. There would probably be other ambitious gentle
men ready to start in and work their way up ?
Mr. F oote. Yes, sir.
Senator H itchcock. Mr. Foote, suppose such a system were estab
lished as the subtreasury that has been suggested throughout the
country, and you could occasionally deposit securities with the sub
treasury and borrow from the Government currency to the extent of
75 per cent of your capital, and the Government also got the first
lien on all your assets in certain cases, do you think the fact that the
Government had the first lien on your assets would impair your
ability to do business with your correspondents in New York and
other places?
Mr. F oote. N o ; I think not.
Senator H itchcock. Y ou would still have your reserve open to use
if the funds of the Government were not sufficient to meet your sea
sonal needs?
Mr. F oote. Yes, sir.
Senator R eed. Let me put one further question to you. Suppose
your bank was examined twice as often as it is now by a bank exam
iner located in that district and thus enabled, by experience, to pass
upon credits, as you have said, and know something of the character
of the borrower. Suppose, in addition to that, there was a special
agent of the Government, who visited there once a year or oftener
if he desired, to check up this bank examiner to see that there was no
possible connivance between him and the bank, would that not be a
pretty safe system?
Mr. F oote. I think so. I believe, however, instead of having the
banks examined twice as often, it would be better to have the present
number of examinations and let them devote twice as much time to
each examination. I f they examined twice as often the routine
work would take up the time, whereas, if they visited the bank the
present number of times, and devoted twice the number of days,
they could get through with the routine work, the clerical work,
checking up the bank, and would have this other time to make invetigations and inquiries.
1524
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Senator H itchcqck. Would it not be quite possible, Mr. Foote,
to have additional examinations depend on the importunity of the
bank to borrow money of the Government; that is, twice the number
of examinations would only be necessary in case the bank was a con
stant applicant for funds?
Mr. F oote. I think a bank that was borrowing actively would
require-----Senator H itchcock (interposing). More examinations?
Mr. F oote. More examinations; yes.
Senator W eeks. I s there not a vast difference between the prin
ciple involved in those two functions ? The examiner who examines
a bank and checks up the bank’s books to see whether the books are
all right will have an accurate knowledge of the bank’s affairs.
That is his first purpose. Now, his second purpose, to look into the
quality of the paper, is simply a test of the management of the
bank and its capacity to manage that part of the business wisely.
The Government wants to insure, as far as possible, that banks are
honestly managed. Do you think that, on the whole, the Govern
ment should be interested in protecting the public against the lack
of wisdom displayed by managers of banks?
Mr. F oote. I think so.
Senator R eed. Otherwise the bank’s books might be all right and
the notes actually there, but the notes might be worthless.
Mr. F oote. I think most of the trouble of the banks comes through
incapacity. I think most o f the bad situations have their commence
ment—
Senator R eed (interposing). You spoke a little while ago of the
circumstance that you probably would borrow within the next 30
days. I take it that is because of the crop movements and you will
have large demands made upon you?
Mr. F oote. Yes, sir.
Senator R eed. N ow , are you able, ordinarily, to anticipate a de
mand o f that kind 30, 40, or 50 days in advance?
Mr. F oote. Yes, sir.
Senator R eed. S o that if you had a Government agency at Mobile
or New Orleans, and you could anticipate that you would desire to
borrow 30 or 60 days in advance, you could make your application
and the Government could look you up, if it wanted to, and still you
would get your money in time ?
Mr. F oote. Well, we usually have that much notice, but sometimes
we do not have to borrow. We had an unexpected increase in our
deposits a short time ago, and we did not have to borrow, whereas we
thought we would be borrowing 30 days ago. I think it very im
portant that it should be arranged so that this money could be ob
tained quickly. We can send our notes to New York and draw
against the New York banks the same day.
Senator M cL ean . What percentage of your paper would be eligible
for rediscount under section 14 of this bill?
Senator O ’G orman. Paper maturing in 90 days.
Mr. F oote. We rarely have in our bank more than $250,000 of
paper that we consider commercial paper.
Senator O ’G orman . What is the average period of the notes?
Mr. F oote. The commercial paper usually runs from 90 days to
four months.
B A N K IN G
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1525
Senator M cL ean . Under this proposed bill a regional bank could
only discount for a member bank paper maturing within 90 days.
^Mr. F oote. We make very few loans running less than 90 days.
The general rule is four months.
Senator N elson. What is the length of your other loans?
Mr. F oote. The average loan is made for four months.
Senator N elson. I mean to your farmers and merchants, outside of
commercial loans.
Mr. F oote. Usually for four months, and the paper is renewed.
We had a $5,000 loan we carried for 14 years, and renewed it continu
ously.
Senator O ’G orman . At periods of four months each?
Mr. F oote. At periods of four months; yes. That firm liquidated
and paid up, but we had that $5,000 loan running 14 years. It wTas
the biggest firm that borrowed money in our town. They made a
good deal of money. It was always good paper. There was a time
when they could not have paid it, but that particular loan we car
ried 14 years.
Senator O ’G orman . At what rate of interest?
Mr. F oote. Eight per cent.
Senator R e e d . That was mighty good banking business?
Mr. F oote. Yes; it was the biggest account we had.
Senator R eed. And about the safest ?
Mr. F oote. Yes.
Senator R eed. That is almost ideal business,, is it not; a customer
always able to pay, but carrying a certain amount of loans?
Senator B ristow. And having a good account at the same time?
Mr. F oote. Yes; that is the way nearly all the business of the
country is done. I f we make a loan for four months we do not ex
pect to get the money and the borrower does not expect to pay it.
Senator M cL ean . Y ou do not carry very much paper that" would
be eligible under this 90-day limit ?
Mr. F oote. We have a very small percentage of our paper that
we could collect at maturity without making a lot of trouble.
Senator M cL ean . D o you handle a considerable amount of ac
commodation paper?
Mr. F oote. Commercial paper?
Senator M cL ean . N o ; accommodation paper. A man gives you
his note and you give him a credit rather than give his note to the
merchant?
Mr. F oote. There is a good deal of borrowing that way, but it is
usually small loans, as in a case where a farmer would borrow, say.
$300.
Farmers’ loans are usually small. You take the average man bor
rowing $5,000 in our country. He is a man abundantly able to pay
that money if he has to do it, but he does not expect to pay it, he does
not make any preparations to pay it, and is not prepared to pay it
unless you give him notice, and the result is a continuous practice of
renewing nearly all the country loans.
Senator M cL ean . Would you then be in a position to get cur
rency under this new system from the central reserve bank unless
you changed materially the character of your paper?
Mr. F oote. We felt we would have to depend principally on our
correspondents.
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Senator R eed. Just as you do now?
Mr. F oote. Yes. We felt that we would have to continue to carry
these accounts and borrow from our correspondents, just as we do
now.
Senator O ’G orman . Flow long have you been in the banking bus
iness ?
Mr. F oote. Since 1888. I moved to Flattiesburg in 1895.
Senator O ’G orman . Have you examined this pending bill ?
Mr. F oote. Yes.
Senator O ’G orman . D o you think it will be an improvement on
existing banking and currency conditions?
Mr. F oote. I think if it could be changed in some respects it would.
Senator O ’G orman . In what respects?
Mr. F oote. I think this exchange feature would ruin us.
Senator O ’G orman . That would not work an improvement?
Mr. F oote. We would rather liquidate our bank and discontinue
business if we had to give up 6 per cent of our earnings. In our
country we lose quite a good deal of money. We do not have the
strong people that there are in other sections o f the country, and it
is necessary for banks to make good profits in the South, and if we
were going along on a maximum earning capacity of about 8 per
cent the business would not be safe.
Senator O ’G orman . I am asking you what, in this new plan is, in
your judgment, an improvement over the existing banking and cur
rency conditions?
Mr. F oote. I think the idea of being able to get money in times
of distress is the proper idea.
Senator O ’G orman . Y ou know you can do it now under the emer
gency act—the Aldrich-Vreeland emergency act?
Mr. F oote. Yes; but the Aldrich-Vreeland Act is so strictly an
emergency proposition that it would be almost discouraging for them
to try to avail themselves of it.
Senator O ’G orman. There is no crisis now ?
Mr. F oote. No, sir.
Senator O ’G orman . Has not the Secretary of the Treasury, under
that act, within the last few months, sent money throughout the
country ?
Senator S hafrotii. Not under that act. The general revenue of
the Government—he offered to send $50,000,000.
Senator N elson. Only half o f it has been taken.
Senator R eed. Just as soon as the Treasury Department signified
its willingness to help it improved the situation so that the banks in
the East felt warranted in advancing money, and there was only half
of it taken.
Suppose, however, that the law was fixed in such a way that banks
could get money issued to them or loaned to them—not necessarily
issued to them, but loaned to them—moneys that the Government
has— could it more easily get it under circumstances that did not
imply that there was a panic on? That is what you really want?
Mr. F oote. That is all we want. We do not need anything more.
Senator R eed. Let me ask you what is the real effect and real trou
ble in the banking system? What do we need to make it a system
that will avoid danger by these banks ?
B A N K IN G
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1527
Mr. F oote. All we need is to be able to get money at certain critical
moments.
Senator B ristow. Upon your assets?
Mr. F oote. Yes; upon our assets.
Senator O ’G orman . I understand you to say you have never had
any difficulty in getting that money from New York?
Mr. F oote. We did not have any trouble in borrowing all the
money we wanted during the panic from New York and getting all
the credits we wanted. We did not get the currency.
Senator R eed. I f there had been some facility afforded at that time
whereby even the New York banks alone could have gone to some
source of supply with perfectly good assets and obtained $40,000,000
or $50,000,000, would there have been any necessity for closing the
hanks of the country?
Mr. F oote. Not a bit. The thing that has hurt New York and the
country worst has been the system of publishing reports on reserves,
showing the margin of reserves to be very narrow; at times showing
the banks were below the legal requirements, with the knowledge that
they could not get any more money. That makes everybody feel
very uneasy. When the New York banks are reported to have a
surplus of reserves reduced to, say, $2,000,000, and everybody knows
that, it makes everybody feel very nervous. When they are reported
as having less than the legal requirements it frightens people, and if
it was so that they could replenish their supply of money there would
not be any trouble at all.
Senator O ’G orman. Have the average bankers of your State ever
heard anything about a need of making the currency more liquid
and mobilizing the reserves?
Mr. F oote. We have had all the information that has come through
the press in recent months on this subject.
Senator W eeks. Mr. Foote, do you think the New York banks did
the best they could to take care of their customers during the panic
of 1907?
Mr. F oote. I certainly do; and I feel that we owe them a debt of
gratitude which we can never repay. I will never forget the kind
treatment they accorded us. We owed one New York bank $145,000,
and our balances averaged almost that amount. I was in New York
during the panic, and we had $90,000 to our credit and owed them
$145,000—all of which was payable on demand. They told us they
would loan us more money in the way of credits, but they could not
give us cash; but that if we could check on them and satisfy our cor
respondents they would let us have $100,000 more money.
Senator W eeks. That was because you kept a good account?
Mr. F oote. Y es; that Avas because we kept a good account.
Senator O ’G orman . Y ou have a pretty good opinion of the New
York bankers?
Mr. F oote. Yes, sir; I think they have done the best they could all
the time.
Senator O ’G orman . I agree with you.
Mr. F oote. They know more about the banking business of this
country than any other class of bankers. You will go to New York
and be treated with more consideration by a New York banker than
any other class of city bankers we have. He knows more about your
1528
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community, more about your assets and your liabilities and what you
can do than any other class of men we have. They are more in touch
with the situation than any other bankers in this country. I have
yet, in the 25 years of my experience, to have any personal knowledge
of any unkindness or lack of consideration that a deserving country
banker has received at the hands of his New York correspondent.
Senator W eeks. W as it the amount of your deposits with your
New York correspondent in a year?
Mr. F oote. With the Chemical National Bank-----Senator W eeks (interposing). I do not want you to mention the
bank; but, roughly, how much do you deposit with your bank in New
York in a year?
Mr. F oote. I would say the deposits are about $10,000,000.
Senator W eeks. H ow much of that is currency ?
Mr. F oote. None.
Senator W eeks. Practically nothing?
Mr. F oote. W e might occasionally make a shipment, but there
would not be enough to make it wrorth while mentioning.
Senator W eeks. In other words, when you have any currency deal
ings with your New York correspondent it is always drawing on
them for circulation ?
Mr. F oote. Always.
Senator W eeks. Did you get any circulation from them during
the panic of 1907?
Mr. F oote. We got some money; yes.
Senator W eeks. D o you recall how much you got?
Mr. F oote. When the Comptroller of the Currency sent out his
telegram suggesting to the banks that they put up bonds and get
the unissued currency on hand, saying he would take bonds approved
by Massachusetts and other States for savings deposits, we had
$20,000 of unused currency with the comptroller. We went to one of
the banks and °;ot New York City bonds, and got that currency, and
I think we got $30,000 in addition from the New York correspondent.
Senator W eeks. H ow would that $30,000 of additional circulation
compare with the amount of circulation you had deposited with your
New York correspondent?
Mr. F oote. We have never put that much cash in.
Senator W eeks. Y ou were getting more circulation from your
New York correspondent than you had deposited with them in a
year?
Mr. F oote. Oh, yes.
Senator P e e d . This currency that you obtained by drawing your
own currency, this currency you had a right to draw from the Treas
ury, do you count that as coming from New York or from the
Treasury ?
Mr. F oote. I counted that as coming from the Treasury. We got
a total of $50,000 in money.
Senator P e e d . I understood you to say that the bank in New York
said they would let you have $100,000 more, but they could not let
you have currency, but they would let you have that amount in
credits. Do you mean clearing-house receipts; or what was the
character of the credit ?
Mr. F oote. They would give us credit for $100,000 and we would
have to check on it.
B A N K IN G
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1529
Senator H eed. They would handle your checks?
Mr. F oote. Yes, sir.
Senator R eed. N ow , if I understand you right, you get all the
necessary business accommodations from these banks in ordinary
times, and can go and borrow any amount of money that you are
entitled to borrow, you do not have any trouble in ordinary times at
all, and you do not need any help then ?
Mr. F oote. Yes.
Senator R eed. Y ou are satisfied?
Mr. F oote. Yes.
Senator R eed. Y ou think the banks in New York— I suppose you
would include the banks in New Orleans, St. Louis, and Chicago—
are inclined to let you have money in ordinary times upon fair terms,
and as a business proposition ?
Mr. F oote. Yes.
Senator R eed. N ow , the trouble, and the only trouble, you say,
arises from the fact that for one reason or another, or for a m ulti
tude of reasons, we sometimes arrive at a point when the bank
reserves o f the country have become very low, distrust is occasioned
by it, people begin to sort of hoard their money in their own vaults—
that is, the different banks— and then it is necessary to have some
relief from the outside?
Mr. F oote. Yes, sir.
Senator R eed. That relief, as I understand you, does not need to
be furnished to a large number of banks in order to be effective, but
if that relief is furnished to a few of the great centers they, in turn,
can relieve their correspondents?
Mr. F oote. Yes, sir.
Senator R eed. D o you think if they will furnish this relief as,
for instance, when the Government, in a case of that kind, would
carry to New York $50,000,000 and to St. Louis $10,000,000 and to
New Orleans $5,000,000, etc.—do you think there would be any dis
position on the. part of bankers receiving that money to speculate
upon it by charging their correspondents heavier rates of interest,
or would they treat them fairly?
Mr. F oote. I think they would treat them fairly.
Senator R eed. Y ou have never seen any disposition to the con
trary ?
Mr. F oote. N o, sir.
Senator R eed. I f you are right about this, the proposition of giv
ing relief would seem to be rather a simple one.
Mr. F oote. I think if the New York banks had not gotten into a
close place in 1907 we would not have had any panic. I do not think
they were altogether responsible for it.
Senator R eed. Have you ever studied the question as to whether or
not there is an element of danger in the New York banking situa
tion arising from the fact that they loan large sums of money upon
industrial stock as collateral, and those stocks fluctuate rapidly in the
market, impairing the security? Have you ever given that matter
any thought?
Mr. F oote. Yes. I think there is an element of danger there.
Senator R eed. I f there was a limit to the amount that a banK
could carry of that kind of loans, on that kind of collateral, would
that tend to steady our system ?
1530
B A N K IN G
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Mr. F oote. I do not know. That is a big question. We became
much disturbed a while ago on account of the decline in stocks. They
were going down so tremendously and everybody got very unhappy.
The banking situation was strong, but the decline in the value of
stocks made everybody very unhappy, and we came very near hav
ing a bad situation. I heard some people make the remark to the
effect that the stock market had no bottom, that there was no telling
how much lower they would get, and they might get to the point where
security on loans would be impaired. There was a good deal of that
kind of talk, and whether or not there would be a recommendation
limiting the amount of money a bank could loan on these securities
I do not feel prepared to say.
Senator R eed. Y ou think that is an element of danger?
Mr. F oote. I think so.
Senator R eed. And if some plan could be devised that would re
move or minimize that element of danger it would somewhat
strengthen our banking system?
Mr. F oote. I think so.
Senator H ollis. The New York reserves, as you understand it,
were below the legal limit in 1907 ?
Mr. F oote. Yes, sir.
Senator H ollis. And the effect of giving you credit for $100,000
would be to increase their liabilities?
Mr. F oote. Yes, sir.
Senator H ollis. That would make their reserves still further
below the legal limit?
Mr. F oote. Yes, sir.
Senator H ollis. H ow do you understand they could give you
credit for $100,000 if their reserves were below the limit?
Mr. F oote. They did not seem to care anything about that. They
seemed intent upon saving the situation. I never was impressed
more with anything in my life than I was with the absolute loyalty
o f the bankers of New York City to the country at large. I do not
think they would have cared anything about their reserves if they
could have relieved the situation.
Senator H ollis. Then the relief they were offering you was at the
expense of breaking the law, as you understood it ?
Mr. F oote. Yes; but the Comptroller of the Currency had said,
in substance, that there would not be any complaints made.
Senator H ollis. I think they would be very generous if they ran
the risk of going to State’s prison for the sake of accommodating
you. I think we ought to fix it so that they may do it legally. I
think that is one of the reasons why we need a new currency, because
they have to strain things and give them assurance that they can
violate the law with impunity. I did not know but there might
be some way to increase your liabilities and not lower your reserve.
I am afraid there is not any.
Senator B ristow. Has not provision already been made by which
they could obtain the currency and relieve the situation without
violating the law in the enactment of the Aldrich-Vreeland bill?
Mr. F oote. I do not think there are any additional reserve re
quirements there. I am not altogether familiar with the bill.
B A N K IN G
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1531
Senator B ristow. They could simply organize and go to the Gov
ernment and get money on their assets to the extent of $500,000,000.
The money is down here in the Treasury now.
Mr. F oote. I think any bank is going to hesitate to discount with
correspondents or with regional banks. The public opinion is very
sharply prejudiced against bank borrowing. We feel very nervous
when we are borrowing money. We do not like to make statements
showing borrowed money.
Senator O ’G orman . When you have occasion to borrow, who knows
it outside of yourselves and the New York banks?
Mr. F oote. Nobody until we publish a statement.
Senator O ’G orman. I s it known in the community ?
Mr. F oote. Oh, yes; we have to publish a statement.
Senator O ’G orman. H ow often?
Mr. F oote. Usually five times a year. We never volunteer to
make a statement when we are borrowing money, but the Govern
ment calls for a statement.
Senator O ’G orman . It is published where?
Mr. F oote. In the local newspapers. We try to get it inside next
to a patent-medicine advertisement, or something of that sort, but
your competitors see it, and then your competitors push it along.
You can print it up in a comer, but your competitors will take ad
vantage of the publication and push it along.
Senator B ristow. And suggest that you had it in a corner ?
Mr. F oote. Yes.
Senator O ’G orman . H ow about your competitors? Do they not
sometimes rediscount?
Mr. F oote. Yes; usually; but there are times when one bank is
borrowing and the other is not, and the bankers are in more or less
competition. It is not all harmony in the banking business.
Senator W eeks. Let me ask you right there, Is not banking ex
tremely competitive everywhere?
Mr. F oote. Yes; sir; and the margin of profit in banking has been
reduced to a minimum. I do not know of any class of people in
the world who would do what bankers have to do for the money they
make out o f it.
Senator O ’G orman. W ill you elucidate that last proposition?
Mr. F oote. I think no other class of people in the world would do
business on the narrow margins of profit on which bankers do busi
ness. For instance, we have $350,000 in our bank which we are loan
ing, presumably, at 8 per cent. That is $28,000 which the $350,000
produced, until you might say the shareholders themselves contribute
that much money. They themselves are providing that much profit,
$28,000. We are earning, in addition to that, $21,000 more, which
is only a fraction of 1 per cent on our deposits, and during the course
of a year we handle about 1,000 transactions a day. We loan dur
ing the course o f the year about $8,000,000. We make $21,000 a year,
you might say, doing it.
Senator O ’G orman. In loaning $8,000,000 ?
Mr. F oote. Yes, sir; in loaning $8,000,000 and taking the risk.
Senator W eeks. Including the money you make in exchange and
all other business ?
1532
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Mr. F oote. Yes. I f you will charge our bank for the 8 per cent
on its capital stock, profits that the shareholders create, there is
just $21,000 left. That is all we make out o f the banking business.
I f you will analyze any bank in the United States by that system, it
will be positively astounding how little money there is in the business.
I f the people generally knew that, there would be very little demand
for bank stock. That is a thing bankers do not tell. There is one
reason we are worried so much about losing this exchange. It is a
very serious proposition. We are on such a narrow margin of profits
we can not afford to lose any more.
Senator O ’G orman . I s your bank one of the large banks in Mis
sissippi?
Mr. F oote. Next to the largest.
Senator O ’G orman. In your State?
Mr. F oote. Yes; our bank is next to the largest.
Senator R eed. O f course, when a bank runs its deposits up to a
very large amount and then when they have not made 1 per cent on
the deposits, they still may make a large dividend for their stock
holders ; but the question of whether they will ever get to that point
or not is always a question of bidding for the business?
Mr. F oote. Yes, sir; all the banks that are making these big show
ings are the old banks, with large surplus and undivided profit ac
counts. I f you have a bank making 5 per cent you may be sure it is
an old fellow.
Senator O ’G orman. Hoary with age?
Mr. F oote. Well, yes.
Senator N elson. What proportion of your deposits are demand
deposits and what proportion time deposits—in rough figures?
Mr. F oote. $450,000 in time deposits, $450,000 savings deposits,
and $1,050,000 or $1,075,000 subject to check.
Senator N elson. N ow . do you pay interest on your time deposits?
Mr. F oote. We do pay 4 per cent, and also pay 4 per cent on
savings deposits.
Senator N elson. The time deposits run for six months?
Mr. F oote. Four months.
Senator N elson. Y ou pay at the rate of 4 per cent?
Mr. F oote. Yes, sir.
Senator H itchcock. We want to hear the other gentlemen of the
Mississippi delegation, but there is one member of the Indiana dele
gation who is obliged to leave the city to-night, and if it is agree
able to the committee, we will hear the gentleman from Indiana at
this time. Who is the chairman of the Indiana delegation?
Mr. J. L. M cCulloch. I am the chairman of the delegation. We
have a committee of five who represent the Indiana Bankers’ Asso
ciation.
Senator H itchcock. Will you state your full name?
Mr. M cC ulloch. J. L. McCulloch, president of the Marion Na
tional Bank, of Marion, Ind. I am chairman of the delegation. I f
you will allow us at this time, Mr. Chairman, we will put Mr. John
P. Frenzel on first. We have prepared a statement to present to the
committee, and we want to enlarge a little on the items which we
have put in the written statement.
Senator H itchcock. Let the statement be read first. We will hear
you now, Mr. Frenzel.
B A N K IN G
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1533
STATEMENT OF JOHN P. FRENZEL, OF INDIANAPOLIS, IND.
Senator H itchcock. Give your full name to the reporter, please.
Mr. F renzel. John P. Frenzel, vice president of the Merchants’
National Bank, of Indianapolis, Ind. May I say, Mr. Chairman,
before I go any further, that we very much appreciate the courtesy
of this privilege o f appearing before the committee. The statement
which we have prepared to present to the committee is as follow s:
.The Indiana Bankers' Association, at its State convention, held in Indianapolis
on September 23, appointed a committee of five to go to Washington and confer
with the Committee on Banking and Currency of the United States Senate in
regard to the currency bill now pending before Congress.
The Indiana Bankers’ Association has 872 hanks in its membership, this being
all of the banks in the State of Indiana excepting 98. The aforesaid com
mittee, therefore, represents almost every bank in the State of Indiana, and,
after very careful investigation and conference among the bankers of the State,
feels confident in assuring this committee that practically all of the banks of
Indiana are opposed to the currency bill in its present form, because—
First. It should not be made compulsory on national banks to subscribe to the
capital stock of the Federal reserve banks under a penalty for not doing so of
a forfeiture of their present charters, acquired and entered upon in good faith,
with the implied understanding, at least, that these would run for the full 20
years.
Second. Banks should have a fair representation on the Federal reserve board.
Third. Twelve Federal reserve banks are too many, and upon this provision
in the bill we beg to submit for your consideration the position taken by all the
banks of the Indianapolis Clearing House Association, as stated in the words
following, and which is fully indorsed by the banks that we represent, viz:
Twelve Federal reserve banks are too many. The centralization of reserves
obviously would be much more effective if there were 3 or 4 or 5. And, so
far as we can see, no considerations relating to other aspects of the subject
require the larger number, particularly as the bill provides for the establishment
of branches by the Federal reserve banks. The Federal reserve board is given
power to make all investigation necessary to the selection by it of the reserve
cities. Why not leave to it also the determination of the number of regional
banks?
Fourth. The dividend on the stock in the Federal reserve banks should be
6 per cent annually, and be cumulative instead of 5 per cent, as now proposed
in the bill.
Fifth. That the clause in regard to savings departments should be changed
so that the national banks may, subsequent to the date when the pending bill
shall become a law, make application to the Comptroller of the Currency for per
mission to open a savings department.
Mr. F renzel. This statement is signed by J. L. McCulloch, Francis
J. Dietz, Thomas R. Paxton, J. P. Frenzel, and Charles M. McCul
loch, the members of the committee representing the Indiana Bankers’
Association.
The members of the committee hare been authorized by the Indiana
State Bankers’ Association to appear before this committee of the
Senate and present our views in regard to this bill. Last week we
had a convention of the Indiana Bankers’ Association, in Indian
apolis, and we had the largest attendance of any convention ever held
in the State.
Senator H itchcock. That association is composed of State as
well as national banks?
Mr. F renzel. Yes; it is composed of State banks as well as na
tional banks and trust companies and savings banks.
Senator O ’G orman . H ow many banks were represented?
Mr. F renzel. Over 700.
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Senator O ’G orman . Out of a membership of over 800?
Mr. F renzel. Out of a membership of 872 there were 700 in at
tendance, and we come fresh from an expression of what we believe
to be the sentiment of the bankers of Indiana.
The first item we have to present to you is a statement that the
Indiana banks believe that it should not be made compulsory on
national banks to subscribe to the capital stock of the Federal re
serve banks.
Senator N elson. H ow is that?
Mr. F renzel. That national banks believe, and they are joined
in this by their competitors and colleagues, the State banks, that it
should not be made compulsory upon them to take this stock and im
pose this penalty, as has been said here, with a forfeiture of their
national-bank charter if they do not do it. We do not believe that is
right. We believe that every bank which got its charter from the
Comptroller of the Currency, either as a primary proposition or as a
renewal of an expired charter, had the idea, and very properly so,
that they were getting a charter to run 20 years, and they believe
it is a violation and abrogation of an implied contract, at least,
where only one of the contracting parties exercises the power, and
the other one is not asked whether he likes it or not. We do not
believe that is right.
Banks should have a fair representation on the Federal reserve
board. That is regarded by all of them a common sense, fair business
proposition. I f they are to furnish the money that composes the
capital of these regional reserve banks, they are entitled primarily,
without any other consideration, to have representation on a board
that governs the fate of that investment.
Capital as they understand it and as it is contemplated in this
bill is made the very foundation, the first requisite. All the lan
guage of the other sections of this bill amounts to nothing until you
have that settled, as we look at it. The capital that that bank has
to have to command confidence enough in respect to it to get the
business that it contemplates getting and be in a position to furnish
the benefits that it is intended by this bill they shall furnish is the
important thing. It is capital primarily that is to be first affected
by the management and conduct of this concern, and the contributors
to this capital think it is simply an act of fairness that they have
potential representation on a board that is to permanently manage
the affairs of this bank. Twelve Federal reserve banks are too many.
Senator N elson. Would not one be better?
Mr. F renzel. Yes; it would, in my opinion.
Senator N elson. Would not one be best of all?
Mr. F renzel. Yes; in my opinion.
It seems to me that there is a recognition here of the power of
centralization in naming the number 12 instead of 50— that might
be called exaggeration; perhaps I should say 12 instead of 20. But,
as we see it, when you make 12 units all over the country you are
going to get 12 institutions that are very likely not going to be in
such close harmony and touch with each other that they will readily
and intelligently understand the needs of every other one of their
fellow regional banks, and therefore fall in with what this bill is
trying to accomplish—uniformity of rates all over the country, with
BANKING AND CURRENCY.
1535
a difference, perhaps, of only the cost of exchange between one place
and another.
Again, it will not be in such a workable condition, because it will
take so much time to get around to a certain place before they can
respond to the emergency that calls for additional circulation. We
feel that by the time that gets around to one of these places that has
only a sort of formal acquaintance with us and is acted upon the
emergency will be gone.
Nothing, it seems to me, makes a banker more forceful in a commu
nity than to get into personal touch with all of the agencies, with all
of the interests, and to understand their various wants, and thus be
able to respond quickly and promptly to the calls made upon him.
That same sort of thing relates to the enlargement of that idea.
The banks in New York, very properly and logically, understand
the value and security in stocks and bonds that are admitted to the
New York Stock Exchange. I f there were no other reason than the
fact that that is where the great majority of that business concen
trates, that would be enough to prove that they understand more
about that and are more in touch with that than the bank in St.
Louis whose business principally is, besides the regular local business,
advances on grain to elevators, and on pork in warehouses, and on
mules in the corrals, and on cotton—bills from their customers in
the South. Therefore, if I go to New York for an accommodation,
it is quite natural that if I present to them something that they are
familiar with I will get more prompt returns than if I go with
something they are not so familiar with, or only familiar with at long
range.
The difficulty we now have, to illustrate it in a homely way, is that
every tub is standing on its own bottom, and that there is no homo
geneity, no relationship of community of interest in all the banks.
Senator O ’G orman. Can you change that condition, Mr. Frenzel?
Mr. F renzel. Yes; I think you can. I think, too, a mistake is
made in the contemplation of some of the things that happened in
1907—that New York had all the money, and it was because they
would not let the money go that the trouble happened in the country.
We had more money in Indianapolis, proportional to the liability,
than they had in New York City.
Senator O ’G orman . I f you had more money in Indianapolis in
proportion to the liability than they had in New York—and we have
heard from other witnesses during the last week or two that that
wase quite general—why do jmu say that New York had all the money
when, as a matter of fact, she did not have all the money?
Mr. F renzel. I do not say that. I say that is the prevailing opin
ion, which, I believe, is a mistake, an absolute mistake.
When our clearing-house committee, of which I had the honor of
being a member, got together, we sat for seven weeks. I think the
Knickerbocker closed down on Friday or Saturday. Saturday night
we had a meeting, and Sunday afternoon we started in on the organi
zation of this clearing-house committee, and on Monday morning it
was in operation. The first thing we did we said that every bank
or trust company that belonged to this association should show just
how much liquid means they had. We had upward of $5,600,000
of liquid means.
Senator H itchcock. That was in Indianapolis?
1536
BANKING AND CUBBENCY.
Mr. F renzel. Yes, sir.
Senator R e e d . What do you mean by the expression “ liquid
means ? ”
Mr. F renzel. National-bank notes, gold, and greenbacks. I mean
money. What I mean to say is that we had the circulating medium.
Senator R eed. Y ou had the cash?
Mr. F rs^ zel. We had the cash.
Senator R eed. Y ou know the word “ liquid,” as used before this
committee in these hearings, has come to have very many meanings.
There seems to be a difference in the way it is used by different
persons.
Mr. F renzel. There is a difference, too. I am speaking of actual
cash.
Now, you know, there were several things considered as to re
strictions to be put on this, that, or the other to keep the people from
running wild, in one way, and to keep the banks from losing all of
their cash by reason of that, in another way. The thing we resolved
to do because of that condition, which, we thought, was a very good
plan, was to keep on paying the pay rolls in cash.
But that is not the thing I wranted to illustrate and which seems
very important to my mind— the consideration of the matter of re
serves, o f liquid currency, in 1907. After we got through with the
seven weeks and wound up the last day the reports showed—reports
came in every day as to how much cash they had in these banks—that
they had $5,800,000, not balances in New York, but cash. They had
$5,600,000 when they started and were scared to death. They got
through with the scare and found they had $200,000 more than they
started with.
Senator Reed. H ow did you transact business in that interval;
with clearing-house receipts?
M r. F renzel. A s between the banks, with clearing-house receipts.
Senator R eed. A s between you and the public— the depositors?
Mr. F renzel. A s between us and the public, we limited them in the
amount of money which they could withdraw. And, by the way,
gentlemen, do not think that was a new thing at all. It was done
in 1873.
Senator S hafroth. What limits did you impose?
Mr. F renzel. $50 a pay. You could come in everv day and get
$50.
Senator M cL ean . $50 to meet the pay rolls?
Mr. F renzel. The pay rolls were paid in cash. You know that is
one question that comes up.
Senator S hafroth. And generally in amounts less than $50, were
they not?
Mr. F renzel. Oh, no; in amounts very much larger. I can tell you
of one pay roll we had there that was about $11,000.
Senator S hafroth . Yes; but if it had not been paid in cash,
checks would have gone into the hands of these employees, and they
would have been for items of about $50 or less.
Senator N elson. They were not paid in checks, I understand.
Mr. F renzel. No; in cash.
Senator S hafroth . But they could have given checks, and those
employees could have drawn money from the banks?
BANKING AND CURRENCY.
1537
Senator H itchcock. When you speak of a $50 limit, you mean
that a man having a deposit account with one of your banks was only
permitted to withdraw actually what he would need for operating
expenses, which you fixed at $50 ?
Mr. F renzel. Yes.
Senator F e e d . Did you take care of the man’s checks in the mean
time?
Mr. F renzel. Yes; he could check as freely as he wanted to in the
payment of his liabilities, and. the checks coming through the clear
ing house, whatever balances resulted because of the clearings of each
day, were settled between the banks in clearing-house certificates.
Senator H itchcock. And they largely offset each other?
Mr. F renzel. They largely offset each other. AVe did this also:
The banks, in order to supply themselves with clearing-house certifi
cates that somebody else might be willing to accept for credit, were
permitted to go to this committee and get clearing-house certificates
based upon securities approved by this committee.
Senator H itchcock. By your arbitrary action for the benefit of
the community you somewhat inflated the currency or the credit
of the community for the time being, keeping the cash in the vaults
of the bank ?
Mr. F renzel. Yes; the figures show -we did that. In some other
communities they went even further than that. They used these
clearing-house certificates for currency in daily transactions in pay
ment of labor. But we did not go quite that far.
I f there had not been any danger, any fear, that something would
happen; if there had not been this system of every tub standing on
its own bottom, there would have been no reason at all wThy a good
part of that surplus in Indianapolis should not have gone out for
purposes of daily transactions; because the real resources required
under the national banking act—I am giving now only approximate
figures— were about $2,500,000, so there was $3,000,000 surplus.
Senator H itchcock. What amount of clearing-house certificates
could you issue at any time during those seven weeks ?
Mr. F renzel. I am sorry I can not tell you the exact amount, but
I think it ran up as high as half a million.
Senator H itchcock. Were there cashiers’ checks and other evi
dences of credit outstanding to add to that?
Mr. F renzel. O f course, we did not keep an account; each bank
kept an account of its own, and those things were probably liquidated
daily or at periods of two or three days— the time it would take to
get them back into the bank that gave them out.
Senator R eed. What was the capital of your clearing-house bank?
Mr. F renzel. I can not give you that.
Senator R eed. Approximately will do very well.
Mr. F renzel. Approximately, I should say $12,000,000.
Senator R eed. AVith an inflation, we will call it, from the clearing
house certificates, using that term in that way, of only a half million
dollars, you were able to pull through and weather the storm?
Mr. F renzel. Yes; and, as the results show, we did not need that.
Senator R eed. S o that, if you had had a place where you could
have gone to get a h alf million dollars of currency— which would
have been about one twenty-fourth o f the banking capital of the
9328°— S. Doc. 232, 63-1— vol 2----- 37
1538
BANKING AND CURRENCY.
town—you would have got through without even issuing a clearing
house certificate that went into circulation?
Mr. F renzel. Yes.
Senator R eed. Y ou did not need very much help?
Mr. F renzel. We did not need any help at all.
Senator R eed. Well, while you did not need it, if there had been
the opportunity afforded to places that perhaps did need it to obtain
help, which would have been only a small per centum of their aggre
gate bank account, just that little additional help wTould have tided
affairs over?
Mr. F renzel. Exactly; and that comes down, it seems to me, to
wThat I am trying to make plain to you, Senator. I f there had been
that sort of relationship of community of interest and personal
touch with and understanding of the needs of communities and the
kind of security they afforded, then this money might have been not
only enough for us, but what surplus we had might have helped out
other communities.
Senator R eed. Suppose there had been a subtreasury of the United
States at Indianapolis with a competent local man appointed there,
and he had the advice also of the bank examiner of that district, and
there had been a law by which your clearing-house association could
have gone there with a guaranty signed by all the banks for
$1,000,000, and carried their good assets also, that would have re
lieved you instantly, would it not ?
Mr. F renzel. It would depend altogether on how he regarded those
assets, or his ability to understand, in harmony with our understand
ing, what should be considered good assets.
Senator R eed. I mean that unquestionably the guaranty of your
banks, representing $12,000,000 of good capital, and, in addition to
that, your taking there $1,000,000 worth of good assets selected from
those banks—that would make the Government mighty secure, would
it not?
Mr. F renzel. Yes.
Senator R eed. Suppose you could have carried that right over to
the subtreasury and got $1,000,000 in currency of the United States—
legal tender for all debts public and private—and could have taken it
into your vaults, you would have been out of trouble in a few
minutes ?
Mr. F renzel. Yes.
Senator R eed. And that would not have required any community
of interest of the banks or anything else except that your local vol
untary clearing house would have cooperated each bank with the
other to get it.
Mr. F renzel. D o you know, Senator, that in making that propo
sition you are contemplating a central bank with branches? You
are taking your Treasury here, with your subtreasuries off here, and
the Secretary o f the Treasury is in harmony, through his bank ex
aminers, with every part of the country. That contemplates a cen
tral bank with branches.
Senator R eed. I understand; but the only difference in the propo
sition I put to you is that the central institution—whether we
call it a bank or the treasury of the United States or a subtreasury—
is entirely a Government concern; and, without discussing the merits
BANKING AND CURRENCY.
1539
of the question whether the Government ought to go into the bank
ing business, I am simply asking the question whether, if your banks
in that emergency had been able to go direct to the Treasury, they
could not have carried to the subtreasury absolute and unquestioned
securities and made the Government safe, and whether that small
relief I have suggested would not have carried you through.
Mr. F renzel. Yes. And if the certainty of that sort of relief had
been understood and unquestioned throughout the country there
would not have been any necessity for clearing-house committees to
get together and pass these resolutions. That is what this bill is con
templating. The point I am trying to make is that through so many
banks you will not have that closeness of personal touch and knowl
edge which will make their action, either in relieving a situation
or otherwise, harmonious.
Senator H itchcock. I shall have to interrupt the witness here to
inquire the pleasure of the committee as to a recess. The Senate
meets at 12 o’clock.
Senator O ’G o rm an . I move that we take a recess until 2 o’clock.
Do you think we will be detained longer?
Senator R eed. I suggest, as an amendment, that we adjourn until
2 o’clock, but do not reconvene in any event until 30 minutes after the
Senate adjourns.
Senator O ’G o rm an . I accept that.
(Thereupon, at 12 o’clock m., a recess was taken until 2 o’clock
p. m.)
AFTER RECESS.
The Chairman. Mr. Moehlenpah, we will hear you now. I would
like to ask that you make a brief statement in regard to your affilia
tions with the bankers, what your positon is, and whether you have
had any connection with the State Bankers’ Association of Wisconsin,
so that the stenographer will have it for the record.
STATEMENT OF H. A. MOEHLENPAH, PRESIDENT OF THE
WISCONSIN BANKERS’ ASSOCIATION, OF CLINTON, WIS.
Mr. M oehlenpah . Senators, I wish to thank you for this courtesy
and to say that personally I feel justified in coming before this com
mittee. I represent the Wisconsin Bankers’ Association, as president,
but do not wish to be understood as representing them individually in
their ideas at this time, because I have had no way of polling the
bankers of my State. Secondly, I wish to say that I come from a
country district, a town of 1,000 inhabitants.
Senator N elson. What s the name of the place?
Mr. M oehlenpah . Clinton, in Rock County.
Senator N elson. It is near my old home.
Mr. M oehlenpah . It is an agricultural State and I represent an
agricultural community. I believe it is fair to say that I represent a
typical country bank in such a community and, in representing such
a community, I represent our State in its entirety as far as the con
stituency is concerned.
It is a dairy district, it is an intensive farming district, 75 miles
from Chicago" Land values are high and increasing rapidly. The
1540
BANKING AND CURRENCY.
farmers are up to date, progressive, enterprising, and I think are
fairly well posted on this bill in its fundamentals.
I think that will accurately state what kind of a bank and what
kind of a community I come from. The bank I represent is capital
ized at $50,000 and does business entirely with farmers.
Senator N elson. I s it a national bank?
Mr. M oehlenpah . A State bank. And as I come here to-day, I
think I can say I have tried to fix my mind all the time during these
25 years of banking experience to get the viewpoint o f the man on the
other side of the counter. What I shall say to-day I think will more
clearly, I firmly believe, represent his thought and his feeling on this
proposed legislation than it would the banker, primarily. I f this
bill should go through, as a banker, as a State banker, I should be
very glad to cooperate in my bank and contribute to the capital stock
of this regional reserve bank on the particular basis that it would
stop, I believe, the recurring of panics and humiliation which I, as
a banker in that community for 20 years and in another community
for 5 years in the earlier period of my experience as a banker have
had. I wTould have recourse, I would have the help that I always felt
I needed under our independent banking system.
I wish to state, too, I was a member of the Chicago bankers’ con
ference. I was honored by being a member of that committee ap
pointed at that conference of 12 men. There were 4 men chosen
on that committee to represent the clearing houses, 4 to represent
the currency commission, and 4 the State bankers’ associations. I
was chosen on that committee. I went to that conference with the
desire, as a citizen, to cooperate as a citizen, to assist in this banking
legislation which I had been taught and led to believe all the years
of my experience as a young man was needed—taught by the city
bankers and the leaders of the banking fraternity. I thought the op
portunity was here, and I went there to attend that conference with
a deep desire in an humble way and a small way to be of assistance,
to represent the Wisconsin bankers. I asked several national bankers
to go there with me that I might have their counsel and advice
in any position that should come up. I went into that conference
in that committee room, and I went into the larger conference with
that purpose and desire. There are some men here to-day, I am glad
to say, that were there—I did not know they were here, but I am
glad to know they are here— from other parts of the country.
The C hairm an . Y ou refer to the gentlemen from Mississippi?
Mr. M oehlenpah . From Mississippi. We happened to be with
each other, and I think sympathized with each other, as country
bankers in what we were up against early at that conference. Mr.
Hepburn presided, as you know.' He called upon Mr. Forgan to
read some resolutions arranged for. As he read the first section of
those resolutions it became apparent to us fellows back in the country
that we were there for another purpose, and every drop of blood in
my system, as a citizen, revolted.
I had gone there to help, to assist, if I could, and the program
was arranged and the skids were greased and we were there to par
ticipate as they chose—not as we chose. I say this, gentlemen,
with reluctance, but I have heard------
BANKING AND CUBRENCY.
1541
The C hairm an . We have those original resolutions proposed by
Mr. Forgan in our minutes, so that the committee will be informed
what you are speaking of from the record.
M r. M o eh lenpaii . But, Senator, I desire to get the attitude more
than I do the technical part of this proposition before the Senate—the
attitude of the country banker and his relation to this thing more
than anything else. It is not prejudice, but I could not help if I
wished otherwise, speaking earnestly whatever I feel. And I wish
to say that coming across the country in a special train—*—
The C hairman (interposing). What special train?
Mr. M oehlenpah . The bankers' train coming to Boston, where
the convention is to be held next week.
Senator H itchcock. Could you not finish this discussion of what
happened at Chicago?
Mr. M oehlenpah . Yes; but I want to get to you, Senator, if I
can, this thought, that the country banker feels deeply grieved, I
believe, about the way he has been represented in the past— at that
conference and otherwise.
I started to say in my conference with other bankers coming across
the country of the Dakotas, Iowa, and Wisconsin, without exception
T- found that sentiment, that feeling, prevailed.
Because of the natural inertia of the average banker he never is
heard, and he never studies deeply these propositions, and he follows
willingly or otherwise the leadership of the city banker at the State
conventions and the national convention. I will not say he is
coerced, but he is led, and that is one reason why I feel justified in
speaking in this way to-day.
Now, in this conference we went into the conference room-----The C hairman (interposing). That is at the Chicago conference,
now ?
Mr. M oehlenpah . At the Chicago conference.
The C hairm an . Where the bankers’ convention was being held?
Mr. M oehlenpah . Yes; there were 12 men sat around that table.
Mr. Forgan presided. We took up the bill, section by section, to
make the changes. The first section, when we came to the proposi
tion as to whether the banks should participate—must participate or
leave it optional—the first controversy arose. There I discovered the
solidity of thought that was shown in the other room, and you men
know nothing about [indicating the Mississippi bankers]. I said,
“ Mr. Forgan, do you think, as a banker, knowing the bankers, that
the banker will cooperate and take a share of the stock in this propo
sition if it is not compulsory ? ” The answer did not come. I asked
the other men, and I stated, “ I do not believe, gentlemen, this bill
or any bill will be competent unless it is made compulsory.”
Senator N elson . D o you want it compulsory as to all State banks,
too?
Mr. M oehlenpah . I f you can make it so, Senator, it would be the
finest thing you could do.
Senator O ’G o r m an . Y ou can not make it compulsory as to State
banks.
Mr. M oehlenpah . I understand that.
Senator O ’G o rm an . That suggests this question: Would it be a fair
provision to make it compulsory upon the national and optional with
1542
BANKING AND CUBRENCY.
the State banks and trust companies who would come in and get all
the advantages o f the system?
Mr. M o eh lenpah . Senator, that is one of the propositions you men,
as lawmakers, must meet, because of your limitations under the law.
Senator N elson . Y ou loan on real estate in your bank, do you not?
Mr. M o eh lenpah . Yes.
Senator N elson . Y ou loan on farm mortgages?
Mr. M oehlenpah . Yes.
Senator N elson . Y ou would be willing to come into the system and
forfeit that right, and be on a par with the national banks?
Mr. M oehlenpah . The national banks loan now on real estate.
Senator N elson . They have no right to do it.
Mr. M oehlenpah . But they do.
Senator N elson. They do it occasionally in a roundabout way, but
they violate the law.
Mr. M oehlenpah . They do it generally, Senator.
Senator N elson . Oh, no; not generally.
Mr. M oehlenpah . I am satisfied they do it in a roundabout way.
Senator H ollis. They do it in this way, w'hich has never been ex
plained to this committee, I believe: A man comes in and wants to
borrow on real estate. The bank says, “ We can not loan on real
estate, but you give us a note, and then to-morrow you come in and
we will take security on the real estate.”
That is the wray they loan on real estate.
Senator H itchcock. And they also have a mortgage made to a
straw man, and he indorses it, and they take it as collateral security.
Mr. M oehlenpah . Yes; there is no question about that. I do not
think there is any controversy on that.
(A t this point there was a call for a quorum of the Senate.)
Senator O ’G o rm an . I would suggest, Mr. Chairman—of course, it
is necessary to go over there—if it is desirable to have further hear
ings this afternoon, we might meet in the Judiciary room close to the
Senate Chamber.
Senator S hafroth. Suppose we do that.
(Thereupon, at 3 o’clock, the committee adjourned to the Judiciary
Committee room of the Senate, and the hearing was resumed at 3.15
p. m.)
Mr. M oehlenpah . Senators, I would like to again state that I
desire to represent only the attitude, the thought, of the country
banker, as I think I know them, but I do not wish to enter into any
technical discussion as to figures, details of this bill. I am not a
public speaker, I am just a country banker. I felt if we ever got a
hearing, if we ever had a hearing on this thing, some of us would have
to get busy and come here.
Senator O ’G o rm an . Didn’t you have a hearing before?
Mr. M oehlenpah . N o, sir. That leads me to say, Senator, at this
conference, the committee meeting in Chicago, when we were closing
that conference, I turned to Mr. Forgan and Mr. Reynolds, when
they were preparing the conference report to take it into the larger
conference, and said, “ Does this report stop me from taking part or
getting my friends to take part on the floor of this conference?”
They said it did. I said, “ That does not seem fair.” I told them
that that did not seem fair, that I did not understand the workings
BANKING AND CURRENCY.
1543
fully o f such a conference, and they said that they desired to make a
unanimous front; “ It is necessary that we do it.” He said, “ You
can bring in a minority report.” I thought what that meant, and I
said, “ I have not the time or the ability to go into that conference
and make a minority report, if I wished to.” They said, “ You had
better keep quiet, then, and we will make a unanimous report, and if
you have anything to say, you can say it some place else.” I presume
he meant such a place as this, although I never thought I would have
such an opportunity.
We went into that conference; that report was made. I remember
this gentleman here from Arkansas. He expressed my feeling, when
Mr. Hepburn, with the gavel in his hand, said, “ There is no further
objection to this section? It stands approved. Section No. 2.” This
gentleman got up, after they had reached the third or fourth section
in the proceedings—he stood up, but I do not think they paid any
attention to him, and he says, “ God. this steam roller is working
fine.”
You wanted to know how much we had to say on that bill at that
time [the Senator from New York], and I can tell you that is how
much we had to say.
Senator O’G orman . Why did you not insist upon having a hearing?
Mr. M oehlenpah . I will give you a concrete case. When that sec
tion was reached-----Senator O ’G orman (interposing). Without wishing to pay you any
compliment you impress me as being a man who would have a say.
Mr. Moehlekpah. I tried hard. For instance, when we got to that
section, I think it was 4 or 5, the one providing for the division o f the
profits, a gentleman from Cincinnati—I do not know his name; I
understood he was a large banker—stood up and asked to have argu
ment and discussion on that point, as to the division of the profits
over and above 5 per cent. Mr. Hepburn proceeded the same way
with the gavel: “ I f there is no further objection.” When I stood to
my feet, thinking perhaps I might get a chance to say something—
at least, I stood up for a moment and asked if we could discuss it a
little, and Mr. Hepburn recognized me, unfortunately. I said:
“ Would it not be wise. Mr. Chairman, if the section relating to the
basis upon Avhich these profits should be divided was read first?”
‘kThere is no objection. It stands approved.”
I was in hopes, Senator, if we could <ret a discussion at that time
we might, at least, get the country bankers in that conference awake
to participate in the conference.
Senator H itchcock . Flow many country bankers were there?
Mr. Moeheenpah. It is pretty hard to tell. The city bankers had
a pretty large majority.
Senator O ’G orman . Was there any revolt between the city bankers
and the country bankers?
Mr. M oehlenpah . No; I think it was ignorance, Senator.
Senator O ’G orman . .Of which one?
Mr. Moehlenpah. I think it was the country banker. He has not
read this bill. He does not understand it in the first place, and, in
the second place, he does not get up to speak at the meetings, and he
feels he is not competent. As long as the big fellow is on the job
1544
BANKING AND CURRENCY.
and does the speaking and writes the resolutions, he knows him pretty
well in his city office, and so forth and so on, and he lets him do it.
Senator R eed. Y ou say this committee went into a room and drew
this report?
Mr. M oehlenpah . Yes.
Senator R eed. And you were one of the committee ?
Mr. M oehlenpah . Yes.
Senator R eed. N ow I can see you had a caucus, but did you have
any conferees to deal with? [Laughter.]
Mr. M oehlenpah . I am not enough-----Senator R eed (interposing). We all understand this. We are
joking about our own fight.
Mr. M oehlenpah . The distinction between a caucus and a confer
ence fight, which you refer to, Senator, I do not consider myself com
petent to understand or to explain the distinction.
Senator O ’G o rm an . The distinction is, if you were stopped in the
caucus and stopped in the conference, your rights were invaded twice,
to put it mildly. [Laughter.]
Mr. M oehlenpah . I can explain the modus operandi of the con
ference, if you care to listen to it.
The C hairm an . I would like to hear it.
Mr. M oehlenpah . When the different sections of the bill were
brought up-----The C hairman (interposing). Were they prepared in advance?
Mr. M oehlenpah . Oh, no. They had the original bill before them,
and they would write over the line or make changes as they went
along. We each held a copy of the bill, and on the side interlined
the changes we were proposing to make in the report to this confer
ence. For instance, we came to “ note issue,” and there was a lot of
work to do and a great deal of talking going on between these mem
bers of the conference; Mr. Hepburn said, “ Now, Mr. H ill”—Mr.
Hill, from Connecticut, and some one else whose name I forget—
“ you go out and fix that section.” And when the question would be
raised, they said, “ You had better go out and bring that in.” And
I found out, after we got to the second or third or fourth section,
that any idea I should have as a banker from the cornfield or back
in the country there had no consideration, and about all I could do
was to rattle and protest and let it go, hoping I might get some op
portunity on the floor, and when I asked for the privilege of debating
on this question they told me just what I told you.
The C hairm an . “ Without further objection, it is approved” ?
Senator O ’G o rm an . Did you have any support?
Mr. M oehlenpah . It is hard to tell you. Senator, how quick and
how rapid this thing worked out there. [Laughter.]
Senator R eed. I would like to know the names of the gentlemen, be
cause sometimes we have to have quick action in political caucuses in
my State.
Mr. M oehlenpah . I should say they would be ideal. [Laughter.]
Senator R eed. Now, seriously, and you must not take exception to
the committee for having a little fun, because we are going to have
a little trouble of our own and that is the thing we are joking about,
our own troubles, and not anything you said-----Mr. M oehlenpah (interposing). Thank you.
BANKING AND CURRENCY.
1545
Senator R eed. When these big bankers got in there, the big fel
lows, you found they had things pretty well cut and dried ?
Mr. M oehlenpah . It looked to me that way. It was very evident.
Senator R eed. And you found they were able to run the steam
roller over these men that were there asembled, and not only able
to do it, but did do it?
Mr. M oehlenpah . I do not like that word “ steam roller.” I
rather used it off-hand, but that is what it was, there is no question
about it.
Senator R eed. Very well. Now, I want to put a question to you
and I want you to give it serious thought. These big bankers have
large numbers of country banks for their clients or correspondents, do
they not?
Mr. M oehlenpah . Yes.
Senator R eed. Some of them have as many as 1,000, and some per
haps more. Now, suppose we have a bill and there was an election
to be held of directors of some institution, would not the same power
that prevailed in this convention (where a man who was present had
a chance to stand out, at least, and shout his protest), would not that
same power, in your opinion, be able to control the election of the
directors ?
Mr. M oehlenpah . Senator, I have thought of that thing as much
as any other thing connected with this bill, but I am free to tell you,
knowing human nature as I do and the power of money and selfish
ness of human nature—I am safe and sure when I say this to you,
and I have given it serious consideration, that the tendency would
be for these men to control that situation absolutely.
Senator R eed. N ow, let me put another question: Suppose we
have proceeded to that point, when you want to elect the directors
of a regional bank, the great bankers of that region would probably
be able to dominate in that election and that would settle the question
of the directorate of that regional bank. Now, do not these bankers
of the West and of the South that we call big bankers sustain inti
mate and close relations with the great money interests of New York
City and the East? Now, do not get irritated about it, Senator
O’Gorman.
Mr. M oehlenpah . It is a long question, but I think I get the
drift of it. They, of necessity, must have connection because of
their correspondents. That relation is of a broader capacity, very
often. They have it in that deposit capacity, and they have it in
that other way which I learned in these recent years to respect, and
that is that social way.
Senator R eed. Social relationship ?
Mr. M oehlenpah . Social relationship; that is it. It is mighty
effective when it comes to bunching up a thing that is desired.
Senator R eed. I f that is true, and if you have 12 regional banks,
and the big bankers run the regional banks, and the big bankers have
close and intimate relations with the big monied interests of the
East, how long would it be until a few gentlemen who are in control
in the great financial centers of the country would be running this
whole chain of 12 banks?
Mr. M oehlenpah . That is a hard question. I do not think any
man could say how long it would be.
1546
BANKING AND CURRENCY.
Senator R eed. D o you not think that inevitably it would follow
that a few would largely control them? I do not say absolutely.
Mr. M o eh lenpah . Senator, I think if the necessity came to con
trol large volumes of money and credit, if that necessity came and
they wished to protect their own interests, their larger interests, as
against the countryman in the city, they could do it very easily. I
can not see any reason why they would not.
Senator O ’G o rm an . D o you approve of this proposed plan, of 12
regional banks?
Mr. M o eh len pa h . I have discused that with a great many
bankers and thought about it. That is a hard thing. I do not see
how you men, or any company of men, can sit down and say 12 banks
would be too many or too little. It is a new proposition. It would
seem to me, to work it out from abanker’s standpoint, if I were going
to work out a thing like that, I would start on a small scale. I
would probably start with a smaller number and make provision for
a larger structure. I would start with a smaller number and see how
it was going to work out. That is the way I would start, but I am
not posted on the whole country as you men are, so as to say 12
would be enough.
Senator R eed. Y ou have just said this system might get in the con
trol of certain interests.
M r. M o eh len pa h . Yes, sir.
Senator R eed. O f course, they might have selfish interests to serve,
along with patriotic interests.
Mr. M o eh len pa h . They might have.
Senator R eed. H ow would it suit you if, instead of having to go
to that selfish interest, that might find itself in a position adverse to
the bankers of your section of the country at some time, you could
just take your securities in a time of stress and go down to old Uncle
Sam and get help direct?
Mr. M o eh len pa h . I am very glad you asked that question because
that goes right to the point in my desire to express the country
banker’s attitude. That is what we wish, that we could do that, and
that alone.
Senator R eed. That is, if'you had trouble with New York, either
that they could not help you or would not help you (and when I say
New York I mean the great money centers)-----Senator O ’G orman (interposing). When Senator Reed says New
York, he means New York, Chicago, St. Louis, or possibly Kansas
City.
Senator R eed. I think the thing is true of my town in a less degree.
Just in the same degree that the town is smaller than New York,
the same influences are present. But, coming back to my question,
you really prefer, then, some system by which you could go to a disin
terested source and get it, so that if you are being dealt with unfairly
or if you could not get help, without regard to the fairness of it. from
another source, the present source, you could go then to the Govern
ment. You would really prefer that?
Mr. M eo h lenpah . Yes; I think that is the first desired result that
the country bankers are looking for, the first desired result under
this whole plan or scheme of agitation for legislation. We could
take care of ourselves in ordinary times. When it got to the stress
BANKING AND CURRENCY.
1547
and times we have had, panicy times we have called it, and we have
the best collateral we know that could be had in the farming dis
tricts of the farmers, we go to the city banker (I refer now to actual
experiences back in 1893), and we put our collaterals on the table.
“ What is th a t?” “ Well, that is a farmer who owns so much,
worth so much. There is his note.” “ Well, that may not be very
good.” I have suffered humiliation in having that kind of notes
discounted as to their value when I knew they were the best to be
had. They absolutely would be paid, and there was everything
back of them, and I discovered the city banker was used to look at
other kinds of security as compared with this kind of securities. I
do not know that they were much better, but they were quicker.
Ours were less liquid, and his were always liquid, and we were help
less. And while we did get help from our correspondent, it was be
cause we had insisted and insisted and insisted until we got it.
I presume we could get it, but if we were to be placed in the posi
tion where we could go to the Government or some great central bank
with our paper and have it scrutinized and investigated and then get
our help, we wrould prefer that. Wouldn’t you, if you were a banker?
Senator O ’G o rm an . I f you look for help, you look to Chicago
generally, do you not?
Mr. M oehlenpah . Yes, sir - or Milwaukee.
Senator O ’G o rm an . Have tney been treating you fairly in Chicago
and Milwaukee?
Mr. M oehlenpah . In ordinary times; no, sir. I do not mean to
say we were treated unfairly at any time,. Senator, but 1893 and 1907
were trying times, and we were all up against it, and I presume the
city fellow was, too.
Senator R eed. The banker you went to was having to do the same
with you that you had to do with your customers, and he had to be
a little more careful and a little more conservative.
Mr. M oehlenpah . We had to conserve our resources and had to
watch after every loan, every outgoing dollar, carefully.
Senator H itchcock. H ow much of a line o f discounts do you re
quire— rediscounts ?
Mr. M oehlenpah . Oh, that varies, Senator. I do not know much
about the other banks. I could speak for myself. It is always
seasonable. I mean by that, at certain seasons of the year. For
instance, the farmers in our locality now have a big crop, and are
going to market and buying sheep and steers to feed, and they come
in and ask for four or five months’ accommodation. I f that comes
in too strong, like it is coming now, and we find our cash is gettinglow, all we can do is to go to Chicago with that same paper and
present it and get help until they sell.
Senator H itchcock. Taking your experience in the last 10 years,
do you require an amount of rediscount greater than your capital?
Mr. M oehlenpah . Greater than our capital? We never have.
Senator H itchcock. So that if provision was made for you to get
rediscount facilities at the subtreasury equal to, say, 75 per cent of
your capital on the deposit of adequate security, that would probably
meet your needs?
Mr. M oehlenpah . I do not think that would be a safe proposition.
Senator O ’G o rm an . Why not?
1548
BANKING AND CURRENCY.
Mr. M oehlenpah . Well, because I can imagine in a section like the
cotton section of our country, where a large volume of business is
done, a $50,000 banker would need $100,000 to meet the needs of
his locality to handle their cotton.
Senator H itchcock. This facility of being able to go to the sub
treasury would not take the place of any facilities you have now,
but would be in addition to all they have at the present time.
Mr. M oehlenpah . I see. Now, let me think about that. I think
that would cover all the needs I could think of offhand. I f I could
have 75 per cent, you say, of my capital—get that right at the regional
bank—and then might also have an equal opportunity to go to the
bank in Chicago or Milwaukee and get other help—I have not any
figures to base it on—I should think that would be fairly ample.
That would be a valuable asset.
Senator H itchcock. H ow many months at a time do you think
the banks would call upon the subtreasury for such relief? Would
it be 60 days, 90 days, or 4 months ?
Mr. M oehlenpah . I think four months—or five months at the out
side. Sometimes loans with us; for instance, the feeders, the farmer
sees he has got a good market and he commences to let go. He
crowds his feeding for a week or two and runs in quick and gets
in capital and pays his note. I should say four months, or five
months at the outside.
Senator H itchcock. Take a 60-day advance. Plow much interest
do you think you should pay the Treasury for that currency for 60
days?
Mr. M oehlenpah . I do not know why I should pay— I think I
should pay the Treasury or the city bank—let me illustrate this way:
I get 6 per cent. I never get more than 6 per cent from my cus
tomers. I f I can go to Chicago and get the money at 5 or 5£, I am
making a little on it. I have had to pay 6, I should say, as many
times as I have not, in order to take care of my customer—to keep
him going.
Senator H itchcock. What would you think, for instance, if you
could £et it for 4 for 30 days, ty if you had it for 60 days, and 5 per
cent if you had it for 90 days?
Senator S hafroth . Y ou mean per annum?
Senator H itchcock. Yes; at that rate.
Mr. M oehlenpah . 1 think any rate you establish should depend on
the money market, the charge for money at that given time.
Senator H itchcock. The ideas is this, that the banks be given a
scale-----Mr. M oehlenpah (interposing). According to the time.
Senator H itchcock. I do not mean that it would be permanent,
but that the loan would be taken out temporarily and put back.
Mr. M oehlenpah . Yes. I think, Senator, that would be wise and
safe to do.
Senator H itchcock. What season of the year would it be required
in Wisconsin?
Mr. M oehlenpah . It is the season now.
Senator H itchcock. Now ?
Mr. M oehlenpah . Yes; in our district.
Senator H itchcock. That is, the advance would begin now?
Mr. M oehlenpah . In September and October.
BANKING AND CUBBENCY.
1549
Senator H itchcock . Y ou would be able to pay it back about when ?
M r. M o eh lenpah . February. February is our great unloading
month for feeders in our country. In the cheese country, in talking
with the other fellows of the State, it is different. If may be just
the reverse—from spring until fall. I am speaking now from what
I know about my own section.
Senator O ’G orm an . D o I understand you approve this bill ?
Mr. M o e h len pa h . Senator, I want to say, without taking too
much time, two or three things I do not approve of, without making
any criticism. I want to give you the attitude of the country bank
ers. There are 27,000 bankers in this country, and there are some
7,000 of them that are national banks. There are some fifty-odd big
banks and some three hundred-odd medium class. We might call
them reserve city banks. That other great crowd are the men I am
trying to get before you.
Senator S hafro th . Did you finish what you had to say or wanted
to say on the Chicago conference?
Mr. M o e h len pa h . I have been interrupted so much that I do not
know how much of that conference I have covered. I f you care to
ask me questions, I would be glad to answer them.
Senator F e e d . I can tell you where you were. You had the bill
before the conference and had the floor once or twice, and each sec
tion had been passed.
Mr. M o eh len pa h . I did not take part in the discussions after that,
because it was useless.
Senator O ’G o rm an . Did anybody else take part in the discussion,
or was there any discussion ?
Mr. M o iil e n p ah . Oh, yes; it rather summoned up the antagonism
in my nature when Mr. Hill, Mr. Wexler, Mr. Forgan and those
men proceeded to discuss certain phases of that bill, when they had
told me in the committee room I was estopped from discussing it.
They were talking principally upon the note issue and the foreignexchange proposition, which I did not consider myself competent to
talk about, but I did feel I would like to talk about the control of
this bill.
The C h a ir m a n . H ow do you think you ought to control it?
Mr. M o eh len pa h . I want to say that this bank, according to the
countryman’s viewpoint, wants to be all the time in the control of
the Government. We are more willing to take our chances with the
Government. We know something about how the comptroller handles
a banking situation, and we know something about how the State
examiners handle a banking situation in our State. There are very
large demands which we understand, and we are willing to submit
to them and be subject to them, and we are fearful, as country bank
ers, to give the central places, where the opportunity is larger for
accumulating these large sums of money—to give them any larger
powers.
Senator O ’G o rm an . Y ou think it would be far better that the bank
be controlled by the Government than by a banking institution con
trolled by private bankers?
Mr. M o eh len pa h . Yes; I do.
Senator O ’G o rm an . And your experience of bankers, possibly, of
your own town, has been confined to Milwaukee and Chicago?
1550
BANKING AND CUKRENCY.
M r. M o eh len pa h . I have had more to do with those two centers,
but I have had a great deal to do with country banks.
The C h a ir m a n . And you are president of the State bankers’ asso
ciation, are you not, of Wisconsin?
Mr. M o eh lenpah . I am ; yes.
Senator H itchcock . D o you keep a balance in New York?
Mr. M o eh len pa h . Yes.
Senator H itchcock . D o you ever have occasion to rediscount there ?
M r. M o eh len pa h . N o, sir; I could not. I would not go that far.
I have never been in that bank. I do not know them, except we keep
a small balance there.
Senator H itchcock . What is the purpose of keeping a balance
there ?
Mr. M o eh len pa h . Just to handle exchange items. Someone may
want to buy a draft for $100 or $200 or $500, and may want it on New
York, and we keep a small deposit there so as to accommodate our
customers; that is all.
Senator H itchcock . I s that balance counted as part of your re
serve ?
Mr. M o eh lenpah . Yes, sir.
Senator H itchcock . Y ou understand under this bill it would
not be?
Mr. M o eh len pa h . We would keep that reserve with the regional
reserve bank.
Senator H itchcock . Yes; and what would you do with the New
York balance?
Mr. M o eh len pa h . That brings us down to the question whether
we wanted to deal with this bank.
The C h a ir m a n . Y ou could draw a draft on the New York bank.
Mr. M o eh len pa h . Sure; there is nothing against that.
Senator H itchcock . H ow could you do that?
Mr. M o eh len pa h . By keeping another account.
Senator H itchcock . Y ou could not keep part of the reserve in the
New York bank.
Mr. M o eh len pa h . That brings us to a suggestion I would like to
make. I do not know just what the Senators’ mind would be on
that, but it seems to me, from the country banker’s standpoint, and
from the operation of this bill, that if you could provide for a
reserve percentage, say, of 4 per cent, in the vault of the bank, 4
per cent at the regional reserve bank, and the other 4 per cent, or,
say, 2 per cent, you would have to keep in your bank or keep with
the city correspondent, you would serve two purposes. One would
be to bring the country bank in closer touch and relation with the
city bank, to get his ordinary accommodation, such as I have referred
to before. He would have a deeper and a stronger interest in the
country banker, because he would have more elbow room in loanable
funds than if he had to keep it all tied up in one place, in the re
gional reserve bank.
Senator H itchcock . That is a criticism, then, you have of the bill.
You do not like the reserve provision?
Mr. M o eh lenpah . It seems to me it could be worked out along
such a line as that, as I have talked with the country bankers as I
came across the country. I do not know whether to put it as a
BANKING AND CURRENCY.
1551
criticism. It is a suggestion that would be a splendid thing to get
the cooperation of the country bankers right at the start, and it
would seem to me, also, you would neutralize the opposition of the
city banker, too, by allowing his country correspondent to keep a
little more.
Senator H itchcock. Y ou detract that much from the mobilization
of the reserves?
Mr. M oehlenpah . Yes, sir; but it seems to me that that must be
an open problem as to what that is going to amount to. It ought to
be elastic enough so that you could work out assistance, and the best
distributor of money to the country banker is the man who is right
on the spot. This great crowd of bankers is in direct touch with
the best citizenship of the country in every way, and if there is any
latitude to be allowed as to the increase of loanable funds and the
tightening up of reserve accounts it ought to be on the side of the
country banker, because he is the man who is in the closest touch
with the citizenship of the country.
Senator O ’G orm an . Are you the president of the Bankers’ Associ
ation of Wisconsin?
Mr. M oehlenpah . I am a State banker, president of the Bankers’
Association.
Senator O ’G o rm an . O f Wisconsin?
Mr. M oehlenpah . Yes.
Senator O ’G o rm an . That association is composed of representa
tives of State banks?
Mr. M oehlenpah . Yes, sir; and national banks and trust com
panies.
Senator O ’G o rm an . H ow long have you been president of that
association ?
Mr. M oehlenpah . I was chosen president of that association in
July.
Senator O ’G o rm an . Are we to understand that you are reflecting
the views of the members of that association?
Mr. M oehlenpah . N o, sir. I stated at the outset that I did not
wish to be so understood. It has not been possible for me or any
one else to poll the members of that association with any degree of
accuracy.
Senator O ’G orm an . Have you had a meeting of your State associa
tion?
M r. M oehlenpah . N o, sir.
Senator O ’G o rm an . Why not?
Mr. M oehlenpah . H ow could we?
Senator O ’G o rm an . Why not?
Mr. M oehlenpah . We have not had occasion to.
Senator O ’G orm an . I s this matter not of sufficient importance for
you to get together and consider the proposition to improve our
banking and currency system?
Mr. M oehlenpah . We have a membership of 800. We have talked
the thing over a good deal, and we thought if we could get a copy of
the bill every banker could write a letter to his Representative or
Senator embracing his views, criticisms, and suggestions of changes,
giving their views; and that has been done. That letter asked for
criticisms and suggestions from the bankers. We thought that
would be a more economical way than to try to call a large meeting.
1552
BANKING AND CURRENCY.
We had our annual meeting in July, and the traveling expenses and
other expenses of such a meeting as you refer to had been considered.
We thought the other method would suffice.
Senator H itchcock . How many national banks are there in W is
consin ?
Mr. M o eh lenpah . About 125, I should say. About 800 banks
altogether.
Senator Reed. Y ou did send a copy of the bill to each member of
the association?
Mr. M o eh lenpah . A copy was sent to every banker.
Senator R eed. Have they made any representations to you?
Mr. M o eh lenpah . That is up to you, gentlemen. I do not know.
They were to report and write letters and criticisms or give sug
gestions to their Representatives, and what they have done has been
done.
I imagine, Senator, knowing the bankers as I do, that very few of
them, considering the corfespondence we have had on other similar
matters of association policies, have written letters. It is very diffi
cult, indeed, to get them to sit down and write a letter discussing such
a problem as this. We can get the best results from them, I believe,
when we discuss the matter with them while we are traveling in the
smoking compartment of a car.
Senator H itchcock . D o you know anything about the comment
which was made by Mr. Frame?
Mr. M o eh len pa h . I know all about it. I was at the meeting in
Milwaukee.
Senator H itchcock. D o you know of the circular letter he sent out
to the bankers of Wisconsin for the purpose of getting an expression
of their sentiments?
Mr. M o eh lenpah . I know of it.
Senator H itchcock . D o you know the result?
Mr. M o eh len pa h . I have seen it in the public print. I presume
you Senators know the questions which were asked.
Senator O ’G o rm an . What were they?
Mr. M o eh lenpah . I do not remember now. You have it in your
records.
Senator O ’G o rm an . I thought you might recall them.
Mr. M o eh len pa h . I can not recall them offhand. I do not wish
to enter into a controversy with Mr. Frame, because we agreed upon
the general principles in regard to the attitude of country bankers.
Senator O ’G o rm an . He has stated in a general way that nearly
every banker in his State is against this bill.
Mr. Moehlenpah. I think that is incorrect—I mean his statement
of it is incorrect. The average banker-----Senator S hafroth (interposing). I would like the witness to
proceed without interruption, and then when he gets through we can
ask him questions.
M r. M o eh len pa h . I am not experienced in this kind of thing, but
I am in earnest. The average banker, when he said he was opposed
to this bill, was opposed to it—I know of one such—on the general
ground as he would look at it in a very superficial way, that it does
not pay him enough interest. The average banker would say: “ I
do not want anything to do with that, because it does not pay me
enough. Five per cent is not enough.” That is, on the surplus.
BANKING AND CURRENCY.
1553
Another reason is because of his superficial touch with and study
of this thing. He picks up a paper and reads what Mr. Forgan and
Mr. Hepburn have sent out, and he says, “ Mr. Forgan is against this
and Mr. Hepburn is against this,’- and, therefore, he thinks he
should be against it. But if you get right down to brass tacks and
would take it up with him in a school-teacher fashion and work out
with him the details of the bill and the way it would work, he would
have a different attitude.
The average banker hates a rediscount and hates a bill payable to
appear in his statement. He does not like it in his statement. I f he
understands it is to be an every-day proposition-----Senator O ’G orman (interposing). Sanctioned by the Government?
Mr. M o eh lenpah . Yes; he will cease in a very short time to be
afraid of criticisms coming from anyone in his immediate vicinity.
That is the stumbling block here with the country banker and the
city banker, for that matter, too. He says, “ I do not want to go
to this bank and borrow money.”
Senator R eed. Y ou say when you explain this bill to the bankers
they get a different view?
Mr. M o eh len pa h . Oh, yes; when we talk about it.
Senator R eed. H ow much new capital would be added to the bank
ing capital by virtue of this bill, to the banking capital of the country?
Mr. M o eh len pa h . In Wisconsin?
Senator R eed. Yes.
Mr. M o e h len pa h . I could not state offhand. It seems to me Mr.
Frame estimated it would take a contribution from the national
banks of Wisconsin of $3,800,000.
Senator R eed. H ow much new banking capital would be added ?
Mr. M o eh len pa h . That represents it.
Senator R eed. Your understanding of the bill is that if we organize
regional banks, the capital of the regional banks would be in addi
tion to the present banking capital ?
Mr. M o eh len pa h . Yes, sir.
Senator R eed. Are you not mistaken about that? Is it not true
that the bank simply takes a part of its capital and transfers it over
to the other banks ?
Mr. M o eh len pa h . I did not so understand it. I supposed it was
out of our own capital.
Senator H itchcock . It simply takes it from you and passes it on
to the regional bank.
Mr. M o eh len pa h . Y ou mean to say if I have $50,000 capital, that
I have only the use of $40,000 ?
Senator H itchcock . Y ou still have a capital of $50,000, but you
have only the use of $45,000 of it. It does not add $1 to the banking
capital of the United States.
Senator O ’G o rm an . The capital o f the reserve banks will be made
up by contributions from the membership banks, and the capital of
the membership banks would be to that extent renewed.
Mr. M oehlenpah . Our stockholders would put up $5,000 more,
and put it up as a contribution?
The C h a ir m a n . Y ou simply take that out of your ordinary re
sources. You do not diminish your own capital at all.
9328°— S. Doc. 232, 63-1— vol 2----- 38
1554
BANKING AND
CUKRENCY.
Mr. M oehlenpah . That is the way I understood it.
Senator H itchcock . Was it your idea that there would be an
assessment on your stock to that extent?
Mr. M oehlenpah . Practically so.
Senator H itchcock . Oh, no.
Mr. M oehlenpah . I thought if we want to we could contribute
this stock. Every bank has its surplus funds and undivided profits,
and a number of them have contingent funds. Now, they sometimes
hide that in a certificate of deposit, or in some other way. Speaking
for my own bank, and I know some other bankers who think like
wise, we felt if we would take $5,000 or $10,000 from this contingent
for the stock in this bank, this new bank, it would go to the credit
of our stockholders.
Senator H itchcock . What are you doing with your contingent
fund now ?
Mr. M oehlenpah . We thought it would be just like undivided
profits.
Senator H itchcock . But you would not have it to use after you
had contributed it to the reserve bank.
Mr. M oehlenpah . We would have the indirect use of it.
Senator H itchcock . Y ou would not have the use o f it.
Mr. M oehlenpah . N o ; we would not have the use of it.
Senator H itchcock . You did not expect to assess your stock
holders?
Mr. M oehlenpah . N o ; I was telling you how we thought we would
handle our share of it.
Senator R eed. The whole import o f my question was whether you
understand that when these regional banks were organized that that
would represent that much new contribution to the banking capital
of the country. I understood you to say that it was your understand
ing of the bill.
Mr. M oehlenpah . Yes; in a very general way.
Senator R eed. The fact is that so far as the bill is concerned, that
could be capitalized by the various member banks taking a certain
amount of their capital and transferring it so that there need not be
a single dollar of new capital added. When that was done and the
reserve banks created, the total of the banking assets of the country
would be indentically the same as they were before, because it would
depreciate the capital of the members by the amount they increased
it through the organization of the regional bank, so there is no new
banking capital added at all.
M r. M oehlenpah . Y ou would not say if I had that money to my
credit or in my pocket, and had it there for my own use, if I should
choose to take that money out o f my pocket and buy the stock of this
bank that that added something to the banking capital?
Senator R eed. Your illustration fails in this: The illustration must
have this, that you have in your bank a certain sum of money belong
ing to the bank, and it constitutes, therefore, a part of the assets of
the bank, and when you take a part of the assets of your bank and
acquire stock in the other bank of equal amount, you have not added
a dollar to the banking capital.
Mr. M oehlenpah . These assets-----Senator R eed (interposing). Bank assets?
I
BANKING AND CURRENCY.
1555
Mr. M o eh len pa h . They are the property of the stockholders of
that bank.
Senator Reed. They are the property of the bank.
Mr. M o eh lenpah . Y ou are talking about the value, the thing
itself ?
Senator R eed. Yes; the real thing.
M r. M o eh lenpah . N ow , you have not.
The C h a ir m a n . Y ou really transfer from assets in one firm to
assets in another firm; that is all.
Senator R eed. That is what you mean? Your idea had been if we
organized 12 regional reserve banks with a capital of $5,000,000, or
an aggregate capital of $60,000,000, there would actually be $60,000,000 new capital added to the banking business of the country, whereas
the fact is that that $60,000,000 may be all taken from the assets of
the banks, so that it is the same money appearing in a different form.
1 just asked that, because I wondered if you made that explanation to
these gentlemen who are ignorant of the bill and to whom you gave
some explanation.
Mr. M o eh lenpah . I do not want to be put in the attitude of being
a distributor of knowledge to my fellow bankers on this bill. My
idea was to try to tell you how we felt on the fundamentals of the
bill.
The C h a ir m a n . Let me ask this question: Are not these reserves
which are now kept by the banks capable of being loaned out, because
their reserves are put to the extent of 4 or 5 per cent of deposits into
a regional reserve bank where they are subject to be loaned out?
Does that not add substantially to the banking capital of the country
by making available reserves which are now dead ?
Mr. Moehlenpah. I do not know but what it adds very materially
to the strengthening of our loanable ability, in the first place, and,
secondly—and that is so important—to the assurance of what we can
do at ail times for our customers, which we can not do now.
Senator H itchcock . This contingent fund you speak of is idle in
}mur bank now, is it?
Mr. M o eh len pa h . N o; it is idle in this way; let me explain that.
Take that contingent fund and hide it in a certificate of deposit,
payable to the stockholders of a bank; if we should happen to have a
loss, our directors would meet and charge that to the contingent fund
the same as an undivided profit.
Senator H itchcock . I f it is a certificate of deposit, then you are
using it as you do any other deposits?
Mr. M o e h len pa h . Oh, yes.
Senator H itchcock . And if you take it away from your bank and
turn it over to the regional bank you will not have it to lend to your
customers, will you?
Mr. M o eh len pa h . N o ; that much of it would be taken from us.
It would become the capital of another bank. We would have re
course to it if we wanted to loan it, but we would not have the same
control of it—yes, we would, too, in a way, so that it does not make a
great deal of difference.
Senator H itchcock . I think you ought to go right along now with
your statement.
Senator W eeks . What authority have you under your State law to
scatter a part of your assets and not show them in your statement?
1556
BANKING AND CURRENCY.
Mr. H o eh len pa h . We have no authority.
Senator W eeks . Y ou just do it?
Mr. M o ehlenpaugh . We do it, but the bank’s customer knows
about it.
Senator W eeks . And he winks at it?
Senator N elson . Does your law in Wisconsin require State banks
to maintain any reserve?
Mr. M o eh len pa h . Yes.
Senator N elson . T o what extent?
Mr. M o eh len pa h . Fifteen.
Senator N elson . Where do you keep them?
Mr. M o eh len pa h . That is deposited in our own vaults or with our
city correspondents or our private reserve agent.
Senator N elson . Provided by the State?
Mr. M o eh len pa h . Yes.
Senator N elson . S o you can keep this 15 per cent either in your
own vaults or with reserve agents?
Mr. M o eh len pa h . Yes.
Senator H itchcock . What do the State bank statements show, as
a matter of fact, that the country banks in Wisconsin do keep?
Mr. M o eh len pa h . I would not answer that offhand.
Senator H itchcock . Can you not recall that?
Mr. M o eh len pa h . I have seen it stated by men whom I believe
are competent to know that it was in the neighborhood of 17£ or 18
per cent.
Senator H itchcock . A s a matter of fact, they keep that much re
serve, although the law does not call for so much. In what money
are you allowed to keep the reserve in your own vaults ?
Mr. M o eh len pa h . With our banks it is optional.
Senator H itchcock . Y ou can keep gold?
Mr. M o eh lenpah . Oh, yes.
Senator H itchcock . And greenbacks?
Mr. M o eh len pa h . Yes.
Senator H itchcock . Can you keep national-bank notes?
Mr. M o eh len pa h . Yes.
Senator H itchcock . Any kind o f money?
Mr. M o eh len pa h . Yes.
The C h a ir m a n . Y ou may continue your statement now. Mr.
Moehlenpah.
Mr. M o eh len pa h . I prepared a statement as I went along, which
I thought I might read to you.
I want to say, briefly and conclusively, and finish what I have to
say, first, that the country banker—that the control of this bank
should be under the control o f the Government. I challenge a contradition. Have any country banker come here and get him alone
and question him and you will find a very large percentage of them
will say that if it is a choice between the control of this new system
by the Government over against the bankers, you will get a very
large majority of them who will say let the Government keep control
of it.
Senator W eeks . D o you know anybody who is in favor of any
other than Government control ?
Mr. M o eh len pa h . At the beginning of our meeting to-day, Sena
tor—I was in that conference in Chicago— and at the beginning of
BANKING AND CURRENCY.
1557
the meeting here to-day I spoke about the way business was done
there. I was a member of that committee that framed those reso
lutions, and I would say that the opposition to the Government’s con
trolling this bank, and I will say that the strength of the argument
for private control from city bankers as expressed by them.
Senator W eeks . They did not express any such opinion to this
committee. They said they thought the banks should have a repre
sentative on the reserve board, but they did not even suggest that
banks should control the reserve board. I frankly do not know a
single person who thinks the Government ought not to control the
issuing of circulation and ought not to control the national banking
system, whatever form it may take. There may be such, but I do
not know of any personally.
M r. M o e h len pa h . Y ou surprise me, Senator.
Senator R eed. Are you not in error, Senator? Was it not argued
here by several men who came here from the Chicago conference that
the bankers ought to have a majority of the directors of all the re
gional banks—of the regional banks, not the reserve board?
Senator S iiafroth . They wanted to be represented on the reserve
board.
Senator W eeks . They wanted to be represented on the reserve
board.
Senator R eed. A nd they wanted a m ajority o f the directors of the
regional banks.
Senator W eeks . Yes.
Senator R eed. And they said they preferred a single bank in the
country; several of them said they preferred a single bank in the
country to 12 banks.
Senator N elson . The representatives of the conference who were
here did not take the stand you have been taking, Mr. Moehlenpah.
Mr. M o e h l en pa h . They took that stand at the conference in Chi
cago; do you not know that?
Senator W eeks . It does not show in their report which was made.
Mr. M o e h len pa h . I do not know as to that report, whether it
does or not.
Senator W eeks . Are you familiar with the report that was made?
Mr. M o eh len pa h . Y ou were not here early in the afternoon when
I explained it.
Senator N elson . Are you for or against the report? Did you vote
against the report ?
Mr. M o e h len pa h . I did, in the conference committee. I did not
take the time to go over that. That is why I wanted to come before
the committee, to explain my action as a member of that conference
committee, ancl in the larger conference, as a country banker, I felt
justified in coming here to tell you how I, as well as other country
bankers, felt.
Senator W eeks . Since you are referring to that, I want to say that
I asked Mr. Forgan when he was here if the report which the bankers’
committee which was here was making was a unanimous report; if
there was any opposition to it, and he said that before the question
was put any person present, any delegate present, was asked to stand
and state whether he had any objections to the report, and there was
no response; and, therefore, he assumed it was a unanimous report.
Mr. M o eh len pa h . I will just explain again as briefly as I may------
1558
BANKING AND CURRENCY.
Senator W eeks (interposing). You need not if you have explained
it once. I would not take the time to do it.
Mr. M o eh len pa h . I objected to many sections. It was a hurried
conference. The work was delegated to different members of the
committee and they were authorized to write up the changes as they
had talked them over and decided, and then at the end of the con
ference we went to a luncheon prepared in the next room, and I pro
tested against its being called a unanimous report to Mr. Forgan and
Mr. Reynolds, and asked if I could not be permitted to discuss it
briefly on the floor of the conference. Reynolds asked me not to do
it, and he said I might bring in a minority report. I said I did not
wish to do that. He said, “ We must go to the men at Washington,
to the administration, with a solid front, and if you have any objec
tion,” he said, “ Make it personally.” He said, “ Let us keep the
solid front,” and the solid front was kept, clear through the whole
program.
Senator R eed. They presented a very fine front down here.
Mr. M o eh lenpah . I did not have any influence with them. On
one side of the table was Mr. Wexler, opposite me, and you know
those men, and the vigor of their presence and knowledge and experi
ence. The country banker could not have any influence there. I did
not, and I say it now, and they know it.
Mr. G. W. R ogers, of Arkansas. Excuse me, but we did have
influence.
Mr. M o eh len pa h . I want to say right here, as I am trying to rep
resent the attitude of the country bankers, the country bankers must
of necessity, because of the inertia and their ignorance, the possibil
ities of getting together, as over against the ease with which the
larger city bankers can get together, have to depend upon you gentle
men here.
Senator N elson . Suppose you go right on and tell us how this bill
in its details will help the country bankers and put them in better
shape than they are to-day. We want information. Suppose you
tell us that.
Mr. M o eh len pa h . That would take a long time.
Senator N elson . Then tell us in a general way; discuss the general
principles. You need not go into details.
Senator H itchcock . Could you not take as an instance yourself?
H owt do you think this bill will help your bank? Have you not
figured that out?
Mr. M o eh len pa h . I could take my notes up and in times of stress
go to this bank and get assistance, and I would know that I could
get it absolutely at any time.
Senator H itchcock . What is there in the bill which leads you to
think that?
Mr. M o eh len pa h . I presumed that was the function of the whole
matter.
Senator H itchcock . Y ou think the board of directors are under
compulsion to discount your paper?
Mr. M o eh lenpah . No, sir; but I think they would.
Senator H itchcock . D o you think there ought to be a provision
in the bill making it certain that they would discount a reasonable
amount of your paper?
BANKING AND CURRENCY.
1559
Mr. M o eh len pa h . I do not think that is necessary, but they ought
to do so.
Senator H itchcock . Suppose, the way the bill reads now, the
directors could refuse you utterly any discount and could discount
the whole portfolio of your competitor across the street.
Mr. M o e h l en pa h . That would be unjust if I had just as good
stuff as he had.
Senator H itchcock . D o you not think there should be something
in the bill for your protection?
Mr. M o eh len pa h . I took it for granted that that was there.
Senator H itchcock . Did you read the bill ?
Mr. M o e h len pa h . I have read it many times, but I do not just
remember the phraseology of that.
Senator H itchcock . Suppose you should go to the reserve bank
in which you had placed one-half of your reserve and one-tenth of
your capital and they refused you this. What would you do?
Mr. M o e h l en pa h . I would do like every other banker. I would
go to the next best fellow.
Senator H itchcock . Y ou could not take your reserve out as you
can now. I f you go to Milwaukee and they refuse, you can with
draw your business and go to Chicago. I f you are in one bank in
Chicago and they refuse you, you can go to another bank in Chicago;
that is, under the present conditions. What would you do if this
bill were passed and you should go to the reserve bank where you
have one-half of your reserve locked up and they would say “ no ” to
you?
Mr. M o eh len pa h . I would have to go—but I have not any city
correspondent to speak of.
The C h a ir m a n . I do not think that is a proper statement to go
into the record, because he has a city correspondent.
Senator H itchcock . H ow much of your reserve have you with
your city correspondent?
Mr. M o e h l en pa h . That varies.
Senator H itchcock . Suppose you go into the new system and you
have 5 per cent of your deposits in vour own bank and 5 per cent
with your reserve agent. How much have you available that you
might have with a city bank correspondent ?
Mr. M o eh lenpah . I would have that 5 per cent. That is a sug
gestion that I want to bring up here at this time.
The C h a ir m a n . That is a suggestion you did make.
Mr. M o e h l en pa h . Some of the Senators have been coming in
since, and that is how the question comes up again. My suggestion,
from a country banker’s standpoint, would be that you have your
stated portion of your reserve in your vault and stated portion in
the regional reserve bank, and that the other portion you can have
any place, with the reserve bank, with the central reserve bank, or in
your vaults. That would give the country banker more latitude, and
he seems to be the one most interested. He would have more funds
to use in the transaction of his business.
The C h a ir m a n . Take the amount of your present reserve; how
much have you on hand now?
Mr. M o eh len pa h . We carry 18 to 20 per cent.
1560
BANKING AND CUKRENCY.
The C h a ir m a n . I f 12 per cent were required under this bill you
would still have 8 per cent to carry with your correspondent.
Mr. M o eh len pa h . Yes, sir.
The C h a ir m a n . That would give you a correspondent to deal
with?
Mr. M o eh len pa h . I understood you were going to compel us to
keep 18 per cent with the regional reserve bank.
The C h a ir m a n . Only 12 per cent would be there, and the balance
you would keep with your correspondent.
Mr. M o eh len pa h . N ow , you are going to fix the proportion abso
lutely.
The C h a ir m a n . That is, only 12 per cent out of your 20 per cent.
Mr. M o eh lenpah . I f you are going to fix it absolutely, why not?
The C h a ir m a n . It is not a question of fixing it; it is a question of
whether or not you would have 8 per cent with your correspondent
outside of this-----Mr. M oehlenpah (interposing). We would.
The C h a ir m a n . That is what I am calling your attention to.
Mr. M o eh lenpah . We would get 2 per cent on it.
The C h a ir m a n . Y ou could move that from one correspondent to
another if they did not treat you right.
Mr. M o eh len pa h . Yes, sir.
The C h a ir m a n . D o you think the management of a reserve bank,
under the supervision of the Government, under the management of
the Federal reserve board, would refuse to extend you an accommo
dation that you were justly entitled to?
Mr. M o eh len pa h . I do not think so. I could not bring my mind
to think that they would.
The C h a ir m a n . I f they did, could you not appeal to the Federal
reserve board against them?
Mr. M o eh len pa h . I should say yes, and I would.
Senator N elson . What is the average amount of your loans?
Mr. M o eh len pa h . About $350,000.
Senator N elson . What proportion of that consists of real estate
loans and mortgages?
Mr. M o eh len pa h . Just now that is a very small percentage.
That is a source of income, so we would get rid of them. We dis
pose of them.
Senator N elson . Y ou take those mortgages and sell them?
Mr. M o eh lenpah . Yes, sir.
Senator N elson . D o you find any trouble in selling them?
Mr. M o eh lenpah . N o, sir; not m our country.
Senator N elson . T o whom do you sell them?
Mr. M o eh len pa h . T o trustees and banks and individuals. You
must understand we are within 75 miles of Chicago.
Senator N elson . Yes; I know. Do you raise tobacco there?
Mr. M o eh lenpah . Only a little. In Rock County they raise some,
over to the west and north. They are getting out of it now.
Senator N elson . What is the character of your other paper? You
take these farm mortgages and sell them, and you say you have no
trouble in selling them. What is the character of your other paper?
I mean is it farmer’s paper?
Mr. M oeh lenpah . It is, altogether.
BANKING AND CURRENCY.
1561
Senator N elson . What is the usual length of time of the farmer’s
notes ?
Mr. M o eh lenpah . I think the longest time on the outside paper
is one year. In most cases it is six months.
Senator N elson . Most of your paper outside of farm mortgages is
six months or one year paper?
Mr. M o eh len pa ii . Six months more than a year, and four months
more than six months. Six months seems to meet the needs of the
farmers. We have a crop in the fall, and they want accommodations
in the spring, and they take it until the fall, making about six months.
Our six months’ paper will represent pretty close to 75 per cent of
what we have, six months and under.
Senator N elson . That paper would not be paper that you could
at that moment discount and get currency on under this plan ?
Mr. M o eh lenpah . It ought to be fixed so that we can.
Senator N elson . Y ou would include in this bill, six-months’
paper instead of 90-day paper?
Mr. M o e h le n pa h . I would like to do that. That is a suggestion,
not a criticism. You would meet the average needs of the average
country banker if you could make that six months, and if you did
make it six months it would do no harm.
Senator H itchcock . At what time in the year would you prob
ably be required to rediscount?
Mr. M o eh lenpah . It would be just at this time.
Senator H itchcock . This paper that you have taken in the spring ?
Mr. M o eh lenpah . N o.
Senator H itchcock . Y ou take it at this time?
Mr. M o eh lenpah . This is the policy in our bank: We loan pretty
close to our reserve. When the fall comes and our farmers go to
feeding, that is the seasonable paper of our customers. You can
call that, as against a farm mortgage, the temporary demand of the
customer. He wants to buy his steers and feed them and sell them
at the most advantageous time.
Senator H itchcock . When you go to the reserve bank with your
paper you have got to have paper that has not a maturity greater
than 90 days?
Mr. M o eh le n pa h . We would have to adjust ourselves to that.
Senator H itchcock . Some of your six months’ paper would have
partly expired and might not be available.
Mr. M o e h le n pa h . I had thought of that. I f you could make it
six months, the average country banker would come under the fourmonth or three-month period and if you did not you would have that
anyhow, and you could make it six months without doing any harm.
Senator H itchcock . H ow much of the six-month paper is to be
paid when it is due?
Mr. M oehlenpah . That paper is always paid, as sure as in any
individual bank or business. As soon as the steers are shipped on the
market the money is deposited to our credit at the stockyards. We
get advice of it.
Senator H itchcock . It is paid automatically out of the proceeds
of the transaction?
Mr. M oehlenpah . Yes, sir; that is the seasonable demand. Out
side of such demands we do not have any extraordinary demands.
The ordinary country debt or business would care for itself, and I
1562
BANKING AND CURRENCY.
presume the other country banker handling cotton or tobacco has
about the same experience. They have the same situation in Janes
ville, Senator Nelson.
Senator N elson . Yes; I know that.
Mr. M o eh l en pa h . Yes.
Senator S hafro th . Mr. Moehlenpah, what kind' of currency do
you think ought to be issued by this bill or by any bill that might be
reported? Should it be bank currency or currency issued by the
Government itself?
Mr. M o eh len pa h . I would like to express here, if I can, what I
consider the attitude of the farmer, the man on the other side of the
counter, who I have sympathy for, and it would not hurt me if he
says when you put it up to him he expects the protection and the
guarantee of this currency. He says, “ Give us the Government
note.” He speaks in plain words, and he says, “ Give us the I O U
of Uncle Sam
they do not stop to discriminate between that and
the regional reserve strength, backed by the same guaranty or col
lateral. They say, “ Give us the promise of the Government direct.”
I can not see any objection to it as a banker. I wrote letters to Mr.
Forgan and Mr. Reynolds before I came here, specifically asking
them to give me the reasons why the direct issue o f currency was not
right; why there should be any objection to it, and I have those
letters.
Senator S hafroth . I will ask whether, in your judgment, the notes
that you think should be issued by the Government direct should be
full legal tender for the payment of debt?
Mr. M o eh len pa h . I can not see any reason why they should not be
legal tender. I am not an expert as to the ramifications of that point.
Speaking offhand I can see no objection why that should not be legal
tender.
Senator S hafro th . Would you regard a system of currency of a
full legal-tender note backed by a gold reserve of 50 per cent, together
with the requirement that the Secretary of the Treasury shall main
tain that reserve at 50 per cent, and, if necessary, buy gold or sell
bonds for the purpose of getting gold—I would like to know whether
or not, in your judgment, that would be a good currency?
Mr. M o eh len pa h . I should think it would be absolutely safe.
Senator S hafroth . Would you think it would be much better than
a currency issued by the banks?
Mr. M o eh l en pa h . Practically it would be quite so. The same guar
anty is back o f the reserve bank notes.
Senator S hafroth . It has a national bank guarantee.
Mr. M o eh len pa h . I think the first one is preferable. Why not ?
Senator N elson . Which is preferable?
Mr. M o eh l en pa h . The issue of the Government, with a deposit of
50 per cent in gold maintained at all times.
Senator N elson . Which system wmuld you like if you had to go up
to the counter of the Government and wanted currency and go there
wfith 50 per cent in gold or go there with your notes to get them dis
counted? How would you like that instead of going up to get new
notes, Treasury notes, for your commercial paper, if instead of that,
you had to go up there with gold and leave it with Uncle Sam ? How
would you like that?
BANKING AND CURRENCY.
1563
Mr. M o e h l e n pa h . Am I to be placed in a position where I have to
come with gold?
Senator N elson . Yes; give him a dollar in gold for every $2 in
paper, instead of taking up your commercial paper.
Air. M o eh le n pa h . I do not understand the comparison.
Senator S ha fro th . I do not think that is a just statement of the
bill that I have introduced. The theory upon which I have based the
bill which I have introduced— and Senator Owen introduced a bill
somewhat similar, except that he has the bond feature in it— is that the
gold certificates come into the receipts of the Treasury, the gold to
be drawn out of the warehouse room and turned over into a redemp
tion fund, and that a United States note, issued by the Government,
payable in gold, shall be issued by the United States Government to
take the place of that gold certificate, and that a similar national
bank note be retired whenever the banks say they are willing to sur
render their circulation. Thus, wfith a gold reserve of 50 per cent, it
will take the place of what may be termed the permanent currency,
namely, the national bank notes and the greenbacks, and the gold
certificates, having behind it at least a 50 per cent gold reserve.
I will ask you whether, in your judgment, that would be a safe
currency.
Mr. AIo e h l e n pa h . H ow is that provision for the redemption of
bonds?
Senator S ha fro th . They pay the bonds off by full legal-tender
money.
Mr. M o e h l e n pa h . Without regard to time?
Senator S hafroth . N o ; they let the banks have the privilege of
doing it. The banks do not care for these 2 per cents; they are willing
to surrender them, I understand.
Mr. M o e h l e n pa h . The question, as I understand it is, you would
redeem those bonds and the note issue under them?
Senator S hafroth . By payment of cash.
Mr. M o e h le n pa h . Without regard to a time limit?
Senator S hafroth . No ; just as this money came into the Treasury;
automatically, as it was received into the Treasury.
Mr. M o e h le n pa h . Senator, I could not answer that question be
cause I am not informed enough to answer it.
Senator H ollis . Y ou suggested that those with whom you had
talked preferred a Government note to a bank note. Have you ever
heard of an objection to a national-bank note? •
Mr. M o eh le n pa h . N o, sir.
Senator H ollis. D o you think that is due to the fact that there
is a Government bond behind it. or for some other reason?
Mr. M o e h le n pa h . Well, I think it is due to the absolute confidence
and belief of the citizen or anyone that holds it that it is the I. O. U.
of the Government. I have asked lots of men many times; they
would take a national-bank note and look at it, and I would ask
them if they understood the difference. They would say no; they
understood the Government was back of it. They do not stop to
think o f the process of issue, as to the bond-secured currency. They
consider that a Government note; that is, the average man.
Senator H ollis. In what cities are your reserve agents located?
Mr. M o e h le n pa h . In Milwaukee, Chicago, and New York.
1564
BANKING AND CURRENCY.
Senator H ollis. Have you ever had any difficulty in obtaining
rediscounts when you needed them?
Mr. M o eh len pa h . In ordinary times, n o ; extraordinary times, yes.
Senator H ollis. When were the extraordinary times?
Mr. M o eh lenpah . 1893 and 1897; those are the times that I have
particular reference to.
Senator H ollis. Did you have any difficulty in 1907 in obtaining
rediscounts ?
Mr. M o eh len pa h . No ; we had to insist; we had to urge— it was,
in a way, a humiliation. They did not have to lend to us any more
than we would have to lend to a customer. It was about the only
place we had to go, and we felt we were entitled to assistance, and
we got it eventually, but we felt in 1893 as if we might have to quit
business at some stages of the game.
Senator H ollis. D o you think that is due to the faults of the
system or the faults of your reserve agents?
Mr. M o eh len pa h . I am constrained to say, Senator, that is due to
the fault of the system. I think the city correspondents with whom
we have had profitable and pleasant mutual relationships wrould be
glad to accommodate us if they felt they could have the same relief
and get it safely.
Senator H ollis. In other words, if they were able to obtain assist
ance they would help those who were doing business with them?
Mr. M o eh len pa h . I think so.
Senator H ollis. Did you have any difficulty in getting circulation
in 1907?
Mr. M o eh len pa h . Well, I am a State banker.
Senator S hafroth . That is all, Mr. Moehlenpah, unless you wish
to make a statement.
Mr. M o eh len pa h . I believe we have brought out the main points,
unless I might state another very general objection of the country
bankers, Senator, is that savings-bank section where you obligate
banks to set aside so much capital and to segregate deposits. As I
understand it, almost half of the national banks of the country have
savings-bank departments now; whether authorized bv warrant or
otherwise they have them, with eight hundred and odd millions of
deposits. The wage earner deposits his savings in the bank and
maybe the manufacturer, his employer, comes in and borrows from
the same bank. To require the average small country bank to segre
gate deposits, to keep separate books, and have a separate bank is an
unnecessary hardship. It seems to me as if that will do no particular
good in that section that I can see.
There are other gentlemen here who are competent to speak on
some other details. I have confidence in the Senators and Repre
sentatives that when they work out the details they will work out
these details satisfactorily, both as regards the reserves and as re
gards the cashing of checks and the handling of the savings accounts,
and all that. I think that is a detail.
But I want to leave with you the firm conviction that I have that
the country banker wants this great, powerful institution to be under
the control of the Government always and that the Government
issue these notes, that you allow reasonable latitude in the matter o f
rediscounts and the keeping o f our reserves. I believe you will have
the cooperation not only o f national banks but of a large number o f
BANKING AND CURRENCY.
1565
State banks as well and be free from the recurring panics, and be
safe and sure that we can move along with our customers in the gen
eral and regular expansion of our agricultural and commercial inter
ests. I f we feel we can do that I think you can safely trust the
average banker to be conservative in his loans. That is human
nature. He will move more surely with a program such as you have
outlined here in general, and it will be a beneficent influence upon all
our country.
During my 25 years as a banker I have looked for this time. I have
been led to believe by the banking leaders that you would give us
relief and assistance, and I am heartily in sympathy with your efforts,
and I have absolute confidence, and the average country banker
has absolute confidence, that you are going to do that and that
these details will be worked out with safety to the banking interests,
having in view the interests of the citizen and the customer. I make
a good interest on my investment as a banker, but I understand I
get it by grace of the deposits that are given me and I think they are
entitled to the first consideration.
Senator S hafroth . Y ou do not think the resolutions passed by
the Chicago conference of bankers represent the attitude of the
country bankers?
Mr. M o eh lenpah . Not in their entirety; no, sir.
The C h a ir m a n . I f there are no further questions we will proceed
with another witness.
Mr. M o eh le n pa h . I appreciate, gentlemen, your courtesy.
STATEMENT OF GEORGE W. ROGERS, CASHIER BANK OF COM
MERCE, LITTLE ROCK, ARK.
Mr. R ogers. Mr. Chairman, I am the cashier of the Bank of Com
merce of Little Rock, Ark. It is a State institution with a capital
stock of $100,000; undivided profits, $250,000. The deposits run from
'a minimum of $1,300,000 to a maximum of $2,700,000.
In Arkansas, up to the present time, we have had no banking law.
The banks operate under the general incorporation act, have no re
strictions whatever in regard to loans, and are not required to keep
any reserve.
The proposition I desire to discuss is the section of this bill that
affects Arkansas bankers. That is the only thing I know anything
about and the only thing I feel competent to discuss. There are
about 450 banks in Arkansas. Approximately 150 of them are clients
of mine. About thirty-odd banks are national banks. We have in
our State a usury law which makes the taking of interest in excess of
10 per cent per annum usury and forfeits both the principal and the
interest. I am informed by some of the smaller national banks that
they take out a charter in order to avoid the usuary law. The pen
alty for usury against a national bank is forfeiture of the interest
only.
In regard to this currency bill I am very much like the man was
with his 49 reasons for not wanting to play poker. When he said
he did not have any money no one was ever interested in the other 48
reasons. [Laughter.]
Now, in regard to section 17 of this bill, which provides that these
Federal reserve banks shall act as clearing houses for country checks.
1566
BANKING AND CURRENCY.
I am opposed to that. I f you pass that section of the bill, I do not
care what else you do, you have just ruined me, and it does not make
any difference what you do to a man after he is dead.
Senator S hafroth . What is that section ?
Mr. R ogers. It is part of section IT, 'which provides that these
Federal reserve banks shall act as clearing houses for country checks,
that they shall handle them at par. That question has not been dis
cussed very much. I take issue with my friend from Wisconsin on
his statement that the little country bankers do not have any influ
ence in Chicago to compel an unwilling committee to bring in the
report we wanted on that line.
That committee wTas stacked; that was the coldest deal I ever went
against in my life. [Laughter.] We were invited there simply and
solely to set the stage, to have a crowd, to carry a spear and sing a
song and dance around, so that the stage would be full while the big
wigs could have the spot lights played on them. The plot laid out
was that they should make their speeches, that the talks would be
made, that the chairman appoint a committee on resolutions, and then
they took us out and fed us, and the committee was to bring in their
resolutions in the afternoon, have them adopted, and they would give
us a banquet at night and send us all home drunk and happy.
[Laughter.]
Senator H ollis. Mr. Rogers, you speak as if you had been in a
Democratic senatorial caucus.
Mr. R ogers. Senators, I was raised in a county that never went
Democratic but once. That was Wayne County, N. Y., and that
was the reason they said that, being brought up with Republicans I
wTas a Democrat, I was so contrary. [Laughter.]
Senator N elson . Tell us how you overcame the Philistines at
Chicago.
Mr. R ogers. When Mr. Foote was speaking in favor of a resolu
tion the first day they said to him, “ Shut u p ; get off the floor; we
did not come here to bother with you; we are going to put this thing
through and go home.” The press made the same remarks, “ Shut
up; go on; let us go home.” I said, “ Bud, don’t be in a hurry, be
cause you are not going to’get through to-day; you will be in luck
if you get through to-morrow, because if we can not be heard here
there is another room in this hotel.”
And I talked to them like my friend says his Democratic friends
did. I put on a front, and I never did let them know how weak we
were. I told them if they did not give us a reasonable opportunity
to be heard we would go and have a convention of our own: that if
they wanted to throw down the gauntlet for a fight between the 300
large reserve city banks and the 26,700 country banks we were ready.
I told them also that some of them wTere accused of being great men
and great financiers, but that for five hours they could employ a
lawyer to plead not guilty for them. [Laughter.]
The second morning we started out on our proposition, and the
proposition I laid down to them was that I was the friend of the city
bankers; that they were my friends; that many of them I had known
for years, and that they were going on a proposition where thev
would cut themselves off from the job; that if they put through this
Federal clearing house it would so cut off deposits of the large city
banks that they would not have any need for them.
BANKING AND CURRENCY.
1567
The question is of clearing country checks—not collecting country
checks. The matter has never been tried m the United States of col
lecting country checks. They talk of the Boston Clearing House
clearing country checks. It does not clear country checks; it collects
country checks. Why, New England you can hold almost in the
hollow of your hand. The whole of New7 England is within a few
minutes of the city of Boston. You have trains just like you can
catch a street car up here, and riding through the country is like
riding dow7n these streets. But with us conditions are different.
Time is a great thing in the collection of these checks. In Boston
they tell me that a large majority of these checks are collected the fol
lowing day. St. Louis is our principal center, and St. Louis deducts
four days’ interest on every Arkansas check, and, I think, five days
on Texas checks, because it takes them actually that amount of time
to collect those checks.
Now, if you commence to clear country checks it means that the
banks will send them there, and the differences will be paid, or the
checks will be charged against your account. But the little bank
down in southeast Arkansas or southwest Arkansas or southern
Arkansas is so situated from a railroad standpoint and in point of
time that it is the second or third day before the checks reach there.
Then, coming back, it is the second or third day before they get the
credit. That would necessitate their having with the Federal re
serve bank an amount equal to four or five or six days on the checks
that come, which is to be charged against their account. In addition
to that they would have to carry their reserve in cash. They would
have to have their 18 per cent with the reserve bank; and, instead of
having 18 per cent as would be necessary for a central reserve city
bank with many banks, it would require in excess of 50 per cent.
Senator S iiafroth. H ow would you have the country bank checks
cleared, then?
Mr. R ogers. That is none of the business of the United States
Government. It is not a part of any currency system any more than
it is the part of the United States Government to make a loan to a
nigger on a mule. That is a question between traders.
Senator S hafroth . H ow are they cleared now in your district?
Mr. R ogers. They are not cleared, they are collected. And there
is a wonderful difference between clearing and collecting. I f the
city bank—for instance, in St. Louis—received checks on Arkansas
points they forwrard them to some bank in that towrn for collection.
They are collected and remitted for, and they are reimbursed in that
way. The city banks have approximately 10 per cent of their capital
stock tied up in those items in transit. One gentleman staled that
that amount now exceeded $1,000,000,000. I do not pretend to
state— I have heard the statements of liars and expert witnesses and
statisticians questioned too often, so I do not want to present any
statistics that I can not vouch for. But, with this amount in the
Federal reserve banks, it so takes away the deposit of the city bank
that they can not lend you any money when you need it.
In Chicago Mr. Wexler said, “ They are going to put it over; this
country will never stand for a minute for this tax.” I said, “ That is
right; they ought not to pay the tax. And when I want to mail
a letter I ought not to have to put a postage stamp on it either, be
1568
BANKING AND CURRENCY.
cause that costs a cent, and when I wanted to come up here to Chicago
I went down there to the station and they told me it would cost
money. I asked them how much, and they told me; and a nigger
standing right behind me asked the same question, and they told him
the same thing.”
Now, there is no reason in the wide world why the banks should
be required to work for the general public and the general good of
all without any compensation any more than it is reasonable and
just and equitable to ask the railroads to haul passengers or freight
absolutely free of charge.
Some of the other gentlemen asked the question whether we would
rather get this money from the Federal reserve bank or from an indi
vidual bank— an incorporated bank. This is the difference: I f you
keep an account that justifies you in asking accommodations, you can
go to the bank and say, “ I want so much money.” It may be con
venient to him and it may not be convenient to him to let you have
it, but if your account justifies the accommodation you get it. Be
cause if he does not let you have it you can walk right across the
street and say, “ Here is my average balance; here is what I want,”
and that fellow wants to increase his business and therefore increase
his pay. The first fellow, if his liver is not working just right, keeps
on that course and loses that much business, and somebody else gets
on the job. But you go to a Federal reserve bank. You gentlemen
may never have had any experience with Federal employees and how
they do business, but I want to tell you how the subtreasury of the
United States does business. I have a letter right here in my pocket
where I sent $50,000 in gold coin to the Third National bank of St.
Louis, Mo., and I wrote them, “ I f you can not give me credit for
$50,000, do not take it.” They telephoned back that they did not
know how much they could give me credit for, that there was a certain
amount of abrasion, and that that would have to be reported on by
the subtreasury.
I said, “ Throw out the light coins,” and they said, “ N o ” ; they
would not do it. They said, “ The people in the subtreasury dump
that on the scales, and you can take what they offer you or throw it
away.” I told them I could not afford to let that $50,000 lie idle,
and I said to let it go. And I have a letter here which says they will
credit us with that $50,000, and that they will turn it in to the sub
treasury when the subtreasury notifies them they can accept it; that
they can only deposit gold in the subtreasury at the convenience of the
subtreasury, and at the convenience of the subtreasury they will
weigh it and tell you how much you are short and you have got it
to pay.
Now, gentlemen, as far as I am concerned, I do not want to go to
any Federal reserve bank for money. When I want it I want it like
the Texan wanted a gun—he wanted it bad and reasonably quick.
At the present time you get your money as you need it. You ar
range for your accommodations to start on, and when you need it
you send along your collateral or your notes as they lire indorsed.
Now, one gentleman that sat over there this afternoon asked some
questions as to whether 75 per cent of your capital would be sufficient.
Down in our country it would not be sufficient. At the present
time against a capital stock of $100,000 I have $550,000 borrowed.
BANKING AND CURRENCY.
1569
I commenced this year to borrow in July, and I will pay in December.
Last year I borrowed early in October and paid in November. The
large borrowing this year is caused by the rains, which delayed the
cotton crop, and the country banks had to be taken care of.
Mr. Foote this morning made some statements in regard to country
loans. My loans are very much different from his. They rarely,
if ever, are renewed, any of them, to exceed once. Along in Septem
ber when the cotton commences to move the small country banks
make their collections; they pay their loans and increase their bal
ances, and that is the money the cotton man has to handle his cotton
on. As the country bank deposits increase and their loans decline
this money is used. And as the cotton goes out the country bank
deposits commence to go down and they commence to borrow.
In other words, the greater part of my assets are used all the time,
either in producing a crop or in moving a crop. Two-thirds of my
business is with country banks, and that is the money I use to move
the cotton with. In the city of Little Rock we handle between
300,000 and 400,000 bales o f cotton a year. There are only three
banks that do a cotton business. This country business in Arkansas
is mostly done to move the cotton. The same conditions prevail in
Pine Bluff, Texarkana, and Fort Smith to a lesser extent.
The conditions in the various parts of the country are wonderfully
different. Now, in regard to the amount I stated it would be nec
essary for these small banks like ours to keep in St. Louis if the
clearings were done there, I will give you a few figures. Here are
two days’ business, taken from my books. The first was October 14,
1912. Cotton was moving and business was active. At the close of
business that day we owed depositors of all kinds $1,634,000. The
current deposits that day were $753,370. The loans paid that day
were $14,028. The exchange sold amounted to $189,900.
On the other side, we bought exchange that day amounting to
$465,626. We paid checks amounting to $586,769. We made loans
amounting to $27,446.
Now, you gentlemen may not understand how the cotton is moved.
The cotton is moved on open account. That sounds better than
“ overdrafts.” The State banks handle cotton brokers’ accounts on
open account, while the national bankers blind tiger it, with the
knowledge and consent of the Comptroller of the Currency. They
do that to evade the limitations on loans.
Against my $100,000 of capital I have had single accounts that
were overdrawn to the extent of more than $300,000 at a time. With
us we consider that the safest and most conservative business that
we do.
The cotton documents reach us attached to the checks— that is, the
bills of lading for cotton to arrive or the compress tickets. We take
them and make a careful record of them, and as the cotton reaches
the compress we exchange with the compress their bills of lading for
the receipts. We at all times have the insurance on the cotton and
at all times have the actual constructive possession of the cotton. As
the cotton is sold it is shipped out, the bills of lading are attached,
and the drafts are used to liquidate the overdrafts, and we deduct
what we consider a reasonable exchange, in addition to the interest
charge, for handling the transaction. The national banks, instead of
handling it exactly as we do— yon take the drafts that are drawn on
9328°— S. Doc. 232, 63-1— vol 2------ 39
1570
BANKING AND CURRENCY.
the cotton man and have him accept them and you call them bills of
exchange, but they are dead when they reach him.
The C hairm an . Have you concluded your statement?
Mr. R ogers. Yes, sir.
Senator H ollis. Mr. Rogers, as I understand it, you want two
things?
Mr. R ogers. T wo things, and that is all we ask for.
Senator H ollis. First, you want to be left as you are in your
collection arrangements ?
Mr. R ogers. Yes, sir.
Senator H ollis. And, secondly, you want to have some place
where you can go and get accommodations, and get it surely when
the business needs of your community require it?
Mr. R ogers. We want some place where we can keep a reasonable
proportion of our reserves, so that they will be under obligations
to take care of us when we need it, and some place that will have
some deposits they can loan to us.
Senator H ollis. Have you in the past had any difficulty in get
ting rediscounts?
Mr. R ogers. Never; the banks have been mighty good to me. I
never have asked for a thing from a bank that I kept an account
with that it was not granted very cheerfully.
Senator O ’G orman . Where do you usually get your discounts?
Mr. R ogers. In New York City and St. Louis. I made the state
ment while you were out that I owed some money right now. I
owe $550,000—$250,000 in New York and $300,000 in St. Louis.
That is the note of the bank, indorsed by the president and myself.
Senator O ’G orman . Without any collateral?
Mr. R ogers. Yes, sir.
Senator W eeks. I congratulate you on your credit.
Mr. R ogers. Well, we keep balances to justify the credit.
Senator W eeks. O f course you do, or you would not get it.
Mr. R ogers. Or we would not get it.
Senator H ollis. Why was not that a perfectly good transaction
you described a little while ago?
Mr. R ogers. I guess, maybe, it is; but it is simply a way of beating
the devil around the stump.
Senator H ollis. It may be that that is a way of business that is
different from what you are accustomed to, but why is not that
perfectly safe?
Mr. R ogers. It is safe, just exactly as long as the bank keeps the
collateral. The point I wanted to make was not that it was unsafe,
but it was simply a way to evade the 10 per cent loan law; that is
all there is to it. It is simply an evasion of that law; and the
comptroller’s office, knowing the necessity of our part of the country,
and knowing the safety of this character of business, just winks at it.
Senator W eeks. Mr. Rogers, you are a State banker?
Mr. R ogers. Yes, sir.
Senator W eeks. Suppose the Senate passes the pending bill just
as it came over from the House. Are you going in?
Mr. R ogers. N o, sir.
Senator W eeks. Why not?
Mr. R ogers. Because it would not be profitable to me.
BANKING AND CURRENCY.
1571
Senator O ’G orman . Have your directors considered that subject?
[Laughter.]
Senator Hollis. That is a little like that acceptance.
Mr. R ogers. Senator, there are two of us own the controlling in
terest in the bank-----Senator O ’G orman (interposing). And those two have con
sidered it?
Mr. R ogers. And those two have decided it. [Laughter.]
STATEMENT OF J. W . BOLTON, PRESIDENT THE RAPIDES BANK,
ALEXANDRIA, LA.
The C h airm an . Mr. Bolton, will you explain to the stenographer
your address and your banking affiliations ?
Mr. B olton. I am president of the Rapides Bank, a State banking
institution, with a capital of $90,000, and a surplus and undivided
profits of $225,000.
Senator O ’G orman . H ow long have you been in the banking busi
ness?
Mr. B olton (continuing). And with average deposits of $1,000,000. The bank is 25 years old, and I have been with the bank 24
years o f that time.
Senator N elson. I s it a national bank?
Mr. B olton. It is a State bank. I started with the bank when
we only had the president, the cashier, and myself. Ours is the
oldest State bank in Louisiana outside the city of New Orleans. It
is a bank organized under the State laws.
The required reserve in Louisiana is 25 per cent. At least 8 per
cent must be kept in cash in your vaults, and 17 per cent may be
kept with your correspondents. You can keep it all in your vaults
if you wish, but you must keep 8 per cent and you may keep 17 per
cent more with your correspondents. As a matter of fact, when our
reserve gets down to 25 per cent, both my father and myself—my
father being the first president o f the bank and now the chairman of
the board of directors, I succeding him—become very much alarmed,
and we try to cut out our loans or begin borrowing money.
I have read this bill as carefully as I can. I do not profess to be
an expert on this question, but there are some awfully good features
to it, and there are some features which, to my mind, are objection
able and should be remedied.
The first feature I want to speak about is that there are too many
proposed regional banks. I do not believe that there should be as
many as 12, but if there should be as many as 12 I believe that the
bill should be changed so as to say not more than 12. The bill,
as it stands now, as I read it, says that there shall be not less than 12,
and when 10 member banks petition there may be other reserve banks
organized.
Now, it seems to me that, instead of a mobilization of our reserves,
the very thing of which we complain—the scattering of our re
serves—will be brought about by the establishment of too many of
these regional banks. That is my view of the matter.
Senator N elson. Don’t you think one would be really better?
Mr. B olton. I should prefer one. I am one of those who prefer
the one central bank.
1572
BANKING AND CURRENCY.
Senator N elson. Under Government control?
Mr. B olton. Yes, sir; under Government control.
Senator O ’G orman . Y ou would prefer for the Government to
issue currency ?
Mr. B olton. N o, sir.
Senator O ’G orman . Y ou do not approve of that?
Mr. B olton. N o, sir; I do not.
Senator O ’G orman . W hy?
Mr. B olton. I do not believe it is necessary. I do not believe that
these notes should have any more collateral behind them than is
necessary, and I do not believe it is necessary for the Government to
issue notes. I believe the notes of the banks are just as good and will
pass current just as well, and the Government might just as well save
its own credit for times of stress and not endanger that credit by be
ing a guarantor, so to speak, upon all these bank notes. I have no
objection to the Government, if it wTants to be the guarantor of those
notes, becoming such, but the Government is not only the guarantor
in this case, but is the issuing power; that is, it is the issuing institu
tion. Instead of the bank being the institution that issues the money,
I understand this bill proposes the Government shall issue it.
Senator W eeks. Mr. Bolton, as I recall, you had 60 years ago in
Louisiana a system of issuing bank notes through State banks which
was perfectly satisfactory, in which there were no losses made-----Mr. B olton (interposing). That is correct, and it was the only
State in the Union where the State bank notes were taken at par all
over the country.
Senator N elson. And they were good all through the Civil War?
Mr. B olton. Yes, sir; they were.
Senator N elson. And passed when cut in two?
Mr. B olton. Yes, sir; that is true; so I am informed.
Now, gentlemen, I say it is wrong to force these national banks to
become members o f this system and not give them the option of say
ing that they will or will not become members, for the reason, first,
that you can do so, that you can force them to do so. I say it is
wrong for a Government to take advantage of a position in which it
is to say to a man, “ You shall invest your money.” Remember,
gentlemen, that a bank is an aggregation of individuals; it is not a
something created by the act of the Lord or by the Government itself:
it is an aggregation of individuals carrying on a business under a
charter granted to it by the Government. As the gentleman from
Indiana said this morning, the people who took this charter expected
that the charter would run for 20 years, and it would not be taken
away from them, except for just cause.
So far as our State bank is concerned, there is no power in the
wrnrld that could take our charter away from us. We are incorpo
rated for 99 years. They can, of course, for violations of the State
law, close the bank or punish the officials, but they can not abso
lutely abrogate our charter. It is an absolute impossibility under
our laws.
You have the power to force these national banks to do this, for
this reason: Take the national bank in our town that has a capital of
$100,000 and a surplus of about $250,000, with deposits running to
about $800,000 additional, and with about $100,000 of 2 per cents
BANKING AND CURRENCY.
1573
against which circulation has been issued. I f they do not come into
this plan they simply carry those 2 per cents 20 years, or a portion
of them, at least. I understand the average time would be 10 years;
that is, a certain portion of them would be redeemed by the issuance
of 3 per cents. At any rate, these 2 per cent bonds are a loss to the
banks, because the moment that the banks of the country would
refuse to come into this system those 2 per cents would go to 50 or 60
cents on the dollar, and the Government has got the benefit of this
low rate o f interest, because the circulation privilege goes with these
2 per cent bonds.
I do not think the Government ought to take advantage o f its
position to force these banks to come in unless in this bill they pro
vide for the redemption of these 2 per cents. Now, if you provide
that where a national bank voluntarily surrenders its charter, or its
charter is taken away from it by reason of its failure to come in,
you will take up those 2 per cent bonds, you have not done them any
injustice; but unless you do that it seems to me there has been an in
justice done. I understand you are asking the State banks to join
this system, and if you are going to do an injustice to my friends of
the First National Bank across the street, or what I conceive to be
injustice, I will be very careful about going into a proposition for
fear that there will be injustice done to me at some future session of
Congress.
Senator R eed. May I ask you a question bearing upon this matter
you have just touched?
Mr. B olton . Certainly.
Senator R eed. Suppose that the Government has chartered an in
stitution which we may call the banking institution of the country.
I speak of it as a whole now—a national bank. Experience has dem
onstrated to it that there are times when that system breaks down.
When it not only is unable to perform its functions but suffers
enormous losses, and not only now, but in the past, it has been ap
pealing to the Government for aid, and that aid has been rendered
by the Government taking its moneys and depositing them in various
places to meet emergencies.
Now, with that condition confronting us, do you think it is in the
nature of a wrong or an outrage to say:
Here is a remedy, but it is a remedy that will be ineffective unless you all
come in, and therefore we insist that you come in?
Mr. B olton . I f you will omit the word “ outrage,” yes; I will say
it is a wrong.
Senator R eed. Then your idea would be that the Government, hav
ing chartered banks for the purpose of carrying on certain functions
as chartered institutions, and it becoming manifest that the system is
dangerous— liable not only to ruin itself but to ruin a great many
others—that ought to be continued indefinitely?
Mr. B olton . I f you require these national banks to come into this
plan you are forcing them to give up what I consider to be a vested
right.
Senator R eed. But you fail to catch one thought. We want to be
fair about these matters.
Mr. B olton . I understand.
1574
BANKING AND CURRENCY.
Senator R eed. We can not change a fact, any of us, by the addition
of adjectives or by taking a one-sided view. I am not saying that
you are; none of us can. It must be manifest to you, as an intelli
gent man, that while this banking system of ours is not, as some have
described it, the worst banking system in the world, but is in many
respects a most excellent system, that nevertheless there are danger
points, not only endangering the banking system and its functions,
but endangering the rest of the country. Now, do you think that the
Government is powerless to say to the banks, “ You must meet this
situation ” ?
Mr. B olton . I do not think the Government is powerless to do so,
but let me call your attention, Senator, to the fact, as I understand it,
that there is a great deal of difference between power and right.
Senator R eed. When I say powerless I mean in the sense of right.
Do you think a Government can not rightfully say to an institution
which, in the progress of its development, has reached the point
where it can not fulfill the functions for which it was created, “ You
must change your plan, and if you do not change your plan we will
have to insist you go out of business.”
Mr. B olton . That is all right, but treat them fairly about these
2 per cents. Take them up when you do so.
Senator R eed. I am not talking now about 2 per cents. I am
talking about this cry that it is an outrage upon the banks.
Mr. B olton . I say if you force the national banks to go into this
proposition you should give them the opportunity of declining to do
so, and when they decline to do so you should take care of their 2 per
cents.
Senator R eed. I do not think there is a question on earth but
that the Government of the United States, having received 100 cents
on the dollar for those bonds, ought to take them up from the banks
at 100 cents on the dollar.
Mr. B olton . But they do not propose to do so in this b ill; that is
the point. I f you say that a national bank must join this association,
and in case they fail to join it within 12 months— which is the time
limit, if I remember correctly in the bill—but say to that national
bank, “ I f you do not join it your charter is going to be forfeited and
we will take up your 2 per cents,” I am with you.
Senator S hafro th . The bill provides for 3 per cent bonds to be
issued in lieu of them.
Mr. B olton . I believe it does.
Senator S hafroth . Is not that equitable ?
Mr. B olton . N o, sir; I do not think so, because a 3 per cent bond
is not worth par to-day.
Senator R eed. Suppose we were to do this— I just suggest this as
a possible alternative. Suppose we were to provide that the banks
that came into this system would be required to keep a reserve such
as is specified in the bill; that the banks that refused to come into
the system should be required to keep in their vaults a large reserve,
thus keeping in their vaults that element of safety which they might
possess by coming into this system. Would that be wrong?
Mr. B olton . I have only stated this proposition from the bill that
is before you.
Senator R eed. Y ou admit that if the system will not stand alone,
if it is not strong enough to do the business o f the country, if there
BANKING AND CURRENCY.
1575
are times when its collapse may endanger not only the banks but the
business of the country that it would be wrong?
Mr. B olton. Yes, sir.
Senator R eed. Y ou say they ought not to be forced?
Mr. B olton. Yes, sir.
Senator R eed. We are trying to devise a plan by which an element
o f safety can be introduced into the system—which the authors of this
bill think is not a harsh system, but a very beneficial one. A bank
that thinks it is a hard system will not want to come in.
Suppose we provide, as an alternative, that a bank not coming into
this system could remain out and keep its charter, but, in that event,
it should carry a reserve in its own vaults of 25 per cent. You could
not say that was unjust, could you?
Mr. B olton. I would not like to give an opinion on that question
without making some figures. I have only studied this question,
Senator, from the standpoint of the bill as proposed, and that ques
tion has not occurred to me.
Senator O ’G o rm an . Mr. Bolton, you will readily recognize, I
think, that if some o f the national banks were permitted to retain
their charters, even though they did not enter into this new plan,
those national banks under this system should, as a matter of cau
tion, prudence, and safety have a larger reserve than would be re
quired of the membership banks. It would be protected by the sys
tem.
Mr. B olton. Y ou could require them to keep the same reserve as
they have at present, which, I understand, is smaller than the reserve
under the proposed law.
Senator N elson. It is larger than the reserve in the proposed low.
Mr. B olton. I mean the present reserve is larger than it would be
under the proposed law.
Senator R eed. That reserve has not been sufficient; that has been
demonstrated in times of stress. It is not sufficient to enable the
bank to stand by itself, so that if they insist on going on. holding
their charters, and not coming into the system, would it be unjust to
require them to keep enough reserve so that they would be safe? I
won’t say the amount, but would it be unjust?
Mr. B olton. I do not think it would be unjust to require them to
keep a larger reserve than under this proposed bill; no. I think you
are right about that.
Senator S hafroth. Y ou do not contend that in any charter there is
such a vested right that you can not change some of the terms and
provisions of the incorporation?
Mr. B olton. Not until the expiration of that charter. I have
never read the permit under which the national banks do business, but
so far as our own State charter is concerned, I am absolutely certain
of the fact that we have a vested right.
Senator S hafroth . There are changes made in the banking act of
the United States every Congress nearly that affect, to some extent,
the privileges that are granted.
Mr. B olton. There have been some very radical changes made in
Louisiana’s banking laws which I thought were all right, but they
did not affect our right to do business.
1576
BANKING AND CUBBENCY.
Senator S hafroth . It is not a question of vested right; it is a
question o f what is fair treatment, is it not?
Mr. B olton. Yes, sir.
Senator S hafroth . D o you not think that under this law your
bank would be better off than it is under the Louisiana law now ?
Mr. B olton. There is one clause in that bill that I should have to
have interpreted before I answer that question. Here it is: “ Such
by-laws ”—referring to the by-laws that are provided for the admis
sion of State banks—“ shall require applying banks not organized
under the Federal law to comply with the reserve requirements.”
That is all right—“ and to submit to the inspection and regulation
provided for m this and other laws relating to the national banks.”
I f that means we are to be restricted to the 10 per cent loan provi
sion, which, I understand, is in force against national banks, we
would have to increase our capital stock a whole lot, because we give
large lines of credit.
Senator S hafroth . Don’t you think, in the interest of the depos
itors, there should be some limit as to the amount of deposits you
could receive, compared to your capital stock?
Mr. B olton. N o, sir; I do not.
Senator S hafroth . Y ou think if you could receive 30 or 40 to 1
it would be all right?
Mr. B olton. Certainly, if the people had confidence enough in your
management of the business.
Senator S hafroth . Then, what is the use of regulation by the
Federal Government or any State unless they fix some kind of limit?
Mr. B olton. There is no limit anywhere on the amount of deposits.
I am speaking of the limit on the loans, Senator. I think they should
be limited, and we are limited under the laws o f our State. But the
limitations are more liberal than under the national banking laws.
Senator O ’G orman . What is your limit?
Mr. B olton. Ten per cent on the capital and surplus.
Senator O ’G orman . T o one party?
Mr. B olton. Yes, sir; and with collateral and upon the approval
of the board of directors at a meeting called for that purpose we can
lend more.
Senator R eed. D o you think that the Government, creating a bank,
ought to create it with such powers as that?
Mr. B olton. The question that was asked of me awhile ago by
Senator Shafroth was if I did not think this proposition was of
greater benefit to us as a bank, and I answered I did not think it
would be of so much benefit to us. My answer was intended to mean,
as to whether or not we should go into this reserve system that is
being proposed, that we could not without a very material increase
in our capital take care of our customers. About 40 per cent of our
business is lumber business. You come from a lumber State, Senator
Nelson ?
Senator N elson. We have some lumber; yes.
Mr. B olton. When a lumberman comes in and wants some money
he does not come in like our farmer friends that want a few hundred
or a thousand dollars. He will come in and ask for $25,000. just like
he would offer you a drink. I have loaned them as high as $50,000.
Senator N elson . And for what time was that?
Mr. B olton. From four to six months.
BANKING AND CURRENCY.
1577
Senator S hafroth . D o you think there ought to be any limit upon
the amount you can loan?
Mr. B olton. Yes, sir.
Senator S hafroth . What limit would you propose?
Mr. B olton. Under our State law we have a limit of 20 per cent
on the capital, surplus, and undivided profits.
Senator S hafroth . T o one man?
Mr. B olton. Yes, sir.
Senator S hafroth . What are the total amount of deposits you can
received compared to your capital stock ?
Mr. B olton. There is no limitation. There is no limitation in the
national law.
Senator S hafroth . Then the objection you have to the present bill
is that with that 10 per cent, without increasing your capital-----Mr. B olton (interposing). We would not be able to operate. I f
this clause which I read means that we have to limit our loans to
$9,000, we would lose 40 per cent of our business.
Senator O ’G o rm an . W ill you read that paragraph again?
Mr. B olton. I do not know that it means that.
Such by-laws shall require applying banks, not organized under the Federal
law, to comply with the reserve requirements—
That is all right—
And submit to the inspection and regulation provided for in this and other
laws relating to national banks.
Senator O ’G o rm an . That means unquestionably that you would be
subjected to the same control and regulation-----Mr. B olton (interposing). A s a national bank.
Senator O ’G o r m an . A s applied to a national bank.
Senator N elson. I so construe it.
The C hairm an . Y ou would be content with the examination, would
you not?
1
Mr. B olton. We would have no objection whatever.
The C h airm an . It is the regulation.
Mr. B olton. Only that one regulation that I know of. O f course,
we could go ahead and increase our capital stock by converting our
surplus and undivided profits into capital stock and get along all
right. But we would have to do that, and whether our stockholders
would like to do that I do not know.
Senator S hafroth . Mr. Bolton, your capital stock is $100,000?
Mr. B olton. $90,000.
Senator Shafroth. And your deposits amount to how much?
Mr. B olton. They average $1,000,000, with $225,000 surplus.
Senator
Shafroth.
N o w . if you go into this you are required to
keep a reserve, either in other banks or in cash, o f 25 per cent o f your
$90,000.
Mr. B olton. N o, s ir ; 25 per cent o f our deposits.
Senator S hafroth . Yes; of your deposits, which amount to
$ 1, 000,000.
Mr. B olton. They will average $1,000,000.
Senator S hafroth . Then at present you would have to keep
$250,000 either in banks or in cash ?
Mr. B olton. Yes, sir.
1578
BANKING AND CURRENCY.
Senator S hafroth . N ow , under this bill you are required to keep
both in banks and cash only 12 per cent, are you not?
Mr. B olton. Yes, sir.
Senator S hafroth . And 12 per cent of $1,000,000 would be
$ 120,000 ?
Mr. B olton. Yes, sir.
Senator S hafroth. That
would release to you in capital that you
could use for loaning purposes and for building up credit $130,000,
would it not?
Mr. B olton. That is the way it figures, but it would not, because
we would not allow our reserve to get below 25 per cent.
Senator S hafroth . I f you had a reserve association that you could
go to at any time and ask them for money and be sure they would
give it to you-----Mr. B olton (interposing). I am not so dead sure they would do it.
Senator S hafroth . But that is the object of this system. We have
to presume it will work-----Senator N elson (interposing). And would you not have to keep
accounts with others?
Mr. B olton. Unquestionably.
Senator S hafroth . Y ou may have to do that bank exchange, but
you could, as a matter of fact, have $130,000 released by joining this
system, and down in your country that is worth fully 6 per cent-----Mr. B olton (interposing). We would not have $130,000 released;
no, sir. You would have the power to do it, but I do not think a
a bank ought to operate with less than' 25 per cent reserve.
Senator O ’G orman . What is the prevailing rate of interest in your
State?
Mr. B olton. I should say that our loans would average 7 per cent.
The C hairm an . H ow many cases have you where you exceed
$31,000 to a single individual?
Mr. B olton. Not many; we have a few cases.
The C hairm an . H ow many would you suppose?
Mr. B olton. I recall two right now.
The C h airm an . Under this bill you could loan up to $31,500
against your reserve, but you think that the loss o f those two ac
counts—
Mr. B olton (interposing). I was only speaking of what we have
on our books right now. We have other customers who ask us for
very heavy loans. O f course, we could increase our capital stock to
$350,000. and get along on a 10 per cent provision.
The C h airm an . N ow , you can take 10 per cent against your cap
ital and surplus-----Mr. B olton (interposing). I thought it was capital.
The C hairm an . Then the only objection you make against this
has disappeared?
Mr. B olton . I f we could get along like our national-bank friends
do.
Senator H itchcock. Would you propose to nationalize?
M r. B olton. N o, sir.
Senator H itchcock. Your State laws do not allow you to keep
less than 25 per cent?
Mr. B olton. N o, sir. We have some advantages as a State bank
One o f them is that under our law we can have a savings depart
BANKING AND CURRENCY.
1579
ment, which we have not. Another is that we can lend money di
rectly upon real estate, which we do not do very much of. We carry
less than 10 per cent o f our loans— frequently not more than 5 per
cent— upon real estate. It is just a little bit more pleasant to do
business with the State bank examiner than with the comptroller—
from the accounts I get from my national-bank friends. The comp
troller is a little bit more arbitrary, and yet our State bank examiner
is very strict. We have a magnificent bank-examining system.
Senator H itchcock. W ill you tell the committee whether other
States also require a reserve of 25 per cent?
Mr. B olton. I do not know what they require. Our reserve at
one time, Senator was 33| per cent.
Senator N elson. Louisiana has always had that banking system.
Senator R eed. In order for you to come in and not suffer some
through the requirement o f a deposit reserve, you would want the
law modified so that you would get some advantage out of carrying
this large reserve at home?
Mr. B olton. Yes; we would have to have our State law modified.
Senator R eed. I f it was not modified, you would want this bill
modified?
Mr. B olton. I tell you, gentlemen, the main objection I have to
borrowing money—I want to borrow my money from bankers, and
bankers do not run this system that you gentlemen propose.
There is only one banker provided for on the Federal reserve
board—only one. There is absolutely no representation at all from
the people who own these reserve banks—that is, on the Federal re
serve board— and only one-third of them that they absolutely control
as directors o f the regional reserve banks. They elect six, but three
of them are subject to be removed by a politically appointed board.
Senator R eed. N ow . I want to have a seance with you about the
•bankers furnishing this capital. The bankers take enough of their
capital which they now have to the regional bank to equal one-tenth
of their capital stock, and they take over 6 per cent of their deposits,
■which counts as a reserve. Now, that is all in their banking business
to-day, and they can immediately borrow it back and substitute their
notes. There has not been a dollar of new banking capital added yet.
Mr. B olton. That is true.
Senator R eed. N o w , the law requires the Government of the United
States to deposit every dollar of its money in these banks, except the
gold that is now held in reserve in special funds; but the banks can
immediately transfer that gold by the simple process of requiring the
redemption of the gold-reserve notes, so that the real financial
strength that comes to these banks comes out of the Federal Treasury.
Mr. B olton. I do not agree with you.
Senator R eed. That is what this system is being created for very
largely, to give the banks a right to come to the Federal Govern
ment and ask to have money issued. Now. in view of the fact that
practically all of the elements of strength come from the Federal
Government and that the bill requires the Federal Government to
deposit all of its moneys in these banks willv-nilly, don’t you think
they ought to have something to say about it?
Mr. B olton. I believe the Federal Government ought to control
the Federal reserve board, and I believe this: I am perfectly will
1580
BANKING AND CURRENCY.
ing, as far as I am concerned, for the President to appoint every
member of the board, but I believe that those four members who are
appointed by the President, outside of the ex officio members should
be men of actual banking experience.
Senator O ’G orman . D o you not think that is the kind he would
select?
Mr. B olton. He is not required to do it. Either those four or
else the President ought to be required to give representation to the
banks of, say, about four men out o f a list of men selected or nomi
nated by the banks.
Senator R eed. Let us consider that a minute. Don’t you know
that if you require me to name 50 men from which you shall select
four, I can compel you to select the four I want absolutely ?
Mr. B olton. N o, sir; I do not think you can.
Senator R eed. I certainly can. I f it was 4 men to run your bank,
1 could select 46 horse thieves and 4 gentlemen, and you would have
to take the 4 gentlemen.
Mr. B olton. But those bankers could select a list of men who ran
their own banks.
Senator R eed. But they could select a list in such a manner as to
absolutely compel the taking of certain men. That trick has been
played a thousand times by pretty good men. [Laughter.]
Senator N elson. I do not want to interrupt you, Senator Reed,
but I wanted to ask him a question. Are you through ?
Senator R eed. Yes; I am through.
Senator N elson. I would like to hear you on this exchange prop
osition.
Mr. B olton. I am coming to that. I would like to finish the
balance of the statement first.
Senator N elson. I would like to hear you on that point.
Mr. B olton. Another reason why I do not care to go into this
reserve system is we would lose 2 per cent on our balances we have.
We are required to carry a 25 per cent balance, and we would lose
2 per cent on that.
The C hairm an . On all of it?
Mr. B olton. T wo per cent on our reserve. On 17 per cent of
our reserves we get 2 per cent.
The Chairman. H ow much would you lose—what per cent o f that
would you lose on under this system ?
Mr. B olton. We would lose 2 per cent on the amount we were
required to carry with the Federal reserve bank, which, as I under
stand, is approximately 6 per cent.
Senator S hafroth . Five per cent.
Mr. B olton. W ill it not be 6 after the banks have been in exist
ence for 86 months?
Senator S hafroth . N o ; 5.
Mr. B olton. That would mean a loss of $1,000 a year to our bank.
Senator O ’G o rm an . I s it not fair to assume the money on reserve
at the regional reserve banks will be profitable and you will get
possibly the equivalent of 5 per cent?
Mr. B olton. I don’t know about that. I know that we would get
something back—that is true; yes.
Senator B ristow. That 5 per cent would be on your stock and on
your reserve?
BANKING AND CUERENCY.
1581
Mr. B olton. Yes; but he is speaking about the share of the earn
ings the bank would get upon their deposits, as I understand it. Is
not that correct?
Senator B ristow. Y ou get more than 5 per cent on the stock now?
Mr. B olton. On our capital?
Senator B ristow. Yes.
Mr. B olton. Oh, yes; we earn more than 5 per cent.
Senator B ristow. It would be limited to 5 per cent on the capital
or deposits, and you would get nothing on the reserve?
Mr. B olton. Yes.
Senator O ’G orman . What do you get now on your capital?
Mr. B olton. We earn from $30,000 to $35,000 a year.
Senator R eed. On how much capital?
Mr. B olton. $90,000; and we have $225,000 of surplus.
Senator R eed. Y ou got that surplus out of profits?
Mr. B olton. Yes; but only by declaring low dividends.
Senator R eed. H ow low ? Did you ever declare below 6 per cent ?
Mr. B olton. Yes; one year 4 per cent, and for two years only 8
per cent. [Laughter.]
The C h airm an . A s long as you can borrow two-thirds of it at 5
per cent, the reserve you would put in the reserve bank, and as long as
you loan your funds on an average of 7 per cent—if you got that
money at 4 per cent it would be reasonable to suppose you would
have a margin of 3 per cent, or two-thirds of 5 per cent, which would
average you 2 per cent on the 5 per cent and be identically the same
as you get now, would it not ?
Mr. B olton. That would be true if we run right down to the legal
reserve; but oftentimes we have as much as 40 per cent.
Senator R eed. N o ; I am not talking about your reserve.
The C h airm an . The hour is so late now we will have to adjourn.
Senator N elson. I would like to hear him on just one point.
The C h airm an . At 10 o’clock to-morrow morning the committee
will meet in the room just across the way here, the Appropriations
Committee room.
Senator N elson. I wanted to ask you one question. It may take
a little time, but I wanted to have him explain this exchange business.
Senator O ’G orman . We are called upstairs, Senator.
Senator N elson. W ill you be here to-morrow?
Mr. B olton. I can be here at 10 o’clock.
Senator N elson. Y ou will be entitled to the stand first.
(Thereupon, at 5.45 o’clock p. m., the committee adjourned until
to-morrow, Friday, October 3, 1913, at 10 o’clock a. m.)
F R ID A Y , OCTOBER 3, 1913.
C ommittee
on
B anking and C urrency,
U nited States S enate,
Washing ton, D. C.
The committee assembled at 10 o’clock a. m.
Present: Senators Owen (chairman), Hitchcock, O’Gorman,Reed,
Pomerene, Shafroth, Hollis, Nelson, Bristow, McLean, and Weeks.
The C h airm an . It was agreed last night that Mr. Bolton was to
have 10 minutes to conclude his statement. We will hear you now,
Mr. Bolton.
15 8 2
BANKING AND CUBKENCY.
STATEMENT OF J. W. BOLTON— Resumed.
Mr. B olton . Senator, I only want to make another objection to
this system, and that is to say I think the power of the Federal
reserve board in reclassifying the reserve cities and particularly the
classifying of a bank in a reserve city as a country bank is an arbi
trary and dangerous power to be given to the board, and I do not
think it is wise.
Now, the thing I wish to say that affects our bank more than any
thing else is this exchange matter.
The C h a ir m a n . Have you anything to add to what Mr. Foote said
yesterday?
Mr. B olton . Yes. I want to say it costs us about $3,000 a year;
and I feel the reason for it, so I have been told, being inserted in the
bill is to get rid of an abuse. You do not get rid of an abuse, because
the banks that make unreasonable charges are the little bits of small
country banks that you can not get at. That is what I wanted to
add to what Mr. Foote said on that, and I want to impress that one
thing upon you—that it is the little, small country banker who
makes the unreasonable charges.
Take Alexandria, for instance. This means, as I say, a loss of
$3,000 a year income to us, and then a loss of an additional $1,000
in the form of revenue we would have to pay to the little inferior
bankers for collecting items we take at par over our counter. The
little interior bank, that is not a national bank, with a New Orleans
correspondent, would send his item on to Alexandria, to the National
Bank of Alexandria, and it in turn will deposit it with the Federal
reserve bank in New Orleans. It, in turn, would send it to Alexan
dria— to our bank—which is a State bank, and as a member bank
it would be forced then to collect that item without any cost or any
compensation whatever, and we are deprived of that revenue.
It is the little banker who abuses this collection charge, and he goes
free unless it is proposed by the Government to collect this either
through the post office or through the express office: and I feel,
myself, that, in the last paragraph of section 17, the most that should
be said upon that subject in this bill is:
It shall be the duty of every Federal reserve bank to receive on deposit at
par checks and drafts drawn upon other Federal reserve banks.
I do not believe this other provision is a part of the currency
bill; I believe it is a part of the detailed operation of this Federal
reserve bank, together with other banks throughout the country.
The question Avas asked me yesterday whether Ave would care to go
into this proposition or not. I will say the law gives us a great deal
of money, Senator, but I do not believe the bankers ought to be forced
to contribute a large amount of money to the capital at 5 per cent
interest, to put in a large amount of money on deposit, on which they
get no interest, and to be deprived, also, of this exchange revenue.
I believe that this is going to create a kiting of checks, and I say
that is going to be a dangerous feature of the bill, and I want to read
one or tAvo of the opinions that were expressed at Chicago by one of
the bankers— one of them by Mr. Fenton, of Chicago, referring to
this matter. He says:
BANKING AND CURRENCY.
1583
I think it is one of the worst things in the whole bill. I can not conceive why
the bankers in the large cities should favor it for even a minute, as some of the
smaller bankers seem to imagine.
Nobody would get rid of the cost of handling these items by turning them
over to the Federal banks, because the national bank owns it. If Congress can
pass a law compelling this reserve bank, our bank or yours, to take a piece of
paper not worth par. not collectible for 30 or 60 days, it can compel a bank to
take a 30 days’ note without charging interest.
At the present $1,000,000,000 is floating around the country in checks on
country banks. If this bill goes through this will be doubled. The $50 check
on the country bank will be as good as currency the minute it goes to a reserve
bank. The flood of checks would get so large that it would absorb all the
reserve.
It is not practicable, in the first place, and in the second, after going to a
great deal of pains to secure the currency notes, checks are introduced as cur
rency with nothing at all back of them. It is one of the most infamous things
ever heard of. T have been trying to find the man who put it into the bill and
can not. How it can be entertained for a moment by any banker, I can not con
ceive. A man working on both the Atlantic and Pacific coasts could open a few
bank accounts for trifles and float any amount of checks he wanted to.
The interlocking of swapping of checks all over the country, which would be
encouraged by such a provision, would be disastrous to the business interests.
Now, it seems to me that that statement is correct, that that gentle
man has a correct view of the situation.
Another feature o f the matter which is going to operate to the
advantage of the big city bankers and to the detriment of the country
banker is this: The big city banker now has clearing-house arrange
ments bv which he can charge his country customer. We can not do
that wdth the country bankers, because we have not that inflexible
clearing-house system.
Another feature: Tf the citv banker takes on a country bank like
ours, he does it because he is able to make an earning on our business,
and he checks over the accounts every month of every one of the cor
respondents to see whether he is making a profit on them. I f he does
not make a profit on our account, he writes to us about it. We have
never had any letters of that kind, because most of them make a
profit on our business, but it seems to me, as I stated a while ago, it
is a matter which has no place whatever in a currency bill.
I want to say. T believe every State banker should join this system,
if it is possible for him to do so, but T do not believe he ought to be
called upon to do it at a very heavy loss to himself. The banks of
this country should not be expected to bear all of the cost of putting
this system into operation (this is mv viewpoint), because this system
not only takes care of the banks, but it takes care of the merchants,
the manufacturers, and the farmers, and all classes o f people in all
classes of business.
The C h a ir m a n . Mr. McMorries, we will hear you now. I will ask
you to speak as directly to the point as possible.
STATEMENT OF EDWIN McMORRIES. PRESIDENT OF THE FIRST
NATIONAL BANK OF MERIDIAN, MISS.
Mr. M cM orries. T want to sav, Mr. Chairman, that I am going to
cover only a very few features of the bill, because I have listened with
very much interest to the gentlemen who preceded me and believe
they have covered very fully many o f the things I had in mind to
speak of.
1584
BANKING AND CURRENCY.
First, I want to voice my objection to one feature, as a banker,
which I believe is held in common by all of the bankers—city bankers
and country bankers alike—and that is the coercive feature of the
measure, making it compulsory that the banks become members of
these regional reserve banks. We do not believe we are warranted
in subscribing so large an amount of our money, placing so large
an amount of our deposits, in any concern that has no indemnity to
offer us whatsoever. Our bank, for instance, would be compelled
to contribute to the regional reserve bank about $36,000 in capital
stock and about $120,000 in deposits, making a total of about $156,000. We have no indemnity whatsoever that this money will ever
be returned to us. It may possibly be returned, but it is not abso
lutely certain. We may get a return of 5 per cent on our capital
stock or we may never get anything at all. The banks may never
earn anything, and we absolutely have no indemnity for the return
of the money on deposit, which we are obliged to contribute, without
any compensation.
We carry, say, about $400,000 or $500,000 idle reserve. That re
serve money is scattered among 40 or 50 banks all over this country,
for several reasons. One reason is we divide the risk. Now, if we
carry $100,000, as we ought to do, with our New York correspondent,
we have as indemnity for the return of that money their own capital.
We know they must lose their money before we lose ours. That
would not be true of the reserve bank at all. Every dollar of our
money is a risk of ours So I believe a great many banks would
hesitate to place so large an amount of their money with an institu
tion if it had no indemnity to provide for its return ultimately and
in the management of which they have no voice whatsoever. We
would not dare to do that. We believe the Government will act
with all wisdom in the appointment of these gentlemen, but we be
lieve that if the Government is to be a shareholder in the profits of
this regional-bank system they ought also to be shareholders in the
possible losses. I f we are going to be coerced in putting money on
deposit and making subscriptions to the capital stock of the regional
reserve banks, and never make a return in the shape of dividends
on our stock, in all conscience there ought to be some assurance given
us, some indemnity providing for the ultimate return of this money,
this reserve, we place with the regional reserve banks under the pro
posed bill. There is absolutely no indemnity that anything covered
hito the reserve banks may come out of the system.
That is about all I have to say on the 'coercive feature of the bill.
Senator W eeks. I would like to ask you one question.
The Chairman. I want to say to the committee it was understood
these gentlemen who were here yesterday would take 10 minutes
apiece, and unless that policy is pursued we will not be able to hear
these gentlemen, because there are other gentlemen here—the Indiana
delegation— who have been here since Wednesday morning and have
been waiting to be heard.
Senator R e e d . Mr. Chairman, so far as I am concerned, I would
just as soon not hear a witness at all as to have him come here with
a prepared speech, and I could not ask any questions.
The C h a ir m a n . I made the observation because of the exigencies
o f the case.
BANKING AND CURRENCY.
1585
Mr. M cM orries. A s a matter of fact, I would rather say what I
have to say to the committee in the way of answers to interrogatories,
because I have no set speech to make. I would greatly prefer to give
the committee my views in the shape of answers to interrogatories.
Senator W eeks . I want to ask you about the compulsory feature
you have referred to. You do not doubt the right of the Government
or any State to modify or in any way change a charter which it has
granted, do you?
M r. M c M orries.
Senator W eeks .
M r. M cM orries.
Senator W eeks .
N o, sir.
Or the privilege which it has granted ?
N o, sir.
I s not the compulsion which you complain of a
question of principle rather than the question of dollars and cents?
It is not, to my mind, a question of whether you are going to make
larger profits on the amount of the capital stock which you subscribe,
or any profits at all, or whether you will ever get the money back.
There is not involved in this proposition the question of whether
the Government is justified in taking a certain part of the capital of
one of its creatures and employing that capital as it sees fit, and the
creature itself have nothing to do in its management ?
Mr. M cM orries. N o; I can not consent to that doctrine at all.
Senator W eeks . I f it has a right to take 10 per cent o f the capital
of the national banks in this way, it has a right to take 20 per cent or
30 per cent or 50 per cent-----M r. M cM orries. All of it.
Senator W eeks . Or all of it. And is not the broad principle in
volved there whether it is wise for the Government or a State to grant
a charter and then, even under the conditions which surround those
men, compel the corporation to turn over to the management o f some
body else, without any voice in its management, a part of its capital
or assets? It seems to me there is the question which this committee
has to decide—not the matter of whether you are going to get a large
interest or small interest return or any interest at all.
M r. M cM orries. Still it is the money o f the banks that is being con
tributed.
Senator R eed. I want to challenge that statement directly, because
it has been made here for weeks. The banks do contribute 10 per cent
of their capital stock, and they have to deposit 6 per cent o f their
customers’ money.
Mr. M cM orries. Yes.
Senator R eed. All that the banks contribute is 10 per cent of their
capital stock. O f course, they are liable for 6 per cent of the deposits,
but the Government is required to deposit under this bill all of its
money and to risk all of its money. Is not that so?
Mr. M cM orries. Yes; but then the sole supervision of the banks is
in the Government and the bankers have no part in the management
of it at all.
Senator R eed. Aren’t you mistaken about that ?
M r. M cM orries. N o, sir; I do not think I am.
Senator R eed. This regional reserve bank is controlled by a board
of directors, the majority of whom the bankers select. Now, the
majority of the board o f directors has the control of an institution.
Mr. M cM orries. Yes.
9328°— S. Doc. 232, 63-1— vol 2------ 40
1586
BANKING AND CURRENCY.
Senator R e e d . Whether there is something in your complaint or
not on that matter, I object to these constant reiterations that the
banks furnish all the capital, when, as a matter of fact, the Govern
ment deposits all of its own money and then proposes to furnish the
additional money needed for the commerce of the country.
Mr. M cM orries. I still say and insist the banks furnish all the
capital. The Government does not furnish any part of its capital.
Senator R eed. W on’t the Government put its money on deposit?
Mr. M cM orries. It puts money on deposit, yes; but the banks make
deposits also, and the Government has the sole supervision.
Senator R eed. Not the sole supervision under this bill.
M r. M cM orries. Well, a majority of the directors are elected by
the member banks, but any director the member banks elect may be
removed by the Federal reserve board.
Senator R eed. Yes; and his succesor elected by the banks.
M r. M cM orries. Yes; and he can constantly be removed by the
Federal reserve board.
Senator R eed. And just as constantly as they are removed new di
rectors can be elected by the banks.
M r. M cM orries. We believe if there is to be a division of profits
between the Government and the member banks the division ought
to be made on the ratio of the average balance. Provision ought to be
made for returning profits to the banks in the ratio of their average
balances. I believe their share of possible losses should be determined
in that way.
Senator R eed. H owt would it suit you, if the Government is going
to organize these banks, that no bank be required to contribute at
all and then provide that the banks should deposit their reserves
there or be compelled to keep them in their own vaults ? How would
that suit you ?
Mr. M cM orries. I think so long as it is left in the discretion of
the banks I think the banks would put their money in the regional
reserve bank unless in their opinion it was being improperly man
aged. But I believe it ought to be left to the discretion or the banks.
I do not believe it ought to be made compulsory, and when I use the
term “ compulsory” I think the present bill, as I view it, leaves to
the bank only a choice of two evils, that is all. I believe the Govern
ment has not given any vested rights in any charters. I do not
agree with the gentleman who preceded me. I believe the Govern
ment has the right to abolish the national bank act as it now stands
if it is a menace to the country and an evil, but they should leave the
banks, to which these charters were originally issued, in the same
shape they were before the Government granted them those charters.
For instance, we were obliged to buy a given amount of Government
bonds in order to enter the system and paid wholly an artificial
value for them, because w*e were given the circulation privilege. To
sum it all up, I believe that if it is going to be left to the discretion
of the banks, and they do not enter the system, I think the Govern
ment should relieve them of the bonds and retire the circulation, but
leave it to the banks to determine whether they will take out a State
charter or become a national bank. I think" it ought to be in the
discretion of the banks to choose whether they will drop out of the
system and the Government ultimately buy back the bonds which were
BANKING AND CURRENCY.
1587
granted with the charters that carried with them the circulation privi
lege. We all know that the bonds could never have been marketed
by the Government without this circulation privilege, and if the
charter is revoked before maturity I believe in all conscience the
Government ought to leave the banks in the same position they were
before they went into the system.
Senator R eed. I want to present this view to you. I think you are
a fair man and I think this committee and Congress wants to do
what is fair. We set up a banking system in this country and you
came into it with many others. That banking system requires the
banks to be ready at all times to meet the demands of their deposi
tors, to pay back their obligations. Experience has demonstrated
that the banks, under the present system, can not always be ready—
at least, they are not always ready. Twice the entire system has
broken down. In 1907 there was scarcely a national bank in the
Federal Union that was not liable immediately to arrest of its charter
and forfeiture of all its rights and to be wound up by a receiver. I
take it nobody will dispute when a bank says to its customer, it won’t
pay the deposits on demand, except in the case of time deposits with
that bank it has committed an act of absolute forfeiture and the
Government has a right to close its doors under the law.
Now, having found the system works that way, the Government
realizing, o f course, it would be a great hardship and perhaps a
great wrong to have enforced the law, and desiring now to provide a
system that will remedy that particular evil, do you think that the
Government is doing anything in the nature of a hardship, if it says
to the banks, “ Now, you can not exist as you are now and comply
with the law. You have failed to do that. I f you go on, you must
accept some plan which will obviate the evil we have already expe
rienced, and make it impossible in the future.”
Now, is that bulldozing at all?
Mr. M cM orries. N o, sir; that is right, but this might not be the
only method or the best method.
Senator R eed. I f you do not think it is the best method-----Mr. M cM orries. I do not.
Senator R eed. I will say frankly I do not apply this to you per
sonally, but I am getting a little tired myself, individually, o f having
bankers come in here from all over the country and talk about this
bill, to which I am not in any way committed—to talk about it as
an attempt of the Government to bulldoze and as being un-American,
when, as a matter of fact, it is only an effort to remedy a system
and make a system work and to protect the banks against the very
thing they have suffered from. I f it is not a good system, if it can
be made so, as far as I am concerned, I would like to hear about that.
M r. M cM orries. I understood, Senator, we were invited here in
order that we might express to you our view about the bill. I have
no disposition to weary the committee at all-----Senator R eed. I did not mean that; do not misunderstand me.
Mr. M cM orries. N o; I have no disposition to do that at all, but if
it is going to be worth while for us to come here, I think we should
submit to you our view and feeling. And I do believe it is un-Ameri
can for the Government, after we have bought the bonds and have
the charter, to take that charter away from the institution unless
1588
BANKING AND CURRENCY.
it is going to subscribe to an amount of capital and contribute to
the deposits and turn the funds over to them without our having a
voice in the management. I can not consent to that as an American
citizen. I feel that way about it, and I would not be honest with
you if I did not say as much to this committee. I believe the na
tional-bank act ought to be modified so as to correct its defects, but
I am far from feeling that the present bill as it passed the House
is an ideal bill in that respect.
Senator R eed. I do not think it is ideal.
M r. M cM orries. I do not think so at all. I will pass from that
feature o f it, unless there is something else about which you desire
to ask a question.
Senator B ristow . Referring to Senator Reed’s question as to the
national-bank system having broken down, that was because the
banks could not pay their deposits upon demand if a very large per
cent of them demand the return of deposits at the same time. That
is incident to any banking system on earth, is it not ?
M r. M cM orries. Y e s ; this, for instance.
Senator B ristow . O f course it broke down, and that is a defect, but
the remedying of that defect could be made without tearing up the
entire system, could it not?
M r. M cM orries. We think so.
Senator B ristow . And inflicting what appears to be an inequity
upon those wTho, upon the importunity of the Government, have gone
into business.
M r. M c M orries. We take that view about it; yes. I can not admit
that the national-bank act as it stands has utterly failed. I know
our bank, for instance, went through the panic of 1907 without plac
ing any kind of restriction upon its depositors and without having to
borrow from any correspondent. And we are not alone in that. I
know quite a number of banks that did that—that did not borrow any
money or put any restrictions upon their depositors.
Senator R eed. Nobody claims it was universal.
Mr. M cM orries. N o, sir: it was not universal. They will always
have well-managed banks and poorly managed banks.
Senator N elson . Y ou could not devise any system to prevent the
management of a bank extending undue credits?
M r. M cM orries. I do not think so. W e think that the nationalbank act has defects and ought to be remedied, but I do not believe
this bill will remedy them.
Senator N elson . The acute outbreak there in New York occurred
in connection with the trust companies and not under the banking
system ?
Mr. M cM orries. That is where the trouble started, just as in the
panic of 1893.
Senator N elson . That is where the fire started. We felt the effect
of the panic in London. It had such enormous ramifications that it
reached around to us by and by.
Senator R eed. Y ou said to Senator Bristow that there were evils
in the system and there was a remedy. Now, tell us wThat the remedy
is in your judgment.
Mr. M cM orries. It is a great big question I can not undertake to
answer. I am not working out a bill. In reality I believe the chief
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1589
defect o f the national bank act as it is to-day is the pyramiding of
reserves. I find one other feature in the bill, the one good feature,
the centralizing of the reserves in the country.
Senator N elson . I am glad to find one who agrees with me.
M r. M cM orries. I believe that is the weak place in the system to
day. I believe the reserves ought to be decentralized.
Senator R eed. H ow much ought they to be, then, the reserves, if
you do not permit it?
M r. M cM orries. The reserve in the bill as it passed the House is
reduced, for the country banks, to 12 per cent.
Senator R eed. This bill of course provides a system of its ow n; but
just let the other system stand and do not allow pyramiding or redis
counting. How much do you think the reserve ought to be?
Mr. M cM orries. I think the reserves worked out in bill are all
right. I have no objections on that. I think that ratio is all right.
Senator N elson . I think that is the best feature of the bill, the re
serve feature.
Mr. M cM orries. Y es; I think it would be all right as it is worked
out.
Senator R eed. Would you prefer, now. keeping this deposit in your
own bank and getting nothing from it then to have to put it in a re
gional bank and get the interest that it would earn?
Mr. M cM orries. I would rather put it in the regional bank.
Senator B ristow . The regional banks do not pay any interest on
deposits.
M r. M cM orries. Y ou would not get any interest any place, you
know.
Senator R eed. What would you think about making the bank re
serve greater than it is now, requiring the bank to keep it in its
vaults, and then allowing it to intrench upon or invade that reserve,
but when it did so to tax it ?
Mr. M cM orries. I think that is a good feature. I believe that the
bank ought to be required, if there were to be any modification in the
reserve feature in that bill—I believe the requirements as they are
now ought to be reduced, because most of us are near centers where
cash money could easily be secured if by any reason our wants were
abnormal. Under the present law we carry a 6 per cent reserve in our
vaults. In our bank that amounts to $125,000. We are within a few
hours of New Orleans, and it is wholly unnecessary to keep so much
money as that, especially in vaults. I believe that feature ought to
be reduced—the amount kept in our vault.
Senator B ristow . Other bankers who have appeared before us
say 0 per cent is entirely inadequate for their necessities. One gen
tleman who appeared, i believe, said if he only had 6 per cent in
his vault he would not sleep at night.
M r. M cM orries. There may be something peculiar in the location
or in the character of the business. We quite often run below the
character of reserve for abnormal times, knowing that within a few
hours we could replace it without any trouble.
Senator W eeks . That is, depending on the character of the busi
ness the bank is doing?
Mr. M cM orries. Wholly so.
Senator W eeks . A s to whether the pay rolls are large and the loca
tion of the bank with relation to reserve centers.
1590
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CUKRENCY.
M r. M cM orries. I f they are in close proximity to reserve centers,
they could carry a very much smaller reserve than the banks far
away. The banks that are far away from reserve centers would
need to carry a much larger cash reserve than the banks near the
reserve centers, naturally.
Senator B ristow . Suppose we had, instead of 12 regional banks, 1
Federal reserve bank, where these subscriptions were voluntary and
the bank performed the functions that the regional bank performed,
or is supposed to perform, under this bill, except more extensive;
that is, to rediscount the paper of any bank whether it is a member
or not, regardless of its capital, if it is a creditable banking institu
tion. What would you think of such a plan as that ?
M r. M cM orries. T hat would run directly in competition with the
member banks who would contribute to this capital stock.
Senator B ristow . They do not contribute, I say. Let it be volun
tary ; let it contribute to it or not, as they please.
M r. M cM orries. I think that would be all right. I would not ob
ject to that. I f the public wanted to subscribe to the stock o f any
such institution, to let it be entitled to do that. I would not have any
objection to that at all. O f course, that would take the Government
directly into the banking business in some capacity, but I would not
see any objection to that to the banks as now organized if they would
have some kind of governmental supervision.
Senator B ristow . Senator Reed asked you; or, at least, I under
stood him to ask you, what you regarded as the defects in the nationalbank system.
Mr. M cM orries. I pointed out to him the piling up of reserves.
Senator B ristow . The pyramiding of reserves ?
M r. M cM orries. Yes; I believe that is the chief defect of the
national-bank act to-day.
Senator B ristow . That is all.
The C h a ir m a n . Mr. McCaleb, we will hear you now.
Senator N elson . Mr. McMorries has not finished his statement.
Senator B ristow . Mr. Chairman, I object to inviting men here and
then telling them they can only talk 10 minutes—inviting men to
come here from 1,000 miles and then allowing them only 10 minutes.
The C h a ir m a n . There were five gentlemen here last night, and
they agreed among themselves they would take 10 minutes for their
remarks before the committee. I call your attention to that fact
without any further comment.
M r. M cM orries. I f you will indulge me just one moment, because
my time has been taken up by interrogatories. I believe if you are
going into the feature of making loans on real estate by national
banks it ought to be restricted to farm notes. That is one feature,
and then I want to say I do not approve of the feature of the bill
which provides for savings departments. I believe that is the weakest
feature of the entire bill. We require a reserve of only 5 per cent,
and every national banker knows that at any time they have people
who want some money, when they can want it worst, they want to
have their money where thoy realize on it the quickest and right now.
Our people have a savings department there. We can not have an
institution under one management. We have one reserve in the com
mercial bank and another reserve in the savings bank. The manage
ment, if the time came, could just as well shift it to the commercial
B A N K IN G
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1591
side, but I believe the savings-bank feature is one of the worst
features in the bill.
Senator N elson . That withdraws that much business?
Mr. M cM orries. Yes.
Senator B ristow . I have avoided asking questions as much as pos
sible, but still I can not help it at times.
The C h a ir m a n . We happen to have a cordage of witnesses who
want to go on to this Boston meeting. Mr. McCaleb has been here
since Wednesday, and he wants to leave at noon, but of course we
can not control the members or the witnesses.
Mr. McCaleb, we will hear you now.
STATEMENT OF W. F. McCALEB, PRESIDENT OF THE WEST TEXAS
BANKING & TRUST CO., SAN ANTONIO, TEX.
Mr. M cC aleb . I Shall not have very much to say, Mr. Chairman,
for the very simple reason that I am in the main in sympathy with
the bill as it stands. I think it can be bettered in a very few re
spects. I think, in the first place, that a great deal of argument on
the score of control is out of the way. To say that we would fear
political oppression—in the main those arguments are not well
founded, because the Federal reserve banks in every main way are
controlled by the bankers who contribute directly to the capital stock.
I f this system is to be effective it must take the form, practically,
of a central bank, and this Federal reserve board must act as the
head of the entire system. In other words, the district banks must be
•more or less branch banks whom you have to count on in distributing
your reserves. I f you do not do it it will be ineffective—I will not
say inoperative.
I find a great deal of opposition to the provision that one reserve
bank may discount for another reserve bank. That must be in the
bill. It is hopeless to keep your reserves at all at hand if you can
not compel one reserve bank to discount for another reserve bank.
You might do that in a different form.
Suppose reserve bank A has a very heavy surplus. Suppose re
serve bank B is depleted. You can simply say to bank A, “ You
carry an amount for reserve bank B. and have B set aside, segregate,
a certain amount of its collateral, and carry it in its own vaults in
trust for the other.” I do not think it necessary at all that the
loans of one bank be transferred to the other. Let it carry them in
its own vaults and have credit in the other account.
Senator N elson . You mean, if I understand you correctly, that
it. should be done simply by a system of bookkeeping?
Mr. M cC aleb . Precisely.
Senator N elson . That is, one reserve bank instead of transferring
discount paper or discounted paper should simply give credit to the
other reserve bank, with a given sum to be fixed by the reserve board?
Mr. M cC aleb . Precisely, and the collateral notes should be simply
segregated in the vaults of the other bank and held in trust.
Senator N elson . What bank?
Mr. M cC aleb . The borrowing bank.
Senator R eed. Or put into the hands of the Federal agents?
M r. M cC aleb . Y e s ; you could do that for the particular bank
that needed the funds for the particular time.
1592
B A N K IN G
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CURRENCY.
Senator N elson . It will be like this: Suppose you were a national
bank and I was one of your depositors, and I did not have funds in
your bank, and my friend, Senator Reed, had a big account in your
bank, it would be transferring a part of his account. He would come
in and say, “ Transfer a part of my account to Senator Nelson’s ac
count.” That is what you mean?
M r. M cC aleb . That is what it would be in effect. I t is only a
suggestion which I had to make. I think I had not seen that stated
before. I see no reason why it would not be much better than trans
ferring loans.
Senator M cL e a n . Then, by a simple process of bookkeeping you
would transform 12 banks into 1 ?
Mr. M cC aleb . Precisely. I repeat-----Senator N elson (interposing). Would it not be simpler to have 1
reserve bank instead of 12?
M r. M cC aleb . The only way you could establish a central bank
would be to have one with branches. You could not have one cen
tral bank.
Senator B ristow . Why not?
M r. M c C aleb . Because of the fact that the country is practically
committed against it; the Democratic Party is committed against it.
Senator R e e d . xVre you certain of that?
Mr. M c C aleb . The Democratic Party is committed against a cen
tral bank.
Senator R eed. That is, a central bank privately controlled ?
Senator N elson . I did not understand the Democratic Party to
be committed against a central bank controlled by the Government.
Senator R eed. I did not so understand it.
Mr. M cC aleb . T o a certain extent it is; historically so.
Senator N elson . I want to get you to a focus on this point. Is not
this in effect, under this bill, with the central-reserve board given the
supreme authority—does it not amount, in substance, to a central
bank; that is, the regional reserve banks are simply branches?
M r. M cC aleb . Precisely; and if this system really works out as is
hoped for, if it really works the things you hoped for it, it must
come to that, in my opinion. You have got to have them, if you carry
it on in this form, and you will look upon the 12 banks as branches.
Senator N elson . That is what it means; you compel one regional
bank to discount or furnish funds for another.
Senator B ristow . Then if we had a Federal reserve bank located
in Washington, controlled by this Federal reserve board appointed
under this bill, with subscriptions by the bank or citizens voluntary
or not, as the case might be, with branches located in 12 or more
cities, it would be a more workable plan than the one suggested?
M r. M cC aleb . I think so.
Senator M cL e a n . Four would be better than one?
M r. M cC aleb . Yes; but you would have to have branches.
That
number would not be sufficient to take care of this business of the
banks. Banks can not afford to wait for their discounts. I f you had
only four branches in this system to take care of the business, you
would suffer such congestion it would be practically hopeless to pro
ceed.
Senator M cL e a n . They would be distributing branches.
Mr. M cC aleb . I favor concentration.
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Senator B ristow . Suppose, Mr. McCaleb, that this Federal reserve
bank, located at Washington, under the direction of this board ap
pointed by the President, as provided in this bill, had a branch in
each of the reserve cities—these 48 reserve cities-----Senator N elson (interrupting). And the central reserve cities.
Senator B ristow . Yes; and the central reserve cities. Would not
such an arrangement be more effective in taking care of the business
of the country than to have 12?
Senator N elson . Twelve regional banks.
M r. M'cC aleb . I think there is no doubt o f that. It amounts to
this: I f you have 12 banks you have to have numerous branches, be
cause the country is so large, geographically, and the demands from
certain sections o f the country are so different, and the members have
to have funds at certain seasonal periods, and the demands for such
funds are so varied that it requires a vast ramification o f ma
chinery.
Senator M cL e a n . Y ou would have to have branches with the 12?
M r. M cC aleb . Certainly; you would have to have numerous
branches.
Senator B ristow . H ow long have you been in the banking busi
ness?
Mr. M cC aleb . About 10 years.
Senator B ristow . Where?
M r. M cC aleb . At San Antonio, Tex. I am a State banker. We
have the largest State banking system in the country, except New
York and a few of the older cities. We have 800 State banks, and I
have already uttered the prediction in Texas that I think practically
every State bank that would qualify would practically be national
ized. We have an excellent State law, but an utterly idiotic law,
because it is utterly unscientific. Thev require 25 per cent of reserves.
I f this law becomes effective, nobody can compete on a basis of 25
per cent of reserves as against 12 per cent. I have already made
plans to nationalize my bank.
Senator R eed. Y ou are a State bank?
Mr. M cC aleb . Yes.
Senator N elson . D o you not regard the reserve system in this
bill better than the present national banking system?
Mr. M cC aleb . Certainly. We have no present national-bank re
serve system.
Senntor N elson . But what is called the national-bank system?
M r. M cC aleb . Y ou have such a thing on the statute books, but
that is all there is to it. It is not a national-bank reserve system any
more than it is a flying machine.
Senator H itchcock . The only reserve, the only real reserve, is
that part the bank is required to keep in its vaults.
Mr. M cC aleb . In excess of this requirement.
Senator H itchcock . D o you want to have a reserve that you can
loan vour funds on ?
Mr. M cC aleb . W h at have you got it for?
Senator H itchcock . That is what I am asking you.
You think
it ought to be a thing which could be invaded?
Mr. M cC aleb . Y ou have got to invade it; it would not be a reserve
otherwise.
1594
Ba n k i n g
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cukbency.
Senator H itchcock . Under what conditions ought you to be per
mitted to invade it? O f course, if you take off all conditions you
have no reserve at all.
Mr. M cC aleb . I think the conditions which are in the law here
are very reasonable.
Senator H itchcock . In this bill?
M r. M cC aleb . In this bill now pending.
Senator N elson . Under your Texas law the reserve is 25 per cent?
Mr. M cC aleb . Yes.
Senator N elson . H ow much in your vault?
M r. M c C aleb . Ten per cent in cash in the vault.
Senator N elson . And the balance in other banks?
M r. M c C aleb . Yes; or approved agent. I want to return one mo
ment to that, because you hear the national banks are going to take
out special charters, and all that sort of buncombe. In the State of
Texas you will find all the banks nationalizing. They will be forced
to it, because they can not compete. I f there were no other benefits
under this measure they would be compelled to do it on the score of
reserve only, because no bank can carry 25 per cent as against 12 per
cent.
Senator N elson . What are your resources?
M r. M c C aleb . About two and a half million.
Senator N elson . H ow much capital?
M r. M cC aleb . $150,000.
Senator N elson . H ow much surplus?
Mr. M cC aleb . $50,000.
Senator N elson . $200,000 in capital and surplus?
Mr. M cC aleb . Yes; $200,000 in capital and surplus.
Senator N elson . And what are your deposits?
Mr. M cC aleb . About $2,400,000.
Senator R eed. I want to find out a little more about your view of
one other matter. You said that if we had just a central bank and
no branches that the business could not be done, because the banks
could not wait so long for discounts. Now, in that, you refer to
moneys which the bank might want to get on rediscounts?
M r. M cC aleb . Yes.
Senator R eed. N o w , let me ask you more about this, and I hope
you will give us your very best view about it. Is it not true that if
there was a central bank established, or 12 banks—regional banks—
you would still have available to you all of that machinery which
now exists, namely, your correspondents in New York, in Chicago,
in St. Louis, wherever they may be, and the same opportunity to
obtain accommodations from them which you would have now ?
Mr. M c C aleb . I think so. That is my understanding of the
measure.
Senator R eed. S o, if we were to establish a central bank or 12
regional banks, whatever benefit was to be derived from that would
be a benefit in addition to those rights and benefits you now enjoy
under the general commercial system which has grown up upon the
banks?
M r. M c C aleb . There is no question about that, Senator.
Senator R eed. So that if we did grant that device and plan that
gave complete and instantaneous relief, just in so far as it did give re
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lief, it would be something in addition to what you now have. It
does not mean the deprivation of those benefits you now have?
Mr. M cC aleb . Anything that we get at all will be better than what
Ave have now.
Senator R e e d . Taking into consideration the fact that in our nor
mal and usual times you and every other sound and solvent banker
can obtain from other banks upon mere commercial arrangements,
business arrangements, accommodations to meet all of your ordinary
necessities; taking that into consideration, if there was a place pro
vided where, when conditions were disturbed or business relations
interferred with, you could go to that other place and get some help,
that would be a great benefit, would it not?
Mr. M cC aleb . Unquestionably.
Senator R eed. It is not true that almost without exception the
banks know, for some time in advance, when conditions are becoming
rather dangerous and strained?
M r. M c C aleb . O f course you know. Here is the point, if you really
get a system you will not arrive at a dangerous point. I f you give us
a system it ought to equalize this demand and make it so that you
never come to the point where you will reach a crisis.
Senator R eed. I am speaking about the one question of the delay
in getting help, and I will put it in this form, because I want to direct
your mind absolutely to it. You are going along under the present
system. You get your help right along from other banks when you
need it. N owt, there comes a period when the banks are coming pretty
close to the line, and you know it. and you know it some days in ad
vance. Would you not have sufficient notice so that you could act
and send your collateral to some Government agent, and even if it
took four or five days to get help, wmuld not that help come in time?
M r. M cC aleb . Certainly; but here is the point you are missing:
Supose there were 10,000 banks, members of one central reserve bank.
Suppose a great many of them, if not all of them, should send in
within 30 days rediscounts. What sort of a force would you be re
quired to maintain in order to handle the business?
Senator R eed. Y ou mean that the 10,000 banks might all come in
at once?
M r. M cC aleb . Not all at once, but there would be such a large
number coming along that you would not have people enough to give
prompt service.
Senator R eed. Let me see if that could not be avoided; that is,
if your idea in regard to it is not— I do not like to say “ exaggerated,”
but you will not misunderstand me?
M r. M cC aleb . N o.
Senator R eed. Is it not a fact, now, that when you get these
strained conditions that relief given—substantial relief—to any part
of the country almost instantly works a relief for the entire banking
system ?
Mr. M cC aleb . That is true; that is the way it should be.
Senator R eed. S o that if half a dozen Chicago or New York
banks— I just use them for purposes of illustration—half a dozen
Chicago, New York, or St. Louis banks came in there and wanted
help and they were given relief, although it did not reach you di
rectly, the moment they were relieved you would be relieved also?
1596
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Mr. M cC aleb . Exactly; it works right on down.
Senator R eed. S o it is not such a complicated thing to give the
relief?
Mr. M cC aleb . I am in favor of the central bank. Then, after
establishing a central bank, if you found you needed branches, then
you could organize them as rapidly as you found you needed them.
Senator R eed. When I started in to these hearings I had the im
pression that possibly the relief had to be granted in New Orleans
in order to give relief to New Orleans, and that relief would have
to be granted to Nashville, directly I mean, in order to help Nash
ville. But it has been intimated, and that is what I am directing
your mind to, that relief given at one or two central points, of a
substantial character, would immediately, if those banks could aid
their correspondents, and in turn their correspondents aid the coun
try banks, so that in two or three days’ time the whole situation would
be relieved. Do you think that is true?
M r. M c C aleb . Yes; and your relief would have to come out of the
large centers, and then it ramifies through all the various auxiliary
ones. It would do no good to relieve one smaller section. For in
stance, in Texas at the height of the cotton season you would have to
send a lot of money, over 100 million.
Senator R eed. But you have been getting that from another bank.
M r. M cC aleb . But we are going to look primarily to this bank
if we are going to complete the system. We have 25,000 bankers,
and they live like hermits, and, like a hermit, this bank hunts the
nearest hole he can find to get away from these insects who commence
to pester him. Give us a colony of busy bees, and then you will lay up
stores. There you would have harmony, and you have the system.
Senator R eed. Your figure is a very terse one, but, like most figures
of speech, they do not always apply. You do all work close to your
hole to-day; that is, you work there in attending to your bank; but
as a matter of fact, and as a part of your business, and because it
pays you to do it, you have correspondents in many places.
Mr. M cC aleb . Y ou have not been a banker, have you?
Senator R eed. Oh, no; I borrow money.
Mr. M cC aleb . When you have been in the banking business 10
years you will know something more about it. You will know how
close you have got to stick on the job, watching your resources. You
give me a real system of banking, such as we have in many coun
tries—in Mexico or Canada, for instance—give us such a system as
they have got there and, confound it, I will go and play golf or go
fishing once in a while.
Senator R eed. I say you do stay by your bank. O f course you
have to do that. I think you will always have to do that. I am not
in favor of any system that would not require you to do it, because I
think when you leave your bank it might get into trouble after
a while. But you do keep deposits in New York, do you not?
Mr. M cC aleb . Yes, sir.
Senator R eed. For business reasons?
Mr. M cC aleb . Yes, sir.
Senator R eed. And get accommodations for business reasons ?
Mr. M cC aleb . Yes, sir.
Senator R eed. D o you keep them in New Orleans?
Mr. M cC aleb . Yes, sir.
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1597
Senator R eed. For business reasons; because you make money out
of it, do you not?
M r. M cC aleb . Yes, sir; that is one of the reasons.
Senator R eed. Y ou keep them in other places, and other people
keep them with you for the same reason. That system will exist, and
continue to exist?
M r. M c C aleb . Yes, sir.
Senator R eed. And that system you will have to draw on in any
event, unless we get in awful trouble ?
Mr. M cC aleb . That is true, but their ability to take care of me will
be diminished if this system goes into effect.
Senator R eed. D o you think their ability to help you would be
diminished ?
M r. M c C al Eb. Yes, sir; I think their ability to help me would be
diminished.
Senator R eed. Would that not be a dangerous thing?
Mr. M cC aleb . No ; I do not think so; not necessarily.
This must be a primary system. We have got to look to this sys
tem for our system, and to the other as a collateral or supplemental
system. That is my view of it.
Senator R eed. I have not been a banker, but my opinion is that
the great tides of business would go right on.
M r. M cC aleb . They would go on, but I would not have anything
to do with a system that would have anything to do with them. The
thing about them is that while their deposits may be somewat di
minished their power to earn money would be increased, and it would
be simpler to do this under the scheme proposed.
There are only one or two things I am going to say further.
think it is a mistake to require a 20 per cent investment.
Senator N elson . Ten per cent, you mean?
I
M r. M cC aleb . Ten per cent ought to be a maximum. I f you put
an additional clause in there, calling for 10 per cent additional, it
always put something up in the way. I do not like that 10 per cent.
Senator N elson . AVould you leave that as it is, 5 per cent at once
and 5 per cent in 60 days?
Mr. M cC aleb . Yes.
Senator N elson . And stop there?
M r. M c C aleb . I would.
Senator P omerene . Assuming that the 10 per cent might not raise
sufficient funds for the regional banks, what would you say as to the
wisdom o f opening the subscriptions to the public and permitting
them to have a part of the stock?
Mr. M cC aleb . I do not see why that should not be done.
Senator P omerene . Y ou would not permit those subscribers to do
business with that bank?
M r. M cC aleb . N o ; I would not. In other words, it becomes an
investment form.
Senator P omerene . A s a banker’s bank?
M r. M cC aleb . Precisely; and merely let it become an investment
form, merely for the outsider who wants to put his money into it.
Senator N elson . Y ou mean then that if the 10 per cent should
prove insufficient you would let the public come in and subject them
to the same limitations as the bankers?
1598
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Mr. M cC aleb . Precisely; and not permit them to do business with
the bank at a ll; is merely an investment proposition.
Senator P omerene . The same as a Government bond?
Mr. M cC aleb . Yes; if they are willing to go into it, and I dare
say a great many of them would do it. I hope you may change the
5 per cent provision and make it 6 per cent. That sticks in the craw
of American bankers.
Senator N elson . What have you to say about the 5 per cent on the
stock; do you think that is a proper amount ?
M r. M c C aleb . I was just saying that I think it ought to be 6.
Senator N elson . Y ou think it ought to be 6?
M r. M c C aleb . Yes. There is another point which I wish to dis
cuss, which I heard raised here to-day, and that is in regard to the
paring of items; in other words, eliminating the exchange. I want
to say, I think that is a most admirable thing, and on that point I
have to disagree with some of my good friends here. It is a tre
mendous waste. You run across this exchange at every turn. The
country bankers are a species of brigands in many things. When
they do remit they always soak you to the limit, and at the rate of
one-fourth of 1 per cent in most places. I think that provision is a
most admirable provision to go in. They are complaining that you
are going to curtail their profits thereby. Their profits will be much
more than offset by their having business with this association when
it comes to the multitude of forms of earning money.
Senator H itchcock . This does not provide for acceptances by
country bankers; it only provides for acceptances by banks handling
exports and imports—foreign exchange.
M r. M cC aleb . But there are various ways in which they can earn
money.
Senator H itchcock . Every country banker has claimed that his
losses would be enormous from this provision, and that he would
have to reduce his dividends.
M r. M cC aleb . I think they are mistaken. I think the earnings
would come up from various other sources.
Senator R eed. From what sources?
Mr. M c C aleb . Most of them could loan from 25 to 50 per cent
more money than they are loaning.
Senator H itchcock . Would that produce an inflation o f credit?
M r. M cC aleb . Not necessarily.
Senator H itchcock . We are trying to get from witnesses whether
this would produce an inflation of credit.
M r. M c C aleb . It does not follow that because you are increasing
your loans, you are inflating.
Senator H itchcock . The increase of loans by 25 per cent would not
result in inflation?
M r. M cC aleb . Not necessarily, because we are borrowing a great
deal of money, for instance, in Texas, and we are borrowing more
or less outside of the State.
Senator N elson. A big cotton crop in your State inflates your
credit more than a poor crop, does it not?
M r. M c C aleb . T hat is certainly true so far as balances are con
cerned.
Senator H itchcock . What is the law o f Texas in regard to re
serves kept by State banks ?
BANKING AND CURRENCY.
1599
Mr. M cC aleb . Twenty-five per cent.
Senator R eed. Y ou say that is a bad law?
M r. M c C aleb . I think it is a pernicious law because it is a hard
reserve to maintain. In Texas we have over 800 State banks.
Senator R eed. Are you allowed to invade your reserves in Texas?
Mr. M cC aleb . Not until we get up to 25 per cent. I am supposed
to sit still until somebody comes in and pays his account.
Senator R eed. So that if your bank was to fail your customers
would get at the rate of 25 cents on the dollar ?
Mr. M c C aleb . Yes.
Senator R eed. N ow , may I direct your thought to another matter?
One thing that makes runs upon banks or what we call panics, or a
run upon a bank, is the fear of the customer that there is not enough
money there to pay all the customers and hence he wants to get his
money out first. That is the real reason, is it not?
M r. M c C aleb . Y e s ; that is one of the reasons.
Senator R eed. And those runs generally are very disastrous, not
only to the bank, but disastrous to the customers of the bank, because
some of them get their money and then the bank goes into liquida
tion and there is a lot of money lost in that process. That is true, is
it not?
Mr. M cC aleb . Yes; very often.
Senator R eed. I f the customers of the bank knew that their money
was safe, you would not have these runs ?
Mr. M cC aleb . I think that is psychologically true.
Senator R eed. That seems like a childish question to ask, but it
is the premise for what I am coming to. I f these banks all go into
a common system, say 1 central bank or 12 regional banks, or any
similar system, they would have a common interest then in preserv
ing the assets o f each member bank, would they not ?
Mr. M cC aleb . I think it would strengthen the fellow feeling.
Senator R eed. D o they not have an actual financial interest ?
Mr. M c C aleb . Certainly they have.
Senator R eed. Because a member bank has brought up his securi
ties, has obtained rediscounts, and is liable upon those rediscounts,
if it fails the central bank may lose some money. That is true, is
it not ?
M r. M c C aleb . Yes.
Senator R eed. N ow , do you not think the banks would be willing
to take the profits that might be earned in these regional banks and
which was a return upon their capital and set it aside in a fund to be
used as a guaranty fund and to make good losses that had occurred
to the system ?
Mr. M cC aleb . Y ou know that is an unfair question to ask me, be
cause we borrow under the guaranty law in Texas. We have a most
excellent one there which is in operation now.
Senator N elson . Guaranty of depositors?
M r. M cC aleb . Yes. It has been in operation six or seven years,
and since it has been in operation not a depositor has lost a dollar.
Senator N elson . D o you not think it would be a good idea?
M r. M cC aleb . I think it would, but that is a very direct question,
and I am inclined to favor that, and for that reason I have come to
be more or less of an advocate o f the guaranty law. T hat will con-
1600
BANKING AND CUBBENCY.
stitute a very small tax upon one bank or the other year in and year
out.
Senator Nelson. I s your Texas law an absolute guaranty, or does
it simply provide a fund for the protection of depositors?
Mr. McCaleb. We have a fund.
Senator N elson . Your State provides a fund and out of that this
amount is paid, but otherwise it is not a guaranty?
M r. M cC aleb . N o ; it is not a State guaranty at all.
Senator R eed. I am not talking about an absolute guaranty law ;
I am talking about the proposition that if your banks all came into a
general system, having a common interest in that system to the extent
of at least 10 per cent of their capital stock, whether it is not possible
to create a fund to be held by the Government so that if a bank went
into involuntary liquidation, out of that fund the depositor could
immediately be protected, that would stop your runs, would it not ?
Mr. M cC aleb . I would approve of that; that is all right. I believe
it would be a panacea if we could have that guaranty along with the
system you are proposing to give us and that you will give us, I am
sure. You will see the United States blossom as it has never blos
somed before.
Senator M cL e a n . That is the system in Canada?
M r. M cC aleb . Y e s ; whereby all outstanding notes are guaranteed.
Senator Bristow. It is similar in principle to the insurance prin
ciple. It is insuring against loss to the man who deposits money the
same as the insurance company insures against loss on account of fire?
M r. M c C aleb . That is true.
Senator N elson . And it is only the fund and not the Government
that is responsible?
Mr. M cC aleb . That is true.
Senator R eed. Has that made for reckless banking in your State?
Mr. M cC aleb . It has not. In six or seven years it has cost my
bank, I think, practically nothing. Our interest in the guaranty
fund is about $10,000. I f I were to liquidate my bank, that fund
would be returned to me.
It all depends on the question of supervision. We do not allow
banks to open in towns where they can not make a reasonable divi
dend. We do not allow banks to open where there are not responsible
men behind them and where there is not a banker in charge of the
bank, and thus far our failures have been very few and nobody has
suffered a loss. I f this system were put into effect with a rigid super
vision, and if you would not permit the organization of banks by peo
ple not competent to run them, it would be a success.
Senator B ristow . The national banks are not permitted to join
your guaranty association?
M r. M cC aleb . Yes; they are.
Senator N elson . Do they come in?
Mr. M cC aleb . I think not to a great extent.
Senator Bristow. They are permitted by the State law, not by
the comptroller?
Mr. M c C aleb . Yes.
Senator Bristow. That is the same as the Kansas law.
M r. M c C aleb . We have a dual form in Texas. You may either
participate in a guaranty fund or you can make one between your
selves, simply doubling your liability.
BANKING AND CURRENCY.
1601
Senator B ristow. Have the national banks in Texas established
an insurance company for the guaranty of their depositors?
Mr. M cC aleb. They have not. I think possibly a few banks have
taken out surety policies. I am not positive of that, even.
Senator B ristow. The national banks in our State have established
an insurance company, and they insure their depositors in a private
company.
Mr. M cC aleb. I know that is true.
Senator B ristow. The State banks are insured under the State
guaranty system?
Mr. M cC aleb. I remember that. The State banks in Texas have
outstripped the national banks in the last two years, and I attribute
that to the guaranty feature.
Senator B ristow. D o you rediscount much of your paper?
Mr. M cC aleb. We do in the summer, beginning in June and up
to the beginning of the movement of cotton.
Senator B ristow. T o what amount?
Mr. M cC aleb. We have this year, I think, about $300,000 or
$400,000.
Senator N elson. I s it what I would call a straight discount; that
is, you simply discount the notes, or do you give your own notes and
put up your commercial paper as collateral ?
Mr. M cC aleb. We do two or three things. We give our directors’
notes.
Senator P omerene. Y ou say “ w e ” ; you are speaking of your
bank?
Mr. M cC aleb. Mv own bank.
Senator N elson. Y ou know what I mean by straight discount?
Mr. M cC aleb. Yes. In some cases we will give our directors’ notes
and then we simply deposit collateral.
Senator N elson. Y ou discount your guaranty; you indorse it, and
you discount that indorsement, and then you give your own notes
and put up your commercial paper as collateral.
Mr. M cC aleb. We give our directors’ notes without any collateral
at all.
Senator B ristow. What class of paper do you rediscount ?
Mr. M cC aleb. Y ou mean, what kind we take for our correspond
ents?
Senator B ristow. What class of paper?
Mr. M cC aleb. A great variety of paper.
Senator B ristow. H ow long did the paper run. as a rule?
Mr. M cC aleb. I think 90 days, maturing under 90 days.
Senator B ristow. Maturing under 90 days ?
Mr. M cC aleb. Yes.
Senator N elson. D o you make many real estate loans?
Mr. M cC aleb. Except in our savings banks. A man may make a
temporary real estate loan in our commercial department.
Senator N elson. Can you make those under the Texas law—
farmers’ loans ?
Mr. M cC aleb. Farmers’ loans-----Senator N elson.. N o limitation on them?
Mr. M cC aleb. Fifty per cent of valuation.
Senator N elson. Any limitation as to your deposits or capital?
1602
BANKING AND CURRENCY.
Mr. M cC aleb . Oh, yes. Our maximum loan is 25 per cent of the
capital stock.
Senator N elson . Any real estate loans?
M r. M cC aleb . Yes.
Senator N elson . Y ou have a pretty good law in Texas.
Mr. M cC aleb . That is a very good State banking law.
I think it
is one of the very best.
Senator B ristow . D o you have a great many customers who re
new their notes continually—I mean the 90-day notes?
M r. M c C aleb . W e have a good many who do renew from time to
time.
Senator B ristow . What per cent of your business—that is, of your
notes— are paid when they are due without renewing?
Mr. M cC aleb . That is a hard thing to estimate offhand. I think
probably not more than—well, it would run somewhere between 25
and 50 per cent.
Senator B ristow . That is, you have customers who renew every 90
days, and they do not expect to pay at the end of 90 days ?
M r. M c C aleb . I dare say there are some who have that in their
own minds. I positively have never told a client that he could have
an extension when his time was up. I have not followed that rule.
Senator B ristow . D o you not think that is rather unusual ?
Mr. M cC aleb . I do not know whether it is or not. It is the rule
in our bank.
Senator B ristow . Suppose that the Federal Government had an
agency in various cities of the country and that the Federal Govern
ment, through the comptroller’s office, would issue this currency
direct to the individual banks instead of to these regional reserve
banks or through the central reserve banks, do you think that could
be practically worked out so that every bank could take its assets and
go to an agent of the Government located near to it and get relief
when they needed it ?
Senator N elson . Get currency.
Mr. M cC aleb . I think that could be done, and if we could not have
a better thing let us have that. You give us a system and we will
get along all right.
Senator N elson . That is putting the Government into the banking
business.
M r. M cC aleb . That is only a subterfuge. You could pursue the
plan you are now pursuing in the Treasury Department, making
loans to the various-----Senator R eed (interposing). Why do you say it would be a subter
fuge?
M r. M cC aleb . I do not think that is what we want.
Senator H itchcock . The present practice provides no elasticity
for currency; it is simply advancing loans.
M r. M cC aleb . It is a subterfuge. It is a temporary expedient, but
it gives us some relief.
Senator H itchcock . It might be made permanent. Suppose the
Treasury Department were equipped to issue additional currency to
the individual banks, just as it is proposed to have the Government
issue additional currency to these reserve banks. Now, the Govern
ment would be performing the same function in each case, but instead
of doing it through an intermediate body it would be doing it directly
BANKING AND CURRENCY.
1603
through the individual banks and to the community which needed
the additional currency.
M r. M c C aleb . I think it would not be anything like as effective.
Senator H itchcock . W ill you explain why you do not think it
would be so effective?
M r. M cC aleb . Because, in the first place, I think it would multiply
the troubles of the Department o f the Treasury, or the comptroller’s
department, tremendously to attempt to do that thing. In the sec
ond place, I think it is the function primarily of a banking institu
tion to do the banking business and not of the Government.
Senator H itchcock . The purpose of this is to supply additional
currency, not for the Government to engage in the banking business.
Mr. M cC aleb . T o a certain extent it is the same thing. You are
breaking into the general scheme and to that extent it is erroneous.
Senator H itchcock . The American banks have never supplied
additional currency. That is not breaking into any banking
practice.
Mr. M cC aleb . I know that is true-----Senator H itchcock (interposing). I am talking now about an
elastic currency to be provided from time to time.
M r. M cC aleb . I know, and that is very good; and, as I said before,
i f you can not do anything better, let us have something that we can
operate along that line.
Senator H itchcock . Your chief objection, as I understand, is that
it would multiply the troubles of the Secretary of the Treasury?
Mr. M cC aleb . No ; it is not that; it is not scientific.
Senator H itchcock . W ill you kindly explain why you think it is
not scientific?
Mr. M cC aleb . Because you are debating a banking and currency
measure here which shall apply to the whole country as a nation,
and it is supposed to be operative 24 hours out o f 24 hours and not
to take care of an emergency.
Senator H itchcock . Suppose we provide that it is to operate 24
hours out of every 24 hours, and day after day. and we establish 50
subtreasuries throughout the country, or 41 in addition to what we
have. Suppose those subtreasuries are located in the banking centers
of the country and properly equipped to do the business of a sub
treasury. Suppose any one of the 7,000 national banks be given the
right to present at the subtreasury its securities and get 75 per cent
of its capital in currency directly from the subtreasury.
Now, that bank is examined twice a year by the agents of the
Treasury or the agents of the comptroller. He has gone over the
paper from time to time. That paper is presented—possibly some
United States bonds, possibly State bonds or municipal bonds, pos
sibly a mixture o f State bonds and commercial paper. That paper
is presented. What scientific objection is there to having the Govern
ment of the United States advance its currency over to the bank that
needed it under those conditions, when the Government is constantly
examining that bank under present conditions?
Mr. M cC aleb . The scientific objection is that it is simply a sub
terfuge.
Senator H itchcock . Will you kindlv explain what you mean by
saying it is a subterfuge?
1604
BANKING AND CURRENCY.
Mr. M c C aleb . Y ou are simply devising a thing for a temporary
purpose, not for constant use.
Senator H itchcock . N o ; not for a temporary purpose. We pro
pose to have it operative at any hour of the business day and at
any month of the year; that a bank can go there and get that cur
rency for 30 days, 60 days, 90 days, 4 months, or even 5 months.
Mr. M cC aleb . That is true, but at the same time there are other
functions of banking outside of borrowing money.
Senator H itchcock . We would not undertake to do those things.
M r. M cC aleb . That is, you leave the system in the same condition
it is in to-day; you have no system, and the national banks all know
it. Give us a system which you can harmonize, a system under which
the banks will cooperate with one another.
Senator N elson . The Government would have to pass upon all
that commercial paper offered for discount.
Mr. M cC aleb . Precisely, and be responsible for it.
Senator H itchcock . The Government in such a case would be
the custodian of the paper while it is in its possession in security,
but the Government has never failed as a custodian, and it is con
sidered perfectly safe as a custodian, and a part of that plan is to
give the Government a first lien on all the assets of the bank. Now,
the Government knows more about the banks than any other banker
can know, because it has the privilege of examining them at any
time. I f you are running a national bank, you know that the ex
aminers come to you at least twice a year, and in addition to that you
make statements to the Treasury four times a year, so that your
business is under the constant inspection of the Treasury Depart
ment.
Now, being so under the constant inspection of the Treasury
Department, can you imagine any power more competent to make
temporary advances of currency than that same Treasury Depart
ment?
Mr. M cC aleb . I admit the point you make; it is all right, but that
is getting away from the question. The question is that you are
giving us a system that will perform functions that are banking
functions.
Senator R eed. But that is not proposed in any bill before Con
gress.
Mr. M cC aleb . The present bill proposes a good many other things
than this.
Senator R eed. The powers of these regional banks are very far
from being absolute powers. There is the supervision by the Fed
eral board over them. They do not do a general business with the
public; they only deal with banks.
M r. M c C aleb . T hat is all true, but the bill embodies a great many
other functions than this mere function of issuing currency against
a collateral in case of emergency.
Senator R eed. What do they do in addition to that, except to lend
back to the banks their own money, or to lend the banks Govern
ment money?
Mr. M cC aleb . There are a number of different things.
broadens the whole field o f banking activities.
It
BANKING AND CURRENCY.
1605
Senator R eed. It takes care of exchanges and things of that kind.
Senator N elson . This allows the regional banks to deal in foreign
exchange.
Senator R eed. Oh, yes; but that is not important.
M r. M cC aleb . There are a great number of things this bill con
templates that you would not get under the scheme mentioned by
your chairman. It would provide, in a way, something as a reser
voir from which you could draw currency in case of necessity. That
means a great deal, indeed, but I say, gentlemen, do not be blinded
by a single proposition; give us the bigger thing.
Senator N elson . Here is another thing, if you gentlemen will
allow me. We all concede this paper ought to be redeemable ulti
mately in gold. Now, if the Government were to assums the duty
of issuing the currency the Government would have to keep a gold
reserve, would it not?
M r. M cC aleb . Yes; it would.
Senator N elson . Under this bill it contemplates a reserve of 33^
per cent. Now, the banks issuing the currency ought to provide that
gold, ought they not?
M r. M cC aleb . I think so.
Senator N elson . And bear the whole burden and not throw it on
the Government?
Mr. M cC aleb . I think that is true; that is my view precisely. I
do not think the Government has any business acting upon it.
Senator N elson . I f the Government went into the business of
issuing that paper currency, no matter under what circumstances—if
it issued a currency redeemable in gold, the Government would have
to make a provision for securing the gold ?
M r. M c C aleb . Certainly, and besides that you would have to main
tain quite a large reserve in your Treasury.
Senator N elson . It would have to bear that burden.
M r. M cC aleb . There is no question about that.
Senator R eed. Y ou say the Government would have to bear that
burden. You mean the Government would have to stand back of
this?
Mr. M cC aleb . Yes.
Senator R eed. Does not the Government have to stand back of this
money issued by these 12 regional banks?
M r. M cC aleb . That is my objection exactly.
Senator R eed. Y ou think the money ought to be issued without the
Government standing back of it?
M r. M cC aleb . I do.
Senator R eed. Well, I am not in favor of issuing a dollar of cur
rency in this country that the Government is not back of.
Mr. M cC aleb . Currency is issued by banks in a number of different
nations where the country does not stand back of it, and it works
very well.
Senator R eed. And there are a good many nations, too, where you
do not have the right of trial by jury.
Mr. M cC aleb . That is also true, but a good many nations have
better justice where they do not have it.
Senator R eed. That is an opinion that I am astonished that any
man would offer in this country.
1606
BANKING AND CURRENCY.
M r. M cC aleb . That is merely an opinion of mine; I may be wrong
about it, Senator.
Senator Reed. I think I ought not, perhaps, to have made that re
mark, but I want to say to you that when the time comes that you do
not have the right of trial by jury you might as well go and burn the
American flag and quit calling yourself a free man, because that is
all there is of liberty in this country, with all its defects.
Senator Pomerene. I noticed your statement a little while ago to
the effect that you never made loans exceeding three months.
M r. M cC aleb . N o ; not never-----Senator Pomerene (interposing). Perhaps I expressed that too
broadly. You said that was your rule?
Mr. M cC aleb . Yes; 90 per cent, probably.
Senator Pomerene. Now, under the provisions of this bill, when it
comes to rediscounting, the regional banks are authorized to redis
count 90-day paper. Objection was made here by bankers from cer
tain localities to the effect that they were always in debt, or nearly
always in debt, or issuing six months’ paper or nine months’ paper;
now, looking at it from the standpoint of a banker, do you think it
would seriously interfere with their business if the general policy of
the law should require them to issue three months’ paper instead of
six months’ paper?
M r. M c C aleb . I do not think it would; it is simply a matter of re
newal. I f a man came in and said, “ I want this much money for six
months,” the bank would say, “ I may have to use this paper, and in
order to bring it -within the standard required I ask you to let me have
it in two pieces.” I think it means simply a little more trouble, as far
as the bank is concerned, but I do not see any objection to his being
able to make the paper conform to the requirements of the measure.
Senator Pomerene. A s a general proposition, you do not think it
would interfere with the business of the locality?
M r. M cC aleb . N o. You mean the operation o f the system?
Senator Pomerene. Yes.
M r. M cC aleb . N o ; I think, on the contrary, it would improve it.
Senator H itchcock. Suppose you discounted a 90-day note of
that sort through the reserve bank by representing to the bank it was
90-day paper and would be paid at maturity?
Mr. M cC aleb . I would not make any such representation.
Senator Pomerene. But the very idea of commercial paper is that
it will be paid out of the proceeds of the transaction for which it
was given.
M r. M cC aleb . That paper in no event could take the classification
o f commercial paper. I should never recommend it, localise most
banks that are doing business in any volume have paper that would
take that classification.
Senator Pomerene. Y ou would not recommend, if the bill permits
only the use of 90-day paper, that a bank should discount at a
reserve bank 90-day paper which it has already agreed to extend
for another 90 days?
Mr. M cC aleb . Certainly, if the banker were required to make a
representation that it was 90-day paper.
Senator Pomerene. That is what it means, is it not ?
M r. M cC aleb . The banker would not use that particular paper.
Senator Pomerene. That is not prime paper?
BANKING AND CURBENCY.
1607
Mr. M cC aleb . I would not so regard it.
Senator H itchcock . Mr. McCaleb, how large a city is San
Antonio?
Mr. M cC aleb . Oh, it has a population of about 115,000.
Senator H itchcock . S o that the paper you discount there is really
in a large community? It is not an agricultural community?
Mr. M cC aleb . N o ; it is not agricultural; it is more of a commer
cial community.
Senator H itchcock . Have you a State bankers’ association in
Texas ?
Mr. M cC aleb . Yes; we have.
Senator H itchcock . I s it composed of both national and State
banks ?
M r. M cC aleb . Yes, sir; it is.
Senator H itchcock . Has it had a meeting to consider this bill?
Mr. M c C aleb . Yes; it had a called meeting and there were about
100 bankers present.
Senator N elson . Out of how many?
M r. M cC aleb . Out o f about 1,200.
Senator H itchcock . When was this meeting?
M r. M cC aleb . It was called in Dallas about three weeks ago, I
think, and there were very few representative bankers there. I
happened to be the only one from San Antonio.
Senator H itchcock . What was the result of that meeting?
M r. M c C aleb . The result was that the convention indorsed the
strictures of the Chicago conference.
Senator H itchcock . Was there any debate?
Mr. M cC aleb . There was some debate, yes; but very little.
Senator H itchcock . H ow was the vote ?
Mr. M cC aleb . It was practically unanimous. The point is this,
gentlemen-----Senator R eed (interposing). I did not hear your statement about
what it was they indorsed.
M r. M cC aleb . The strictures made by the bankers at their con
ference at Chicago.
I said to those bankers, “ How many of you gentlemen have read
this measure?” There were not a haif dozen of the 100 that were
present that had read the b ill; and I am free to say to you that I do
not think there were a half dozen competent to judge as to the merits
of the bill. A great many bankers are very ordinary mortals; they
are not lettered. They have not studied economics themselves, and
what they know is the little routine of their banking rules. That is
getting down to the milk in the coconut.
These men got up there and voted because they had read some ad
verse criticisms here and there coming from certain sources, and
they voted against it. It was simply because it was novel to them;
it was a little cloud on the horizon, but after all it was a cloud and
they considered, of course, that the best thing to do about it was to
put up their umbrellas.
Senator H itchcock . When did you say this meeting was held?
M r. M cC aleb . About three weeks ago.
Senator H itchcock . Who called the meeting.
M r. M cC aleb . It was called by the president o f the association.
Senator H itchcock . D o you know how he came to call it?
1608
BANKING AND CURRENCY.
M r. M cC aleb . Well, he came back from Chicago full of enthu
siasm, of course, and I think that he and the secretary, and possibly
the executive committee, authorized the calling of the meeting.
Senator H itchcock . Is he a city banker?
Mr. M cC aleb . He is a city banker; yes.
Senator H itchcock . In what city ?
M r. M cC aleb . In Dallas. The thing was so carefully censored
in the press that not one word in praise o f this bill got into it.
Senator H itchcock . I s the press against the bill down there?
Mr. M cC aleb . I think, in this particular city, it was for the time
being.
Senator H itchcock . This was three weeks ago?
Mr. M cC aleb . Yes.
Senator H itchcock . Y ou say the bankers did not understand the
bill?
M r. M cC aleb . N o ; they did not.
Senator H itchcock . D o you think Congress ought to pass a
measure that the people whom it affects do not understand?
M r. M cC aleb . M r. Chairman, if you wait to pass a bill until you
can pass one that everybody understands, you will never pass one.
A n d you will not find the bankers, as a class, very superior to other
classes o f people.
Senator H itchcock . And you do not understand the bill ?
Mr. M cC aleb . I do not know whether I do or not, Senator.
Senator H itchcock . We do not know whether we do.
M r. M cC aleb . I do not want to flatter myself.
Senator N elson . We are not clear whether we understand it.
Senator R eed. D o you think you ought to come here and ask this
committee to pass a bill which you do not feel reasonably confident
you understand?
M r. M cC aleb . Well, I think I understand it, Senator; I might
put it that way.
Senator H itchcock . Y ou are better off than the rest of the bankers
in Texas?
Mr. M cC aleb . Well, I do not know, Senator; you are placing me
in an embarrassing position. I might say, howrever, since you have
drawn me out this way, that I have had possibly a little better op
portunity to go into these things and understand them than some
bankers. I happen to have devoted some years to the study of
economics and finance, and I happen to have my bachelor’s, master’s,
and doctor’s degrees from reputable institutions of the country, and
I think I can-----Senator H itchcock (interposing). Which of the European sys
tems do you consider the better?
Mr. M cC aleb . I think, possibly, the Scotch system.
Senator H itchcock . Has this plan any resemblance to the Scotch
system ?
Mr. M cC aleb . N o ; it has not; but the Scotch system would not
be well adapted for our conditions here.
Senator N elson . Is there much difference between that and the
Canadian system?
M r. M cC aleb . The Canadian system is patterned largely after it.
I f we could have a system as good as the Canadian system I would
be quite satisfied.
BANKING AND CURRENCY.
1609
Senator H itchcock . I s it not a fact that the notes of the Scotch
bank are at a discount 50 miles over the line from Scotland ?
Mr. M cC aleb . That may be true-----Senator H itchcock (interposing). It is a matter of fact. As
soon as you cross the Scotch line you will find that those notes are
at a discount.
M r. M cC aleb . Y ou will find United States notes at a discount, too.
Senator H itchcock . N o ; they are practically at par.
Mr. M cC aleb . They are all discounted, Senator—the notes of
every country. When you go into a foreign country they are always
subjected to a discount.
Senator H itchcock . But that is just about the rate of exchange.
The Scotch notes are-----M r. M c C aleb (interposing). Below the point o f exchange?
Senator H itchcock . I mean to say that if you offer them in the
transaction of business even 25 miles across the Scotch border they
are at a discount.
Mr. M cC aleb . Why is that true?
Senator H itchcock . I am asking you, since you say you consider
the Scotch system the best.
M r. M c C aleb . I do not say I understand the Scotch system.
Senator R eed. Y ou said you thought it wTas the best.
Mr. M cC aleb . I have read the Scotch banking laws and know
something about them, but it is many years, Senator, since I have
gone into the details.
Senator R eed. D o I understand that you think the Canadian sys
tem is good?
M r. M cC aleb . I think it is a very excellent system.
Senator R eed. What is the Canadian system, as you understand,
in the outline?
Mr. M cC aleb . N ow , Senator, I think that is unfair to put that
question to me, because I did not get up here to discuss these various
banking systems.
Senator R eed. I am not trying to be unfair, and do not want you to
think anybody here wants to be unfair or technical. I want you to
understand my standpoint. I am looking for light, and I am asking
these questions because I want it. I have understood that the
Canadian banking system was a system of very large banks with
numerous branches.
Mr. M c C aleb . That is true.
Senator R eed. Would you consider that-a wise thing to have in our
country ?
Mr. M c C aleb . I do not see why it would not operate here, but we
are not built for it. You are trying to build on ground that you have
already preempted. The thing to do is to go ahead and build and
fit into your new system these particular banks that you already
have.
Senator R eed. I think so, too. You and I agree exactly on that.
In other words, if the plumbing is a little out of order in a house,
in order to remedy it you do not want to begin by dynamiting the
house?
Mr. M cC aleb . Exactly.
Senator R eed. Y ou want to disturb it as little as possible, but still
get a really effective remedy.
1610
BANKING AND CURRENCY.
Mr. M cC aleb . That is really the only logical way to proceed.
Senator R eed. S o we can not very well discuss European and
Canadian banking systems, because they are all different systems.
Mr. M c C aleb . You want to put this into effect with as little dis
turbance as possible.
Senator R eed. Taking our banking system as a whole and admit
ting it has some defects, do you regard it, as it has been frequently
characterized, as the poorest banking system in the world, or do you
regard it as a fairly good banking system that needs some remedies?
Mr. M c C aleb . It has been a fairly good system or it would not
have lasted as long as it has, but it certainly does need remedying.
Senator H itchcock . I suppose we ought to go on with the next
witness. Mr. Frenzel desires 15 minutes.
STATEMENT OF JOHN P. FRENZEL— Resumed.
Mr. F renzel . I think I asked the privilege of 20 minutes just to
have leeway; that was all.
Senator H itchcock . We have plenty of time.
Mr. F renzel . I think when I left off I was speaking about the
reduction of the regional banks from the number proposed by the
bill, 12, to a smaller number. Then I tried to go on and explain
that the trouble in 1907 was not that there was not enough liquid
circulating medium in the country to take care of the situation, but
there was no means of safely distributing it in such a way that it
might perform all of its functions in the time that the excitement
continued.
I f you recollect, I spoke about the situation in Indianapolis and
the amount of reserve— as it was called—that the banks had there
when the trouble began in the latter part of October, and the amount
they had left after the seven weeks of operation under the clearing
house rule.
Applying that to this provision in the bill, it strikes me that, as
you have it, these regional reserve banks are going to be sectional
and not sufficiently national to perform the functions that you in
tend they shall perform promptly, and, so to speak, automatically,
as the necessities for accommodations grow and accrue.
The question was put to me, you will remember, if 5 would not
be better than 12, and if 3 would not be better than 5, and, finally, if
1 would not be best of all. I subscribed to that and said yes. One
would be very much the best, and in nearly all of the discussion of
recent years that I have heard and read about with reference to a
change of our system or the introduction of a new system, the preface
has always been submitted that, of course, an ideal system would call
for a central bank; but let us not talk about that, because we can not
have it.
Senator N elson . What makes you think we can not?
Mr. F renzel . I am just quoting; that is what I hear—“ Shades
of Gen. Jackson,” and other things.
Senator N elson . That was a private bank; that was not a banker’s
bank.
Mr. F renzel . It is referred to in that sort of way.
Senator N elson . It was not controlled by the Government.
Senator B ristow . And it got into politics.
BANKING AND CURRENCY.
1611
Mr. F renzel . Yes; however that may be, I think I heard Senator
Aldrich himself, in his exposition of the measure which he took so
much time to get up, speak in that way, that the desideratum was
a central bank, but that condition here, chiefly political, prevented
that sort of thing, and that we must therefore look for some other
system.
It seems to me that the great difference of judgment and opinion
in reaching what would be a good substitute for that is quite natural,
because when you depart from something that is ideal and right it
looks to me like it might be merely a matter of opinion of 1 man, or
10 men, or 100 men, as to what system might be right, and they
would very likely, groping about, propose a whole lot of systems.
You remember how it was before we got down to the square-out
declaration for the gold standard here, and all the various stages
we went through of expedients and expedients, until we got down to
the place where we said that really one standard is the simpler thing.
So we are groping about in the dark—not in the dark altogether, but
we are groping about— and there are many opinions as to what is a
good substitute for what is popularly believed to be an ideal system.
Now, you take 12 regional banks and distribute them over the
country. They will be conducted primarily with reference to the
business of their particular regions, and that is the business they
will become fam iliar with, and they will not be so familiar with the
business o f some other region; hence, they will not be in such sym
pathy Avith it. You have recognized that in this bill.
1 have not heard it dwelt upon, but you recognize it in this bill,
because you permit this board to fix a rate for rediscounts, and you
know that will be not less than 1 and up as high as 3 per cent above
what the prevailing rate is in that region.
But if a system o f regional banks amounts to anything at all it
seems to me it must be a system that Avould include the equalizing of
rates. It must be a system of equalizing rates. Well, the equaliza
tion of rates comes about by the right of any one section, when it
needs it, to get relief from some other section that has a surplus.
Senator N elson . At the same rate-----Mr. F renzel (interposing). Simply the difference of the cost of
getting the circulating medium from one place to the other.
Senator N elson . The same rate at one place as at the other?
Mr. F renzel . The same at one place as at the other; that is the
equalization.
Senator R eed. I f we had one central bank, that Avould necessarily
be true, would it not?
Mr. F renzel . It would be true, because that central bank------Senator R eed. Would charge the same rate every place?
Mr. F renzel . Y e s ; it would be in such close touch with all o f the
regions of this country that they Avould not have to have somebody
come from the regional bank or from the Pacific coast to spend per
haps a week explaining to the regional bank in New Y ork or Chi
cago just why it is that their conditions at a particular time are thus
and so. That central bank Avould have that information and would
anticipate— except in the case of an occurrence that might come for
Avhich there are no rules to enable a man to foresee it, like an earth
quake—
1612
BANKING AND CURRENCY.
Senator N elson (interposing). There would be no lobbying by one
regional bank to get funds from another?
Mr. F renzel . Not at all.
Senator P omerene . Would not the reserve board provided for in
this bill have the particular information you are speaking of?
Mr. F renzel . Yes; but it is a question whether the reserve board
through this arrangement would get sufficiently into the minutiae of
this business in these various communities. It would be working at
too long a range. Whereas if it was a central bank with branches, or
if there were fewer regional banks, they would naturally get this
information and have it, and the relief for any particular necessity
would almost work automatically.
Senator P omerene . D o you not think there would be pipe lines of
information to this banking head, whichever system there was?
Mr. F renzel . Yes; it woul be almost as close anyway—except for
the physical distance of a few miles— as a large bank with its various
departments in the same building.
Therefore, I think that for the prompt relief and the marshalling
of assets for the general good quicker and more promptly you will
secure that with a fewer number of regional banks better than under
the system contemplating the greater number of regional banks.
You know you have not stopped at 12; you have an elaborate pro
vision for going further. It is doubtful whether it would be availed
of, in my opinion, because the banks themselves would see that that
is not good and would not apply for these regional banks. You know
you have provided that if 10 banks unite and request the starting of
a regional bank the Federal board has the right to grant a charter,
and that shall not be repealed afterwards except by the vote of threefourths of those banks, I think.
The whole point about that seems to me to be to arrange it in such
a close way that the marshalling of the reserves will be much more
effective and promptly responsive to the needs of the country at
large.
Senator N elson . Y ou will have one great big reservoir to draw
from instead of 12 ?
Mr. F renzel . Yes- and therefore the banks say it should be 5
instead of 12, or, as I said here, 4 or 3. That is one of the recom
mendations that we left with your secretary.
Now, we have said that we think the dividend on the stock of the
reserve bank—that the rate should be changed-----Senator H itchcock (interposing). The Senate meets in five min- •
utes, Mr. Frenzel-----Mr. F renzel . I am practically through. We have said here that
we believe the rate should be changed from five to six.
Senator P omerene . The rate of dividend?
Mr. F renzel . The rate of dividend. That has been dwelt upon
here and I am inclined to think-----Senator R eed. I do not think that is a question you need spend
much time on because that is. after all, a detail.
Mr. F renzel . I do not think it is important. We think that the
clause in regard to savings-bank departments should be changed so
that the national banks, when this law goes into effect, may imme
diately make application to the comptroller for the privilege of
adding savings departments. We see no reason, if you are going to do
BANKING AND CURRENCY.
1613
that at all, why we should have to wait a year. To a large extent
that is being done now.
Senator P omerene . D o you regard that, in national banks, as an
advantage ?
Mr. Frenzel. I hope you will excuse me from answering that, but
a great many banks in our State are really going into this savingsdepartment system, and they say, “ Why should you wait a year?*’ I
really do not see any good reason at all.
Senator Pomerene. Your objection is that if it is to go in at all it
should go in right away?
Mr. Frenzel. Right away; yes.
(Thereupon, at 12 o’clock m., a recess was taken until 2 o’clock p. m.)
AFTER RECESS.
Senator H itchcock . Mr. Foote, we will hear your further state
ment now.
FURTHER STATEMENT OF FRANCIS W. FOOTE, OF HATTIESBURG,
MISS.
Mr. F oote. I am sorry the gentleman from Texas has left, because
I specially wanted to speak with respect to this exchange proposition.
T want to say something in regard to that matter which I would pre
fer to say in his presence.
Senator H itchcock . This is not a controversy. We would like to
hear any comments you would like to make.
Mr. F oote. His statement that the country banks were robbers
and brigands was based upon the assumption of a city banker who
wants to make country bankers do a lot of work for them for nothing.
It is a selfish position that such bankers take without any regard
whatever for the rights of country bankers or the morals of the ques
tion. He would have country banks remit at par simply that his
bank might be benefited accordingly. There is one thing which the
city man always loses sight of on this proposition; that is, that the
country banker deposits with the city banker. In this affair the
country banker is carrying his burden and the city banker’s, too.
Forty per cent of the deposits of city bankers are made up of the
balances of country bankers.
Senator H itchcock . In the reserve cities?
Mr. F oote. N o, sir; the minor cities of the country all have tre
mendous country-bank balances. The gentleman from Little Rock,
Ark., testified yesterday that two-thirds of his deposits were de
posits of country banks. They want us to continue to deposit with
them and furnish them with the sinews of war, and want to take
from us the little earnings we are making by charging for making
the transfers. I f we had no accounts with city bankers and did
nothing for them; if they were not the tremendous beneficiaries that
they are at the expense of country banks, then there might be some
reason for their kick and complaint about the charges country banks
make for a collection service. But the statistics show that we furnish
them 40 per cent of their deposits. They are not satisfied with that;
they want us to remit for them free. It is purely selfishness in
them.
1614
BANKING AND CURKENCY.
One of the city bankers remarked gleefully to another banker that
if this provision of the law was not changed it would save his bank
$200,000 a year.
Senator O ’G o rm an . A city banker?
Mr. F oote. Yes; and his bank has $2,000,000 in capital and $40,000,000 deposits, and is one of the most influential and prosperous
banks in the country. The officer of that bank was in great glee
over this provision by which, if it was not changed, the earnings of
his bank would be increased 10 per cent. He did not intend to give
the benefits of this parring to his customers. He is going to charge
his customers, as he is now doing, and save the expense of collecting
agents. He is going to take away from the little fellow out in the
country the profits of that and keep them for himself.
Senator O ’G o rm an . H ow would he justify to his cousomers the
making of this charge, when, i f this feature o f the bill prevails, it
would be known throughout the country that there was no expense
incident to the collection?
Mr. F oote. They have taken care of that. They have a special
provision in there stating that nothing in the act shall be construed
to prevent them charging their customers for that sort of service.
It states that expressly.
Senator H itchcock . Taking out the cost, it is nothing more than
that.
Mr. F oote. Yes. They would presumably provide for the cost.
Senator N elson . They are making the charges now and profess
they only cover the cost, and yet they get a revenue from it. Your
banks in New York, Senator O ’Gorman, charge for collecting coun
try checks and they profess to make the charge only to cover the
cost, and yet they derive a revenue from it?
Senator O ’G o rm an . Yes.
Mr. F oote. The New York banks do not have many country
checks. The business men of New York generally exact New York
exchange, and there is a very, very small percentage of items paid in
New York in country checks, and the same thing might pertain to
Boston.
Senator O ’G o rm an . This bank of which you speak, of $2,000,000
capital, is that a southern bank?
Mr. F o o te . No; that was a western bank. They are not going to
give their customers the benefit of these par facilities. They are
going to continue to charge just as they now do, and attempt to
put the country banker in an ugly and unfair attitude in the premi
ses. They had it that the country banker makes these tremendous
charges, when, as a matter of fact, the country banker does not. I
had a letter from the president of the First National Bank of Gulf
port a few days ago in which he referred to a complaint he had from
a wholesale house in Chicago, in which the wholesale house derided
his bank for having charged $2 for remitting to cover a $25,000
item, stating it was an outrageous charge, unheard of, and that they
would not have paid a greater rate than that for a $100,000 remit.
He wrote the Chicago hose that he had only charged one-tenth of
1 per cent, $1 a thousand. That is a case where the country banker
remitted at one-tenth of 1 per cent to the city banker, and the city
banker charges his customers one-fourth o f 1 per cent.
BANKING AND CURRENCY.
1615
Senator N elson . More than twice as much.
Mr. F oote. Yet it reported to its customer that they charged just
what the country bank charged, and the country bank was being
berated and accused of making an excessive charge. I f you gentle
men will get right down to the bottom of these facts you will find
the country banks do not deserve the onerous things which are said
about them. Country banks are not making the charges complained
of. There is a certain amount being added to the charges of country
banks, and it is being assumed that whatever it costs the wholesale
man or manufacturer is what the country banks charge.
The gentleman from San Antonio, Tex., this morning said that
these country banks were robbers and brigands; that they were hold
ing up the business public for one-quarter of 1 per cent. This bill
would never reach the class of bankers charging a quarter of 1 per
cent. They are the little fellows, the little banks with a capital of
$15,000, and sometimes $25,000, in very small communities, where
everything is done on a very small scale. Those bankers will not
come into the system, and a vast majority of them will not have
sufficient capital to be admitted. They are away back in the country,
where they are not caring much about what is going on, and they are
not going to participate in this proposed financial reform.
Furthermore, the percentage of checks upon wdiich banks charge
one-quarter of 1 per cent is infinitesimally small. I do not know how
to estimate it. I do not suppose that one one-hundredth part of the
checks that go to country banks pay as much collection charges as a
quarter of 1 per cent. They always take the highest charge as a
standard by which to fix their arguments. The country banker feels
that the country is paying these charges at last, and if we do not get
them we are losing that much of what belongs to us. It is a wellknown fact that in all business all costs are estimated and fixed and
prices are quoted accordingly. Now. then, in the case of the shoe
manufacturer of New England, the packer of Chicago, the iron maker
of Pennsylvania, or anybody else, all of the cost of handling the busi
ness is included in the prices quoted, and if we do not get it we are
feeling that we are not getting that much of what belongs to us. It
is put in every price quoted for the benefit o f the country banker,
because they have anticipated the expense. The country banker
works continuously for these manufacturers and wholesalers. I sup
pose 10 per cent of the correspondence of our bank is devoted to
making credit reports to that class of people on the dealers in our
territory.
Senator O ’G o r m an . T o whom do you render those reports?
Mr. F oote. T o the people who are selling goods in our territory.
Senator O ’G o rm an . D o you get any compensation for it?
Mr. F oote. Not a bit; none whatever. We are always making
those reports.
Senator N elson . On the standing of the business man in the com
munity ?
Mr. F oote. Yes; they keep us on that very closely. We will
average, in our banks, five or six reports a day.
Then, they will send us their hard claims for collection, and they
receive a "reat deal of attention from us. and the charges arp in
finitesimally small. Suppose we did charge $2.50 a thousand for
1616
BANKING AND CURRENCY.
collecting a hard account, an account to which we may have given
hours of attention; it would be a mere trifle for them to have to pay.
A lawyer would charge them, in our country, 15 per cent for the
same service. The wholesalers, so far as we know, are not com
plaining. We have not heard o f any fight being made on this propo
sition by those people. They seem, at least, not to be antagonistic
to us. It is just the city banker, as far as we know, the fellow like
the gentleman from Texas, who seems to be out of harmony with
country bankers, and seems to think they are a lot of brigands and
robbers. We feel that this is purely a question between traders, and
not an affair that bankers ought to differ about. We feel that if the
wholesaler is willing to take a retailer’s check and pay the charges
for collecting it, the city banker, who is receiving our balances and
the large benefits that come through the balances we carry with them,
ought to keep his mouth shut.
Senator S hafro th . WTiat amendment do you suggest in the bill
with relation to that matter ?
Mr. F oote. I think the provision requiring regional banks to re
ceive checks and drafts at par for credit of member banks ought to
be eliminated.
Senator S hafro th . What would you think o f putting a maximum
amount which they should charge and making it, say, one-tenth of 1
per cent?
Mr. F oote. Y ou mean have the regional banks charge one-tenth o f
1 per cent?
Senator S hafroth . Yes.
Mr. F oote. And pay that to the remitting banks?
Senator S h afro th . Yes.
Mr. F oote. That would be a great improvement; but I think it
would be greater to eliminate it entirely.
Senator S h afro th . Then there is no limit at all on what can be
charged. Why could not some banks charge three-quarters or onehalf o f 1 per cent?
Mr. F oote. Y ou can collect by express a good deal cheaper than
that.
Senator S h afro th . Then you would have a definite fixed amount?
Mr. F oote. That is not a good deal. I f a bank charges an out
rageous rate they will be sent by express.
There is another advantage, gentlemen, to the present system.
There are certain cities that need bank balances, and they can get
them by offering collecting facilities and supplying a great deal of
capital at strategic points where it is needed. Take the gentleman
from Little Rock. He said some of the deposits of his bank were the
deposits of country banks, and that his bank was now borrowing
$500,000. I believe he said his bank had $1,400,000 deposits at pres
ent. I f he has $1,400,000 deposits now and two-thirds of that is made
up of country-bank balance— that is, say, $900,000 in country-bank bal
ances— and he is borrowing $550,000, making $1,450,000 of outside
capital which that community is using, it is to the best interest of
that community to demand a system that will enable it to attract the
accounts of country banks. I f this system is such as to force all
country banks to put all their items in the regional banks they won’t
have any use for banks like this one at Little Rock, or banks like this
one in Des Moines, or the one at Shreveport, La., or Mobile, Ala., or
BANKING AND CURRENCY.
1617
the one in Denver, and, as far as that is concerned, it is going to
materially reduced the usefulness of the present reserve banks, and
in my opinion, it is going to cut out the bank balances at such points
as Little Rock, Oklahoma City, El Paso, and Houston, Tex., Des
Moines, and other places. I f there is no special occasion for sending
deposits to those cities the country banker is not going to send them
there. He is making deposits with those cities now, largely because
those cities are for collection facilities. The Little Rock banker re
ceives these country-bank balances and lends money, presumably at
8 per cent. Whatever it costs him to collect the checks he is paying,
because he values his money accordingly.
Senator W eeks . I do not think you could draw conclusions in most
cases from that Little Rock bank, do you ?
Mr. F oote. N o.
Senator W eeks . I do not recall any bank having that amount of
capital borrowing so much money, or having such a large percentage
of its deposits bank deposits.
Mr. F oote. That is extraordinary, but I referred to it, because it is
a specific case that came before the committee in my presence. The
average city bank has 10 per cent country bank balances.
Senator W eeks . It seems to me the gist of this thing, the crux
of this thing is what do you want to have us do to satisfy you, and
banks doing the kind of business you are doing—what do you want
to have us do with the bill?
Mr. F oote. We want to eliminate that provision requiring regional
banks to receive the items for collection.
Senator W eeks . Suppose the regional banks receive these items
for collection, how is it going to affect the commercial interests of the
country, and when I say commercial interests I mean all kinds of
business men? Are they going to benefit by it?
Mr. F oote. I do not believe they are, Senator.
Senator W eeks . H ow much money do you suppose it is costing the
business men o f the country to collect checks now ?
M r. F oote. I do not know ; but it has been estimated that it costs
the regional banks at least $50,000,000 to collect these items if they
pay the present rates.
Senator W eeks . D o you think that is a good and safe estimate?
Mr. F oote. I do not know. We have tried to go into the matter
carefully in Mississippi, and we estimate that the revenues of the
banks of Mississippi in that particular are $650,000 a year.
Senator W eeks . O f course, we do not wTant to do anything with
out the fullest consideration, that is going to affect organized busi
ness as it is now organized. At the same time if there is going to be
an opportunity to greatly facilitate a great business like the collec
tion of checks, we at this time want to take advantage of it.
Mr. F oote. Senator, the average man checking on a bank in our
country, his banker would not be at all affected if it was not for the
exchange that is earned on his account. We have a lot of merchants
that do $5,000 worth of business a month in the bank and do not
carry much of a balance. It is difficult to keep them from overdraw
in g / Most of those exchange earnings come from accounts of that
character. The average balance in our bank is only $500.
Senator N elson . The average per depositor?
9328°— S. Doc. 232, 63 -1— vol 2------42
1618
BANKING AND CURRENCY.
Mr. F oote. Yes. There are lots of accounts that we and every
other bank has that would be a great expense to us if we did not earn
this exchange. I f we dealt only with that kind of people we would
have to cut the accounts out or charge them fees for handling the
business.
Senator N elson . I f you did not have collections, would you not
charge so much for carrying such an account ?
Mr. F oote. That would be a very difficult thing to do.
Senator O ’G o rm an . H as that ever been done in the banks of this
country ?
Mr. F oote. I never heard of it.
Senator N elson . I was told that a bank in Chicago—I think it has
over $1,000,000 in capital, about $2,000,000 in capital and surplus—
that they made a rule to make a small charge where a man’s account
did not exceed $250 on an average.
Senator O ’G o rm an . A small charge for what?
Senator N elson . For depositing.
Senator H itchcock . They do it in England on all accounts.
Senator N elson . The charge is very slight. It involves a good deal
o f bookkeeping. Every time a check is drawn on that little fund it
has to be entered on the books, and with an account that does not
average over $250, the expense is greater than the profit. The
Chicago bank to which I referred made a rule that where the account
was less than $250 on an average, they would charge a small amount,
just enough to cover the expense. They do not make any charges on
accounts over that amount.
Senator S hafro th . That is the first I ever heard o f anything of
that kind.
Senator H itchcock . We have banks in Omaha which adopted the
policy o f withdrawing an account wThere it averaged less than $250.
Senator W eeks . That is general.
Senator S hafro th . There is always the hope that it will not
always be so small.
Senator W eeks . Hopes are sometimes so long deferred.
M r. F oote. I f we do not get some relief from this provision in this
bill we can not charge people in our country for carrying these
accounts.
Senator H itchcock. A s a matter o f fact, you could not run a bank
in your community without making these charges?
Mr. F oote. Not profitably.
Senator H itchcock . Y ou think that is probably true o f other small
communities throughout the country?
Mr. F oote. I t is true of nearly all communities in the South and
W est.
Senator H itchcock . That the other means of profit are not suffi
cient to enable you to give banking facilities to the commimitv?
Mr. F oote. Yes, sir; that is a fact.
Senator H itchcock . I think that is one of the great differences
between the United States and European countries. Our small towns
have banking facilities and in the European countries small towns
are practically without banking facilities, except w’hat they get
through the post office.
Mr. F oote. Senator, in Europe they have so much less expense. In
our towns wTe have to pay a man whom we consider an expert at the
BANKING AND CURRENCY.
1619
head of our bank. O f course, he is not much of an expert, but he
is the best that we can get. He gets $4,500 a year. Then we have
other officers there who are paid what is considered high pay for
bank officers. But in the branch of Lloyd’s bank in some little town
in England they are probably not paying a man to run that branch
over $1,000 a year, and the direction or control of the policy of the
bank is in London. There is no comparison in economy in doing
business in England and in this country.
Senator H itchcock . H ow large is your town?
Mr. F oote. It has 12,000 population.
Senator H itchcock . I am very positive that there are many towns
of 12,000 population in Europe without any banking facilities at all.
Mr. F oote. Whenever they have any banking facilities it is simply
a branch, and the branch is operated in the interest of the parent
bank. In the little banks down in the South they operate largely
from the standpoint of community interest. We tried to develop the
communities to these banks and put capital in the communities.
That is not the case in the French banking system. The capital all
flows to the great wealthy people, and they give back as little as they
can possibly afford to.
There is another thing about the position of the country bank.
The business is largely refined in country banks. The country banks
lose a lot of money.
In the first place, out in the country there is not the class of loans
you have in the cities. The banking facilities are not as efficient.
The gentleman from Texas this morning testified he had two degrees.
You find most country bankers have had not much more than two
years in school. He assumed that he was better qualified to pass on
this proposition because he had two degrees, and he was right in
assuming that the country banker, as a general proposition, was not
a well-educated man, but you can not improve that condition. It
is here with us. It is a national state of being, and we will have to
deal with it, and we can not regulate these things according to the
man who has had two degrees. He had been lifted way above the
normal man in his estimation. For instance, he goes on to say that
what these bankers who come before this committee say is pure bun
combe. I do not believe a word of that. I think all the bankers
appearing here are serious.
But we think, Senators, if this condition must remain in the bill
it at least ought to be so amended as to prevent checks going to the
regional banks bearing the indorsement of nonmember banks. I f
we can not be relieved entirely, we ought certainly to get that much
relief. Nonmember banks ought not to be permitted to run any
checks through.
For instance, we will assume that a bank in St. Louis, ambitious
to serve its customers, would say to the State banks if they did not
want to become members and issue checks on these banks that they
would pay them. The St. Louis banks will cover checks from multi
tudes of banks in Oklahoma and Texas and elsewhere that do not
belong to the system. They will turn them into the system and get
them parred at the expense of the members, and a nonmember bank
gets the same benefit. I do not think if this provision must stand
that any check that is handled by a nonmember bank ought to be per
mitted to go through the system. Member banks receiving checks
1620
BANKING AND CURRENCY.
from nonmember banks ought not to be allowed to take those checks
into the system. That is simply for the reason we, who are in the
system, can not ourselves loan the nonmember banks. I f you have
a bank and you do not come into the system, and I am in it, you can
send your checks to some member bank and deposit it, and you clear
them at par for the benefit of your balances. The member bank will
put them into the system and we will have to pay them at par, but the
system in turn can not take my checks and par them for me. The
system would insist upon three times the revenue in the way of
exchange earnings, and that is to put the nonmember bank in the
position of charging what it pleases, and we would have the burden
of paying those expenses and collecting all the checks we receive on
nonmember banks without any compensating benefit in that regard
from the system. I think if that provision of the bill must stand it
ought at least to allow for the passing through of any checks bearing
the indorsement of nonmember banks.
The Chairman. I f you had an account in St. Louis with a reserve
bank, and Bill Jones, oue of your big depositors sent his check to a
merchant in St. Louis, that merchant would put the check into his
bank there and that bank in St. Louis would put that into the Federal
reserve bank at par. Then the check on you would be paid in St.
Louis at par, would it not?
Mr. Foote. Yes, sir.
The Chairman. Would not that be almost the same thing as your
keeping an account in St. Louis ?
Mr. Foote. The same thing.
The Chairman. Y ou would not really need an exchange account
there for the purpose of accommodating your depositors?
Mr. Foote. N o ; I think not. I think that if the regional banks
permit their members to draw on them generally that it would elimi
nate the necessity for carrying any other bank accounts. I do not
believe we would have to have any banks at all.
Here is the trouble with us. You can not, in these regional banks,
collect items for us on nonmeinber banks, and at present there are
about 75 per cent of our items that would be on nonmember banks,
under present statistics, and therefore we can not get them to take
up our business just as we do at present. We have the checks to
handle that will be drawn on nonmember banks, and so we must
keep that relation with the regional banks which the law requires,
and keep up the other feature of our establishment too, and in the
meantime we lose our revenues from that feature of our business.
Do I make myself clear?
Senator Reed. I f the checks were drawn on a member bank, could
you not have been charged for that collection if you could not collect
through the regional bank and collect it through the outside bank;
you could still charge them in that instance, could you not?
Mr. Foote. Y ou could charge, I think-----Senator Reed (interposing). I may have misunderstood you, but
I thought your argument was that you would have to keep some
money in a city, in some banks, because you would have to get that
bank to collect for you from the nonmember banks. You would get
your exchange on that?
Mr. Foote. We would charge our depositor; yes.
BANKING AND CURRENCY.
1621
Senator R eed. S o yon would not be deprived of that kind of
revenue ?
Mr. F oote. We would lose all the revenue from the business. We
have to pay as much as we charge, and maybe more. We could not
make anything. At present we are absolving all of those charges
and make a profit of $11,000 a year in our bank. I f we have to lose
that $11,000 we would still keep up the present arrangement of
carrying large balances here and there to effect collection facilities.
Senator H itchcock. Suppose you did not go into the organiza
tion, but you opened an account with a bank which did become a
member of the new organization; and suppose you deposited with
that bank all the checks which you received upon which you would
ordinarily secure collection charges. The bank in which you de
posited it would deposit those checks; being a member, it would
have the right to have them collected at par through the regional
bank?
Mr. F oote. Yes, sir.
Senator H itchcock. Under those circumstances is there any neces
sity for a bank becoming a member of the proposed organization in
order to get the advantage of having checks and drafts cashed at
par?
Mr. F oote. Absolutely none. The nonmember banks get all the
benefit in that particular that the member bank would get without
having to contribute anything in any way toward the making of the
system.
The Chairman. We will now hear Mr. McCulloch.
All right, Mr. McCulloch, we will hear you now.
STATEMENT OF J. L. MeCTJLLOCH, PRESIDENT OF THE MARION
NATIONAL BANK, MARION, IND.
Mr. McCulloch. Mr. Chairman, I want to say for the Indiana
delegation or committee that we do not feel the necessity of taking
very much of the committee’s time by having it hear all of the
members of the delegation. We have, as you all know, presented a
written statement signed by each member of the delegation, and
we thought it was better to have Mr. Frenzel enlarge upon the
written statement and talk a little more at length in regard to it.
But the other members of the committee do not care to take up your
time unless your committee desires to hear from them.
What I wanted to say to the committee was a little resume of the
powers of this committee and how it was appointed, and to give, if
[ could, a little more emphatic explanation of how our banks feel
in regard to the matter of this pending bill in Indiana.
As has been stated in the written statement, we are appointed by
the Indiana Bankers’ Association, which is composed of 872 banks,
practically all of the banks in the State, excepting 98. We had
recently a large representative meeting at Indianapolis of this asso
ciation. At this meeting we had over 700 bankers on the afternoon
of the 23d, at which time this committee was appointed, and Senator
Owen, the gracious chairman of the committee, very kindly came
out to Indiana to address that meeting, and I believe he will bear
me out in the statement that it was a very representative meeting, and
1622
BANKING AND CURRENCY.
that the members present at that meting seemed to have open minds,
and were willing to be shown in regard to this bill and very anxious
to learn everything in regard to the bill they possibly could.
Now, I want to emphasize that, because the statement has been
made or the impression created, perhaps, that because some of what
you might call the big bankers of the country who came here that
any of the rest of us who come seem to reiterate what they said and
let them lead us too easily. We have, of course, respect for the big
bankers of this country who have studied these questions, but I
want to say for the bankers of Indiana that we have a very repre
sentative lot of citizens who are the presidents and officers of the
banks of Indiana, and we think they are our leading citizens in the
towns which they represent, and they have local influence and are
men of fair ability, at least, and men who are not willing to be led
unconsciously without a good deal of investigation— after a good
deal of investigation for themselves. I believe every banker in
Indiana is earnestly considering and trying to find out all about this
bill he possibly can. In other words, it is being studied carefully at
home in the evenings, and they are talking with other bankers whom
they meet or other citizens of the community who are interested.
I myself am president of a bank in a town of only 25.000 inhab
itants, which might be called a small country bank. I find that the
leading citizens, the merchants, the manufacturers of our town are
anxiously considering this bill, and when they come into the bank
they want to talk about it and consult with you about it and ask you
what you think about it. They are also studying the bill and inter
ested in it. Now, I think that codition is true all over the State of
Indiana, that, as I have stated, all of our business interests, manufac
turing interests, as well as banking interests, are greatly interested
and are thinking and trying to get information about this bill. I
want especially to emphasize that fact for the bankers, because if we,
as Indiana bankers, get up here and happen to make some objections
to the bill which have been made, perhaps, by some of the larger
bankers before us it will not create the impression some people have
spoken of. We are earnestly considering the bill and studying it
ourselves. In our meeting with President Wilson yesterday morn
ing he kindly honored this committee with an interview of 40 minutes,
discussing the bill. When we made an objection that happened to
have been made before in regard to representation on the reserve
board he wanted to know right away if we had read the bill. I
make this little talk to try to show you that any impression of that
is erroneous. We finally convinced President Wilson, I believe, be
fore wre left that we knew something at least about the bill and had
studied it in good faith and had tried to the very best of our ability
to not object to this bill in every particular, by any means, but were
only trying to help as best we might in constructing a bill which,
when it was finally passed would be as near ideal and what the coun
try needed as possible. We, I think, convinced President Wilson, and
I hope we may convince this committee, that we, the Indiana bank
ers, come here in good faith and in an earnest effort to help.
The Indiana bankers, as a whole, I believe are favorable to this
bill if we can get some changes in the bill as it has passed the House
of Representatives. As I stated, at our meeting of 700 bankers we
were harmonious in thinking the best way to handle the matter
BANKING AND CUBBENCY.
1623
and express their views was to appoint this committee of five to
come down here and talk with you in regard to the bill and explain
as best we might some few changes which we thought were abso
lutely necessary to make the bill workable. In appointing that
committee we took a good deal of care to select men who would really
represent the different sizes of banks and the different sizes of cities
in which the banks were located, and also the different localities.
In order to get ourselves clear on the record, I wish to repeat that
this committee is composed of myself, as president of the Marion
National Bank, of Marion, Ind., as chairman of the committee; Mr.
Charles McCulloch, who is the son of our famous citizen, Hugh
McCulloch, who is president of the Hamilton National Bank, of
Fort Wayne;. John P. Frenzel, who has already talked to you, vice
president of the Merchants’ National Bank of Indianapolis and
president of the Indiana Trust Co. of Indianapolis. Another mem
ber of the committee is F. J. Reitz, president of the City National
Bank of Evansville. Another member is Thomas Paxton, the presi
dent of the People’s National Bank of Princeton. Two of our mem
bers are from the southern part of the State, two from the northern
part of the State, and one from the central part of the State, the
city of Indianapolis. So this committee represents the different
localities, the different cities in and almost all of the State, by being
arranged in that way—stretched over different parts of the State.
This committee has taken a good deal of pains and time to try to
find out the sentiments of the different bankers in their localities.
In addition to that, at our Indianapolis meeting, which was held
only about 10 days ago, we had a continuous conference with each
other almost entirely about this bill. In addition to that, I have
been president of the Indianapolis Bankers’ Association during the
past year, and I spent a great deal of time, especially lately since
this bill has come up, traveling over the State and talking with
bankers from many towns. I have talked with hundreds of bankers
over the State in regard to this bill. And I say to you now, after
having talked with the bankers in the different localities of the
State, and having talked with so many different bankers of the
cities, as I have explained to you recently, we believe that the bill
is not satisfactory to the bankers without some changes.
The Chairman. What changes?
Mr. McCulloch. The changes which we propose, as I have said,
we have agreed upon and given to you in writing. We ma}^ be mis
taken in some of these things, but we give you, as best we may, the
feeling which we find from our different conferences and talks with
bankers throughout the State. Those reasons, as I say, are given
to you in writing.
Senator H itchcock. Can you recapitulate now ?
M r. M cC ulloch . M r. Frenzel has given to you the details. The
first, of course, that has been read to you, is the compulsory feature
about coming in and your charter being forfeited unless you do
come in.
The second is a fair representation o f the bankers upon the Fed
eral reserve board.
The third is a question of 12 regional banks being too many.
Senator H itchcock. I s that the second?
M r. M c C ulloch . That is the third.
1624
BANKING AND CUBBENCY.
Senator H itchcock . What is the second ?
M r. M cC ulloch . The second was fair representation upon the
Federal reserve board—fair with us. We would not expect anything
but a minority representation, but some voice where we could be
really heard on such important matters as come before the Federal
reserve board.
Third, we think 12 regional banks are too many.
Fourth, the dividend to be changed to 6 per cent instead of 5.
Fifth, the clause in regard to savings banks, that the banks be al
lowed to come in at once instead of waiting for a year—that the
savings-bank department be allowed to come in at once if they de
sired to do so, instead of waiting for a year. I do not feel-----Senator H itchcock (interposing). Will you explain what you
mean about the clause which required banks with savings depart
ments to wait a year?
M r. M cC ulloch . Y ou will find the clause under savings banks.
As we read the bill, as we understand it, it means that any bank—
for instance, now, as we have some national banks, they have sav
ings departments, and they might have to stop that savings depart
ment after the law went into effect for one year. The clause reads
as follow s:
That any national banking association may, subsequent to a date one year
after the organization of the Federal reserve board, make application to the
Comptroller of the Currency for permission to open a savings department.
We assume that to mean that if this bill went into effect we could
not make that application to the Comptroller of the Currency to
open a savings department until after one year, and if a bank did
have a savings department they would have to close it up, practi
cally, and wait for a year before going on with it. There are some
national banks that have savings departments, as has been explained
to you already. Whether that is right or not the comptroller allows
it to have a savings department, and so long as you are now making
it legal to have a savings department, why wait a year and make
them disorganize the departments they already have and then, in
a year from now, you can put it back in ?
I do not feel, gentlemen, that I am perhaps versed enough in this
bill to go into the technical features of it, although I have studied
it a great deal, and I do not feel that it would be anything except a
repetition of what has gone before so many times; and. as I say, the
committee stated they thought it was better and easier for us to
agree on these points which we wanted to put in writing, and then
let one of our number explain the matter in more detail, and we
have had Mr. Frenzel do that for us, and I understand Senator Reed
wants to ask particularly some questions of Mr. Frenzel. As the
other members of the committee explained, Mr. Charles McCulloch,
of Fort Wayne, had to go home last night. Unless you want to hear
from the other members of the committee, we feel it would be taking
a great deal of your time to have you hear us.
The C h a i r m a n . That practically concludes all you want to say?
M r. M cC u lloch . That concludes what I want to say.
Senator H it c h c o c k . I would like to ask you a few questions.
Would it be necessary for the operation of the average bank in
Indiana to contract its loans to any extent in order to raise money
BANKING AND CURRENCY.
1625
for the purpose of subscribing to the capital of the reserve bank of
that district?
Mr. M cC ulloch. Well, they have got to get the money from some
place.
Senator H itchcock. Where would they get the money ?
Mr. M cCulloch. Where would they get it?
Senator H itchcock. That is what I am asking you, where would
they get the money ?
Mr. M cC ulloch. The banks of Indiana, of course, have to keep
their money in use up to somewhere near the reserve required by law
to make money, and it would be fair to assume that money was
now, in a way, up to the point left for reserve, and I do not see where
else they could get it unless they asked some people to pay off their
notes.
Senator H itchcock. What sort of condition would that produce?
Suppose the banks of Indiana began to ask a few of their customers
to reduce their loans?
Mr. M cC ulloch. It would, to that extent at least, make it perhaps
a little hard for some of the communities, and the answer to that
is that if the amount which is asked for, and especially if it were
possible to find they did not need as much as or certainly not more
than 10 per cent, that is indicated as the first call of the bill, that
that would not be enough to be very pressing. And they could, in
turn, in a very short time after they put in their money for the call,
if it became absolutely necessary for the benefit of their community
to get in shape pretty quick, borrow that back and overcome it in that
way after a short temporary interval.
Senator H itchcock . Have you more than one reserve city in
Indiana?
Mr. M cC ulloch. Only one—Indianapolis.
Senator H itchcock. D o you know what amount of money is on
deposit in the banks of Indianapolis as a reserve of country banks?
Mr. M cC ulloch. Well, that would be a mere guess on my part,
Senator. I, o f course, might make a guess.
Senator H itchcock. Assuming that it is $15,000,000?
Mr. F renzel. About $15,000,000, I think, Senator.
Mr. M cC ulloch. N o ; he means only as reserve for the country
banks. I would not think that much, but of course Mr. Frenzel,
being in an Indianapolis bank, ought to know about that.
Senator R eed. Y ou mean the country banks have in the citv banks
$15,000,000?
Mr. F renzel. Yes.
Senator R eed. There is $10,000,000 in one bank in my town.
Mr. M cC ulloch. He is not talking about the total deposits, but
he is talking of the reserve balances of the country bankers.
Senator H itchcock. That is what Senator Reed refers to. Kansas
City and Omaha—where I come from—are larger reserve cities than
Indianapolis. I would assume they have about $15,000,000 on deposit
of the country banks. Now, assuming that figure, what would the
Indianapolis banks do in order to meet the checks which the country
banks would draw if that $15,000,000 was transferred to the reserve
bank?
1626
BANKING AND CURRENCY.
Mr. M cCulloch . They would do the same thing, I suppose. They
would have to find that money some place, and they, in turn, would
contract their loans a little.
Senator H itchcock. How would that affect business conditions of
Indianapolis?
Mr. M cCulloch . Wait a moment; that is a contribution, isn’t it?
Would they have to contract their loans also, as well as the smaller
banks? Yes; they would. You are right about that. Well, every
body admits who has studied this bill that temporarily—immediately
after the bill went into effect—there would be quite a contraction of
loans. I think anybody who has studied the bill can not get anything
else out of it. That is the feeling of most people who have studied
the bill, and it seems so to me. That would be only a temporary
arrangement. In other words, this would be only a shifting of the
balances to the reserve banks from somewhere else, and if the bill
works, as we hope it may, we could shift around again. But during
the interval there is no question about there being a contracting of
the loans.
Senator H itchcock. N ow . as a banker, would you think it better
to have that contraction made very gradually ?
Mr. M cCulloch . I think perhaps it would be better to have it
made very gradual.
Senator H itchcock. What are the banking conditions in Indiana
now ? Are the country banks rediscounting much of their paper ?
M r. M cC olloch . W e have been during the last three months, yes.
W e discounted considerable paper.
Senator H itchcock. Where do they rediscount?
Mr. M cC ulloch. With their different correspondents.
Senator H itchcock. At Indianapolis?
Mr. M cCulloch. At Indianapolis.
Senator H itchcock. Chicago?
Mr. M cC ulloch. Chicago, New York, Cleveland, and Cincinnati.
xVnd the smaller banks, of course— for instance, our bank has 25 ac
counts with small village banks, etc., and they have some of their dis
counts with us. Fort Wayne has some close. Evansville and the
middle-size cities, of course, have small banks around them, for redis
counts close at home, ordinarily.
Senator H itchcock. I s it customary for the banks to rediscount to
a greater extent than the amount o f capital ?
Mr. M cC ulloch. Sometimes they do. I do not say it is customary.
It is a little out o f the ordinary, I should say.
Senator H itchcock. What would you say is the average discount
of the country bank?
Mr. M cCulloch. I should say one-half and not over two-thirds of
the capital.
Senator H itchcock. What would you say to the proposition if a
subtreasury were established in Indianapolis for the purpose of af
fording an opportunity to the banks of Indiana to procure currency
to the extent of 75 per cent of their capital upon seasonable demands
at a rate of interest which would increase in accordance with the
length of time they required the money? Would that meet the needs
of the situation in Indiana ?
Mr. M cC ulloch. It would help, oertainly.
BANKING AND CURRENCY.
1627
Senator H itchcock. That is, allowing the banks to have all the
facilities they now have, through their correspondents, and giving
them this facility in addition. How many months a year do you
think the Indiana banks would apply to that subtreasury for that
purpose ?
Mr. M cC ulloch. Well, of course, the greatest demand is during
the crop-moving period, but that does not always follow. We have
demands at other seasons of the year which it is pretty hard to
specify when they may come or why they come, sometimes. Ordi
narily it would be only once a year, stretched over the months, per
haps, from the first o f July to the first o f November or the middle
of November. At intervals during those months. And, as I have
stated there would be other times when some of it would be going
on. In fact, I think there is a little of it going on almost all the
year around.
Senator H itchcock. What rate of interest do they pay on their
rediscounts?
Mr. M cC ulloch. Well, that depends somewdiat on the local con
ditions—on the amount of balance which they carry. The ordinary
rate which they carry of interest is usually 6 per cent, and the
bankers in rediscounting for each other usually get a little less rate
than that. I f they carry a pretty good sized balance with the bank
from whom they are asking the accommodation, I would say the
rediscount would not average over 5 per cent, sometimes more and
sometimes less, owing to the conditions and the general rate of
interest.
Senator H itchcock. Would this requirement to subscribe 20 per
cent of the capital keep many banks out of the new7 system ?
Mr. M cCulloch. I do not understand the question.
Senator H itchcock. Would the requirement of the bill that every
bank who joined could subscribe 20 per cent of the capital keep many
of the banks out of the system ?
Mr. M cC ulloch. That is a pretty hard question. I think, of
course, it is pretty unjust to tell them that they must come in.
Senator H itchcock. Suppose it is left optional; suppose it is
made optional?
Mr. M cCulloch . Oh, if it is left optional, I think many would
come in, and perhaps more. Surely as many wrnuld come in if it is
left optional as if they were compelled to come in.
Senator H itchcock. H ow7 do you explain that?
Mr. M cC ulloch. Well, there is a feeling, you knowT—it is human
nature; that is all, for them to feel as if it is a little bit of imposition
upon them to be compelled to do a thing. Almost all American
people do not like to be driven. They are very easy to lead, but
somehow they revolt against being driven; that is all.
Senator H itchcock. Are there any reserve requirements under
the Indiana laws for State banks, now ?
Mr. M cC ulloch. Country banks, 15 per cent; 6 per cent in the
vaults and 9 per cent in the reserve banks. The reserve city banks
are required to keep a reserve of 25 per cent.
Senator H i t c h c o c k . And those country banks would still have
to keep that same reserve if they did not come into the association,
while remaining State banks?
1628
BANKING AND CUKRENCY.
M r. M c C ulloch . Unless the State law was changed; yes. But
I think the next session of the legislature, after this law went into
effect, would very likely change that. That would be my guess. In
other words, they would reduce the reserves to the same as the national
banks. My reason for that is that formerly they did not charge as
much reserve. They did not have the same requirements in regard
to reserve as national banks, but they very soon made a law so that
the State banks would be the same as the national banks. It is now
practically the same.
Senator H itchcock. Can the State banks keep among their reserve
national bank notes?
Mr. M cC ulloch. I am not sure about that. I think they have to
keep just the same kind of a reserve. I am not connected with a State
bank, and I could not answer that. Mr. Frenzel belongs to a State
bank, as w^ell as a national bank, and he could answer the question.
The C h airm an . Mr. Frenzel, you may answer the question, if you
like.
Mr. F renzel. Were you asking about the requirements of the
national banks, when you asked the question, or the reserves under
the State law?
Senator H itchcock. I am asking about the State law as to State
banks.
M r. M cC ulloch . As I understand it, it is the same as national
banks. The law in regard to the trust companies in the State of
Indiana is a little different. They have a different law governing
trust companies, but the State banks, as I understand if. have to keep
the same reserves as the national banks under the Indiana law. I
may be mistaken.
Mr. F renzel. I f you will permit me, it is 15 per cent of the com
mercial deposits.
M r. M cC ulloch . That is the trust companies, but he is talking
about the State banks.
Mr. F renzel. The State banks. Oh, of course, they keep in the
reserves national-bank notes or gold.
Senator H itchcock. Any kind of money ?
Mr. F renzel. Yes.
Senator H itchcock. Then you can keep national-bank notes as
reserve ?
Mr. F renzel. Yes.
Senator S hafroth . I think it is universal in regard to State banks.
Senator H itchcock. N o ; some States do and some do not. It is
pretty general, howrever.
Senator S hafroth . It is pretty general. I did not suppose there
was a single State that did not have that provision permitting
national-bank notes to be used as their reserves.
Senator H itchcock. I have no more questions.
The C hairm an . All right, Mr. Frenzel.
FURTHER STATEMENT OF J. P. FRENZEL.
Mr. F renzel. Mr. Chairman, has the committee any intention of
asking me any questions?
Senator R eed. I want to ask you a few questions. How do vou
regard our banking system as a whole? Is it a good system or a bad
BANKING AND CURRENCY.
1629
system ? I do not mean whether it is a perfect system, but whether,
taking it as a whole, it is a pretty healthy banking system?
Mr. F renzel. I do not think it is.
Senator F eed. What is the defect you think exists that ought to b e .
remedied, or the defects?
Mr. F renzel . I think the first one, which is a very serious one,
is that you provide in the national-bank act for a circulating medium
that is not flexible. That gets into a fixed form, as to amount,
whether the needs of the country require it, or whether they do not
require it.
Senator F eed. D o you apply that, now, to the national-bank cur
rency ?
Mr. F renzel. Yes; the national-bank notes. That is part of the
national-bank act.
Senator F eed. The first proposition is lack of flexibility in the
national-bank currency ?
Mr. F renzel. Yes.
Senator F eed. What is the next? That is No. 1, is it?
Mr. F renzel. That is No. 1.
Senator F eed. And if that was remedied the principal evil would
be gone?
Mr. F renzel . I f that was remedied the principal evil would be
gone; yes.
Senator F eed. What is the next evil in order of importance?
Mr. F renzel. There is nothing in the system that provides for any
distribution of resources for the general good, as between business
done in the various parts of the country, through all of the national
banks that are part of the system. In other words, speaking o f it in
a homety way, it is a system that requires every bank to stand upon
its own bottom, without having the advantage of help, sympathy,
and cooperation from any other bank in the system. Therefore the
aggregate of the whole is not distributed and shifted from time to
time where the temporary needs may call for it, but remains in every
single individual concern only.
Senator F eed. I do not mean to cut you off from a full answer, but
I am trying to cover a lot of ground in a little time.
Mr. F renzel. Very good.
Senator F eed. Let us see—you have a bank in Indianapolis?
Mr. F renzel. Yes.
Senator F eed. In ordinary times your bank keeps on deposit a
fund in one or more banks in Chicago and also in New York, do you
not?
Mr. F renzel . Yes.
Senator F eed. D o you in any other place?
Mr. F renzel. St. Louis. Those are the three reserve cities.
Senator F eed. And in ordinary times you have no trouble in get
ting any accommodation you may want, within reason, of course,
from any one of those sources, do you ?
Mr. F renzel . N o.
Senator F eed. Therefore the difficulties you referred to in your
last answer must be difficulties which cover the extraordinary or
unusual situations?
Mr. F renzel . Oh. no; Senator. They are cumulative. They com
mence with a very little trouble, with a very little surplus of funds,
1630
BANKING AND CURRENCY.
growing out of these large deposits, and they keep growing until you
get-----Senator R eed (interposing). To the danger line?
Mr. F renzel. T o the place of the reaction and the acute stage
which we call here, in this country, panics.
Senator R eed. Yes.
Mr. F renzel. N ow , don’t you see, Senator, if that relation was
homogeneous between all of these concerns, you know, that piling
up at one time because of certain conditions of business, of large
funds in New York, in the shape of deposits from country banks, or
in Chicago or some other place, where they could not use it because
the needs of business did not demand it, and where and because of
that condition, you know, they are tempted to go into speculative ven
tures, would not occur ?
Senator R eed. Just to keep right at the point as nearly as we can,
you say then money sometimes piles up in New York, and perhaps
in Chicago or St. Louis, that there is no real demand for, and you
think they get into speculation?
Mr. F renzel. Yes.
Senator R eed. O f course, those banks would prefer something aside
from speculation if they could get it, would they not?
Mr. F renzel. Yes.
Senator R eed. Therefore I take it that when there is a surplus of
money in Chicago, New York, or St. Louis your bank would not have
the slightest difficulty in getting all the money it wanted upon any
kind of reasonable terms?
Mr. F renzel. That is right.
Senator R eed. Not a bit?
Mr. F renzel. N o.
Senator R eed. S o that, if I get you, then, when money thus piles
up there and the banks there can not use it and the banks anyw’here
else can not use it, then the temptation exists for these big centers
to invest in questionable securities?
Mr. F renzel. I would not call them questionable securities, but in
more speculative ventures.
Senator R eed. In stocks and bonds. Now, if that money was not
piled up there in that way that trouble would not exist, would it?
Mr. F renzel. N o.
Senator R eed. I f you had a system— and it is only piling up there
by a want of demand of the general banking system of the country
for it?
Mr. F renzel. Yes.
Senator R eed. S o it simply amounts to a plethora o f money at
some season of the year or at some time ?
Mr. F renzel. Yes.
Senator R eed. I f you had the money all in the hands of one bank
that would be true, would it not?
M r. F renzel. N o.
Senator R eed. Y ou would have the amount of money.
Mr. F renzel. But do not confuse money with credits or circulating
mediums. You would have an automatic way of reducing the surplus
by retiring and canceling these obligations that would be out in the
shape of circulating notes.
BANKING AND CURRENCY.
1631
Senator H eed. S o that there ought to be a way, wThen the money
piles up, automatically to retire it?
Mr. F renzel. That is the reason, Senator, I mentioned when you
asked me that I believed one of the first and most serious defects
was the fixity o f our notes.
Senator R eed. What I want to get at is how you propose to auto
matically retire as a plain, practical question. Let us drop all ques
tions of definitions of money and different kinds of money, and all
that sort of thing, and just say we have the currency we have now
in the United States and you want to now fix a remedy onto this
system just as we have it, and remedy it. How would you automati
cally retire the money that is piled up in New York, St. Louis, and
other places and does not get back into the country banks?
Mr. F renzel. Be retiring it.
Senator R eed. What would be the process of retirement? What
is the means to be used?
Mr. F renzel. It would not go into the central bank—that is what
you propose, if you please—it would not go into the central bank
except by way of some transaction. When it goes in by way of that
transaction, the central bank has got to give something for it.
And where the central bank has its reserve on hand, it does not
need that on hand and it cancels it. That is all. It is practically
a bookkeeping entry, and instead of their being, say, a thousand
of metallic currency and a thousand of bank notes, circulating notes,
you have only, say, a thousand of metallic currency and you would
have reduced, you know, the circulating exchange you have on hand.
Senator R eed. Who is to do that ?
Mr. F renzel. In the case which you propose, Senator, if I under
stand your question, the central bank; or, if you have some other
agency, which can do that promptly and quickly it would be just
as well.
Senator R eed. Let us take this present system and forget we are
talking about a regional bank system or anything else. Nobody
wants to take money he gets and burn it up and destroy it, and, of
course, therefore he keeps it and loans it out.
Mr. F renzel. Oh, yes; there is a way, Senator. They can send the
notes back and destroy them.
Senator R eed. For all practical purposes there is no way of retir
ing it, I of course know about the way you can retire a nationalbank note, but there is no proposition in this bill that provides for
their retirement, is there ?
Mr. F renzel. Yes.
Senator R eed. What is it?
Mr. F renzel. I think you will find in the bill there when they get
back— in the first place, if one regional bank gets a note of another
regional bank, it is under a penalty of 10 per cent if it uses it, and
it must immediately send it back to the bank it is issued to and the
bank it is issued to can take it, unless somebody comes there and asks
for i t ; but if they do not ask for it, the purpose o f that issue is gone
and they cancel it.
Senator R eed. Why would not that temptation exist just the same
to take that and invest it or lend it to somebody who wanted money,
who might be dealing in stocks and bonds?
1632
BANKING AND CURRENCY.
Mr. F renzel. Oh, I think you are quite right, but not to the same
extent, you know, because legitimate demands o f the commerce and
trade of the country would keep that circulating and would keep it
from piling up where it might be seen and tempting the speculator
going to the bank and trying to get it. It would not happen. That
is to say, I would not say it would not happen absolutely, but it
won’t happen in that proportion where the trouble finally will be
formidable. Do I make myself clear, Senator?
Senator R eed. Yes.
Senator S hafroth. Y ou mean by that this paper which the re
serve bank will take, being based upon a commercial transaction, the
money which will be obtained upon that will not be used for specu
lative purposes?
Mr. F renzel. No ; but it would be more likely, as soon as it gets
through with that use, to take it right back-----Senator S hafroth (interposing). And pay it; and when it is paid
back the banker can cancel the notes issued to put it in force ?
Mr. F renzel. And automatically in that way reduce the reserve,
because on one side of the ledger you cancel the liability of the goods
that pay it, and that brings up immediately the percentage of the
reserve they have and makes it automatic. That results, finally, in
a reduction of the rate for the purpose of getting somebody to come
in, you know, and borrow money of them.
Senator R eed. I have heard a good deal about this automatic regu
lation, and I am not satisfied with it. O f course if we had an
automatic regulation it would be a very fine thing to have, but what
I am trying to get is a sensible answer to the question of how it is
automatically retired. AVhen we speak of an automatic regulation I
do not mean by that a regulation of some human agency— that is,
by somebody who puts the brakes on of his own volition.
Here is one of the regional banks that is organized. It has the
right to obtain Government paper whenever it takes a note indorsed
by a member bank due within 90 days over to the Government re
serve agent and presents it to him. It has a right to get that in
currency. There is to be set aside a 33A per cent reserve. AVhen
that note becomes due it may be renewed, put back in, and the process
continued indefinitely, can it not?
Mr. F renzel. Yes; but continue; go right along with it. By that
process, just to the amount that the man borrowed in those circulat
ing notes, you have increased the circulating medium for doing
business, for getting credit, 67 per cent. In other words, if that
amount he puts in is $1,000 in a circulating note and he has got to
keep $337 underlying it, you have increased the agency with which
to do business just $667.
Senator R eed. Yes; on a $1,000 note; certainly; I understand that.
Mr. F renzel. And you have increased the volume of the agency
with which to do the business of the country just $667.
Senator R eed. I understand that perfectly. That is what I have
in mind.
Mr. F renzel. AA7hether he pays that note or not—he may not
take up that note in that transaction.
Senator R eed. Oh, n o ; he may not take up that note, but he may
go and pay his note to the regional bank, and the regional bank may
bring up another note of another customer the next day, but you
B A N K IN G
AND CUKRENCY.
1633
have, as long as that transaction is unclosed, increased the circulating
medium to that extent, have you not ?
Mr. F r e n z e l . For that particular transaction or for any other
transaction ?
Senator R e e d . A s long as the bank keeps that $667 that it got
from the regional bank and has not retired it, the circulation of the
country is increased that much.
Mr. F renzel. Only, Senator, I should like to put it another way,
if you please. So long as that $1,000 of circulating medium is out,
the circulation of the country is on a basis of $667 increase.
The C hairm an . That is not all, Senator Reed. I call your at
tention to the fact that when that $667 is received by the country
bank it becomes a basis of credit for four or five or six times that
through reloans.
Senator R eed. I understand that. We understand that when you
get out a circulating medium it will be multiplied in the way of
credits anywhere from once to a dozen times; generally, on the aver
age, I think, about eight times.
Senator S hafroth. That is what Mr. Forgan said—eight times.
Mr. F renzel. In the center of a large city, you know, it would be
only four times.
Senator R eed. Anyway, without spending time on it, it increases
the circulation, does it not? Now, we have got it increased. The
more money there is in the country the more that money piles up—
and there is a plethora of it—and it leads to speculation like they
have in New York when they get too much.
Mr. F renzel. It tempts the speculators and the exploiters.
Senator R eed. And the more money you have to speculate with
the more you want to speculate with.
Mr. F renzel. That is the natural consequence.
Senator R eed. Expanding the currency is a good deal like feed
ing a lion’s cub meat. The more meat you feed him the more he
grows and the more he wants. That is the trouble with what we call
inflation, is it not?
Senator O ’G o rm an . I f you add that, there then comes a time when
he can not get enough to keep going and the break occurs.
Senator R eed. Yes. By this process we have an inflated cur
rency—not by an automatic process at all, but simply because men
bring up their notes and want it. Now, I want to know what there is
to compel the retirement of that $667 just as soon as it is not needed
in business, when you say to me in the same breath that the inflation
of the currency tends to make speculation and that speculation mul
tiplies speculation. What is the automatic process that brings it
back? I f you can solve that for me successfully, there will be a great
trouble removed from my mind.
Mr. F renzel. Thank you, sir. That is a great question, and it
would take, perhaps, a good deal more of a student than I am to
present it to you in such a way that you would be satisfied.
Senator R eed. We are just a couple of farmers, and we will try to
talk so we can both understand.
Mr. F renzel. Naturally, it seems to me, going back to that note
you spoke of, that that increases the circulating medium $667 that is
issued by this agency which has authority under the law to issue it.
Now, whenever it has finished its purpose, I take it it will find its
9328°— S. Doc. 232, 63-1— vol 2---- 43
1634
BANKING AND CURRENCY.
way around back to the place where it came from, either by way of
deposit or otherwise. That original agency, recognizing that there
is no further use for that note cancels it and that will have the effect
of reducing its liability, thereby automatically raising its metallic
reserve. It will be deposited somewhere, Senator. The man will
not keep it in his pocket; he will deposit it, and the bank will deposit
it somewhere else, say, in another bank in Chicago. The Chicago
bank will send it to New York, and New York will send it to the
regional bank that is tributary to it, and that regional bank will have
to send it back to the bank that issued it. And, as soon as that bank
that issued it gets it in its hands, under the automatic operation of
that clause, it will have to cancel it.
Senator R eed. Let us trace that. Let us say this is a $1,000 note.
It starts out from the regional bank in St. Louis. They give it to
you, and you start it on its way rejoicing. There is not anybody
in the whole world that can tell when it will ever get back to that St.
Louis bank. It may make the rounds of all the banks in the country
before it gets there. It might come back the same day. It might not
be back in a year.
Senator O ’G orman . Like a lost freight car.
Senator R eed. Yes; as has been suggested, it would be like an old
freight car that gets off on another line of railroad, and you can
not find it for a long while.
Senator H itchcock. A half of the circulation of the country is in
the people’s pockets all the time.
Senator R eed. Yes; I will add that half of the circulation o f the
country is in the people’s pockets. Now, have you any automatic
regulation there that does not permit a very large inflation?
Mr. F renzel. Oh, yes; I think so. You are supposing a case,
Senator, that is not likely. You can not speak of this thing in units
o f $5, $10, or $50 that men keep in their pockets; you must speak of
it in greater units.
The man who comes to the regional bank at St. Louis and gets it,
gets it now for some business purpose. He does not want it to eat
or for an ornament. He wants it to pay off some debt that he owes
to a private man. He pays that debt and that man deposits it in
some St. Louis joint-stock bank or some private bank. That bank
has no use for it, and he says, “ I will send that to my correspondent,
the Continental National Bank in Chicago.” It goes there, and the
Continental Bank in Chicago says, “ We have no use for this; we
will send it to the Hanover Bank in New York,” and they do so.
It goes to the Hanover Bank, and they say, “ We do not have any
use for this money; we will deposit it as a part of our transactions
with the regional bank in New York.”
Here it is. Now, what does the law say? Just as soon as it gets
to that place they can not wait a minute. That must go back to St.
Louis, and, automatically, just as soon as St. Louis issues it the book
keeper is notified-----Senator R eed (interposing). I understand the termination of it,
but let us follow it and see if we are right about it.
Mr. F renzel. Well, what are you going to do with the money-----Senator R eed (interposing). I am not trying to argue with you;
1 am seeking light.
BANKING AND CURKENCY.
1635
The C h airm an . W ill you permit me to make a suggestion? In
speaking of a note of this character, it may indeed, like an old freight
car that is lost, go into somebody?s pocket and be worn out there;
but it is a volume you speak of, and the notes in the Federal reserve
bank upon which these Federal reserve notes are emitted must be paid
at a fixed time, and paid with currency, either with these notes or
with legal-tender money, and therefore when those notes are paid
the volume contracts by the retirement of a like volume of money.
Senator S hafroth . The 30, 60, and 90 day drafts.
The C hairm an . Yes.
Senator R e e d . I am afraid of that. Please bear with me in my
trouble here. I am trying to follow this $1,000 note. You take that
$1,000 note; you get it in your bank, and you get 10 others like it.
Now, you have a surplus in your bank which you can not use, and for
business reasons—you are going to get about 2 per cent on those
notes—you deposit them with your correspondent in Chicago.
Now, I think right here is where our chain breaks. I f that bank
will take those notes and pay you 2 per cent, it takes them because
they are worth 2 per cent to it, and it proposes to loan them to some
body else for 4 or 5 per cent. It does not send them, as you indicate
in your illustration, from bank to bank. It sends them to a bank
where it is going to make money out of them, and any bank that is
going to pay interest upon them is a bank that is not going to send
them in for cancellation.
Senator S hafroth. It will have to pay a 10 per cent penalty if it
goes out of the district.
Senator R eed. Not as long an the note stays in the same district.
Senator S hafroth . That is true.
Senator R eed. And no man would take it in another district if he
had to immediately cancel it, and you would not send it to a district
where it no longer brought any interest, because you paid value for
that money.
Senator H itchcock. A s a matter of fact. Senator, the case is
stronger than that. It is only the regional reserve bank which is
required to send it in for cancellation. Any one o f the 7,000 national
banks or any one of the 17,000 State banks can use it just as an indi
vidual can.
Senator S hafroth . But it has got to be taken by any reserve bank
in any district in the United States when it is presented to them for
payment.
Senator H itchcock. A s Senator Reed says, if any bank in the re
serve city accepts the deposit it will not necessarily put it with the
reserve bank, but will lend it out again.
Senator S hafroth. That may be; but is not this the automatic
control? You go to one of these reserve banks and present your 30,
60, and 90 day paper for discount, and they discount it. At the end
of that time that has got to be paid, and that constitutes the trans
action.
Senator R eed. But, Senator, let me show you where I think you
have overlooked something. We take a vast quantity of commercial
paper down to these banks. Every bank does it, because it wants this
money to use, and it can get it on very favorable terms. At once
there is a very lar^e volume of this money put out. Now, that money
does not have to be retired until, through the accidents of business,
1636
BANKING AND CUBKENCY.
it gets into a Federal reserve bank, when it is sent back for retire
ment. In the meantime there has been another volume of this money
issued—other volumes. Each day money is being issued and each
day these notes, in the long course of time, will be coming back in for
redemption. But in the system is there not involved the idea of
multiplying our money by at least two ?
Mr. F renzel. That would be true, Senator, if it were not a fact
that some time or other somebody has got to pay back some obliga
tion that he gave for the purpose of getting this note out in the first
instance.
Senator R eed. No ; I do not agree with you.
Mr. F renzel. H ow are you going to give it to him first, Senator?
Senator R eed. I am trying to solve this question; I am not trying
to argue with you. I am stating it in this way, however, because I
can better express it than by simply asking questions. There is no
reason why your bank could not take $50,000 of good notes, go to the
Federal reserve bank that may be established at Chicago, and get,
we will say, $50,000 of currency. O f course, the gold reserve has
got to be there. Every other bank can do the same thing. At the
end of 30, 60, or 90 days you have to pay that. You have got to
either pay it in cash or put up your notes, and, as you got the $50,000
and had it to loan out, of course you have the other notes. And as
long as you keep $50,000 of notes there you will have this money out
and you will keep it out. You are paying a very low rate of interest
upon it, practically none.
Now, I insist that when your system is working that will double
the present actual volume of currency or largely increase it. And so
you have to have something added to your automatic machinery to
make that money retire. The rate of interest is mentioned in the
bill, but that is not automatic, that is a human agency. Some man
has control, and wisely regulates it. I f he does wisely regulate it
he will force retirement. I f he does not wisely regulate it we will
have inflation. So it is not automatic; it is subject to human control,
and human control is really the only control, as I see it.
Mr. F renzel. O f course, you can not go to a concern like the
National Cash Register Co. and ask them to devise a machine that
will work this thing out without some human guidance. You are
correct.
Senator R eed. I think you can-----Mr. F renzel (interposing). And therefore, that the condition you
are proposing may not continue, you limit, in the first place, the kind
of paper that you accept to a certain kind and quality and running a
certain length of time. In other words, that extension of credit
and accommodation has to be within the limits of what human ex
perience says is about right, so it will not get into a positon where
it has inflated the currency to such an extent.
Senator R eed. Y ou spoke of another limitation-----Mr. F renzel (interposing). And, Senator, in order that it may
not go too far—the increasing of the volume of circulating medium
upon which business is to be transacted and credit extended—you
go farther than that and you provide a penalty if they do not keep
up the reserve. That operates about as it does in other systems, you
know. They make a certain charge of per annum interest for a
BANKING AND CURRENCY.
1637
volume of circulating notes over and above a certain amount which
they take as normal in the first instance.
Senator R eed. N ow , let me take those things up one at a time-----Mr. O scar N ewton (interposing). Senator Reed, will you pardon
me for making a suggestion there? This thought has occurred to
me, that probably was taken up by the gentlemen from Indiana.
The one thing that will operate to drive this $1,000 note back to the
bank that issued it is the fact that it can not be held in any national
bank as a reserve. Why should a national bank want to hold that
note when it could send it in to the bank that issued it and get for
it gold that it could hold in its vault and which would be a basis for
credit and a basis for deposits?
Mr. F renzel. They might do that as we do now with national
bank notes.
Senator R eed. The suggestion is of value, but I want to go back
and take these things up together. I admit that every time you
require a 33 per cent gold reserve you have fixed a limitation which
is almost mathematical in its certainty, because the gold production
is limited, and the gold supply is limited. But, of course, if you
are only required to keep 33 cents on the dollar and can issue 100
cents we must admit that that regulation will not prevent an im
mense inflation.
Mr. F renzel. That is right.
Senator R eed. We admit that. While that is a check it is not a
sufficient check.
Now, the next proposition is commercial paper. We have heard
a good deal about prime commercial paper, paper such that the trans
action wipes out. But everybody concedes—I have not heard you
speak of it— that we do not propose to attach to this commercial
paper a bill of lading or warehouse receipt, which absolutely stops
the transaction at that point and pays it out, but that we are to take
the notes that are regarded as commercial paper. That, of course,
means that there is a very large volume of it and it, of course, means
that nobody can tell how much there is of it and that there may be
and undoubtedly is enough to vastly inflate the currency. So that
is not a sufficient limitation, is it?
Mr. F renzel. N o.
Senator R eed. N ow , you say the time of this paper is limited.
But there is not any trouble in renewing, in various forms, the paper
from time to time. As long as you have not got the warehouse
receipt or the bill of lading attached, of course, the transaction may
continue.
Now, my friend here, Mr. Newton, of Mississippi, suggested that
national banks would not want to keep this because it would not be
counted as a reserve. Let us grant that. That is one thing that
would tend tend to drive the paper in. but do you not need something
that will force it in, and can not that be found in the fact that when
money has been out a certain length of time it must be penalized with
an interest rate? AVould not that, added to this bill, have a tendency
to drive the money back?
Mr. F renzel. Yes; you have tried to meet that in your bill by this
arrangement of a penalty for a reduction of the required reserve.
1638
BANKING AND CURRENCY.
It is in your bill. You have to keep 33 per cent in the vaults or you
have to pay a penalty.
Senator H eed. But it is the 67 per cent above that I am afraid
of, and I take it there is not a banker in this room that would seri
ously propose doubling the present amount of money or trebling it.
That would not be a good thing to do.
M r. F renzel . N o.
Senator R eed. N ow , would you not meet that by a provision, first,
that this money can not be used as long as it pays a rate of interest
which is so high that a bank will not want it except wThen it really
needs it, and by raising that rate the longer it keeps it out? And is
it not necessary, in all seriousness—because a mistake here will be
very serious—to add some such check as that to this bill ?
Mr. F renzel. S o far as I follow you, Senator, I will say this, that
if is very necessary to have some agency— some power—by the exer
cise of wrhich, as required by law, this inflation may be prevented.
In other words, this additional issue of circulating medium must
get back to its own place as soon as possible.
Now, your illustration, to my mind, presupposes a kind of banking
that I should not like to subscribe to. In the first place, remember
that if the powTer of issue is used it is because o f the demand for
some commercial or industrial or agricultural transactions or need.
In other words, a participant bank, a stockholding bank, is not
going to go to the regional reserve bank primarily and ask that notes
be issued to it upon its own obligation, on proper collateral, or the
discount of paper which it has in its vaults for the accommodation
of its customer without a necessity for that condition.
Senator R eed. Let me ask you if you do not mean by the word
“ necessity ” an opportunity to reloan it on what it thinks is good
security?
Mr. F renzel . That, I would say, would be very dangerous bank
ing, because if that continued without some sort of check you wTould
find that when the bank made its reports the controlling board would
say, “ Here, here; you are getting top-heavy; you have a lot of
rediscounted paper''-----Senator R eed (interposing). You know we are talking about au
tomatic business now.
Mr. F renzel . Exactly.
Senator R efd. I am not talking about this question of not having
a wise board of control; because we are making a lavT now, and we
might get an unwise board o f control. The feature I have in mind is
putting into this bill something that forces this condition, leaving
a discretion somewhere, but that absolutely fixes a limit.
Mr. F renzel. I really do not know how you would find that.
The C h a ir m a n . That may not be without fixing in advance the
limitations of human wisdom.
Senator R eed. But. we can now, in the cooler moments of the legis
lation, fix limits, I think, within which we may work with reasonable
safety. We can at least find a safe limit. What I am afraid of is
one o f these great general booms that sweeps over a country—-—
Mr. F renzel . Y ou may well be afraid of it.
Senator R eed. That sweeps everybody off his feet; and as long
as you limit your business to credit currency there is not much d if
ference; but if you can keep on making money, and making money
we must consider whether that is not liable, when it is left absolutely
BANKING AND CURRENCY.
1639
to human agency, to get into hands where there will be enormous
inflation.
Mr. F renzel. I think you have in mind. Senator—if you will
pardon me for suggesting it—that perhaps if you put a penalty on
an issue beyond a certain amount which your judgment would tell
you was a safe amount that might check such inflation as would
bring about the conditions you suggest. For instance, you say, “ You
can have, up to $200,000,000, the privilege of issuing circulation,
which must be based upon safeguards and upon these primary con
ditions.” Now, you may also, for the purpose of an emergency, based
upon that same safe reserve—and, by the way, I think it is smaller
than 33^- per cent; I would rather see it higher. You may have also
a privilege, to be used very, very carefully and cautiously, and only
in certain conditions, of an additional issue based upon the same
amount of metallic reserve, but you must pay 6 per cent on that as
long as it is out. I notice in the bill that, in a way, you have tried
to effect the same sort of thing by a penalty on your reduction of re
serve below a certain percentage. I f I had to say offhand, Senator—
and I am not a student, you remember-----Senator H eed (interposing). I know you are not; that is the reason
1 like you.
Mr. F renzel. I should say, offhand, that this would be the better
way—the penalty of a rate of interest-----Senator R eed (interposing). You know I like book men, but then
I like these men that do things somewhat better than the men who
write about what other people have done. Now, as a practical man,
don’t you think that some sort of check—I shall not say that you
have outlined it or that I have suggested it—similar to the ones we
have been speaking about ought to go into this bill to make it safe?
Mr. F renzel . Absolutely. I f you are not certain this does it
you must put it in, because if you do not you will have an era of
inflation that will be awful just as sure as we are assembled here.
Senator R eed. I thank you very much. I might go into many
other matters, but I have taken sufficient time.
Mr. M cC ulloch. I believe this concludes the Indiana delegation,
as I understand it, and we want to thank the committee for their
courtesy and kindness, and especially the chairman.
Senator R eed. Y ou won’t go back home and tell them you did not
get a hearing?
M r. M c C u lloch . W e will say emphatically that the Indiana
bankers would like to have this bill passed, with some few workable
changes that we think will make it a success, and we want the bill
passed as speedily as can be done and make it a good bill, and we
will help you in any way we can to make it a success.
Senator R eed. Y ou would rather we found out the mistakes now
than later?
Mr. M cC ulloch. Surely; you are doing exactly right.
STATEMENT 0E OSCAR NEWTON, PRESIDENT OF THE JACKSON
BANK, JACKSON, MISS.
Mr. N ewton . Mr. Chairman and gentlemen of the committee, it
makes a banker who has the interests of his depositors at heart feel
very comfortable to see the great interest that you gentlemen are
1640
BANKING AND CURRENCY.
taking in this measure and the safeguards you are endeavoring to
throw around the currency of the country. That is absolutely nec
essary, for at times past we have seen even our United States notes
fall below par, and the notes of many States worthless. It reminds
me of a story I heard not very long ago. There was a steamboat
captain going down the Mississippi River with an old wood-burning
steamboat and he saw some wood on the bank, and he wanted to
buy it. This was in the days when notes were passing below par.
He drew his boat up to the bank, and asked the old woodsman what
he would sell his wood for. He replied, “ In gold, a dollar and a
quarter a cord, in greenbacks, cord for cord.” [Laughter.]
Now, this bill in the main meets wTith my hearty approval. I do
not attempt to represent all of the State bankers of Mississippi, but
speaking for myself, I should like to see such a bill enacted as would
be attractive and draw into the system all the State banks. 1 be
lieve this will be necessary to make the bill a complete success.
When I speak of the State banks I mean those having a capital of
over $25,000.
The C h a ir m a n . What changes do you think ought to be made?
Mr. N ewton . The changes which I think ought to be made are
two. I think that the exchange provision would keep out of the sys
tem all of the State banks in the State of Mississippi, and there are
331 against 31 national banks.
Senator R eed. Only 31 national banks?
Mr. N ewton . Only 31 national banks and 331 State banks.
To make my remarks very brief, I would say that if this provision
on page 33 of the bill were amended by striking out the last word in
line 15, the word “ upon ”-----The C hairman (interposing). “ Upon any of its deposits” ?
Mr. N ewton . “ Upon any of its deposits ”—the first four words in
line 16.
Then on page 34 the words in lines 3, 4, and 5, reading:
And may also require each such bank to exercise the functions of a clearing
house for each member bank.
I f this provision was stricken out 1 believe it would be attractive
to most of the State banks of Mississippi.
There is one other provision that we object to, and that is after 36
months all member banks are required to keep in their vaults or in
the Federal reserve banks 12 per cent of their deposits. I believe
that this is impounding—and I use the word seriously—too much
of a bank’s working capital, none of which it can use at any time. I
believe that if 4 per cent of a bank’s deposits—and I am speaking
now of country banks—was kept in vaults and 4 per cent in the Fed
eral reserve banks and 4 per cent allowed to be kept with its ap
proved correspondents it would make the bill much more attractive.
With these two provisions, which I consider the most important,
corrected, I believe that a large number of the State banks of Mis
sissippi would join the association.
Senator H itchcock. Your last objection is based upon your de
sire to have the banks privileged to keep a larger proportion of their
reserve outside of the reserve cities?
Mr. N ewton . Yes, sir.
BANKING AND CURRENCY.
1641
Senator H itchcock. O f course you realize that that would inter
fere with the mobilization of the reserves?
Mr. N ewton . We think, however, it will furnish sufficient capital
to borrow on, because we believe if you make that correction in the
bill it will be so attractive that it will bring in a larger number of
State banks, over which you have no control, except that you may
approve them.
Senator H itchcock. Why do you say the State banks are so anx
ious to keep a part of their reserves outside the reserve banks?
Mr. N ewton . For two reasons. The first is that if the exchange is
eliminated it will enable us to keep such balances with our corre
spondents as we can make trades with them; we can control their
collections.
Another is that there are times when we might need money, when
such collateral as we would have might not be entirely acceptable
to the Federal reserve board, and we have had years and years of con
nection with our correspondent banks. They know us personally.
Frequently they loan on the character of the bank, on its officials,
rather than the collateral it presents, and we believe it would be
easier-----Senator H itchcock (interposing). Is there any objection among
the banks of Mississippi to the provision requiring them to subscribe
20 per cent of their capital?
Mr. N ewton . There is some objection from the national banks and
from some of the State banks. I, myself, would prefer that the
capital be fixed at 10 per cent, .5 per cent to be paid in with the ap
plication and the other 5 per cent to be paid in in 60 days.
Senator H itchcock. Where will the Mississippi banks procure the
money with which to make the payment of the capital?
Mr. N ewton . It will come from our correspondents.
Senator H itchcock. Y ou have sufficient in your reserves at the
present time to provide for that payment of money ?
Mr. N ewton . I think we have. O f course, at this season of the
year the cotton crop is beginning to move, and many of the banks
are borrowing money, and the State banks would probably not join
the association just at this time, because they would hardly care to
borrow. They would probably wait until they had paid their bill?
payable and had a surplus on hand.
Senator H itchcock. It has been stated that instead of allowing
the national banks a year in which to join they should be required
to decide within 00 days.
Mr. N ewton . I have not studied the bill with reference to the
national banks as much as with reference to myself, being a State
bank. I have not given that matter any consideration.
Senator H itchcock. A s a State banker, how soon would your bank
probably decide to join?
Mr. N ewton . I f these two changes were made in the bill, we would
join at once. We have bills payable, and we have at this time a large
reserve. We have not borrowed any money for two or three years.
Senator H itchcock. H ow does it happen that there are so few
national banks in Mississippi?
Mr. N ewton . For the reason that our country is an agricultural
country and the best loans we have presented to us are the farmers’
1642
BANKING AND CURBENCY.
loans, and the farmer secures his loan with a mortgage on his land.
He frequently borrows money in March and April and makes the
notes payable in October, November, and December.
Senator R e e d . Where are you going to get your commercial paper
to come in?
Mr. N ewton . We objected to the 45 days that was originally in the
bill, but when it was amended to 90 days we calculated w7e can come
in, because we have some commercial paper and we do not need money
until about July and August, and we will have a good deal of farmersTpaper maturing and bills payable for agriculture, as well as com
mercial paper. It has 90 days to run. The bill has been amended,
Senator Reed.
Senator H itchcock. What do your State laws provide in regard to
the reserve of the State banks ?
Mr. N ewton . Our State laws are, I regret to say, very inadequate.
We hang our heads in shame when we say we have practically no
banking laws now, but at the next session of the legislature there
will be a law enacted, because there is a committee appointed now
from the two houses of the legislature preparing a bill to be sub
mitted, and we feel sure the bill will be enacted.
Senator H itchcock. Y ou say there is no requirement as to reserve?
Mr. N ewton . None at present.
Senator H itchcock. What amount can you lend to one borrower?
Mr. N ewton . It is not regulated by law at this time.
Senator H itchcock. Are there any failures in the State?
Mr. N ewton . We have had some. One other reason why we believe
that it will be necessary for the State banks to join in order to
make this bill work satisfactorily is the reason that it will popularize
the measure. We believe the people of all sections of the country,
particularly in the agricultural sections, wdll appreciate the bene
fits o f the bill, and any public measure that is popular usually
succeeds.
Senator H itchcock. A s a matter of fact, then, if not of law, what
reserves do the banks in Mississippi contain ?
Mr. N ewton . We will average from, I should say, 12 to 30 per
cent.
Senator H itchcock. H ow are they divided? How much is prob
ably kept in the vaults and how much in reserve cities—any of the
reserve cities ?
Mr. N ewton . It depends on the location of the bank. I f it is in
a very small town, during the summer season w'hen business is dull,
the bank would keep a very small amount in cash. It would keep
most of its available funds with its correspondents in New Orleans,
Memphis, St. Louis, and New York. In the winter season when
crops are moving it is necessary for us to keep larger cash reserves
to meet pay rolls for labor and for the purchase of cotton.
Senator H itchcock. Where do you discount most of your paper?
Mr. N ewton . A s I stated already, our own bank has not borrowed
any money for three years, but we would discount in New York, St.
Louis, New Orleans, and Memphis.
Senator H itchcock. Some banks go to one center and some to the
other ?
Mr. N ewton . Yes.
Senator H itchcock. And some bank use all three?
BANKING AND CTJBBENCY.
1643
Mr. N ewton . Yes.
Senator H itchcock. What rate of interest do they get on such
rediscounts?
Mr. N ewton . It varies with the size o f the bank and the responsi
bility of the bank, and with the balance that is kept. I would esti
mate that from 4^ to 6 per cent.
Senator H itchcock. D o you have any idea how much of a line
of discount the average bank requires?
Mr. N ewton . Some large banks who handle a great deal of cotton
frequently borrow as much as two or three times the amount of their
capital during the crop-moving period.
Senator H itchcock. And what length o f time does that cover?
Mr. N ewton . 'About four months.
Senator R eed. I want to see whether you are out of trouble or not.
You loan nearly all of your money to the farmer down in Missis
sippi. You do as they do in some other southern cities. A farmer
comes in in the spring of the year and wants to make a crop, and ar
ranges with you to carry him through the season. You loan him the
mone}7 and you take mortages, sometimes?
Mr. N ewton . Yes, sir.
Senator R eed. Y ou take a mortgage on a cotton crop?
Mr. N ewton . Yes, sir.
Senator R eed. That is about the best kind of a security you can
get, provided the crop comes good?
Mr. N ewton . Yes, sir.
Senator R eed. Those are the best class of securities you have in
your bank?
Mr. N ewton . We rarely loan onty on that crop.
Senator R eed. And your farmers’ loan would be called the better
class of securities?
Mr. N ewton . Yes, sir.
Senator R eed. Your commercial loans are limited; you loan to the
local merchant at times?
Mr. N ewton . Yes, sir.
Senator R eed. O f course, when the merchant buys goods he has to
have a little money; he needs the money. That is about the only
kind of commercial transactions you have, is it not?
Mr. N ewton . Yes, sir. We have some lumber accounts.
Senator R eed. Y ou loan lumbermen?
Mr. N ewton . Occasionally.
Senator R eed. You do not have in your bank very much business
where a man will buy cotton, ship the cotton, draw for the money, and
have you carry him during that interval. You do not have much of
that?
Mr. N ewton . Yes; there is a great deal o f that.
Senator R eed. It comes at only one season of the year ?
Mr. N ewton . It comes at only one season of the year, the fail and
winter season.
Senator R eed. It comes after you need the money, does it not?
Mr. N ewton . We need the money most at that period.
Senator R eed. And you have some of the paper?
Mr. N ewton . Yes, sir.
1644
BANKING AND CURRENCY.
Senator R eed. Y ou spoke about agricultural paper. O f course,
agricultural paper is a new term, at least to me. I do not know
what it means. I want to read you this section o f the b ill:
Upon the indorsement of any member bank any Federal reserve bank may
discount notes and bills of exchange arising out of commercial transaction.
Of course, loaning to a farmer to carry him through his crop is not
a commercial transaction?
Mr. N ewton . N o.
Senator R eed. It continues “ that is ”■
— that means the same as
though it said “ that is to say” ; “ 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 pur
poses.”
I do not know, I will say to you frankly, what construction might
be put on that, but it strikes me that the controlling feature of that
phrase is found in the words “ arising out of commercial transac
tions,” and the following words, “ that is, notes and bills of exchange
issued or drawn for agricultural, industrial, or commercial purposes,”
would be qualified and they would have to partake of a commercial
nature, and not be a mere loan to a farmer in carrying him through
his crop, because it admits that-----Senator S hafroth (interposing). Does it mean for the sale of
wheat that a draft is drawn in that way that it becomes a commer
cial transaction?
The C hairm an . That is intended to be as broad as it could be
written.
Mr. N ewton . That is one reason why I favored a regional reserve
bank. We would have directors elected in our own region wTho are
familiar with the needs of our section, and I believe that those men
would not discriminate against the very best paper w^hich we would
get.
Senator R eed. That is true; nobody ought to do it. But if the bill
is so plain that they could not do differently, of course, wherever
they came from they would be obliged to follow the law.
Senator S hafroth. Before you go into that, I think the clause
following ought to be read. Does not this give a pretty wide lati
tude : “ The proceeds of which have been used, or may be used, for
such purposes, the Federal reserve board to have the right to deter
mine or define the character of the paper thus eligible for discount
within the meaning of this act.” It says up above, the same sec
tion, “ notes and bills of exchange issued or drawn for agricultural,
industrial, or commercial purposes, the proceeds of which have been
used, or may be used, for such purposes.”
The C h airm an . That is evidently too broad.
Senator R eed. The language there now either means one of two
things; it either means commercial paper as it is ordinarily understood,
representing a commercial transaction, and is intended to include as a
commercial transaction money which might be loaned for moving
cattle, moving cotton, or something of that kind, and is limited to
the thing actually in commerce. It either means that or else it is
so broad it will cover every transaction in the country.
Mr. N ewton . Except stocks and bonds, which are prohibited.
BANKING AND CURRENCY.
1645
Senator R eed. Yes. Have you any suggestion as to that lan
guage ; and if you do not care to make it now, and would like to have
time to think it over and write your suggestion we would be glad to
have it.
Mr. N ewton . I would prefer to write it out.
Senator S hafroth. Right there, Senator Reed, if this is a limited
power which is given would not that have a tendency to check the
quantity of money which can be taken from the regional reserve
banks ?
Senator R eed. Yes; just in proportion as the paper which can be
taken to the bank is limited, of course, that limits the power. I
believe that language might be easily construed to admit any kind
of paper, and I think we ought to give it careful thought.
The C hairm an . We will now hear you, Mr. Dickson.
STATEMENT OF T. H. DICKSON, SECRETARY MISSISSIPPI BANKERS’
ASSOCIATION, JACKSON, MISS.
Mr. D ickson. Mr. Chairman, I am not an active banker, but merely
an association worker. I am secretary of the Mississippi Bankers’
Association, and I came up here by the instruction of our executive
committee to express our sentiments upon one particular part upon
which the members of our delegation from Mississippi have touched,
and that is the question of exchange.
As Mr. Newton has told you, we have only 31 national banks
in the State, most of whom are members of our association, and we
have 331 State banks, and as an association we are very strongly op
posed to this exchange clause, and I will direct most of what I have
to say in that direction.
There was a meeting of the executive council of our association on
the 24th of September, at which meeting a resolution was passed
instructing me to come to Washington simply to give an expression
of the views of our association to the effect that we would like to
have that clause eliminated from the bill, or at least such feature of
it eliminated from that clause as would force the handling of indi
vidual checks of any Federal reserve bank shareholder holding those
checks at par through a Federal reserve bank, and I believe, as a
matter of current comment, that the attitude of the State banker
toward this bill, those who have given it considerable thought, is
largely as outlined by Mr. Newton. I believe they would make up
their minds to come in immediately should that clause be removed.
We would like to have that clause either removed or changed very
much, and perhaps one or two other minor changes in the bill which
would make our bankers feel that it was sufficiently attractive for
them to come into the system.
I feel that that clause as it stands now would operate as a very
serious barrier to the State banks of Mississippi wishing to come in.
I f there are no questions which the members of the committee desire
to ask me, that is all I have to say. I thank you very much, Mr.
Chairman, for the privilege of making this statement.
The C h airm an . We are much obliged to you, Mr. Dickson.
We will now hear from Mr. Scott, of Texas.
1646
STATEMENT OF J.
BAWKTN'G AITD CURRENCY.
T. SCOTT, VICE PRESIDENT FIRST NATIONAL
BANK, HOUSTON, TEX.
Mr. S cott. Mr. Chairman, in order that I might put these views in
as concise form and as short space as possible I reduced some sugges
tions to writing. I would like to state, however, before going further,
that the First National Bank of Houston, Tex., has a paid-in capital
of $2,000,000, surplus and undivided profits o f $350,000. Our de
posits range from $10,000,000 to $12,000,000. We have our circulation
outstanding amounting to about $2,000,000.
(The paper mentioned by the witness follows:)
The Glass-Owen banking and currency bill as it stands to-day is not far from
a workable basis, but in order that it will not prove too great a burden upon the
individual banks throughout the country to qualify themselves for participation
in the plan proposed, also that it may simplify the change from our present
system to the new, some further modifications of its provisions are quite desirable.
I do not mean by this to imply that the plan as now proposed without further
changes would prove a failure, for there is no question but that it is a decided
improvement over our present system, and would, in operation, give the business
world, and the people as well, relief in a large measure from the evils with
which we now contend. I believe, however, that certain further changes might
and can be made which will greatly improve the practical operation of the plan;
will render it the easier for the individual banks to participate; make them more
ready to respond; and such changes will do no violence to the proposed bill or
to the opinion of those who champion it. The changes I would suggest are as
follows:
(1) Required subscription to the capital stock of the Federal reserve banks
should be reduced from 20 per cent, as now proposed, to 10 per cent.
It is required under the proposed bill that each national bank shall subscribe
to the capital stock of the Federal reserve bank of its respective district a sum
equal to 20 per cent of its own capital stock, one-half of which is to be paid in
and the remaining one-half to become a liability and to be subject to call and
payment when necessary. If there was the remotest possibility that the sub
scribing individual banks would ever be called on to pay in the 10 per cent addi
tional provided for in the bill, thereby in the end contributing a sum equal to
20 per cent of their capital stock in the capital stock of the Federal reserve
banks, this requirement alone would so extremely penalize the resources of the
individual banks of the country as to render the plan unattractive to them, no
matter how much of inducement there might be otherwise offered. As a matter
of fact, the paid-in subscription of 10 per cent would be more than amply suf
ficient for the purposes, and the bill should be changed so as to strike out the
double liability, as it is now seriously objectionable, no matter how remote the
possibility of its ultimate payment may be. The average bank is willing to sup
ply of its own capital stock an amount equal to 10 per cent for its contribution
to the capital stock of the Federal reserve banks, but there is serious objection
to the continued liability of an additional 10 per cent, or any part thereof.
(2) Provisions requiring each Federal reserve bank to handle miscellaneous
checks at par for member banks should be eliminated; same, however, should
apply on drafts of member banks on other member banks.
The provisions in the proposed plan requiring the Federal reserve banks to
handle miscellaneous checks for its members is founded on the wrong premises
and should be stricken out. It is right and proper that any member bank
should be permitted to send in to the Federal reserve bank of its district its
own checks or drafts on any other member bank in that district, or upon those
in any of the other districts, and receive credit for same, but the large volume
of sundry and miscellaneous checks should not under any circumstances be
handled by those reserve agencies. The Federal reserve banks should not
invade the domain of private banking in this or any other respect. They are
designed and created for other functions more sacred and requisite for the
welfare of the Nation, and if permitted in any respect to handle any business
whatsoever rightfully belonging to the individual commercial banks, they would
under the same hypothesis of reasoning be entitled to engage in other lines of
private endeavor at their pleasure.
BANKING AND CURRENCY.
1647
(3) Reduce number of Federal reserve banks from not less than 12 to the
lowest possible number, not to exceed 5, and limit the number of branches of
each Federal reserve bank to 1 for each $1,000,000 of the capital stock of said
Federal reserve bank, instead of 1 for each $500,000, as is now provided.
The main object of creating those Federal reserve banks is to mobilize the
present scattered reserves of the banks of the country into some central points,
where they can be utilized in a legitimate way, instead of as under the present
system locked up in the several thousand separate banking institutions of the
country, serving no useful purpose, either in times of commercial prosperity or
in those of business depression. The reserves thus mobilized will form a fund
as a basis for the discounting of commercial obligations of credit and furnish
ing against same, through the subscribing member banks, such circulating notes
as may be required at the hands of commerce. In order that these improved
and requisite facilities may be accessible to the various individual banks of
the entire country, it does not necessarily follow that there must be created and
established any great number of these agencies or branches thereof throughout
the country to meet the needs. The fewer the number the less will be the cost
of their maintenance, and likewise more easily their proper supervision.
(4) Incorporate in the law itself some of the rights and privileges of the
individual member banks and give to the local board or directors of each
Federal reserve bank a wider scope of authority in the management of their
respective institutions.
The law as is framed under the proposed plan is wholly silent on the obliga
tion that will rest upon the Federal reserve banks, through the head board of
control, to provide in a fair and equitable way the more important facilities
said member banks will from time to time require. As it is now provided, every
thing will be left to the discretion of the head board of control, and the member
banks have no expressed or implied rights other than those that may be ex
tended them by this board at its pleasure. The law itself should definitely fix
the rights of the individual members in the more important requirements, such,
lor instance, as to the amount of discounts which member banks in good stand
ing could not only offer and expect to receive credit for, and through said credit
circulating notes, if desired, but that they would under the law have the right
to demand the maximum when desired as their inalienable right under the
provisions of the law. Beyond this amount, which might be termed the
pleasurable limit of the individual member, it would then come within the
discretion of the board as to whether the excess should or should not be
granted. There should be definitely fixed somehow or somewhere, so that each
member bank could rely upon its discounts being accepted up to some given
sum, when such paper as is eligible is sent in for discount, instead of awaiting
in due course the fate of such remittance at the hands of the board, as now
provided for in the bill.
Those are the four suggestions I have. Otherwise I rather believe
the plan as it notv stands is worthy of approval.
Senator H itchcock . D o you think anything should be stipulated
as to the rate of interest the reserve banks should charge the indi
vidual bank?
Mr. S cott. I think the rate of interest should be that prevailing
in the district at the time the limit is asked for. For any excess
which might be asked for, for an amount over and above that amount,
I think it might be right and proper that such member should be
charged a higher rate of interest.
Our capital is $2,000,000, and if it were fixed in the law that we
would be entitled to receive $2,000,000 of discount at any time we
have need of them, and that there was some obligation resting upon
the Federal reserve bank through the head board of control to fur
nish us with that facility, we should*have that amount at the pre
vailing rate in the district when the paper was sent in. I f we wanted
more than that, if we had need of an additional $500,000, I think we
should be charged a higher rate for the use of that additional
$500,000; say, at the rate of 1 per cent per annum for the first month,
if the prevailing rate was 5 per cent, we would be charged 6, and for
1648
BANKING AND CURRENCY.
the second month at the rate of 7 per cent, and if the third month
at the rate of 8 per cent. While under this plan it is very desirable
that credit facilities should be easily obtained, at the same time I
think it is likewise desirable that there be a check somewhere to what
might possibly lead to inflation.
Senator H itchcock . I am very glad to hear you say in such strong
terms that you think the individual bank should be guaranteed as a
matter of right.
Mr. S cott. I f they are not guaranteed, what is there?
Senator H itchcock . That is one of the serious criticisms'which
should be made of the bill now.
Mr. S cott. Under our present system we have the privilege of
borrowing up to a certain amount. The system is full of instances
where a member bank knows they can do this and can not do that.
Senator H itchcock . H ow would you provide a standard by which
the paper that you offer would be judged?
Mr. S cott. I think the paper we should offer would be passed on
by the board in our district. I have made the contention that a
wider scope of authority should be lodged in the hands of the di
rectors of each Federal reserve bank.
Senator H itchcock . Of course, those directors could say your
paper is not good, and in that way cut down your discount ?
Mr. S cott. Well, I do not think we can assume they are going to
do that. A bank in good standing wdth the department they will
know.
Senator H itchcock . What would you think of standardizing the
paper to some extent by requiring national-bank examiners to supply
the Federal reserve bank with lists of paper?
Mr. S cott. Y ou mean desirable accounts from each district ?
Senator H itchcock . Yes; to O. K. it. Certain lists.
Mr. S cott. Yes; I think the bank examiners should know and be
satisfied with the paper they passed upon.
Senator H itchcock . D o these examiners of the comptrollers office
acquire a knowledge of the paper in the district ?
Mr. S cott. At first they are not able to judge wholly as to the
character a bank has. They have to learn that by experience. They
are careful to make inquiry of their commercial earnings, the com
mercial ratings of the various firms in the district or in the com
munity, and if a loan occurs to them to be excessive they do not hesi
tate to point it out, and they make considerable inquiry about all
the large loans.
Senator H itchcock . As I understand it, they keep lists which thfey
turn over to the comptroller and also preserve for themselves.
Mr. S cott. They do, and they keep such lists for other examiners.
For instance, if another examiner in the district follows the preced
ing examiner he is supplied with the lists of the previous examiner.
Senator H itchcock . That being the case, what would you think of
a plan whereby a subtreasury could be established in Houston, and
perhaps one or two other places in Texas, to which the national banks
of that State could apply when they wanted an advance, say, equal to
75 per cent of their capital, and in that subtreasury have a repre
sentative of the board who would act upon the paper, and who would
be assisted by the previous examinations and records made by bank
examiners? Could that subtreasury advance the currency "of the
BANKING AND CURRENCY.
1649
United States and of the banks, in a similar way, to those people with
those facilities?
Mr. S cott. That might serve the purpose during periodical times
o f stress.
Senator H itchcock. Why limit it to times of stress; why not have
it as a constant resource that could be applied just as readily as a
reserve bank?
Mr. S cott. It is not so much the need of an additional currency
that we find our present system is a failure, Senator. I think at
most seasons of the year we have ample currency, but what we need
is more credit facilities.
Senator H itchcock. O f course actual currency would do for you
just as well as credit?
Mr. Scott. I think I would rather have credit than currency.
Senator H itchcock. When you have a demand for money what
your borrowers want is the money, is it not?
Mr. Scour. No.
Senator H itchcock. They want the credit?
Mr. Scott. They want the credit.
Senator H itchcock. I f you had the money, you could give them
the credit, could you not?
Mr. S cott. Yes.
Senator H itchcock. S o that if you could get the money, which I
will call currency, of the subtreasury in Houston, why would not
that supply all needs?
Mr. Scour. Well, as I remarked just now. that would be a tem
porary expedient to take care o f us until we get something better.
Senator H itchcock. Suppose you could go to it at any time, why
would not that be just as good as any other place of resort?
Mr. Scott. There are some functions which these reserve banks or
central banks will be expected to perform other than the issue of
currency. You see, if this reserve bank was established and we sent
on $1,000,000 of our paper, the chances are we would not ask for
currency. What we want is credit.
Senator H itchcock. T o check against?
Mr. S cott. T o check against.
Senator H itchcock. And the only purpose of checking against it
would be for use in making loans?
Mr. Scour. We want it, of course in such shape that if we had calls
for the currency itself we would have somewhere, some place, to
go and get it; but what the country needs at this time is not more
currency, it is more credit.
Senator H itchcock. Jt does have need for more currency?
Mr. Scott. Only at times when there is fear of a panic and the
people have become alarmed at the situation and begin to withdraw
their funds.
Senator H itchcock. Currency performs the function of credit,
does it not? It would give you the loanable funds, exactly as credit
would, would it not?
Mr. S cott. A s a matter of fact, more than 90 per cent of our de
posits are subject to check, and against which, except in times of
stress, we would not be called upon to pay out a single dollar of cur
rency, unless perchance a depositor needed the currency to meet some
obligations, notes or bills. Ninety per cent of our depositors ask
1650
BANKING AND CURRENCY.
for a credit extension. For instance, a customer may come into our
bank and make a note for $10,000, and it is placed to his credit. He
immediately can step on the outside and give a check for $5,000.
That check may be presented by the holder. He may have need for
the money, and he takes the $5,000 in currency out of our bank, but
otherwise, as a matter of fact, he has not received $1 of currency.
Senator H itchcock . I can not understand your reason for saying
there are times you prefer credit to currency. It seems to me cur
rency performs every possible function of credit.
Mr. S cott. It is not as convenient to commerce as credit.
Senator S h afro th . But it permits you to build up credit on it to
the extent of three or four to one?
Senator H itchcock . Explain why it is not as convenient as credit.
Mr. S cott. There are very few transactions carried out by cur
rency.
Senator H itchcock . Let me assume a case in which you need
$1,000,000 additional in your bank.
Mr. Scott. Yes.
Senator H itchcock . Y ou need it for one of two purposes, either
to pay depositors or to advance to borrowers.
Mr. S cott. Yes.
Senator H itchcock . Those are the only conceivable cases. I f you
had currency, why would not that serve either of them ?
Mr. S cott. Well, if we had the credit to draw against it would be
a more convenient form.
Senator H itchcock . I am asking you why currency would not
serve the purpose.
Mr. S cott. It might, of course.
Senator O ’G orman . Have you any doubt about it, that it would
serve both purposes?
Mr. S cott. Have I any doubt?
Senator O ’G orman . Yes; that the currency would serve both of the
purposes indicated in Senator Hitchcock’s question?
Mr. S cott. It would not be as convenient, of course, as credit.
Senator H itchcock . Explain why.
Mr. S cott. Suppose, for instance, one of our customers came in and
asked for $1,000,000 to be put to his credit. It is a commercial con
cern. They have some obligations for purchases of material and
things of that sort to meet in New York, and they want New York
exchange for $400,000 at a time when they are moving the crops.
We might find it necessary to rediscount some of our paper to meet
that extraordinary payment; but he does not want currency; he
wants New York exchange.
Senator H itchcock. Why could you not have the subtreasury in
Houston wire the subtreasury in New York to place it to your credit
there ?
Mr. S cott. Well, there would simply be the cost of transportation
o f the money from one part of our country to the other.
Senator H itchcock . Y ou will have, in any case, if you are doing
business with the Federal reserve banks to pay it anyhow.
Mr. S cott. Not if we send in our notes for credit. It does not
mean we have got to take right back the currency for it, as I under
stand the bill.
BANKING AND CURRENCY.
1651
Senator H itchcock . That is true. But in all banking transactions
some one has to pay the cost of transferring currency to make the
balances good. You can swap credit as much as you please, but there
comes a time when the actual balance must be met by real currency.
Mr. Scour. That currency is in all forms, of course, and a small
portion of the whole.
Senator H itchcock . Can you conceive any other objection to the
plan I have suggested except there might be times you would prefer
credit to currency ?
Mr. S cott. No; I do not know that I can.
Senator H itchcock . That is all.
Senator R eed. - You spoke about the bankers having an absolute
right to go and get money. You say in your paper here as a heading,
which you read to us:
Incorporate in the law itself some of the rights and privileges of the indi
vidual member banks, and give to the local board of directors of each Federal
reserve bank a wider scope of authority in their management of their respective
institutions.
And then, in your note on that, you say:
As it is now provided, everything will be left to the discretion of the head
board of control, and the member banks have no expressed or implied rights
other than those that may be extended to them by this board at its pleasure.
The law itself should definitely fix the rights of the individual members in the
more important requirements, such, for instance, as to the amount of discounts
which member banks in good standing could not only offer and expect to receive
credit for, and through such credit circulating notes if desired, but that they
would, under the law. have the right to demand the maximum when desired as
their inalienable right under the provisions of the law.
O f course, that means that you want a system by which, if you take
down good notes up to some certain fixed point, you have a right to
demand and receive the money.
M r. S cott. W e won’t have to wait several days to find out whether
they are going to be accepted or not.
Senator R eed. Y ou want a right to go and demand it?
Mr. S cott. Or to send the paper by mail and draw the drafts
against the reserve banks— against the paper.
Senator R eed. O f course, whatever right was extended to your
bank would be extended to all banks.
Mr. S cott. O f course.
Senator R eed. S o that you have a condition, then, where all banks
of the country would have a right to demand certain advancements,
o f course limited in some way by the capital stock o f the bank in
question ?
Mr. S cott. Yes.
Senator R eed. Y ou would make it the duty of this bank to pay
those demands?
Mr. S cott. And furnish you with that line o f credit.
Senator R eed. Suppose they did not have the money?
Mr. S cott. Well, they must not fix the limit beyond a sum where
they would not have it.
Senator R eed. There would necessarily be no money except Gov
ernment money on hand at anj^ time. This Federal reserve bank
has not any sources of income except two: First, its capital that is
contributed to its organization. O f course, it is very small as com
pared with the aggregate of the deposits of the country or the busi
1652
BANKING AND CUBEENCY.
ness of the country. Second, 6 per cent on the deposits. As soon as
those two sums have been paid in or either of them has been paid
in, there is nothing to hinder the bankers borrowing it back, is
there ?
Mr. S cott. Y ou could borrow back not only that sum but double
the amount, less 334 per cent or 50 per cent reserve, whatever that is.
Senator R eed. There must be a 334 per cent reserve back of any
moneys that are issued. But, up to this time, they have not issued
any moneys.
Mr. S cott. We are not going to borrow back the money we put in?
Senator R eed. Why not? The very thing I understand to be
praised in this bill is that you have your money and you do not have
it. You take your reserve out of your bank and put it over into this
bank.
Mr. S cott. And then borrow that same money back?
Senator R eed. And then borrow that same money back and use it,
as long as you have what is called the legal reserve under this bill.
Mr. S cott. I do not understand you can borrow back the money
you put in.
Senator R eed. There is nothing to hinder it.
Mr. S cott. Y ou are going to issue notes; the notes are to be issued
against this sum total that has been put in there as a basis.
Senator R eed. N o ; it does not follow that a single reserve note
will be issued to you or to any other bank unless the managers of
the bank want to issue it, and it is presumed you won’t issue money
as long as there is plenty of money on hand. Now, you draw the
money out. I am just trying to see if we could put your plan into
action. There are some things about it I like. But if you take a
bank that has $5,000,000 of capital and $20,000,000 of reserve, then
it has 600 banks all members, and all have a right to draw back if
they have a speedy necessity for money, would they not ?
Mr. S cott. Well, Senator, in the first place if all banks come in
and contribute this 10 per cent—the national banks alone; I am not
speaking o f the State banks—we will have a paid-in capital of ap
proximately $100,000,000.
Senator R eed. In all the banks?
Mr. S cott. That is it. The amount that would be required to
be lodged with these banks from our reserves will approximate
$400,000,000, in that neighborhood. In addition to that sum there
will be approximately $200,000,000 that the Government will deposit.
Senator R eed. Let us leave the Government out for the present.
Mr. S cott. Let us put it all in, now, while we are about it, because
the bill comprehends this situation. There are the twelve or less—it
would be better were it one, for that matter.
Senator O ’G o rm an . Why would it be better?
Mr. S cott. Because it would be all one system and one unit, which
is always better than a system divided up into several units. 1
think the single reserve association or Federal bank, whatever you
choose to call it, with branches, would perhaps serve a better purpose
than to have it split up.
Senator O ’G o rm an . T o have only one organization?
Mr. S cott. T o have only one organization, with branches. So,
as I say. we will have $700,000,000 in these 12 units, making up one
plan. Now, if we carry a 334 per cent reserve, will not that enable
BANKING AND CURRENCY.
1653
these 12 reserve banks to issue their notes or extend credit facilities
to the extent of double this amount, or $1,400,000,000?
Senator R eed. Yes. What I was trying to find out a moment ago
was, without the issues of notes that the bank might not have any
money. The demand might be so great that this fund might soon be
exhausted. Now, you want an absolute right to compel the issuance
of money.
Mr. S cott. What could be accomplished by mobilizing this money
unless it is intended to carry with it the function of note issue,.and
if we need any money to get back the identical money and the same
amount of money and no more money than we have put in ? Wherein
will we have benefited the situation?
Senator R eed. Y ou would not benefit the situation except through
the issuance of new money. I grant you that.
Mr. S cott. That is the only waj^.
The C h a ir m a n . I do not think it is a correct conception, for the
reason these reserves which you put in, if left in your own vault, are
not usable for loans, and if you put them in the Federal reserve
bank you would have a right to borrow back two-thirds. The bank
keeping back 33^ per cent reserve, you could borrow back twothirds of that which was put in and actually use that much of your
reserves, which you could not now use.
Mr. S cott. Yes; I grant you could do that to that small extent.
The C h a ir m a n . That is not a small extent, because you use all the
capital that is put in there of $100,000,000. And against the deposits
you have $600,000,000, say, of reserve of Government money, of
which you could borrow $400,000,000, and that would go back in your
own vaults in cash.
Mr. S cott. Yes.
The C h a ir m a n . And become the basis of credits, which could be
extended two or three times, perhaps.
Mr. S cott. It is not more money we need.
The C h a ir m a n . It enlarges your credit.
Mr. S cott. Yes; it enlarges our credit.
Senator R eed. Well, that is true, and that is what I was trying
to get Mr. Scott to say, but that also involves this idea, does it not
(we are going to be fair and practicable) : When you take 10 per
cent of your capital and put it over in the reserve.bank and 6 per
cent of your deposits and put that over in that bank and then borrow
that money back, you no longer have any reserve in cash if you loan it
out—use it. And you have also the right to borrow back your own
capital, leaving a reserve of 33^ per cent back of these notes.
Senator S hafro th . D o you understand that if you draw money
they have all got in the bank that back of it you have got to leave
a 33^ per cent reserve?
Senator R eed. N o.
Senator S hafroth . Only when you issue new money ?
Senator R eed. Only when they issue new money. You have bor
rowed the peoples’ money back, and if they borrow it back, they no
longer have it in cash. They no longer have it as a reserve; they
have used that reserve just as effectively as though you went into
your vaults to-day and took out 6 per cent of your reserves and
loaned them, have you not?
Mr. S cott. Y ou have; yes.
1654
BANKING AND CUKRENCY.
Senator R e e d . N o w , you would like to have the right to say to the
Government o f the United States, for that is what it amounts to,
Here are certain good securities and, up to a certain limit, you must
issue money, if necessary.
Mr. S cott. Somewhere; yes. Fix your limit somewhere.
Senator R eed. Where would you put that limit?
Mr. S cott. Well, if these reserves placed in your banks are only
subject to one-third withdrawal or two-thirds withdrawal, and that is
all, the limit would have to be placed very low, because the possibility
of the reasonable bankers getting back those reserves would be very
restricted. For instance, take this $700,000,000. Do you mean to
say under this bill only two-thirds of that can be handed back to the
banks or loaned to the banks?
Senator R eed. N o ; my understanding is the whole of that can be
loaned.
The C h a ir m a n . N o ; it can not.
Senator R eed. We are not speaking about issued money now.
The C h a ir m a n . You are speaking of the deposits. The deposits
of the Federal reserve banks have to have 334 per cent in gold or
lawful money behind them.
Senator R eed. Yes; you do hold back one-third of the deposits.
Mr. S cott. And, Senator, if we start with a mobilization fund o f
$100,000,000, which is to serve as a reserve against the note issue, or
credit issue, will that not take care of an amount just double?
The C h a ir m a n . It would do two things: First, it will allow the
capital to be loaned back in full, without any reserve.
Mr. S cott. Yes.
The C h a ir m a n . You can loan the capital. I f it is $100,000,000
you can loan $100,000,000 of it.
Mr. S cott. Yes; that is right.
The C h a ir m a n . The next feature is you can loan two-thirds of
those deposits, both member and Federal bank deposits. That will
be $600,000,000, making a total loaning capacity of $500,000,000 on
that basis. Now, in addition to that, you then have one-third or 334
per cent of per cent of gold against any note issues you have, and if
you have in the vaults $200,000,000 of gold as a reserve you can issue
against that Federal reserve notes up to twice the amount.
Mr. S cott. I f that is the limit. You start out with $700,000,000,
and after you have issued, say, all the notes that will stand for,
$500,000,000, you still have your $700,000,000.
Senator R eed. N o ; you confuse that. The $700,000,000 is money
in the bank.
Mr. S cott. I understand.
Senator R eed. And that money can all be loaned out subject to
this one limitation. Let me state it in order: All the money of the
Federal Government can be loaned out, as I understand it; all the
banks’ capital can be loaned out; two-thirds of the bank reserves can
be loaned out. That is correct, is it not, Mr. Chairman?
The C h a ir m a n . Yes.
Mr. S cott1. I do not think the Government’s deposits can be loaned
out in full.
The C h a ir m a n . Two-thirds of it.
Mr. S cott. A reserve against that should be kept, just the same as
the deposits of the banks.
BANKING AND CURRENCY.
1655
Senator R eed. N o w , that 33-J per cent is just as rigid as any reserve
in the bank to-day, is it not? It can not be gone into; it has to be
laid aside.
Mr. S cott. Y ou are requiring, however, more than a 33£ per cent
reserve if you can only issue $500,000,000 of notes.
Senator R eed. We are not talking about issue of notes. I am
coming to that. This money can be loaned. Now, in addition to
that, we come to the question of issuing money, Mr. Scott.
Mr. S cott. Giving credits, Senator.
Senator R eed. Then you bring in your promissory notes.
Mr. S cott. The giving of credit is just the same as the giving of
currency or the issuing of currency, and whether I take notes or I am
given credit for it, it is practically the same thing.
Senator R eed. I think you and I are confusing the thing and con
fusing the record. When you bring in your promissory notes and
want a rediscount. Mr. Scott, and get money issued for them, which
they have all said is the main feature of this bill-----Mr. S cott (interposing). It is the main feature of the bill.
Senator R eed (continuing). You can get 66 per cent of money
issued on them and must lay aside 33^ per cent of gold reserves,
making the 100 per cent. Now you want the right to demand o f the
Government that it shall do that when you bring in these proper se
curities. Where would jmu put the limit on that demand?
Mr. S cott. Well, about the capital stock of the bank.
Senator R eed. About the capital stock of the bank. Now, if all of
the banks of the country availed themselves of that privilege, that
would make an absolute right to demand-----The C h a ir m a n (interposing). $1,056,000,000.
Senator R eed. $1,056,000,000. Would not that be a tremendous
inflation?
Mr. S cott. Well, it will scarcely ever be required.
Senator R f.ed. That is the possibility of it?
Mr. S cott. Yes; that is the possibility of it.
Senator R eed. That is an absolute right?
Mr. S cott. Yes; if every bank in the United States availed itself
o f that privilege.
Senator R eed. D o you think the banks of this country ought to
have the right to demand that the Government increase the circulat
ing medium of the country bv $1,056,000,000 without any right on
the part of the Government to check or limit that inflation?
Mr. S cott. Well, I think it should be within the discretion of the
board to refuse any excess at any time to any banks that were ha
bitually using it.
The C h a ir m a n . Any excess over $1,000,000,000?
Mr. S cott. Yes; and the rate of discount would check the issu
ance—you certainly would not borrow it unless there was some un
usual demand for it.
Senator R eed. It is proposed in this bill, as far as the bill goes—
of course if you put a discretion in the board to fix any rate of in
terest it wanted to it could speedily stop you getting money.
Mr. S cott. Let us say, then, one-half of the capital. I just men
tioned the amount of the capital.
Senator R eed. Don’t you think it would be better than either o f
those to give the bankers the right, upon the presentation of a cer
1656
BANKING AND CUBBENCY.
tain class of securities, to get money but always to have, in the
board, the right of refusal. That is to say, that the board, unless
it is inimical to the banking system or the currency of the country,
the stability of the currency, shall grant this money; but if it, in its
opinion, thinks it dangerous, that it shall not.
Mr. S cott. Suppose in a given district there should be banks. As
I understand, under this plan there is no limit to the discounts that
the board w ill extend any member of the reserve bank.
Senator R eed. No ; there is no limit, as I understand it, except the
discretion of the board.
Mr. S cott. As long as their reserve will permit them to extend
additional accommodations they could and will do so.
Senator R eed. That is pretty dangerous, too, isn’t it ?
Mr. S cott. I am leading up to that. I think there should be a
limit somewhere to every applying bank.
Senator R eed. And should not there be a limit upon the board
itself, that it can not go beyond a certain amount?
Mr. S cott. And if it does, there should be a higher tax, which
would automatically retire the excess. I f you will just give me a
minute I will try and bring out that idea to you. Suppose certain
bankers in a district would use considerable money all the year
around, habitual borrowers, and some banks better managed, per
haps, would only need it for a short time, perhaps, during the cropmoving period. Suppose it applied to the Federal reserve board in
a regional district in a time of the year when the reserve was under
its requirement and asked for some discount facilities, and they were
then told that they could not get it. You see the point I am trying
to bring out there. Now. that is the thing that could be done and
ought to be done with those bankers who habitually get the excess.
Senator R eed. Would not you reach that feature by providing a
system by which the bank, when it got its first accommodation,
would pay a certain rate of interest and if it kept that money longer
than a certain period it would pay more, and thus make it so that
some bankers could not constantly keep what is in fact an overdraft?
Mr. S cott. Yes.
Senator R eed. We get down to that question of interest pretty
nearly every time when we run this down, don’t we?
Mr. S cott. Yes.
Senator R eed. Don’t you think it is necessary, now, that this bill
should have incorporated into it a provision by which the interest
rate must, under the law, increase so as to compel the retirement of
these notes which may be issued and of any moneys borrowed from
the bank?
Mr. S cott. There should be some slight excess of the rate from
month to month. I do not think I would make it so high that it
would force it out in less than three or four months, at any rate.
Senator R eed. That is, of course, reasonable. Your paper has
been very interesting, but in view of the fact that we have to have
an executive session of the committee, I will not bother to ask you
any more questions
(Thereupon, at 5.30 o’clock p. m.. the committee went into execu
tive session, at the conclusion of which an adjournment was taken
until to-morrow, Saturday, October I, 1913, at 10 o’clock a. m.)
BANKING AND CURRENCY.
1657
SATURDAY, OCTOBER 4, 1913.
C ommittee on B a n k in g and C urrency ,
U nited S tates S enate ,
Washington, D. C.
The committee assembled at 10 o’clock a. m.
Present: Senators Owen (chairman), Hitchcock, O’Gorman, Reed,
Pomerene, Shafroth, Hollis, Nelson, Bristow, Crawford, McLean,
and Weeks.
The C h a ir m a n . Senator Crawford, if you have some witnesses to
present, the committee will be glad to hear them.
Senator C rawford . Mr. Chairman, I will present Mr. Bassett,
of Aberdeen, S. Dak., who comes here representing the country banks
and interests, generally speaking, of business and otherwise, of the
State of South Dakota in relation to the proposed bill.
STATEMENT OP J. C. BASSETT, PRESIDENT OF THE ABERDEEN
NATIONAL BANK, ABERDEEN, S. DAK.
The C h a ir m a n . Mr. Bassett, will you kindly give the stenographer
your banking affiliations?
Mr. B assett. I am president of the Aberdeen National Bank, of
xVberdeen, S. Dak. I have been engaged in the banging business for
25 years, during all that time in the State of South Dakota. I come
before you, not as an economist criticizing the bill, except as it
appears to us, from a practical standpoint, not to be workable and
practicable for our section of the country.
In the State of South Dakota we have 104 national banks and 504
State banks. O f course, the national banks are the ones that are
particularly affected by this matter. The condition of the State
banks, except as they may be considering the proposition whether
they will come into the system or not, is rather quiet.
I do not care to discuss the various criticisms we may have to pass
on the bill particularly, except with regard to two or three points
that closely affect our district. Strictly speaking, we are in an agri
cultural country, and, of necessity, our paper runs for a longer time
than it does in other portions of the country, and one of the prin
cipal objections that the country bankers have to the bill is with
respect to section 14 relative to the rediscount question— as to the
length of time of the paper.
The C h a ir m a n . It does not say the length o f time o f the paper.
Mr. B assett. The limit of the length of time: that it shall not
be-----The C h a ir m a n . The maturity?
Mr. B assett. The maturity; that it shall not be more than 90 days.
The C h a ir m a n . Y ou do not mean that that would mean the length
of time the paper would run?
Mr. B assett. N o ; I understand we may have 6 months’ paper, and
if it had only 90 days to run-----The C h a ir m a n (interposing). I simply wanted to make that
clear.
Mr. B assett. Yes, sir. O f course, the closest time for money in
our country is during the crop raising period, and also during the
period when we are------
1658
BANKING AND CURRENCY.
The C h a ir m a n (interposing). During what months?
Mr. B assett. The farmer and the cattleman begin to borrow in
March and the first part of April, and the shortest time that class
o f paper runs is until the latter part of October or the first part of
November. The cattle man wants to carry his cattle just as long
as he can, because during the last two or three months they put on
more flesh than at any other time of the year—during the feeding
time.
The C h a ir m a n . When do they begin borrowing in a strong way?
Along about July?
Mr. B assett. Well, they are more apt to in June; the first part
o f June and the latter part of May. They put their money into
their cattle proposition just as early in the season as they can, so as
to get them out on the range. Now, it is, to a certain extent, true
o f the farmer and the grain-raising man that he needs his money
earl}’ in the spring, and of course that runs until fall.
The C h a ir m a n . That grain clears up about July, does it not?
Mr. B assett. It matures about the 10th of August in our country—
the 1st to the 10th of August, and the heavy crop-moving season is
in the middle of October to the 1st of November, from maturity to
threshing time.
The C h a ir m a n . When you begin to get in your payments on
grain ?
Mr. B assett. When we begin to get in our payments on grain.
Our heaviest payments really are the 1st of November.
Now, in the later reports of the comptroller he has asked us to
separate out our different classes of paper as to maturity-----The C h a ir m a n . I will state that I caused that to be done in order
to get before the committee the volume of these maturities, and I
find that there are $3,600,000,000 of maturities inside of 90 days. I
merely mention that-----Senator N elson . But if you will notice the figures you will see
that the biggest share is in the central reserve and the reserve cities.
The proportion is different when you get to country banks. And
then it bears in the different localities-----The C h a ir m a n (interposing). I have those figures and they will
be before the committee. I have had them printed.
Mr. B assett. I presumed that the change in the comptroller’s de
partment had something to do with this bill. O f course, you must
take into consideration that that covers a lot of 30-day paper and
60-day paper-----The C h a ir m a n (interposing). We understand that.
Mr. B assett. A great share of that being in the agricultural and
western country, and a great deal in the larger city banks.
The C h a ir m a n . We have that divided.
Mr. B assett. S o that, as a practical illustration, we find in our own
bank—without giving you the detailed figures—a discount of prac
tically $600,000. I have had those notes sorted out as to what was
actually 90-day paper to run. I found in that $93,800.
Senator N elson . Out of $600,000?
Mr. B assett. Out of $600,000 worth o f paper. That gives you a
concrete case of a bank located in an agricultural country, except that
I believe that in a small town where there are $25,000 banks the
percentage is even more.
BANKING AND CURRENCY.
1659
The C h a ir m a n . H ow much 120-dav paper do you have?
Mr. B assett. O f 120-day paper we had $210,000.
The C h a ir m a n . 1 ou could use half 120-day paper under this bill
for that 33J per cent?
Mr. B assett. Provided the regional bank has.the required amount
of reserve. That could be done in a pinch. I do not know what
that condition might be.
The C h a ir m a n . Moreover, even if they did not have it, they could
issue notes against your business o f a qualified class.
Mr. B assett. Yet I presume that would be rather a doubtful
proposition if they had considered it, if they were not up to the
reserve.
Senator P omerene . Did you give the capital, surplus, and de
posits of your bank?
Mr. B assett. I did not.
Senator P omerene . I wish you would make a statement.
Mr. B assett. The capital of our bank is $100,000, and a surplus
o f $50,000, and undivided profits of $45,000.
Senator P omerene . And your deposits?
Mr. B assett’. The deposits were $1,384,000 at the time I made
this analysis that I speak of.
In that connection, I would say that we are in a town of practi
cally 15,000 people, but, of course, in our paper we have considerable
mercantile paper. That paper, under our rules, we never take longer
than 90 days, while the agricultural paper and the cattle paper we
have to take for the length of time that the party wants it.
Senator Nelson. That is generally five to six months?
Mr. B assett. That is five to six months. I mean by the time
he wants it it is within that length of time.
I notice the argument has been raised that it would be a very
easy matter to take the paper 30 days and then renew it. You
take a cattleman that has $100,000 or $200.000—practically his whole
capital—invested in stock. He does not care to take the hazard o f
being able to renew that at the end of 90 days. He may have per
fect. confidence that his banker will renew it according to his word,
but we have had conditions arise when the banker was absolutely
helpless and that man does not care to put himself in that condition,
to hazard his own business. It would be hard work to induce a stockman to give 90 to 120 day paper, because it would come right in the
middle of the proposition when the cattle have not made the gain
they should, and that is the part that shows the profit. So it looks
to us as if it would be very desirable to be able to take longer paper.
Senator P omerene . Right on that point. I assume that your cus
tomers have been dealing with you for a good while, and while they
know that heretofore they have had six and nine months’ peper,
there has been a change in the banking system of the country which
would suggest the propriety of making that 90-dav paper. That
being the case, don’t you think you would not have as much diffi
culty as at first blush you seem to feel you would have to persuade
them to take that paper and then renew it?
Mr. B assett. I realize the fact that a banker that has been in
business—his customers who have been in contact with him for a
good many years have a good deal of confidence in him and they
would rely upon him somewhat. But they would hark back to 1907,
1660
BANKING AND CURRENCY.
when promises were practically abandoned, and they would bring
that up; they would talk about that.
Senator P omerene . One of the purposes is to prevent the difficul
ties that occurred in 1907.
Mr. B assett. I understand, but they would hark back to that even
under those circumstances.
Senator P omerene . I know, but it seems to me that a banker of
your skill could explain that satisfactorily.
Mr. B assett. I f I had to have 90-day paper I should endeavor to
explain it, to be sure.
Senator B ristow . But the State bank that did not have to come
under these restrictions or change its method of business would not
have to explain.
Mr. B assett. It would not have to explain at all, Senator. All it
would have to do would be to take his paper.
Senator P omerene . And the bank would also have less trouble
if it did not believe-----Senator B ristow . The Senator has a beautiful theory on that, but
I have letters every day from national bankers saying they are going
in under the State banking provision in our State, and from State
bankers saying they are not interested in this because they do not
expect to go in.
Senator P omerene . I want to apologize for interrupting, Mr. Bas
sett. We adopted a rule here the other day, and I perhaps ought not
to have said anything.
Mr. B assett. A s far as I am concerned, I am glad to have you
do so.
Senator P omerene . Y ou were developing that question, and I had
it in mind.
Mr. B assett. I have no set speech, Senator; I am simply talking
from a practical point of view.
Senator C rawford. Y ou say there are 104 national banks there?
Mr. B assett. There are 104 national banks in South Dakota.
Senator C rawford. Do you have any figures to show what the
total capitalization of the 104 banks is, and the amount that the un
impaired capital and surplus would be for all of them ?
Mr. B assett. Yes: I have the comptroller’s statement of the 9th,
which gives those figures. As I remember, the capitalization of
those banks is $27,164,000. with deposits of $32,302,000.
Senator C rawford. What would be the aggregate amount, if you
have ascertained it, that they would have to pay toward the capital
stock of the reserve bank for that region—the i0 per cent?
Mr. B assett. I could figure it out, of course, but I have not those
total figures. It will vary from 70 to 90 or 95 per cent of their
capital. Take it in our own case, with a capital of $100,000. Figur
ing on the 20 per cent basis— and I, as a conservative banker, can
not figure anything else that we would have to pay in—and the
amount we would have in the reserve in the regional bank without
interest— it would figure about 90 per cent.
Senator C rawford. Ninety per cent of what?
Mr. B assett. O f our capital that we would actually lose any in
come from, except what income might come from the earnings of the
regional bank.
BANKING AND CURRENCY.
1661
Senator C rawford. It is only 10 per cent of your capital and sur
plus that you subscribe; you subscribe 20 and pay 10.
Mr. B assett. Yes, sir; I figure that there is another 10 to pay.
Senator C rawford. Yes; but what I am trying to get at is how
much money will be taken out of the State in bulk—loanable assets—•
and tied up in stock subscriptions to the regional reserve bank.
Mr. B assett. The capital stock of $27,000,000 in round figures.
And, as I said, the amount that is put into the reserve from the de
posits, you understand, goes into the regional reserve bank, and that,
as far as we are concerned, is practically dead money as far as any
income is concerned. It would vary from 70 to 90 per cent. I f it
were 80 per cent, it would be $21,000,000.
Senator C rawford. I confess I do not understand it. You sub
scribe only 20 per cent of your capital stock. How much money will
that be?
Mr. B assett. Twenty per cent of the capital stock would be
$ 20 ,000.
Senator C rawford . Yes; but for all the banks in the State.
Mr. B assett. It would be 20 per cent of $27,000,000.
Senator C rawford. Just to get it in the record, what does that
amount to ?
Mr. B assett. $5,400,000.
Senator C rawford . S o that one-half of that paid in cash for the
stock would be-----Mr. B assett (interposing). $2,700,000.
Senator C rawford. That would be no longer available as loans to
your customers in South Dakota?
Mr. B assett. That is correct.
Senator C rawford . They would be deprived o f the use of that
amount in the State?
Mr. B assett. Yes, sir.
Senator C rawford. N ow , what would the reserve tied up in the
. regional reserve bank without interest amount to in the aggregate?
Mr. B assett. The law contemplates 5 per cent of $32,000,000.
Senator N elson . No; it is 5 per cent of your deposits.
Mr. B assett. The deposits are $32,000,000. It would be 5 per cent
o f that; it would be $1,600,000.
Senator N elson . Added to them, that would make it over
$2,000,000, would it not?
Mr. B assett. Added to the $2,700,000, it would make it $4,300,000.
Senator C rawford. That is what I wanted to get at. The effect of
this law as it is presented here would be to take out of the loanable
assets of the national banks of South Dakota this sum of-----Mr. B assett (interposing). $4,300,000.
Senator C rawford . And it would be located in the regional re
serve bank, unless the South Dakota banks which paid it in could
get it back again by reason of discounting their paper in the regional
reserve bank, would it not?
Mr. B assett. They have the opportunity; but what I maintain
is that that class of paper as a whole is only a comparatively small
amount of what they would be able to get back of what they put
out. You have only figured the 10 per cent. Any reliable and
responsible banker if he has an obligation out for 10 per cent—we
have got a 20 per cent obligation—or $2,700,000 more.
1662
BANKING AND CURRENCY.
Senator C rawford . N ow , your town is the second largest town
in the State, it is not?
Mr. B assett. Yes.
Senator C rawford . Well, most of these 104 national banks that
you speak of are located in country towns much smaller than the
one you live in?
Mr. B assett. Towns varying from 2,000 to 500 people, most of
them. I think I have already said that conditions would be even
stronger in favor of having a less amount of that class of paper in
the smaller country banks than in ours.
Senator C rawford. There would be less commercial paper in the
smaller banks proportionately than in a bank like that in Aberdeen,
or a bank situated in Sioux Falls, would there not?
Mr. B assett. Aberdeen and Sioux Falls would correspond quite
closely.
Senator C rawford . Take a small town of from 600 to 1,500 people.
Would they have much paper maturing in 00 or 90 days that they
could rediscount under this law at the regional reserve bank?
Mr. B assett. Very little— only possibly during the month of Sep
tember—the latter part of August, and September and October; say
three months out of the year. A great many of them even run a
year.
Senator C rawford . I did not want to interrupt the thread of your
remarks, but I wanted to get those facts in the record.
Senator P omerene . Just along the line of what you have been ask
ing, may I ask a question? What reserves do you require under your
State law?
Mr. B assett. Under the State law a trifle higher than under the
national—20 per cent.
Senator P omerene . N ow , of course, under the national-bank law
your reserves are 15 per cent now, and under this bill they would be
reduced to 12 per cent. Where do you carry your reserves, gener
ally speaking?
Mr. B assett. In reserve centers like Minneapolis, Chicago, St.
Paul, and New York.
Senator P omerene . And what, in fact, are your reserves on the
average—what per cent of your deposits?
Mr. B assett. From our own bank, our reserves will average from
30 to 35 per cent, including cash on hand and actual reserve.
Senator P omerene . And you carry that largely for convenience, I
take it?
Mr. B assett. For convenience and safety and facility of doing
business. We could not run on a 15 per cent basis, although the law
permits it.
Senator P omerene . Then, how would you be prejudiced by the fact
that the law now would require 12 per cent of reserves ?
Mr. B assett. Because I think there is not any benefit from it. from
the fact that 12 per cent or even 15 per cent is too low to do business
carefully and conservatively and with reasonable speed.
Senator P omerene . Would it not be a good thing for you to have
some place to go where you could rediscount your paper, assuming
that was the custom throughout the country generally ?
Mr. B assett. I consider that I have that now.
BANKING AND CURRENCY.
1663
Senator P omerene. Yes; but in your section of the country is it
not regarded as rather bad banking to do it?
Mr. B assett. It is not regarded with favor.
Senator P omerene. I think that is true generally throughout the
country.
Mr. B assett. Yes, sir; a bank that borrows extensively and shows
it in their statements is not considered in good shape.
Senator P omerene. But if it were adopted as a national policy,
don’t you think it would be regarded rather as good banking instead
o f bad banking to rediscount—when necessary, of course?
Mr. B assett. There may be in the course of a series of years a
complete change of sentiment, but from my own standpoint I do not
regard it as particularly good banking to borrow money for any
length of time to reloan—from a banker’s point of view. But in a
series of years a change of sentiment might come about.
Senator P omerene. That seems to be the condition generally in the
European countries.
Senator N elson. What it amounts to, Senator Pomerene, is bor
rowing money to loan out.
Senator P omerene. I take it that would only be done in cases o f
necessity. Every locality gets into the condition where they need
additional currency for some reason or other.
Senator C rawford. Mr. Bassett, right there, it seems to me that
this system—if the small country national banks of South Dakota
are compelled to go into it—will take out o f their loanable asssets
over $4,000,000 for paid subscriptions to stock of the regional bank,
and that it will also take out a large additional sum that is required
to be kept in the regional reserve bank as a reserve. For that reserve
the bank is to receive no interest, as I understand it.
Mr. B assett. Yes, sir.
Senator C rawford. Upon the stock so subscribed, amounting to
over $4,000,000, the dividends are limited to 5 per cent— or they were
originally in the bill. Now, on the other side, what will be the benefit
to the communities from which this money is taken in South Dakota,
to the banks themselves, and to the people out there who are now
borrowing this money from the banks? What will be the benefit
which they will receive from this system that will compensate the
community and the banks for the loss of the use of this money as it
is being used now?
M r. B assett. I fail to see any particular benefit that m ight arise
from it, except in time of extreme panic. I do not see personally, or
as a banker in that locality, any particular reason why they should
discount, which they would have to do to overcome this loss of
$4,000,000, except in time of stress. It might be a safety valve at
that time.
Senator B ristow. D o you not think a safety valv^ could be created
without having to pay so much for it?
Mr. B assett. I certainly do. I am not prepared to draft a bill
to that effect, but, from a practical standpoint, I believe it could be
done.
Senator C rawford. That is the chief thing in this bill to which you
object and the banks of your State object?
Mr. B assett. That is one of the chief items, and then the question
of exchange charges in another section of the bill.
1664
BANKING AND CURRENCY.
Senator B ristow. Before you go to that, if it will suit you just as
well, let me ask you another question. It has been intimated that a
six months’ rnjte if it matured in three months could be used for re
discounting. Now, how would your customers feel if you sold their
notes and when they came to pay them they would have to pay them
to some bank in Minneapolis or Chicago?
Mr. B assett. O f course, that question would arise with them im
mediately, particularly if it became a custom to rediscount. They
would say: “ Why, we dare not risk that; you may not have that note
at all when the time comes. It may be in the Government bank in
Chicago, and you would not have anything to say about it.”
The C hairm an . D o you mean to say that notes would be paid in
that event in the Government bank at Chicago?
Mr. B assett. I f it was rediscounted—for instance, if Chicago were
the regional point.
The C h airm an . Yes; but it is made payable in your bank.
Mr. B assett. Surely.
The C hairm an . And would be payable in your bank and nowhere
else.
Mr. B assett. Yes; but we would obey the instructions of the re
gional bank that was returning it to us.
The C eiairman . O f course, but if you wanted to extend that paper
you would give them a rediscount again.
Mr. B assett. We would have to assume that responsibility our
selves.
The C hairm an . Y ou would do that in any event?
Mr. B assett. I f I were going to extend it I would extend it; yes,
sir.
The C hairm an . In either case, whether you had sold it or not?
Mr. B assett. I would feel that I had to obey the regional bank in
any case.
The C h airm an . O f course, and it would simply be a transfer of
credits.
Senator B ristow. Under the provisions of the bill such paper as
that, however, would not be available as a basis for currency, for
the alleged merit of this 90-day system is that the money is to be
picked out of the pockets of the people in order to relieve the strin
gency by the payment of these notes. That is one argument that
has been made for 90-day paper. And if it has to be renewed at the
end of 90 days it is not taken out of the pockets of the people, but
it is extended just as it is now.
The C h airm an . I s the Senator asking the witness a question ?
Senator B ristow. I am simply thinking aloud in regard to some of
the remarks I have heard the chairman make in the past. [Laughter.]
Mr. B assett. There is the question of exchange, which, of course,
naturally meets -with a very serious objection from practically all
the country banks. I believe that the business men as a whole over
the country believe, and the bankers certainly believe, in a legitimate
charge for exchange. I f these checks and drafts, that might be
drawn on the various banks in the country were received by the
regional bank at par, as indicated in the bill, and charged to your
account in that regional bank, it would be very questionable at any
time whether a bank would be able to keep up its reserves. It is
an ordinary thing for our reserve bank in Minneapolis to charge us
BANKING AND CURRENCY.
1665
from $40,000 to $G0.000 a day in checks they gather, and a regional
bank would certainly gather a larger amount than that even. We
would not know whether we had $10,000 in the regional bank or
$30,000.
The C hairm an . Y ou would not know that as to the reserve bank,
either, until you were notified?
Mr. B assett. N o, sir.
The C h a ir m a n . A n d one case is the same as the other, is it not?
Mr. B assett. N o ; only to this extent: That in one case we are
obliged to keep it there and in the other case we can tell them not to
charge it off to our account, but that they can send it to us for col
lection.
The C hairm an . D o you not constantly remit to your present re
serve agent in order to offset these checks that are charged against
you?
Mr. B assett. In the daily transaction of business-----The C hairman (interposing). Would you not do the.same thing
with the reserve bank?
Mr. B assett. To a certain extent.
The C h airm an . What would be the difference?
Mr. B assett. Because the reserve bank would charge it to our
account— —
The C hairman (interposing). Your present reserve bank does
that ?
Mr. B assett. No, sir; we do not allow them. We are in a position
to say so.
The C h airm an . Y ou do not allow them to charge checks against
you ?
Mr. B assett. N o, sir; we are in a position to say to them that
they shall not.
The C hairm an . What happens is that they send those checks back
to you and you remit for those checks? Is that the idea?
Mr. B assett. Yes, sir.
The C hairm an . In other words, you are able to keep that out
standing money moving as a volume of checks a little longer?
Mr. B asseti\ Yes. sir.
The C hairman . And in that way you get the volume of interest
for a few days?
Mr. B assett. One of the nice little details-----The C hairman (interposing). One of the nice little details at the
expense o f the country ?
Mr. B assett. I do not think it costs anybody anything.
The C hairm an . I f it does not cost anybody anything, you do not
gain anything.
Mr. B assett. It may cost the reserve bank a little-----The C hairman (interposing). You get the use of it and a positive
benefit, and it does not cost anybody anything ?
Mr. B assett. It does not cost the customer or us anything.
Senator B ristow. The reserve agent does that in order to get your
account?
Mr. B assett. He wants the account that much, at least.
Senator B ristow. Y ou could not go to him when you are compelled
by law to keep your reserve in a Federal bank? Your hands would
be tied so far as utilizing that which you now have is concerned?
9328°— S. Doc. 232, G3-1— vol 2------15
1666
BANKING AND CURRENCY.
Mr. B assett. I do not think the Government bank would submit
to dictation.
Senator P omerene. Did you have any difficulty in getting money in
1907 from the reserve agents?
Mr. B assett. A little; it was not even serious.
Senator P omerene. Y ou would have felt a good deal of relief if
you had not been hampered in that way. would you not?
Mr. B assett. We would have felt relieved if we had not been
hampered by a panic at all. I could not say that the situation was
with us particularly strenuous.
Senator P omerene. It was pretty general all over the United
States, and you felt it to a certain degree in your own State?
Mr. B assett. Oh, yes; we did not sleep quite as long as usual.
Senator P omerene. And if you had had some place at that time
where you could have taken your short-time paper and had it re
discounted and got currency for it, it would have relieved you quite
a good deal, would it not?
Mr. B assett. I did do that and got relief.
Senator P omerene. What per cent did you pay at that time when
you were rediscounting your paper?
Mr. B assett. Six per cent. There was another point I wished to
touch upon, and that was relative to farm loans, in section 2G.
Senator P omerene. In that connection, what was the controlling
rate o f interest up there? When you were getting it at 6 per cent,
what did you charge your customers for it ?
Mr. B assett. From 8 to 10. The majority—our average rate is
about 7 to 8 at the last statement. There is a difference between a
business rate and a cattle rate.
Senator N elson. What are your lowest rates?
Mr. B assett. Merchants’ paper at 6 per cent. O f course, we do
not see any money in borrowing money at 6 per cent and loaning it
to the merchant at 6 per cent.
Senator C rawford. Mr. Bassett, before you take up this other
point I should like to get a statement from you—that is, if you are
able to give it—with reference to the proportion of paper held by
all the national banks in South Dakota that would be rediscounted
at a regional reserve bank under this proposed law. What propor
tion of the paper held by national banks in South Dakota, as they
run—little banks of $25,000 and larger banks like yours— would be
within that class that would be rediscounted?
Mr. B assett. I would only be able to estimate that from my rela
tion with the bankers of my State, and from my connection with
State bankers in country towns, which would issue that class of
paper. I would say 15 to 20 per cent only.
Senator C rawford. Not more than that?
Mr. B assett. N o; because the smaller the town, the more sparsely
settled the community, the more apt that paper is to be a long-time
paper.
Senator C rawford. I s it not also a custom to renew and extend
from one crop period to another crop period, accepting the interest
and a small payment and extending the balance, so that the average
loan will extend over a considerable period of time?
BANKING AND CURRENCY.
1667
Mr. B assett. That does happen. I would not say that that is the
custom. A certain percentage of that paper will figure out that
way; but I would not say that was the custom, for a man’s paper
to go on from year to year.
Senator N elson. What proportion of your national banks are
those small $25,000 capital banks? It must be a majority of them.
Mr. B assett. I should say 60 per cent of them.
Senator N elson. Which come under that category?
Mr. B assett. Under that $25,000 capitalization. When the law
allowing banks to organize with a capitalization of $25,000 went into
effect many national banks were organized on the strength of it. I
would say in this connection you remind me of the fact I had in
mind to organize two other national banks soon, but it has entirely
departed from my mind since this bill has been pending. I do not
think I want any more national banks.
Senator Crawford. The customers of those little $25,000 banks, as
a rule, are farmers and stockmen and retail merchants, little country
storekeepers ?
Mr. B assett. Yes, sir; in the small towns.
Senator C rawford. Almost exclusively the borrowers are of that
class in the small towns where you have banks of $25,000 capital.
Is not that true?
Mr. B assett. Practically all of them. I f there is nothing further
relative to these short-time loans, I would like just for a moment to
speak relative to section 26, “ Loans on farm lands.” I have not
seen that there is being very much said about that— about the 12month period originally amended from 9. I think. It does not cover
the contingencies of the case that arise in our country. I f a farmer
makes a loan on his real estate—our land is of good value—he makes
it for further improvements on the land, so it is usually made for
three to five years. I would be inclined to think that that would be
rather a long-time loan for a national bank to make, but, to my idea,
if it was made for two or three years—not less than two years—it
would be practicable for the national banks in our country to take
considerable of that paper, to the extent it is limited in the proposed
bill. It is limited as to what they can take. As I understand it,
in the South the cotton grower is accustomed from the training of
his banker to give a mortgage for a short time. But that can not be
done in our country, because the money the farmer borrows is not to
raise his crop. He is usually good enough to get that on his note,
or a note with a signer, or on chattel security. The question has
always been raised that the real estate mortgage was not liquid. T
found during the panic of 1907 if there was anything in our bank
that we could raise money on it was a real estate mortgage.
The C h a ir m a n . Where did you raise it principally?
M r. B assett. From the farmer himself. I f a farmer came in the
bank— I do not know of any case of this kind, but I know with some
it did happen— and he Avas scared he was not going to get his money
and was given a real estate mortgage o f some neighbor he knew, he
was perfectly satisfied.
The C h a ir m a n . That occurred in quite a few places in the country?
Mr. B assett. Yes. And really during the panic of 1907 that was
the most mobile asset we had; but I believe in this case there is no
1668
BANKING AND CURRENCY.
question that it should run for two or three years, to be made by
national banks.
Senator N elson. I know of two instances in the southern part of
my State in the panic of 1893 and 1894 where a run was checked by
the giving of mortgages.
The C hairm an . Yes; Festus J. Wade went about through the
country doing that very thing, and he made over a million.
Mr. B assett. The bank said:
Why, when you let us have the money you did not expect for a moment we
were going to let it lie idle? We loaned it out on your neighbor’s mortgage,
and here it is.
The C h airm an . That was done in quite a few instances, and
Festus J. Wade, on his own activities, went through the country and
sold mortgages in $500 amounts. The mortgages were issued in the
first place for $500 amounts, so as to make them a marketable
security.
Senator N elson. I would a great deal rather take a good farm
mortgage than any railroad stock or bond you could give me.
Senator B ristow. I f farm-mortgage security was given the same
advantages that it is proposed to give this commercial paper, would
it not add to the desirability of farm mortgages as security? That
is, if the Government would take a farm mortgage as a basis for cur
rency, would it not make a farm mortgage a more desirable loan
than it is now without such a privilege?
Mr. B assett. It would not, on account of the lack of elasticity or
ability to raise money quickly.
Senator B ristow. Y ou can raise it more quickly upon the other
security?
Mr. B assett. Yes. May I ask what the suggestions to the com
mittee have been on this point as to the length of time of real-estate
mortgages ?
The C hairman . The suggestions made by the witnesses have been
to extend it from nine months to five years.
Mr. B assett. That is, the mortgages to run for five years? I am
inclined to think that would be a little long as this is too short.
There was one other point, relative to the savings department. I
know a great many banks throughout our country are carrying a sav
ings department purely, I think, at the pleasure of the department. 1
do not know that it is authorized in any way, but there are no sav
ings banks, practically, in our country. There are only two in the
State. The condition exists differently there than it is in New’ Or
leans or east of the Ohio in that respect, and it occurs to me there
is no reason why they ought to be obliged to wait a year before they
can organize a savings department under this act. It would make a
loss of time after the going into effect of the new act which, it occurs
to me, would seriously affect business.
Senator H ollis. D o you not think those banks would rather con
tinue under the present system, by courtesy of the Comptroller, than
to adopt a hard and fast law like this?
The C hairm an . A good many of the bankers have objected to the
savings-bank provision, because of new rules and regulations that
would perhaps change the class of investments, and that is the reason
the Senator asked you that question.
BANKING AND CURRENCY.
1669
Mr. B assett. Well, as they are doing business now, they pay no
particular attention to it, but there would be safeguards thrown
around this savings department, relative to the withdrawal of de
posits, that, to my mind, would be a safety. We all know in times
of panic the savings-bank depositor is the fellow that is scared first,
but you take a savings bank doing business and they can put up a
sign in their teller’s window, “ We have taken 60 days’ notice,’’ and
leave the doors open and go on and do business. I f a national bank
at the present time is running a savings department, and they put a
sign in their teller’s window, “ We have taken 60 days’ notice,” they
would either be flooded with depositors after their money and would
have to close up the commercial department, too, or shut their doors
immediately.
Senator H olllis. D o you feel at present the savings departments
are rather loosely conducted and ought to have safeguards thrown
around them ?
Mr. B assett. They are not as safely conducted as the average sav
ings bank throughout the country; no.
Senator H ollis. Ought they to be? What is your opinion about
that?
Mr. B assett. My opinion is that the deposits of the savings bank
can use a little different class of investments than the deposits of the
commercial bank.
Senator H ollis. Just give me your opinion whether you think they
are too loosely conducted now and ought to have more safeguards
thrown around them.
Mr. B assett. I do not know as I would care to say they are too
loosely conducted. I would prefer to say I think it would be better
if they were limited as to their class of investments for the savings
department.
The C hairm an . Y ou have a State bank, I believe, have you not?
Mr. B assett. The bank of which I am president is the Aberdeen
National. I have six State banks operating under State laws, but
I only referred in this matter to the national-bank proposition. I
have taken some pains since this law has been under consideration
to ascertain the condition of the country banks, and the large ma
jority o f them feel that it would be onerous under the present re
strictions; and unless it was quite materially changed, in respect to
some of the suggestions that have been offered from time to time,
they would be very apt to go under a State charter. And I do
know that the State department of banking expects a large increase
in their department if this law should go into effect as it is.
Senator C rawford. Y ou think it would be much more just to the
class of banks, such as those in South Dakota, if under the bill it was
made optional with these small banks to subscribe or not subscribe
to the stock of these regional reserve banks, do you not? You think
that would be much more just than to leave it as at present?
Mr. B assett. I think it might be much more just, but I do not
think you would get one of them in. I do not think they want the
safeguards.
Senator C rawford. They would not exercise the option in favor
o f coming in?
Mr. B assett. I do not think they would under the present condi
tion.
I think if it is modified they would.
1670
BANKING AND CURRENCY.
Senator C rawford. I think perhaps some of the larger banks
they have in Sioux Falls, Lead, or any large town might think they
could use the rediscounting feature of this Federal reserve bank,
while the smaller banks in the smaller towns would not be able to
see any benefit.
Mr. B assett. That might seem so, but in the case of Sioux Falls,
the largest town in the State, there are the two largest banks in the
State. They are State banks. I do not think they have any idea
of conducting a national bank under any conditions. It does not
necessarily follow that the national banks will always have the
largest business in the towns.
Senator B ristow. Mr. Bassett, if this system was established,
there would be some of the large banks in the commercial centers
that would come into it, probably a number of them. They could
get these rediscounts on their paper. They would be desirous of your
deposits or the deposits of the State banks, and they would want to
be your correspondents the same as they do now, and they would
guarantee to take care of you in time of trouble through this re
serve bank, which they could go to doubtless in order to secure your
business, would they not?
Mr. B assett. The reserve banks you are speaking of?
Senator B ristow. Yes.
Mr. B assett. Not the regional banks, but the reserve banks?
Senator B ristow . The reserve banks that were members of the
regional banks.
Mr. B assett. Oh, I think they would be just as anxious for our
business as they are now, from their standpoint.
Senator B ristow. And so far as getting help in time of trouble
is concerned, you would not have to be a member also of the regional
reserve bank in the practical operation of business ?
Mr. B assett. Under this bill?
Senator B ristow. Under the bill.
Mr. B assett. A s a national bank I would have to be.
Senator B ristow . But you would not have to be a national bank.
Mr. B assett'. N o.
Senator B ristow . Y ou could give up your charter and take a State
charter.
Mr. B assett. Yes.
Senator B ristow. And let the burden rest on the other fellows.
Mr. B assett. That is what I say will be the result of the bill if it
stays as it is, but I think you gentlemen will make amendments to it.
Senator B ristow. D o you think there ought to be any change made
in the national-bank law ?
Mr. B assett. I do not pose— I pose more as a practical banker than
I do as a critic of the present national system, only I do know this,
that the currency problem under the present law lacks elasticity.
We have that illustrated very strongly by the banking experts, also
in the accumulation and pyramiding of reserves.
Senator B ristow. The reason of my asking you is because you are
a practical banker. I get a good deal more information that is useful
to me from practical bankers than theorists, and that is the reason I
like to have actual bankers come in, because they give us practical
notions as to how it would affect business and not theoretical notions
BANKING AND CURRENCY.
1671
what ought or ought not be or might happen to be. Your trouble,
then, if there is trouble with the national-bank law, is not in the
national banking law so much as in the elasticity of your currency?
Mr. B assett. Yes; and particularly at the crop-moving time, when
we do require a great deal of currency.
Senator B ristow. Yes. So if provision was made whereby you
could secure additional currency upon your assets, temporarily, from
the subtreasury or from a bank— a Government bank of some kind—
there is not any other relief you can think of that would be de
sirable ?
Mr. B assett. In general. I would consider that that was the
desired point, and that is the weak point in the present nationalbank law.
Senator B ristow. What reserve do you carry in your vaults; what
per cent of your deposits?
Mr. B assett. The law requires 6 per cent. We carry probably
8 to 10 per cent.
Senator B ristow. Eight to ten per cent. What per cent of your
deposits do you carry with your correspondents?
Mr. B assett. Well, 25 per cent, in round figures. Our total re
serve runs from 30 to 35 per cent in our case.
Senator B ristow. Y ou find that necessary to handle your business
properly ?
Mr. B assett. We find that necessary to handle our business prop
erly and expeditiously, and at the same time to make it perfectly
safe.
Senator B ristow. S o that this reduction from 15 to 12 is a matter
o f no consequence?
Mr. B assett. It does not affect us. I do not think, except in the
ory, it affects hardly any bank.
Senator B ristow. I f you became a member of this new banking sys
tem and deposited your reserves with the regional bank, as you would
have to do, what deposits would you find it necessary to keep in the
present commercial centers where you now have your reserves,
anyway?
Mr. B assett. I do not see that it would change the condition as to
how much money we would have to have in the reserve cities, like
Minneapolis, Chicago, and New York, than what it is now, except part
of it. instead of being in the present reserve banks, would be in the re
gional reserve bank. I do not know of any reason why it would
change the general trend of business or require less money in Chicago
than it does now.
Senator B ristow. Y ou carry a reserve in New Y ork ?
Mr. B assett. Yes, sir.
Senator B ristow. O f what per cent?
Mr. B assett (continuing). Because we have to.
Senator B ristow. Y ou keep that there as a matter of business?
Mr. B assett. On account of the transfer of funds, particularly. I
do not think the average western bank carries as much money in
New York nowadays as it did 10 years ago.
Senator N elson. They have not since 1907.
1672
BANKING AND CURRENCY.
Mr. B assett. I think. Senator, they all learned something in 1907.
And then there is the further reason that Chicago answers the pur
pose of our country in an exchange way that it did not answer some
years ago. In other words, it is becoming more of a reserve center.
Senator W eeks. What did you learn in 1907?
Mr. B assett. We learned with the first notice that currency was a
shy article and we should not receive any from New York. We felt
it coming down the line.
Senator W eeks. Did you receive any ?
Mr. B assett. Did we receive any notice?
Senator W eeks. Yes.
Mr. B assett. I received a telegram from Chicago and a phone
message from Minneapolis. The phone message from Minneapolis
stated that the New York banks had shut off and they were not re
ceiving currency from any source. Consequently, they shut off on us.
Senator W eeks. Did you ask New York for any circulation at
that time?
Mr. B assett. N o, sir.
Senator W eeks. Had you ever done it?
Mr. B assett. I have borrowed money in New York.
Senator W eeks. I mean, have you asked for currency from New
York?
M r. B assett. N o, sir.
Senator W eeks. Y ou have never done so?
Mr. B assett. It is too expensive. We are willing our nearest re
serve bank should pay the express on it rather than ourselves.
Senator W eeks. Yes. What I was trying to get at was, if you did,
in 1907, ask New York for any currency?
Mr. B assett. N o, sir; because I thought I knew better.
Senator W eeks. Why did you know better?
Mr. B assett. I read the papers every day, and I took my banker’s
word in Chicago that he could not get any currency.
Senator W eeks. D o you not know that the bankers, wherever they
did ask for it in New York, did get currency from that center?
Mr. B assett. N o, sir; I did not know that fact.
Senator W eeks. Did you ever undertake to find out whether they
did or not ?
Mr. B assett. I took their word for what they told me.
Senator W eeks. Don’t you know perfectly well, Mr. Bassett, that
every banker was trying to husband his own resources at that time,
naturally enough?
Mr. B assett. Yes, sir.
Senator W
eeks .
Y ou and every other banker?
Mr. B assett. Yes, sir.
Senator W eeks. And don’t you know every banker was discourag
ing any man who wanted to obtain currency, fearing that he would
be short at the same time when he actually needed it ?
Mr. B assett. Yes, sir.
Senator W eeks. And is it not probable that your Minneapolis
and Chicago bankers passed along that word to you from New York
because they did not want you to draw on them ?
Mr. B assett. I think every banker was endeavoring to conserve
his own resources.
BANKING AND CUEBENCY.
1673
Senator W eeks. Y ou know at the beginning of the panic, the
New York bankers had the reserve, didn’t you?
Mr. B assett. I understand they did.
Senator W eeks . And you know at the end of the panic they did
not have the reserve ?
Mr. B assett. I am not laying any particular claim against the
New York bankers but what they did the best they could for the
country.
Senator W eeks . I am trying to find out what you learned in 1907.
Wasn’t it a fact that the comptroller’s report in December, 1907,
shows that the country banks had increased their reserves and the
reserve city banks had decreased theirs during the panic?
Mr. B assett. I will take your word for that.
Senator W eeks . Y ou may take my word, but the figures show it.
Mr. B assett. Y ou ask if I know it. I am not familiar with the
figures enough to know it, at this minute, but I am inclined to
think so.
Senator W eeks. I simply want to determine from you whether you
were refused currency by your New York or any other reserve agent?
Mr. B assett. Yes; I was, by other reserve agents.
Senator W eeks. Y ou were by other reserve agents. Now, what
would your deposits in a year with your reserve agents amount to?
Mr. B assett. The average?
Senator W eeks. The volume. Last year how much do you sup
pose you deposited with your reserve agents?
Mr. B assett. Oh, I do not know. Our average balance would
probably be $275,000.
Senator W eeks. D o you suppose you deposited $25,000,000?
Mr. B assett. Somewhere in that neighborhood.
Senator W
eeks .
H ow much of that was currency?
Mr. B assett. A small part of it.
Senator W eeks. What per cent?
Mr. B assett. Five per cent, maybe.
Senator W eeks. H ow much currency do you suppose you have re
ceived from your reserve agents during the past year? As much as
you deposited?
Mr. B assett. About 10 times more.
Senator W eeks. About 10 times more. Now, do you think on the
whole (I ask you this question without any prejudice), that you are
entitled to ask your reserve agent for something you do not deposit
with him?
Mr. B assett. Yes.
Senator W eeks. In other words, if you deposit credit and not cur
rency, do you think you are entitled to currency ?
Mr. B assett. Yes, sir.
Senator W eeks. Suppose he sent back the credit ?
Mr. B assett. I think we are entitled to currency, because we send
him items on which he could go over to the Treasury or the subtreasury and get currency.
Senator W eeks. That is quite true. But in 1907 he could not do
it, could he? Now, I am not complaining of you, and I am not com
plaining of the reserve agent, but I am simply trying to demonstrate
that it was at the head the system broke down. The reserve city
1674
BANKING AND CURRENCY.
banks had no resources from which they could replenish the currency
which their customers were entitled to call on them for, and that is
one of the things we want to correct now. We want in some way to
provide so that the banks everywhere— in the reserve centers and
everywhere else— will be able to get circulation whenever they need
it— in trying times as well as in normal times; and it is the system,
at the head, that broke down in 1907.
Mr. B assett. All right; but don’t understand me to say I don't
think that the currency issue in this bill is not the good feature of it.
Senator W eeks. N o.
Mr. B assett. I say it is the good feature, and the only one I see of
any moment.
Senator W eeks . I rather got the impression from your manner
o f answering Senator Nelson’s question, that you were critical of the
reserve banks; that they did not do what they should have done in
1907.
Mr. B assett. I do not mean to cast that reflection. I mean to say
that the panic of 1907, I believe, has caught every conservative
banker the nearer home lie can keep his reserve the better.
Senator N elson. That is the point.
Mr. B assett. I never had better treatment in my life than from
my New York correspondent, with whom I have had an account for
24 years.
Senator W eeks. You mean in regard to their being mobile, that
you can keep your reserve better nearer home?
Mr. B assett. In the main, actually nearer home. I f there was a
reserve city at Minneapolis, I would prefer to keep it as near there as
practicable if it will answer my practical purposes for exchange, and
I think, to a great extent, that is a reason why the money is now kept
in Chicago.
Senator W eeks. In other words, Chicago banks are stronger?
Mr. B assett. Sure.
Senator W eeks. H ow much money did you make last year, gross?
I do not think I am asking a personal question, because I suppose
you make that statement in your statements which you make to the
comptroller.
Mr. B assett. We do; but that is not for general publication. In
dividually, as far as my banks are concerned-----Senator W eeks (interposing). Do you have any hesitation of tell
ing what you made ?
Mr. B assett. I have no hesitation in telling the dividends.
Senator W eeks. What is the capital?
Mr. B assett. $100,000.
Senator W eeks. Let us suppose you made $30,000 gross and
$20,000 net. What percentage of that was made from exchange?
Mr. B assett. There is not enough difference between the two allow
ances there.
Senator W eeks. I knowT there is not; but you are not inclined to
tell me what the real facts are, so I am supposing it. I know what
the difference ought to be.
Mr. B assett. I did not wish to cast any reflection------Senator W eeks (interposing). H ow much of that did you make
from exchange?
BANKING AND CUKRENCY.
1675
Mr. B assett. About $5,400, in your figures, and that is what our
exchange was. I would just as soon tell you that.
Senator W eeks. Your exchange was $5,400?
Mr. B assett. $5,400 last year.
Senator W eeks. Have you figured out in your own mind whether,
if the present bill, the pending bill, became a law, thare would be any
material saving in exchange to the business community?
Mr. B assett. T o my own local business community I do not think
there would be any.
Senator W eeks. O f course it is not, I assume, the desire of this
committee to do anything to interfere with the normal course of busi
ness, but the cost of collections in this country is a very large- item.
And while we are considering the problem, if there is any way of
reducing the cost of collections within reasonable limits, we ought to
adopt it. Now, the complaint that has been made by the country
bankers, without exception, I think is that if the pending bill is
adopted it will materially curtail their earnings, and that is one of
the main reasons why they object to it.
Mr. B assett. That, I think, is correct.
Senator W eeks. I f it is to curtail their earnings, will there be a
benefit to the business community commensurate with that lessening
o f earnings?
Mr. B assett. N o, sir; I think not. I do not think there would be
any benefit to the business community.
Senator W eeks. Have you figured that out pretty correctly, so
that you feel justified in making that statement?
Mr. B assett. Yes; I feel—you understand, not one person or two
persons, or two concerns, paid this, but this $5,400 was in 10-cent
items, or possibly 15-cent items, scattered over the whole territory
over which the checks circulated. That was paid by the Chicago
merchants, the St. Paul merchants, and some of it by the New York
merchants, and I think the burden of that amount was broadly scat
tered. It is not a burden, sir, on anyone, and it will make quite a
difference to the banker.
Senator W eeks. Let us take your individual case, Mr. Bassett.
I f we pass the bill as it came from the House, and it becomes a
law, what are you going to do as president of the Aberdeen bank?
Mr. B assett. I can tell you what I think I am going to do.
Senator W eeks. O f course, you can not say definitely because you
have your stockholders to consult and vour directors, and all that
sort of thing. But what would you be inclined to advise them to do?
Mr. B assett. I am inclined to think I would advise them to take
out a State charter and be able to compete with our neighbors across
the street and our neighbors in the other block.
Senator W eeks. Assume that you do that and the bill passes in its
present shape, and the exchanges are so diverted that they go through
the regional bank; do you think you are going to be able to compete
successfully with the member bank under those circumstances?
The C h a i r m a n . What is that question, again?
Senator W eeks. Excuse me. I did not intend to turn away from
you. I am asking if the Aberdeen National Bank gives up its national
charter and takes out a State charter, if Mr. Bassett does that, and a
material part of the exchanges are diverted so that they are to go
1676
BANKING AND CURRENCY.
through the regional bank, if he thinks he can compete successfully
with the member bank in his own community.
Mr. B assett. Yes; I still think I could. I certainly would not
be any worse off than they are, and I might be better off.
Senator W eeks. N ow , from your own standpoint, what do you
think we ought to do in changing this bill, to make it satisfactory
to you, so that you will become a member bank and so that you will
change your State banks into national banks, and they become mem
ber banks?
Mr. B assett. Well, the recommendations I have been talking about
are the changes—two or three of them 1 have been talking about.
One was the change in allowing longer time paper to be used for
discount.
Senator W eeks. Then, if we take your testimony, as your opin
ion and adopt what you have suggested, you would feel justified in
doing that, would you, in becoming a member bank and taking out
national charters and having your State banks become member
banks, as well?
Mr. B assett. Some of them, yes. I am inclined, however, to say
this—do not understand me that I am opposed to everything in this
bill.
Senator W eeks. Nobody is, Mr. Bassett.
Mr. B assett. I think it has some good features.
Senator W eeks. Everybody agrees there are a good many good
things about it.
Mr. B assett. Yes; I do not want you to think, sir, that I think
that.
The C h airm an . What are the good features, as you understand it?
Mr. B assett. The principal good features—you mean in the bill
as it stands?
The C h airm an . Yes.
Mr. B assett. Oh, in the bill just it stands, I do not see many good
features.
The C h airm an . D o you see anything whatever good in it? I f
you do, I would like you to mention it. I f you do not think there
is, I would be glad to have you say that.
Mr. B assett. Oh, I do not know as I care to go on record exactly
as passing on the bill as a country banker. I do not think I care
to put my opinion up against all you gentlemen in the Senate and
House about that.
Senator H itchcock. Would you be willing to take it after we get
through ?
(No answer.)
The C hairm an . D o you know who the author is?
Mr. B assett. I assume the names of the parties that appear on
the bill.
Senator W eeks. Mr. Bassett, you were asked by the chairman
who, and we would like to know.
Mr. B assett. I say I assume the parties whose names appear on
the bill.
Senator S hafroth. D o you not think the right to go to the reserve
bank with 60 and 90 day paper and discount it and get the money
for it is a very valuable and good thing in the bill ?
BANKING AND CURRENCY.
1677
Mr. B assett. I f I had a sufficient amount of that paper I would
think it was.
Senator S hafroth . Would you not have, if you wrere in distress,
and wanted to get money to meet a run on the bank? Wouldn’t you
think it pretty much of a salvation to you ?
Mr. B assett. I am inclined to think that the bill would overcome
a panic condition, such as existed in 1907 ?
Senator S hafroth . Are not the panic conditions the most serious
conditions to the bankers?
Mr. B assett. Yes, sir.
Senator S hafroth. And this bill, at least, would remedy that
condition, would it not?
Mr. B assett. I am inclined to think it would overcome that con
dition.
I do not know as I know of any other features.
Senator S hafro th . Don’t you think the right to get new currency
into your community by hypothecating commercial paper would be
a good thing, independent of the amount that is coming to you?
Mr. B assett. D o you mean because it is new, instead of old ?
Senator S hafro th . N o ; but because there is a shortage of money
and there will be more money to relieve a strain.
Mr. B assett. I do not agree with you on that point, because I
think we would have to pay out more money than we would get
back under the percentages required in the act.
Senator S hafroth. Y ou would hypothecate your securities. You
would not pay any money in the reserve bank. You would go and
get money issued to you, according to this bill ?
Mr. B assett. Oh, yes; you would pay 10 per cent of the capital.
Senator S hafroth . I mean in times of stress.
Mr. B assett. You would still have times of stress.
Senator S hafroth. Certainly, you would; but would that be an
inducement, in your opinion? You would be drawing 5 per cent
interest and get 40 per cent of the net earnings?
Mr. B assett. That is where I differ with you. I do not think we
would be drawing anything.
Senator S hafroth . That may be, but the bill allows it, anyway ?
Mr. B assett. Yes.
Senator S hafroth . Don’t you think you would be drawing any
thing? Don’t you know the United States Treasury would deposit
every dollar of general revenues now in these banks?
Mr. B assett. Yes.
Senator S hafroth . And don’t you know that amounts to about
$285,000,000 ?
Mr. B assett. I will take your word for the figures.
Senator S hafroth. Don’t you think that money would earn some
thing to go toward a dividend or interest o f 5 per cent on the capital
stock ?
Mr. B assett. I f you went into the general banking business, I
think it would.
Senator S hafro th . They are not going to hold the money away
from the people, are they?
Mr. B assett. It looks to me like a lovely theory.
Senator N elson . One thing, Senator Shafroth, you overlook, is
that under this new tariff bill they won’t have that much money.
[Laughter.]
1678
BANKING AND CURRENCY.
Senator S hafroth . That depends. They say they will have
$18,000,000 more after that. Don’t you think. Mr. Bassett, that
would be a great advantage to your bank, if it goes into this thing?
It will get such a large amount of deposits on which to loan out,
and there may be an income to the regional bank coming back.
Mr. B assett. N o, sir: I don’t think so.
Senator S hafroth. Y ou don’t think so?
M r. B assett. N o, sir
Senator S hafroth . Y ou think they are going to lock that up there
and not let anybody have any of that money, do you ?
Mr. B assett. I do not see how they are going to make 5 per cent,
unless they go into the general banking business; but I would not
pass on that. That is simply my opinion.
Senator S hafroth . Don’t you think the money you put into this
regional bank, as your reserve—do you suppose they are going to
lock that up and not have any income on it at all?
Mr. B assett. N o ; I don’t think they are going to do that.
Senator S hafroth . They are going to let it out, are they not?
Mr. B assett. I mistrust so; but it does not say under the bill what
they are going to do.
Senator S hafroth . The bankers elect six of the board of directors
in the regional bank.
Mr. B assett. They do not elect anybody on the general board.
Senator S hafroth. They elect three directors.
Mr. B assett. In the regional bank?
Senator S hafroth. Yes. They elect three to represent the agri
cultural, commercial, mechanical, or industrial interests of the dis
trict, do they not?
Mr. B assett. Yes.
Senator S hafroth . They are chosen bv the banks themselves,
those six?
Mr. B assett. Yes.
Senator S hafroth . Are they going to sit down and do nothing
with this money and make nothing for the regional bank?
Mr. B assett. I f the main board tells them to do nothing, I think
they will.
Senator S hafroth . D o you think the main board would tell them
any such thing as that ? Do you not think they want to make a
success of it?
Mr. B assett. O f course, if the Government is going into the gen
eral banking business, for the sake of making money, making 5 per
cent on whatever money is in that regional deposit, I am. of course,
inclined to think the country banker would be more strongly opposed
than ever.
Senator S hafroth . The powers of this regional board are simply
directory and supervisory. They do not go into the loaning and
discounting personally. They are not in the banking business any
more than the Comptroller of the Currency right now is in the
banking business, or to a much greater extent.
Mr. B assett. N o ; but it has a pretty good control, you know.
Senator S hafroth. S o has the Comptroller o f the Currency got
a right to make suggestions.
Mr. B assett. They are received too, and acted upon.
BANKING AND CURRENCY.
1679
Senator S hafroth. Y ou do not suffer any hardship because of the
supervision of the Comptroller of the Currency?
Mr. B assett. N o, sir; I do not regard him as a competitor. I
regard his control as proper.
Senator S iiafroth. Y ou think when this bank does not receive
business outside, in competition with banks, that it is going to be a
competitor of the member banks?
Mr. B assett. I think it would have to be if it is going to earn
its dividends. According to what you say I am not inclined to
think so.
Senator S hafroth . That is all.
The C hairm an . Who is your other witness?
Mr. B assett. Mr. Jewett, a wholesale man from Aberdeen.
Mr. S hafroth. I want to ask one more question, please. Do you
think that this rate that should be paid to the bank should be 6 or
5 per cent? We have had a great difference of opinion on that.
Mr. B assett. I do not think it will cut any figure, because I do
not see how it is going to earn either one, so I am as perfectty
satisfied with 5 as if you make it 6.
Senator H itchcock. I was not in when you testified in chief, Mr.
Bassett, and I wanted to ask you a question, or perhaps a series o f
questions. Suppose a subtreasury of the United States were located
in your State, or conveniently thereto, with the facilities for advanc
ing national banks currency to the extent of 75 per cent of their
capital, upon the deposit of adequate security, at a reasonable rate
of interest so designed as to force the retirement of the loan within
a few months, would that facility be of any considerable addition
to the bank facilities of your State ?
Mr. B assett. Let me ask you, what is the basis of that loan?
Senator H itchcock. The basis would be the deposit with the
agent or the subtreasury of adequate security consisting either of
United States bonds at par, State bonds at 90, municipal bonds at
90, or commercial paper at 80 per cent of the face value. Suppose
there was a subtreasury within a few hours of your town, and you
could, upon the deposit of such securities, get as a matter of right
75 per cent of the capital of your bank ?
Mr. B assett. I think that would be an advantage. I think it would
be generally considered by the banks to be an advantage.
Senator H itchcock. It would be in addition to all the other facil
ities you now enjoy through your banking connections?
Mr. B assett. Yes, sir.
Senator H itchcock. What rate of interest, under such conditions,
would you consider reasonable ?
Mr. B assett. I would think there is not any reason why that
should not be at the current rate that was in vogue at the time—the
current rate for that locality.
Senator H itchcock. What length of time would such discounts
generally be required for? How many months?
Mr. B assett. Y ou mean in the particular part of the country I
represent ?
Senator H itchcock. Yes.
Mr. B assett. We are obliged to take so much six months’, seven
months’, and eight months’ paper that I would say the average
would be from five to six months.
1680
BANKING AND CUEBENCY.
Senator H itchcock. Where do you rediscount now ?
Mr. B assett. I f I were rediscounting I would discount with my
reserve agents in Minneapolis, for instance. •
Senator H itchcock. Minneapolis, Chicago, or New York?
Mr. B assett. Minneapolis, Chicago, New York; yes.
Senator H itchcock. And all those facilities under this plan woidd
be retained and this subtreasury would be additional to what you
have now and without detracting anything at all from the relations
you maintain now? The national-bank examiner comes to your na
tional bank twice a year, about?
Mr. B assett. Yes, sir; he comes to our bank about twice a year.
Senator H itchcock. Does he get such a knowledge of your paper
as to enable him to pass, in a way, upon its value ?
Mr. B assett. I think so. He gets a good deal better information
about it than he used to. He goes into detail a great deal more than
he used to, and the examinations are a great deal better.
Senator H itchcock. He genarally makes a list of large borrowers?
Mr. B assett. He makes a list which, I understand, he compares
with their reports.
Senator H itchcock. Such a list would be deposited with the subtreasury for reference?
Mr. B assett. Yes.
Senator H itchcock . S o that the subtreasury would have all the
knowledge that the Treasury now has in regard to the national bank
in any particular district ?
Mr. B assett. Yes.
Senator H itchcock. And you think if such an arrangement could
be made it would be of material assistance to the banks?
Mr. B assett. I think it would.
Senator H itchcock. In times of stress and seasonable demands for
funds it would be of considerable assistance?
Mr. B assett. I think so.
Senator H itchcock. Have you examined the pending bill in order
to ascertain whether an individual bank would, as a matter of right,
secure any discounts from a reserve bank?
Mr. B assett. From a regional reserve bank?
Senator H itchcock. Yes.
Mr. B assett. I would say they could.
Senator H itchcock. Suppose you found there is no provision in
the bill assuring a bank which had put in one-tenth of its capital
and one-half of its reserve, that its paper is going to be discounted?
Mr. B assett. Suppose I found that in the bill?
Senator H itchcock. Suppose you found there is no such pro
vision in the bill making any such guaranty of that sort; suppose
that it not discretionary with the regional reserve bank directors.
Would you think that is an objection?
Mr. B assett. O f course; we object to it as it is now.
Senator H itchcock. I understand you do.
Mr. B assett. I f we start out on that basis, I think the bill ought
to be amended.
Senator H itchcock. That is my opinion. That is what I am
calling to your attention, that after a bank has been required to put
in one-tenth of its capital and one-half of its reserve, it is given no
BANKING AND CURRENCY.
1681
guaranty that it can have any part of its paper discounted; that the
whole matter is left discretionary with its reserve bank directors?
Mr. B assett. I think that should be amended. At the same time
I would give the authors of the bill—no one claims authorship—I
do not think they played a hocus pocus game. The bill is designed
to give banks relief.
Senator H itchcock. We are designing a bill to give each bank
certain relief. I want to ask you how much paper you think a
reserve bank ought to be required to discount for a member bank?
Mr. B assett. Y ou mean what proportion of their capital; on that
basis?
Senator H itchcock. Either upon its capital or upon its portfolio
of loans. Suppose you are running a national bank, and there is
another national bank across the street, and you want to have some
paper discounted and you find you are only able to secure discounts to
the extent of one-third of your capital, whereas the bank across the
street is able to secure discounts to the total amount of its capital.
What do you think would be the result of that favoritism?
Mr. B assett. It would not be very favorable to me.
Senator H itchcock. It would be a pretty serious matter if your
bank was discriminated against?
Mr. B assett. O f course, that is one of the objections to the bill,
that there is a certain amount of political control.
Senator H itchcock. It is not necessarily political. I think we
have got to guarantee to each bank some relief, and upon the other
hand, we have got to limit the amount that can be taken by any
bank.
Mr. Bassett. I would suppose that when the question came up, if
a bank was unreasonable in its demands, the board of directors of the
regional bank would be justified in considering that. I assume the
members of that board would be the judges of that fact somewhat.
Senator H itchcock. Suppose you had $100,000 in a bank and you
had $800,000 of loans, would you think it would be reasonable for the
regional bank to rediscount $1,400,000 of that paper? Do you think
there ought to be a limit to make that impossible? Do you not think
there ought to be a limit somewhere?
Mr. B assett. I think that would be better and safer. I have never
been accustomed to borrow and loan again on that. That has not
been my training.
Senator H itchcock. Y ou think if a subtreasury plan were
adopted 75 per cent of a bank’s capital would be a reasonable amount
for it to be permitted to borrow of the Government ?
Mr. B assett. I would think so.
Senator H itchcock. And if all the national banks did that at the
same time, that would take out only $700,000,000 of extra currency,
and if the banks in different parts o f the country would take it out
at different times in the year, the amount at any one time would
probably not be more than half of the possible limit. What do you
say in regard to that proposition?
Mr. B assett. That amount of currency would be a safety limit.
Senator H itchcock . D o you think that would be an inducement to
increase the capital of banks ?
Mr. B assett. I think that would apply in the smaller banks of
$25,000 capital. I do not believe it would affect the larger ones very
9328°— S. Doc. 232, 63-1— vol 2------46
1682
BACKING AND CURRENCY.
much. O f course, there are quite a good many national banks in
which the amount of surplus and undivided profits is much larger
than the capital. There might be a little switch there if it was
limited to 75 per cent of the capital.
Senator H itchcock . That would be better for the depositors?
Mr. B assett. There would be that much more elasticity.
Senator Crawford. Mr. Jewett, one of our wholesale grocers, is
here, Mr. Chairman, and would like to be heard.
The C hairm an . At 12 o’clock the Senate meets, and we have
therefore only a few moments before that hour in which to hear him
at this time. The committee can adjourn at noon to meet on the
Senate side of the Capitol; but if Mr. Jewett desires, he can speak
to us until 12 o’clock.
STATEMENT OF H. C. JEWETT, OF ABERDEEN, S. DAK.
Mr. J ewett. Mr. Chairman, I am only here this morning for the
purpose of cooperation with Mr. Bassett, from Aberdeen, in regard to
the question of the time of the paper in our section o f the country.
I have been in the State of South Dakota for 30 years, in the
wholesale business, and come in touch with paper of all kinds which
comes through the merchants to me, and, as I read the bill, the time
is not long enough for paper coming to me through him and his
bank. Mr. Bassett asked me to come here and corroborate his state
ment in that respect.
The C h airm an . What length of time do you extend to your cus
tomers ?
Mr. Jewett. It varies. Ours is almost entirely an agricultural
country.
The C h airm an . I am asking you about the time.
Mr. J ewett. Our paper runs either 6, 9, or 12 months.
The C hairm an . Y ou sell goods on 12 months’ time?
Mr. J ewett. I f a man can not pay his bill, we take his note, with
interest, and we keep it until his crop is harvested. We are able
to do it.
The C h airm an . What is the volume of your paper. What time
do you give, ordinarily?
Mr. Jewett . Our regular terms are 30 and 60 days and four
months.
The C hairm an . Sometimes you renew it on account of the neces
sities of the case?
Mr. J ewett. We may be compelled to.
The C hairm an . It sometimes happens that you will renew it, if
necessary ?
Mr. J ewett. That is sometimes the case. We have some accounts
which we have to carry for another year, and we put them in the
form of notes.
The C hairm an . And you carry it as an open account?
Mr. J ewtett. Yes, sir. Mr. Bassett’s suggestion about the time is
a very good one, and I came here with him only to corroborate his
statement with regard to the time of the paper in our section of the
country.
Senator B ristow. Y ou discount these notes at the bank sometimes,
do you?
i
BANKING AND CURRENCY.
1683
Mr. J ewett. Yes, sir; sometimes.
Senator B ristow. Y ou sign them and stand good for them?
Mr. J ewett. Yes, sir.
Senator B ristow. N ow , if a bank took those notes and sent them
down to Chicago or to St. Paul and sold them to a bank there and
you had to pay them when they were due, would your customer know
anything about where the notes were when they came due?
Mr. J ewett. What notes we take, Senator, at the present time,
we take to Mr. Bassett’s bank. We do business with him. We do
not take a certain form of note; we take an acceptance and stamp
across it “ Payable at the Aberdeen National Bank,” at a certain time,
and at a certain rate of interest, and it is accepted by him.
Senator B ristow. Suppose the acceptance was disposed of at a
regional bank and the man could not meet it, what does he do when
it is due. Does he pay it, or do you extend it ? How do you handle
it when it is due and not paid?
Mr. J ewett. We would have to pay it ourselves and take another
note, and take that up.
Senator B ristow. D o you have much of that?
Mr. J ewett. Not much, recently. The item in regard to farm
loans is another one of which Mr. Bassett spoke. The average
farmer in our country does not borrow money on a year’s time for
any improvements, or any addition to his real estate holdings. He
will borrow for two, three, five years.
Senator B ristow. Three or five years, as a rule ?
Mr. J ewett . Yes, sir.
Senator B ristow. What do you think of farm loans as security?
Mr. J ewett. I know of none better.
Senator B ristow. A farmer’s loan, conservatively made, is as good
as anything?
Mr. J ewett. It is; I should myself so consider it, taking it on a
basis of 50 per cent value.
Senator B ristow. I f there were means provided for a market, a
ready market, for such loans, so that a man could have one of them
and get cash on it when he wanted it, it would be very advantageous,
would it not, to that class of security, in the lowering of the rate
somewhat, and make it more desirable?
Mr. J ewett. In our section of the country?
Senator B ristow. Yes, sir; if there was a market for those secur
ities, at all times.
Mr. J ewett. Yes, sir.
Senator B ristow. N ow , why should not a farm loan be used as the
basis for credit in these regional banks, for curency or for redis
count, or any other kind of business?
Mr. J ewett. There should be none that I can see.
Senator B ristow. And these acceptances of your merchants—they
are called here by the witnesses who have been before us, prime
commercial paper. Do you think that is any better security than a
mortgage on a good farm out there?
Mr. J ewett. N o, sir.
Senator B ristow. I f you had a lot of funds entrusted to you for
investment, where you wanted them to be absolutely secure, and
safely invested, would you or not prefer farm loans to these ac
ceptances ?
1684
BANKING AND CUKKENCY.
Mr. J ewett. Yes, sir; I would.
Senator B ristow. I am very glad to hear a business man who is
dealing in stocks of goods and acceptances, and things of that kind,
state what is absolutely a fact, and therefore knows it and will
admit it.
Senator C rawford. Mr. Jewitt, the objections in the West, and
in agricultural communities to this bill are based very largely, are
they not, upon these particular points to which Mr. Bassett calls
attention ?
Mr. J ewett. My attention was called to these features of this bill.
Senator C rawford. Outside of that, do you hear objections to
governmental control of this bank, and to the mobilization of these
reserves, and to having greater elasticity in the currency? Do
the people out there really object to those features of this bill?
Mr. J ewett. 1 am no banker, Senator. I know something about
the banking business through acquaintances with friends of mine
who are in the business. I am not a holder o f any stock in any
bank, but I have, since this matter has been widely discussed, heard
remarks by different bankers regarding what bankers think of this
matter, and there seems to be among the bankers a very hard feeling
against a good many features in this bill as it now stands.
Senator C rawford. Outside of these particular points you are
emphasizing?
Mr. J ewett. Yes, sir. But they are looking at it from their sicre.
Senator C rawford. I got the impression that the people out there
were not hostile to this bill, so far as the other features were con
cerned. but I know they do object seriously to it upon these points,
which have been emphasized here by these two witnesses. I am
satisfied on that point, but as to the other provisions of the bill I
have not heard much in the way of objections.
The C hairm an . We are very much obliged to you, Mr. Jewett.
Are there any other witnesses from South Dakota who desire to
be heard at this time?
Mr. J ewett. I do not believe there are now.
(Thereupon, at 11.45 o’clock, the committee took a recess until
12.30 o’clock p. m.)
AFTER RECESS.
The C h airm an . We will now hear from Mr. James C. Hallock.
STATEMENT OF JAMES C. HALLOCK, OF BROOKLYN, N. Y.
Mr. H allock. Mr. Chairman and gentlemen, you have before you
a novice in making addresses. In my experience I have never before
had so distinguished an audience as I have the honor of addressing
to-day.
The country does not realize the admirable make-up of this com
mittee and its truly representative character. We have on this com
mittee four ex-governors, an ex-lieutenant governor, a former dis
tinguished justice of the supreme court of my State; and every mem
ber of the committee is a man of well-known ability. This committee
represents four States at salt water—New Hampshire, Massachusetts,
Connecticut, and my own State of New York. It represents Ohio,
BANKING AND CURRENCY.
1685
Minnesota, South Dakota, Nebraska, Missouri, Oklahoma, Kansas,
and Colorado.
I have sat here, gentlemen, for two weeks observing your delib
erations, and come to the conclusion that you have already agreed
among yourselves, as I have observed you, upon all that is essential
to give this country relief that they now want in regard to legisla
tion of the character that you are proposing. I t will be my object
to show you that I have had some experience in the matters I am going
to talk about, and that it is perfectly feasible for you gentlemen,
inside of one week, to agree upon what you want to do, and that
that will be the best result you will ever reach if you take half a
year. I have observed you, and you will come to no better conclusion
than that. My object is to endeavor to prove that that is the course
that should be adopted.
The letter which I addressed to your honorable chairman, asking
for a hearing, requested it in order that I might explain, among
other things, the real cause of the panic of 1907—
an error of judgment on the part of the New York Clearing House. It was
published at the time in the metropolitan press, and throughout the country,
but not as the cause. Indeed, when the clearing house committee gave it out,
they did not suppose it would be the cause of one. It was not mentioned or
intimated in the report of the Pujo committee, and it has been completely lost
sight of in the House debates on the pending bank act (H. R. 7837), so far as
my observation goes.
Now, gentlemen, I am going to give you a little reference to my
ability in the judgment of another person.
Senator N elson. What was the mistake of the clearing house?
Mr. H a l l o c k . I will explain that. It is a very delicate matter. I
want to have it understood and, having the proofs, propose to sub
mit them to you to settle the question beyond doubt, that it was no
conspiracy but simply an error of judgment. A very serious one;
oh, yes; and one that should be provided against.
An ex-Member of Congress whom you all know, Mr. Charles M.
Fowler, of New Jersey, cites me in his recent work, Seventeen Talks
on the Banking Question, page 293, as “ the highest authority in
this country upon clearing-house operations.” O f course, that is
merely his opinion.
In a word. I wish to explain why he should venture any such
assertion. My father, way back in 1852. finding the banks of New
York without a clearing house and without ability to agree upon es
tablishing one, suggested to them that they should adopt the London
plan. There had been a clearing house in London for three-quarters
of a century. They said such a plan might be good enough for London,
but not for New York. As they could not agree upon a plan, my
father said he would get them up one. He went around for 6
months among the banks to see what they could agree on. Ascer
taining this, he submitted a plan which they agreed to. I repeated
that operation, myself, in Boston. I brought about the clearing of
out-of-town checks in Boston by bringing the banks there to an
agreement. Here in this little book I have signatures of 42 Boston
banks which were brought together by me.
Now, gentlemen, what I am going to try to do in this hour which
you have allowed me is to try to bring you together, if it is possi
ble, and I believe it is.
1686
BANKING AND CURRENCY.
Senator W eeks. Just a moment. Do you think we should con
sider any legislation relating to clearing houses in this bill?
Mr. H allock. N o ; not definitely; not specifically.
Senator W eeks. I did not know but what you were going on to
argue in favor of that.
Mr. H allock. Oh, no; not at all. I will give you definitely all
that in my judgment you should consider in regard to this measure
to make it one of the greatest bills ever passed in our history. Hav
ing observed you, I believe you have already agreed, in substance.
All I propose is a synthesis of your ideas, so that you can get together
and end the suspense that is now felt throughout this whole country
in regard to what you are going to do. My argument will be de
voted to the question of reaching a wise conclusion, so that Congress
may adjourn and go home.
Senator N elson. Is not the country in a prosperous condition now ?
Mr. H allock. I am glad you asked that question. I came to this
city to make a panic less liable than it is to-day. When we come to
the question of what the panic of 1907 really was, we shall then
better understand the present dangers.
Before the panic of 1907 the Secretary of the Treasury began to
distribute money throughout the United States. He gave that order
on the 22d of August, 1907. He commenced to distribute some
$25,000,000 on the 28th of August and made weekly deposits with
banks, principally in the West, South, and Southwest, until the 14th
of October. The next week we had a panic.
To-day the Secretary of the Treasury is doing a similar thing.
Theoretically he is preparing for some land of trouble. What was
done by Secretary Cortelyou was of no use whatever, and what is
being done now is useless so far as preventing a panic is concerned.
There are two fundamental principles in regard to panics. In
order to prevent a panic you must act before it starts is the first
thing to understand. The second thing is that you can have no
panic in this country which does not start in the city of New York.
And why? Because this country, in its banking relations, is, as it
were, a great network of wires that run down to one wire in New
York. I f that one wire comes down or the trolley goes off the wire,
you have a disturbance that affects the whole country. That is what
the panic of 1907 was.
Before the panic of 1907 I knew that one was coming. Permit me
to read what I published at the time.
Senator N elson. When was that published?
Mr. H allock. That was published on the 28th of January, 1907.
I had made up my mind that a panic was coming.
The C h airm an . Y ou may give it to the stenographer and not take
up the time reading it now.
Mr. H allock. I would like to read at least a part.
The C hairm an . Y ou may read.
Mr. H allock. It was from reading Secretary Shaw’s report for
1906 that I made up my mind the Government was rocking the boat.
Upon this theory I proceeded, and certainly was not mistaken. I
said in this publication:
According to his report, in midsummer of 1906, “ he withdrew from the chan
nels of trade $60,000,000 and locked it up. This was accumulated in part by
excessive revenues and in part by deliberate and premeditated withdrawals.”
BANKING AND CURBENCY.
1687
He acknowledged elsewhere that would have been a crime under ordinary cir
cumstances. He says “ his only excuse for withdrawing the people’s money
when they (the banks) did not need it and when its presence invited specula
tion was to have it ready to restore when they did not need it and when its
absence would bring certain disaster.” The Secretary reports that in 1902 “ he
restored to the channels of trade somewhat over $57,000,000,” and in 1903
“ there was restored ” $27,000,000. During the calendar year 1906 he increased
the public deposits in national banks $94,000,000. This amount had been with
drawn from the “ channels of trade ” and restored. In September he restored
$26,000,000 upon the understanding that it was to be withdrawn about February
1, 1907. Later he restored more on similar terms, so that the question of with
drawing over $30,000,000 is now up.
An interesting inquiry presents itself. Restoration implies previous with
drawals. May not withdrawing the funds have caused the crisis which they
were restored to relieve? I f business men went to their banks and demanded
payment in coin or currency, how long would it take to reach a crisis?
Perhaps I ought to explain what is referred to in this paper.
When the Government took money out of the banks it took actual
money out of their reserves, which disturbed the basis of their loans
and business. When the Government put money into the banks it
was done the same way. It was not checked in and out. Hence the
withdrawal of $60,000,000 in such a way was a very serious operation.
Shaw withdraws from banks more money than merchants would have to to
precipitate a crash. Therefore the presumption is that the Secretary every year
brings on a crisis by withdrawing funds from the “ channels of trade ” and
meets it by restoring funds.
President Roosevelt had written him a very complimentary letter
saying that he had saved us five times from the effect of an annual
crisis. In this publication I called Secretary Shaw the checkless,
because he was not checking the public money in and out of the banks,
but putting money physically into the banks and taking it out
physically.
The C hairm an . Y ou mean by that it would affect credits to a
larger degree-----Mr. H allock (interposing). Yes; just as they say of J .P . Morgan,
that the Government gave him $25,000,000 which he used on the stock
exchange. You can not use a single dollar bill or coin on the stock
exchange. What he did, and very properly so, was to have that
money put in banks and made the basis for their loans. With that
deposit of $25,000,000 the banks could loan $100,000,000, four times
the amount. To continue:
Shaw, the checkless, recommends to Congress giving the Secretary $100,000,000 to be deposited with the banks or withdrawn, as he might deem ex
pedient. He would have the whole business of the Nation at his mercy. No
mortal should have such power, least of all an official who abhors a check book,
and, in drawing money out of a bank, demands coin or bills like a scared de
positor in a run on the bank. Shaw would contract the national bank circula
tion at pleasure, enable banks to import gold, influence financial conditions
throughout the world, and prepare to avert any panic in the United States or
Europe. In short, Shaw would create a Treasury colossus, and the unnatural
thing he would convert the Secretary into recalls a strange tale.
In 1816 Byron proposed to Shelley and his wife that each of their poetical
circle should write a ghost story. And on a dreary night in November Mrs.
Shelley thought of the story which made her fam ous: Frankenstein, a too
learned physician, collects from dissecting rooms all the parts of a human
being, molds them into a man of gigantic stature, about 8 feet high and pro
portionately large, and galvanizes into life a hideous, misshapen, uncouth, des
perate demon, who, full of resentment for being called into existence, murders
by degrees the whole family of his creator, Frankenstein.
1688
BANKING AND CURRENCY.
Senator N elson. We are very busy and have got to go upstairs
into the Senate Chamber, and can you not give us your views in re
gard to what you said? Give us your views now, as clearly as you
can, without reading what your views were at that time. You ex
pressed those views 8 or 10 years ago.
Mr. H allock. Senator, I will tell you the trouble with the present
situation. You had a banker here from Lawrence, Mass. He told
you exactly the situation of his bank and how this measure would
atfect him.
Senator N elson. What I would like from you, and you will excuse
me, I do not wish to break into the thread of your argument. There
is one point about which you can give me a whole lot of light which
has always been something of a mystery to me, and that is what was
the particular and direct cause of the panic of 1907 ?
Mr. H allock. I am going to tell you that in detail, just exactly
what it was.
Senator N elson. Why not tell us now,
Mr. H allock. I do not like to be hurried over that.
Senator N elson. My idea is that you should tell us what brought
on that panic, from your standpoint. Then you referred to the mis
take of the clearing house; tell us just what that mistake was.
Mr. H allock. I will, sir.
Senator N elson. Y ou must excuse me for being blunt.
Mr. H allock. Certainly, sir.
Senator N elson. I want information, and I do not think it is nec
essary for us to go into ancient history. I do not think you need to
take the time to give us what you wrote such a long time back. Give
us your views now.
Mr. H allock. I want to show you the exact situation.
Senator N elson. Can you not show us what brought on the panic
o f 1907 ? What was the cause of that panic ?
Mr. H allock. Oh, yes; I can show you that. In my opinion, the
measure that was most needed early in 1907 was one to permit the
deposit of customs receipts in banks, which had been forbidden bjr
law since 1846. After the agitation that I started Congress passed
the act of March 4, 1907, which struck out four words “ except re
ceipts from customs ” from section 5153, Revised Statutes, and for the
first time in 61 years permitted the deposits of customs in banks.
What did the Treasury Department then do? It refused to carry
out the law fully, applying it only outside of subtreasury cities. In
the subtreasury cities eleven-twelfths of the customs revenues were
received. The law was thus enforced where only one-twelfth of the
customs revenues were collected.
Senator N elson. Please state what you think brought on the
panic. I have been curious on that point all this time.
Mr. H allock. Senator, I will submit to you the proofs. This is
not my opinion merely.
The C hairm an . Go ahead and do it now.
Senator N elson. I made a speech on that subject once, Mr. Chair
man; it was a speech in favor of protecting depositors in banks, and
I stated my views as to what the immediate needs of the bank were,
and I wanted to know whether I was mistaken on that.
The C hairm an . I would like Mr. Hallock to state it.
BANKING AND CURRENCY.
1689
Mr. H allock. Just give me a moment. Up to the time of the
panic-----The C h airm an . I think we will save time by letting you alone.
Mr. H allock. I will go right ahead; you have very kindly given
me the floor.
I heard Mr. Untermver give his testimony before this committee,
but I did not know until he came back the next week what he really
had in his mind.
The C h airm an . I wish you would confine yourself to the panic of
19°7.
Mr. H allock. Yes, sir; and I want to explain why I happened
to know about that:
The C hairm an . I do not want you to do that. We are waiting
on you and we want you to go ahead.
Mr. H allock. Then I must put this in, at least, that in March, when
I found that the law authorizing the deposit of customs receipts in
banks was not carried out in any subtreasury city, I came on to
Washington-----Senaor N elson. Hold on. That law was passed after the panic.
The C h airm an . No; in March they struck out the four words
which Mr. Hallock has referred to.
Mr. H allock. Yes: and I came on to Washington and stayed in
this town 15 months, it the elbow o f the Secretary of the Treasury,
trying to prevent this panic. The Aldrich-Vreeland bill was passed
afterwards, but this was another measure, a short measure, passed on
March 4, 1907. I came here and want to state why-----Senator N elson (interposing). I think you are right about the
date. Now, your opinion is that the Secretary was not complying
with the law in depositing part of the Government receipts in the
subtreasury instead of the banks?
Mr. H allock. I do not say that.
Senator N elson. That was one of the causes.
Mr. H allock. I do say this that if the Government had deposited
those receipts in the New York banks and had checked out the deposits
the situation would not have been so tense as it was, and then this
mistake that the banks made would not have occurred. That is the
real reason why I wanted to explain the situation, so you will under
stand it before we come to the panic; otherwise it would be like a
piece of gossip which I was telling you, and I have no such desire
at all.
The Government would not deposit its customs receipts in New
York banks. I f the collector had deposited his receipts in banks,
the importers would have paid in checks, which he would have re
ceived, just as collectors received them in the case of internal revenue.
That was not done. Therefore the situation in New York was very
peculiar. There Avere very large payments made for imports and
banks had to settle in actual cash with the Government, and the Gov
ernment would lock it up. This disturbing element,you must remem
ber, was introduced through mismanagement of our Treasury De
partment.
Now I am ready to go on Avith the panic.
Senator N elson. I want to say to you that I am interested in leg
islation in the Senate Chamber, and I am sitting here at the sacri
1690
BANKING AND CUBBENCY.
fice and neglect of my duties upstairs. But I will not stay unless
you get to the point without any further loss of time.
Mr. H allock. I come to it now.
The C hairm an . Y ou have now stated that the Government with
drew currency instead of leaving it on deposit in the banks. Was
that one of the contributing factors?
Mr. H allock. Yes, sir.
The C hairm an . I understand you.
Mr. H allock. N ow , I am ready to give you the other part.
The C hairm an . Please proceed.
Mr. H allock. There was a speculation in copper, in shares of the
United Copper Co.
Senator N elson. Yes; I know about that.
Mr. H allock. There were great losses, and all that sort of thing,
which involved the president of a bank, Heinze, head of the Mercan
tile National Bank. The failure of the concern he was connected
with in that speculation involved him to such an extent that the
banking community were able to drive him out of the control of his
bank. He and Mr. Morse and Mr. Thomas have been acting in ways
that were very offensive to the New York bankers.
Senator N elson. They were presidents of trust companies?
Mr. H allock. N o, sir; Mr. Morse was president of the National
Bank of North America. Mr. Thomas was president of the Con
solidated National Bank, and also connected with a chain of banks.
But they had excited the animosity of the bankers. You must under
stand that. Then came this incident on the stock exchange connected
with speculation in United Copper shares, I think it was, that went
to smash, and Mr. Heinze could not remain as president of his bank
without aid from other banks. They drove him out.
Senator N elson. That is what started the prairie fire; you are on
the right track now.
Mr. H allock. Yes, sir; he was the first man. Then there was an
other man doing the same kind of work whom they were after, and
that was Mr. Morse. Understand, I am not saying the bankers of my
town are different from other people. These men had done things
they did not approve of and they thought they were justified in tak
ing some action.
You see, his bank had about $20,000,000 of deposits, largely due to
interior banks. Just about this time there was a pressure on New
York to send out currency. You know there was a general feeling of
unrest coming on, and the correspondents of the National Bank of
North America needed funds. The bank had to supply them. Pretty
soon it got to a point, while the bank was perfectly solvent, where
they had not the cash to send out, so they had to go to the clearing
house for aid, and that moment the clearing house people knew they
had Morse. So they put Morse out of his bank on Saturady night.
The C hairm an . That was October 19?
Mr. H allock. October 19, yes.
Senator N elson. Y ou are on the right track now. They started in
to wipe out those fellows and punish them, and it was like a prairie
fire; it got away from them.
Mr. H allock. Yes; and I will get to that in a minute.
Senator N elson. They did not intend, at the beginning, to do any
thing but go in and punish a few men.
BANKING AND CURRENCY.
1691
Mr. H allock. I will give you absolute proof of that.
Senator N elson. I am beginning to think you are a statesman now.
Go on. [Laughter.]
Mr. H allock. N ow, we got to Saturday night, and these bankers
had been working hard all of Saturday to get rid of Morse. It was
their chance, and their turn came late at night.
The C hairman . They told Morse to retire from his banks?
Mr. H allock. Yes.
The C h airm an . Did they not inform him they would not clear
for his banks unless he got out?
Mr. H allock. Practically; they must have done that.
The C h airm an . He agreed to get out?
Mr. H allock. They forced him out.
The C h airm an . He agreed to get out?
Mr. H allock. Oh, they forced him out; or, of course, they would
have forced his bank to close. The next day is Sunday.
The C hairm an . What happened on Sunday?
Mr. H allock. I will tell you.
Senator N elson. They did not go to church ? [Laughter.]
Mr. H allock. N o ; they did not. Something happened on Sun
day the newspapers did not find out.
Senator N elson. What was that?
Mr. H allock. Something that on Monday the editorial comments
of no New York paper, and of none in the country, contained the
least notice of.
Senator N elson. It was on that Sunday they were laying the
plans to gobble up the Tennessee Coal & Iron Co.'?
Mr. H allock. N o ; that was a mistake. They were not thinking
about that. That was not in their minds at all. They had no other
intent than to clean house.
The C h airm an . Please tell us what happened.
Mr. H allock. A man had occasion to go down town to the Wall
Street section on that day.
Senator N elson. On Sunday?
Mr. H allock. On Sunday; and to his great surprise he found the
streets there, which are usually deserted on Sunday, lined with auto
mobiles. He recognized the automobile of a bank president he knew
very well. He went up to the chauffeur and asked, “ Where is the
boss?” The chauffeur replied, “ I do not know.”
Then this man did a little thinking. He thought there might be
something going on at the clearing house, so he walked around the
corner to Cedar Street, and noticed that the door o f the clearing
house was open, as on week days, with the same porter there
he was in the habit of seeing at the door. He had the cleverness to
ask no questions, but nodded to the porter and went upstairs.
When he got upstairs he saw some 20 or 30 bankers. When they
perceived him, one of them exclaimed, “ Oh, this will not do.” He
pleaded, “ I don’t leak.” Something was going on, and he said, “ I
have got to say something,” meaning, I suppose, in his paper. In
other words, hie was in there and not going out, if he could stay.
Pretty soon a banker over in one part of the room sang out, “ Tommy
is good enough for me.” So Tommy stayed. In other words, they
could not get rid of him, and he went with the bankers into their
secret conclave.
1692
BANKING AND CURRENCY.
The C hairm an . What occurred?
Mr. H allock. This occurred: A proposition was presented to
the body that they should rid the banking community of Heinze
and Morse and Thomas.
Senator N elson. Out of the clearing house?
Mr. H allock. Not only out of the clearing house, but out of the
banking business.
The C hairm an . A s officers and directors of these banks, you mean ?
Mr. H allock. Yes, sir; and when they proposed this, this inter
loper, who, I like to believe, represented the people, got up and said,
“ I f you do that there will be a panic.”
Senator N elson. D o you know his name?
Mr. H allock. Never mind let me go on with my story. He said,
“ I f you do that there will be a panic,” and some one said, “ It will all
be over in three days.” That was the belief of those men about what
they were doing. Then they went on and discussed the matter
further, and this man could not keep still. He was interested in
banks. He was thinking, perhaps, of the effect it would have on his
bank, and in a week or so he was behind its counter during a run on
his own bank. He got up a second time and warned them that a
panic w’ould come.
The C hairm an . In this Sunday meeting?
Mr. H allock. In this Sunday meeting; yes, sir. That is, one of the
Sunday meetings.
The C hairm an . Y ou are on the first Sunday meeting; do not get
away from the first Sunday meeting.
Mr. H allock. I will not; but the directors of the National Bank
of North xVmerica and the directors of the Mercantile National Bank
were also having meetings that same Sunday to elect successors to
Morse and Heinze.
Now I have told you what I have learned from a man who volun
teered the information to me and I have no intention of telling his
name. It is not necessary, because the clearing-house committee met
that night and made their own confession to the Associated Press
and telegraphed to the corners of the earth.
Senator N elson. What was that?
Mr. H allock. I will show you.
Senator W eeks. D o you think you ought to come here and repeat
a matter of that sort without furnishing this committee with the
information on which it is based ?
Mr. H allock. I will give you the information.
Senator W eeks. I mean the man’s name. You were merely told
about this matter.
Mr. H allock. Yes. sir; in one sense it is merely hearsay.
The C hairm an . There were 20 men present, you say?
Mr. H allock. He said there were.
The C hairm an . Did not the newspapers say that, giving the
names of all the men who were there?
Mr. H allock. Yes.
The C hairm an . And it appeared in the public prints the next
morning?
Senator W eeks. Did this man’s name appear?
Mr. H allock. N o.
BANKING AND CURKENCY.
1693
The C h airm an . It is easy enough to ascertain from these men, to
summon these men. We can summon these men.
Senator N elson. I would like to have them here. That was merely
started to freeze out two or three men, and it got away from them.
That was the trouble, and I want that feature of the case investigated
to the bottom, as it has not been done so far. I want to have these
men showrn up.
The C hairm an . We can summon them all; do not be troubled
about that.
Senator W eeks. Mr. Chairman, I am not troubled about any
thing; and I am not disturbed about this. But I do not think a wit
ness ought to come here and give us anonymous information. I think
that he ought to assist the committee; and if the committee is willing
to give its time to listen to him. he ought to assist the committee to
the limit of his information; then we could very easily determine
whether we wanted to summon 15 or 20 men. if we had the man who
furnished him with this information come before the committee, in
order to find out what he really knew. It is not necessary to get
excited about this matter at all. But I want to enter my protest
against the committee having to listen to anonymous information.
Mr. H allock. I f that was all the information I had, the case would
be different. I have had that information since 1908. The man who
gave it to me has never published it. and has no disposition to.
The C h airm an . G o ahead with the facts.
Mr. H allock. I am going to call your attention to a statement of
the clearing-house committee, about which there is no question.
The C h airm an . That appeared in the public prints?
Mr. H allock. Y ou will find it in all the New York newspapers
o f that date. I got this from the New York Times of the following
morning, October 21, 1907.
The C h airm an . Read it into the record.
Mr. H allock. “ At a late hour last night the Associated Press was
assured by the clearing-house committee that the Heinze, Morse, and
Thomas interests had been eliminated from the banking organizations
o f New York City.”
You observe this is not my statement. But, first, I would speak
about my informant. I f I should give his name it might hurt him.
He told me something as a matter of information. I f he gives me
permission, and you insist upon it, I will tell you his name; but if
he does not give his permission you will never get his name from
me, no matter what I may suffer. You have the proof here from the
clearing-house committee itself of what occurred.
Senator N elson. The papers show that on that Sunday they had
decided to eliminate those men from the banking world?
Mr. H allock. What I read you is from the New York Times,
which is on file in the Library of Congress; and if you are not satis
fied with what the Times says, you can read it in the Tribune, the
World, the Herald, or any New York papers.
(Copious extracts from New York dailies and the Washington
Post will be found at the end of Mr. Hallock’s statement.)
The C hairmajst. G o on with your next statement.
Mr. H allock. Y ou understand, I know these bankers-----Senator N elson (interposing). Go on and tell us what they did.
1694
BANKING AND CURRENCY.
Mr. H allock. They are good men, and what I say is not reflecting
on them personally. They simply thought they were correcting an
evil, and did it in their way. I admit what they did was a criminal
act, according to the laws of New York. It was conspiracy against
the property rights of Morse, Heinze, and Thomas. These conspir
ing bankers could have been punished, but the statute of limitations
protects them now. The usefulness of this statement is that it dis
poses once for all of the accusation against the bankers of my city
that they intended to bring on a panic. They did not. They
brought it on, but did it through ingnorance, without realizing the
effect of what they did. That is the conclusion I want your com
mittee to understand.
The C hairm an . Give us the facts, Mr. Hallock.
Mr. H allock. N ow , the New York Times of Sunday said:
A s the result of the steps taken by the banks the weekly statem ent w as one
o f the strongest m ade at this season of the year, etc.
The addition of $6,000,000 to the surplus, cash increasing and
loans decreasing, etc., increased their reserve so that when this panic
broke out they were apparently better off than usual at this season.
It simply brings us back to that act of elimination as the cause of
the panic.
You understand the Mercantile National Bank, of which Heinze
was president, and the National Bank of North America were both
original members of the clearing house. The Consolidated National
was not a member, I believe. How is that, Senator Weeks?
Senator W eeks. I do not remember myself.
Mr. H allock. At all events, the other two were old respected mem
bers of the association. So the clearing-house bankers turned on
their own people, but did it, as they thought-----The C hairman (interposing). We do not care about conclusions;
just give us the facts.
Mr. H allock. I may call attention to this statement in the report
o f the Pujo committee:
The panic of 1907 started with the closing of the Knickerbocker Trust Co.,
which followed immediately after the announcement of the National Bank
of Commerce of New York— the trust company’s clearing agent— that it would
no longer act as such.
The C hairm an . What day of the month was that?
Mr. H allock. I am com in or to that now.
The C hairm an . I want to know the day if you know it.
Mr. H allock. It was Monday, the 21st, the day following that
Sunday. This notice was given by the National Bank of Com
merce—
The C hairman (interposing). That was the 21st of October?
Mr. H allock. Yes.
Senator S hafroth . 1907?
Mr. H allock. Yes. The trust company attempted to keep its
doors open on Tuesday, although it was not to have its checks cleared
after that day, and closed them at 12 o’clock after paying out
$8,000,000. Thus closed the Knickerbocker Trust Co.
The C hairm an . What became of the president.of the Knicker
bocker Trust Co.—Mr. Charles Barney?
Mr. H allock. He finally destroyed himself.
BANKING AND CURRENCY.
1695
The C hairman . Committed suicide?
Mr. H allock. I believe so.
This eliminating action of the clearing-house committee brought
on the panic by starting a run on banks; not so much a run on their
counters as a run by drawing checks for the purpose of transferring
funds to banks that the depositors considered safe, which, of course,
resulted in a very large amount of checks to pay. For instance,
the National Bank of Commerce had a debit balance at the clearing
house of $7,000,000 which resulted from this drawing on the insti
tutions that it was clearing for. It was a very critical condition for
a clearing bank to be in.
Now, the New York Sun on October 21 had these headlines over
its story of what had happened at the clearing house on Sunday:
“ Finds its banks are solvent— Any clearing-house bank that may
need cash will get it now.” This suggested that the trust com
panies would not get it; and a number of overprudent people did
draw their funds from the trust companies.
The C h airm an . Did not this meeting on Sunday declare the banks
solvent that had been run by Morse and Heinze?
Mr. H allock . Oh, yes.
The C h a ir m a n . They declared those banks solvent, did they not,
and gave it out to the press?
Mr. H allock. That is, solvent so far as paying depositors was
concerned. They admitted earlier that there was some impairment
of capital and surplus, but from the public’s standpoint, the pro
tection of depositors, they were solvent.
Senator N elson. And still they refused to clear for them the
next day?
Mr. H allock. But, you see, this announcement in the Sun and
other dailies started everybody that had an account in the Knicker
bocker Trust Co. to draw on it, and those checks had to be cleared
by the National Bank of Commerce, so there was no telling how
many millions the National Bank of Commerce would have had to
pay "if they had not refused to clear. From the ordinary standpoint
they were"justified in acting so, but the point I am making here is
that the panic did not start with the closing of the Knickerbocker,
but the Knickerbocker’s closing was a result of the action on Sun
day, and that action was not intended to bring on the panic in any
way, but was an error of judgment.
I need not say much more except this: On that Sunday there was
a syndicated article, a written interview with Mr. Rockefeller,
printed in the New York Times-----The C h a ir m a n (interposing). John D. Rockefeller?
Mr. H allock . Yes; printed in the New York Times with this title
spread across the page, “ Rockefeller sees no portent of disaster.”
That same article was printed in the Washington Post under the
title “ Time for patience.” In other words, our greatest expert in
acquiring wealth saw no portent of disaster. I knew a panic was
coming as early as January, 1907; came to this city in March, 1907,
and remained here 15 months trying to stop it.
Senator N elson . Tell us what other causes directly led to that
panic.
Mr. H allock . I have told you the whole story. %
1696
BANKING AND CURRENCY.
The C h airm an . I s it not a fact, Mr. Hallock, that beginning in
January there were important constrictions of credit in Xew York
and that the interest rate went through a violent fluctuation, up as
high as 40, 50, and 60 per cent?
Mr. H allock. There were. And in March there were occurrences
that made a number of prudent bankers put their houses in order.
The C hairm an . Was there not a general sentiment throughout
that section that there was danger of constriction at hand?
Mr. H allock. There was no feeling of apprehension in Xew York
that wTe were going to have a panic. The panic was as unexpected
and unnecessary as the shooting of McKinley.
The C h airm an . Was there not an important reduction of loans,
as much as $50,000,000 on the loan side, during those months, from
month to month, between January and July?
Mr. H allock. I did not go into that at all. But let me tell
you-----Senator W eeks. Have you any information?
The C hairman (interposing). I will put in the record a table of
those fluctuations of interest, and also o f loans.
Mr. H allock. Let me show you the way I look at it. Take the
Brooklyn Bridge. It will carry a great load of passengers, but if
you should put the whole load on one hanging section of the bridge
, it would buckle. You must keep the load moving. Whether a few
pass over the bridge or a crowd makes no difference.
So it is with New York. Xew York can stand anything that hap
pens unless the trolley goes off the wire or the wire comes down.
That is what happened at New York in 190T. You may have the
same thing over again if you press this bill in the form proposed.
Mr. Untermyer, the other day-----Senator N elson (interposing). Now, here, I want to bring you
to another point. I want you to tell us what you know about how
Mr. Morgan saved the country by laying the foundation for the con
solidation of the Tennessee Iron & Coal Co. with the Steel Trust?
Mr. H altock. He did not save it at all. Look at it this wav-----Senator N elson (interposing). How was that brought about?
Was not that on Sunday?
Mr. H allock. They do many things on Sunday in New York.
But you must look upon prosperity a^a beautiful vase-----Senator N elson (interposing). Now, don't go into poetry; give us
the facts.
Mr. H allock. But this is so pretty-----Senator N elson (interposing). Give us the cold lead.
Mr. H allock. Senator, let me drop this vase. While you have it
whole, you know, it is all right. I f you drop it, it breaks. When
Mr. Morgan came in the thing had broken. I am trying to call
attention to the necessity of preserving prosperity and preventing
these accidents.
I would not say a thing against my own people; would not soil
my own nest. A New Yorker born and bred, I am proud of mv
city, the greatest port on the face of the earth-----The C hairman (interposing). Let me call your attention to the
fact that ought always to be remembered in these discussions when
you talk o f New York, that New York contains everything that is
good and everything that is bad in human nature. Proceed.
BANKING AND CURRENCY.
1697
Mr. H alt.ock. We are well supplied in every particular. I have
nothing to say about the Morgan matter.
Senator C rawford. Don’t you think these panics come on at a
time when they ought to loosen up and use these reserves; but. instead,
they turn around and each fellow goes to hugging his reserve and
cutting down on loans, and, of course, the result is stringency and
panic ?
Mr. ITallock. Nothing of that kind, in my estimation.
Senator N elson. I want to bring you to this clearing-house matter.
Mr. ITallock. I will bring it to you-----Senator N elson (interposing). I want to put you on the track of
one thing. Was not one mistake the clearing house made in 1907 in
not pursuing the course that the New York Clearing House had taken
in the panic of 1873-----Mr. H allock (interposing). What was that? I tried to stop that
panic myself.
Senator N elson . I thought you were an expert on clearings.
Mr. H allock. They had the panic, didn’t they? I believe in pre
venting panics, and every great panic we have had since 1837 might
have been prevented had the clearing-house management followed
the advice of my father-----The C hairman (interposing). What was that advice?
Mr. H allock. Why, in the panic of 1857, you know, they had no
currency, Government currency, but only State bills of different
kinds. In Massachusetts they had the Suffolk Bank system, by
which an excellent currency circulated throughout the six States of
New England. In New York we had a fair arrangement, not by co
operation of banks, as it was in Boston, but through the action of
individual banks. So we had a great deal of currency, but much of
it was stuff you could not handle at all without loss.
So the city banks had no medium of settlement except gold. When
this panic of 1857 occurred there was such a demand on the little
gold in their vaults that the banks had no means of providing for
payments among themselves, settling their balances. Finally they
adopted this device: Settlement in their own bills, which were made
up in bundles of. say, $5,000, and those bundles were passed back and
forth from bank to bank at the clearing house. It was the only means
they could think of.
The C hairm an . What was your father's advice?
Mr. H allock. His advice was that the clearing house should re
discount for members. They afterwards did this, but also issued
clearing-house certificates, which makes a complex operation of it.
The C h airm an . We understand the clearing-house certificate.
Mr. H allock. I am afraid the committee do not.
The C h airm an . What was your father's advice? We want to get
back to your father’s advice," by following which panics could be
prevented.
Mr. H allock. The first element is rediscount.
The C h a ir m an . That is what he advised?
Mr. H allock. That is part of it; not in those terms. The idea
was that a bank that had securities could bring them up to the
clearing house and get credit for the amount agreed upon. That is
rediscount.
9328°— S. Doc. 232, 63-1— vol 2------47
1698
BANKING AND CURRENCY.
The C h airm an . That is the very basis of this proposal now, is
it not ?
Mr. H allock. Yes; but you introduce an element that I am trying
now, in my explanation, to keep out.
The C hairm an . What is that element you think ought to be kept
out ?
Mr. H allock. That the discount must necessarily be paid in
notes. Witness after witness has shown you that banks do not re
quire notes upon receiving a rediscount. Take, for instance, the
great Baring operation, where the Bank of England agreed to take
over securities and grant a rediscount of £11,000,000.
Senator C rawford. What do you want? To give them credits?
Mr. H allock. Yes.
Senator C rawford. And treat that just as the Bank of England
does? Call that gold?
Mr. H allock. Yes. That, in general, was what my father sug
gested.
But, as I said, I have definite propositions that I want to make to
this committee, so that this committee may agree inside of a week
on a measure that will meet with the approval of the whole United
States.
The C h a ir m a n . G o ahead; state your proposition now; we are
ready for it.
Mr. H allock. Y ou know I am inexperienced in public speaking,
and my plan has been broken up a little. I want to introduce one or
two facts.
The C hairm an . We want your propositions now. You want to
tell us how to fix this bill.
Mr. H allock. Yes, sir; but I want to give you an idea of the sig
nificance of what I am going to say.
The C hairm an . We will determine the significance of it after
you say it.
Mr. H allock. Well, now, gentlemen, that was done before, and I
do not know whether you were satisfied with my statement of the
panic or not. I would have stated it a little differently.
The C hairm an . Y ou have stated it clearly.
Mr. H allock. I f you are satisfied, I am, and we will let that go.
I will bring it to a conclusion in a moment.
The cashier of the bank at Lawrence, Mass., gave you some very
valuable information. He told you how, during the panic of 1907,
he had no trouble in obtaining all the currency he needed for his
pay rolls, and that he obtained that currency from his correspondent
in Boston. He also told you he did not know where the Boston banks
got that money. Now, that is a thing I want to explain, so that the
committee can understand it.
Why was it that in Boston the banks had no trouble in supplying
all the banks of New England with all the currency they needed?
As Senator Weeks brought out from him, the witness did not know
of any bank in New England that did not have all the currency it
needed during that panic for the transaction of its business.
I want to base something upon that fact and will tell you where
that money came from. Remember currency is only needed in bank
ing for certain purposes. For other purposes it is a nuisance, an
expense, and banks do not want it. They would like to throw it out
BANKING AND CURRENCY.
1699
of the bank and put the amount into other forms. It bears no in
terest, you know, and has other disadvantages.
My father, as I told you, in 1853 brought about the agreement
among the New York bankers to adopt a plan of clearing city checks.
In 1854 the bank clerks brought to our house the silver pitcher, of
which this is a picture. [Exhibiting it.] I witnessed their presenta
tion of this pitcher to my father, and there my knowledge of the
clearing house began. These clerks declared my father the originator
of the clearing house in America. It began operations in 1853, and
this pitcher was given in 1854, after my father had been assistant
manager of the New York clearing house.
Senator N elson. Now, come to the bill, or I shall have to leave
you.
Mr. H allock. Just let me finish this. I brought about in 1898 and
1899 the clearing of out-of-town checks in New England.
Senator C rawford. Tell us where that money came from.
Mr. H allock. I am going to.
Senator C rawford. It takes you too long to get to it. We do not
care for pictures and that land of thing. Tell us where that money
came from.
Mr. H allock. It was because the New England banks had a means
of clearing their out-of-town checks through Boston; that is, they
could do with checks all the business that could be done with checks.
Therefore they did not have any unusual need for currency, and they
had too much sense to lock it up in their vaults. They kept on hand
the amount needed, and the New England bankers outside of Boston
shipped their excess currency to Boston, so there was always a sup
ply on every hand.
The C h airm an . Then the point is, Mr. Hallock, that the clearing
of these checks through Boston in this convenient way resulted in a
less strain upon the currency ?
Mr. H allock. That is it.
The C h airm an . That is what you want us to understand?
Mr. H allock. Yes, sir.
The C h a ir m a n . Then, would not the clearing of these checks
through the new reserve banks at par have a like effect?
Mr. H allock. Oh, but now you are taking up another subject.
That would be an admirable system, and the New England banks, a
great many of them, would like to have that kind of a system. But
you have heard here that other banks, in Mississippi and other States,
do not want to have anything of that kind.
The C h a ir m a n . Oh, yes; I think we heard something of that kind.
I am asking your opinion.
Mr. H allock. That is true, sir.
The C h a ir m a n . What is your opinion about it?
Mr. H allock. It is a digression, but I will give it to you. Such
collections by the reserve bank would bring about a state of things
which, so far as the discussion has proceeded in my presence during
the last two weeks, is not considered at all by this committee; and, so
far as I know, it is not considered anywhere, except that I presented
it-----The C h a ir m a n (interposing). Do you favor it or not, and if you
do not favor it tell us why you do not.
1700
BANKING AND CUBRENCY.
Mr. H allock. Put it that way then. It was suggested to forbid
the central bank handling checks. You know that is one of the sug
gestions or amendments.
The C hairm an . I am asking your opinion as to whether it is a
good thing or a bad thing, and your reasons for thinking so.
Mr. H allock. I am giving you my reason. It is this, that even
if you forbid the reserve bank to receive these checks on deposit the
members of that bank will put them into the bank in spite o f all you
can do.
The C hairm an . That is a good suggestion. I think that is so, too.
Mr. H allock. I know it is so, and it is going to have this effect:
It is going to increase the credits in those reserve banks to a degree
you have no conception of at all.
The C hairm an . W hy? Tell us about that.
Mr. H allock. W hy? Well, I may have to give you a few facts.
The C hairm an . Give us the facts.
Mr. H allock. In England, where they clear out-of-town checks in
London, they do not collect those checks as cash. They take them
merely as collection items. After the checks are paid by the country
bank to which they are sent by its clearing agent in London and the
agent has received from the country bank a letter of advice to debit
it with that amount, less certain checks which have not been paid
but sent across the country, back to the banks that sent them to Lon
don originally; then, and not till then, the checks are paid through
the London clearing house.
We do the business different. A Boston bank will take a piece of
paper on San Francisco, with a face value of $10,000. as a deposit of
$10,000, and then get the money for it after days and days. And so
it is all over the country.
The C h airm an . And they list that among their current exchanges,
do they not?
Mr. H allock. Absolutely, as a deposit.
The C h airm an . And then they know it is a credit on the exchange?
•Mr. H allock. Yes; and they send it out for collection. That is
the method of doing business in this country. xVccording to your
bill that same method will be followed in the case of the new reserve
bank. And let me tell you this about the proposed bank: You think
you are going to establish 12 banks, but you are not-----The C hairman (interposing). We are not?
Mr. H allock. N o, sir; you are not. You are going to establish
one bank. It does not matter what you call it; it is one bank. I
know what I am talking about. All you can establish is one bank,
divide it up as much as you please. So I will call it one for the sake
of illustration, because we are talking, in a general way, more or less
poetically. [Laughter.] Let us assume that 25.000 banks become
members of that central bank. Now, can any of you conceive of a
better method of collecting checks on the myriads of members than
by turning those checks in for credit to the bank or its branches?
Why, it would be impossible to find anything better than that.
But suppose that the reserve bank credits those out-of-town checks
as deposits. So far as the checks are payable in the region where
deposited they will balance one another very quickly. That is ad
mirable so far as the local arrangement is concerned, but those checks
that are payable in other regions will have to be handled through
BANKING AND CURRENCY.
1701
other regional banks or branches in some way. Therefore there will
be lapses of time when these credits will be carried on the books and
accumulate as real deposits of money. The result is that the deposits
in that central bank will surprise you by their size. You have no
conception of that.
And, if you will permit me, there is another point I should like to
speak of, which has been presented in a way at variance with the
facts, as you will see when you come to examine them later and ascer
tain just what they are. It has been stated that if a country bank
deposits 5 per cent of its net deposits in the bank as a reserve it can
borrow back two-thirds of that money. There is a misapprehension
here. Let us put it this w ay: Suppose a bank wants a rediscount
from that central bank. All it has to do is to obtain, if its net de
posits are $100,000, $5,000 to deposit in that bank. Suppose it gets
from its correspondent or takes from its own vaults $5,000 in gold
certificates. It deposits that with the central bank. Now, the central
bank can rediscount to an amount of more than two-thirds of that;
they can rediscount to the extent of three times that. Instead of
returning two-thirds of $5,000—or make it $6,000, two-thirds of
which would be $4,000—instead of that it can rediscount $18,000.
So, I tell you, this is a big plan you are pressing for adoption; you
have no idea how big it is.
Senator C rawford. D o you call that dangerous?
Mr. H allock. Many people talk about inflation. One of the big
gest inflations in this country is in our population.
Senator C rawford. Then you do not consider this a vice in the
bill?
Mr. H allock. I do not. But I want you to realize what you are
building up. According to banking methods it will take a form that
you have very little idea of at present. And, by the way, I will illus
trate that-----The C hairman (interposing). You spoke of a deposit of $5,000
affording a basis of credit of a much larger amount. How do you
figure that out?
Mr. H allock. Because a reserve—for instance, a reserve of onethird— allows you to issue three times that amount. That is the
whole principle.
Senator C rawford. H ow do you make that out?
Mr. H allock. That is the fact.
The C hairm an . Y ou can issue notes?
Mr. H allock. Any form of discount you want. You understand
some of the bankers told you they did not need notes very much;
they wanted rediscounts but not notes.
The Chairman. Your explanation is that it is a fact, and that ends
it. It may be a fact, but if you know any reason why it is a fact I
would like to have you give it.
Mr. H allock. I can give it to you. In New York the reserve is 25
per cent. Now, that pays----The C hairman (interposing). In other words, they can lend threefourths o f that sum and then deposit that three-fourths and lend
out three-fourths of three-fourths, and then lend out three-fourths
of the remainder-----Mr. H allock (interposing). I can not follow that.
The C hairm an . That is a correct diagnosis of it.
1702
BANKING AND CURRENCY.
Senator C rawford. Mr. Forgan said that under the present system
$1 actual assets at the foundation was the basis for the expansion
of $8 in credit.
Mr. H allock. Taking the average-----The C hairman (interposing). And that is substantially true, but
it involves only the capital.
Mr. H allock. That, in general, is so.
The C hairm an . The statement I made is the correct reason why
that would be true in the New York banks. I f they deposited
$100,000 in gold, the bank being required to keep 25 per cent of that,
would be able to lend out $75,000 of that money-----Mr. H allock (interposing). Oh, no; $100,000.
The C h airm an . I am speaking of the deposit.
Mr. H allock. They do not lend out that money necessarily.
The C h airm an . Just hold on a minute. I will state this matter
correctly. A deposit is made of $100,000 in gold. Against that
$100,000 in gold the bank is obliged to retain $25,000 as a reserve.
That is true, is it not?
Mr. H allock. S o far as that is stated in that particular way.
The C hairm an . Then the $75,000 in gold that is loaned out to
Tom, Dick, and Harry on their notes flows right back into the banks
as gold or is redeposited as gold; and of that $75,000 which flows
back into the bank as gold the bank may lend three-fourths of
$75,000, retaining one-fourth in gold against that $75,000. And so,
by a series of loans and deposits and loans and deposits it finally fig
ures down that you can lend three or four times as much as the
original deposit of gold. Therefore it results in a credit expansion
of three or four times the amount of the original deposit in gold.
You are applying that same argument to the regional reserve
bank, but it is a very different question with the regional reserve
bank, because when this gold is withdrawn from the regional reserve
bank, if it is withdrawn, it will then go into some country district
where it will not quickly flow back into the regional reserve bank.
And I doubt whether the argument would apply with equal force
as it does apply in New York where the loans are made in large meas
ure in the city itself, which results in their immediately flowing back
into the channels of the bank’s deposits.
That is the reason why I asked you for your reason. I wanted to
see what your reason was, and you replied it was a fact. I wanted to
get your reason for its being a fact, and therefore I broke in upon
you to explain what the system was in central reserve cities.
Mr. H allock. But, Senator, you assume that the rediscount would
be paid in gold in that case.
The C h airm an . Yes. You think it may not be?
Mr. H allock. I know. Only in exceptional cases will the gold be
used at all. It will be used just as you provide in the bill-----The C hairman (interposing). Tou think they simply take a credit
at the bank?
Mr. H allock. O f course, just as it was in the case of the Baring
failure, in London, to the extent o f £11,000,000. They do not want
the gold ; it is expensive to handle-----The C hairman (interposing). Then they make deposits, do they
not?
Mr. H allock . To an extent you can not conceive of.
BANKING AND CURRENCY.
1703
The C hairman . They will deposit this credit immediately to their
own credit with this bank. They have a credit to their account. Then
they have to keep one-third against that credit——
Mr. H allock (interposing). That is better than gold, sir.
The C hairm an . That may be, but that is not in point. The result
is that the bank can do the very thing which I have described as
taking place in New York by retaining one-third and lending it out
again.
Mr. H allock. O h ; yes, sir.
The C h airm an . All right. Now, the reason has been given?
Mr. H allock. Oh, yes.
Now, I want to explain one thing. In the earlier part of my re
marks I spoke of—at least, I started to-----The C hairman (interposing). You were going to tell us something
about this bill. There was some defect you wanted to point out to
us; and I should like for you to do it, because this bill is here sub
ject to bombardment, and if you can punch a hole in it, I should be
glad for you to do it at once.
Mr. H allock. I do not wrant to punch a hole in it.
The C hairm an . I am using that as a figure of speech. I speak of
it as a battleship undergoing the assaults of an enemy, and we are
trying to find the weak spots in it and to correct them if we can.
Mr. H allock. I have not stated all the points I wanted to bring
you to the conception of the possibility of an agreement inside o f a
week upon a measure that will satisfy the whole country.
The C hairm an . What is that measure?
Mr. H allock. That is what I am coming to.
The C hairm an . Give it.
Mr. H allock. A s I say, it is a synthesis of those things you have
already agreed to at this table.
The C hairm an . What are they?
Mr. H allock. O f course, in selecting such points I must leave out
those things in which you disagree. You must understand that.
Therefore the number is comparatively small, but of great impor
tance.
The C hairm an . All right; give them.
Mr. H allock. And I showed you that my father and myself have
done the same thing in bringing the banks together-----The C hairman (interposing!. Give us these points, Mr. Hallock.
Mr. H allock. Yes; I will give them to you, but I want you to
understand the importance of them. You may think it is such a little
bit of a thing that it is not enough.
The C hairm an . I wish you would give us these points; otherwise
you may not have an opportunity to do it, because this committee is
likely to adjourn and leave you without an opportunity to say what
you have to say.
Mr. H allock. The first thing you are practically agreed upon is
to protect the 2 per cent bonds. You propose in the bill something
that I never supposed a Democratic Party would agree to. Under
stand, I have studied these things all my life. I never supposed that
the Democracy-----The C hairman (interposing). Oh, confine yourself to the point,
Mr. Hallock, if you please.
1704
BANKING AND CURRENCY.
Mr. H allock. But it is proposed in this bill to substitute a 3 per
cent bond for a 2 per cent bond.
The C h airm an . Yes.
Mr. H allock. Banks hold 2 per cent bonds, and you propose to
give them a 3 per cent bond—to pay extra. The bankers will laugh
at you if you do it. O f course they will. The idea, when you have
got bonds out at 2 per cent, that you are going to give them bonds at
3 per cent. That is something they do not expect you to do if you
look after the interests of other people.
The C hairm an . D o you think that is right or not?
Mr. H allock. I think it is wrong.
The C hairm an . I am glad to hear you say so.
Mr. H allock. Absolutely wrong. "And let us be just to the bank
ers; I have nothing against them. The reason bankers want to have
3 per cent bonds put in place of 2s— and one banker suggested 3£ per
cent— is to have a bond that will stay at par or above.
The C hairm an . Y ou said we wTere agreed upon a certain propo
sition.
Mr. H allock. Yes; you have. I am coming to it.
The C hairm an . I wish you would. I am very anxious to get it.
Mr. H allock . I am showing you that it is foolish when you have a
2 per cent bond to give the man that holds it a 3 per cent bond.
The C hairm an . Y ou say we have agreed upon the wrong thing,
then?
Mr. H allock. In the bill, not at the table.
The C hairm an . What have we agreed upon at the table?
Mr. H allock. Y ou have agreed to this, that the 2 per cents should
be kept at par. It is in your own bill. What I am proposing is that
you carry out the Owen bill with very slight modifications, and the
Shafroth bill as to the other matter-----The C hairman (interposing). You think the committee has ex
pressed an opinion that would be favorable to that adjustment, rather
than the 3 per cent?
Mr. H allock. Absolutely, you have— I do not mean every one of
you.
The C hairm an . I have great confidence that Senator Shafroth
will come around to that opinion after a while.
Mr. H allock. That is my first point. The Owen bill (S. 2898)
says:
The Secretary of the Treasury is further authorized in his discretion, when
requested to do so by national banks having outstanding national-bank notes,
secured by 2 per cent bonds, to purchase such bonds at par and accrued interest,
and to assume the redemption at par of the bank notes secured by such bonds,
charging the amount of such notes against the proceeds of such 2 per cent bonds
and paying the balance in cash to such national bank. * * * when such
national-bank notes, the redemption of which has been thus assumed, shall
come into the Treasury of the United States, they shall be canceled and retired,
and in lieu of such notes so canceled and retired the Secretary of the Treasury
shall issue Treasury notes of the same amount.
Now, that measure, if it was carried out, would, of course, keep
the twos at par. It would satisfy people that are now in great dis
tress of mind to know what is to be the fate of those bonds, and if
they are not obliged to turn them in, of course they will keep them.
I f they are obliged to turn them in they will get par.
The C h a ir m a n . You think that is all right?
BANKING AND CURRENCY.
1705
Mr. H allock. Absolutely. Look here, you are sensible men; is
there any question about it?
The C hairman . That is what .you think the committee can agree
upon ?
Mr. H allock. Y ou have agreed upon it, in my opinion. I have
been present and I have watched you. There is no reason to stay
here six months to settle that question. You can settle that in one
week.
The C hairm an . What is the next question you think the commit
tee can agree upon?
Mr. H allock. I have not finished with that. I like to put im
provements upon things a little. I f in addition to that you will
simply repeal that provision of the national-bank act in section 5167,
which says:
Whenever the market or cash value of any bonds thus deposited with the
Treasurer is reduced below the amount of the circulation issued for the same,
the comptroller may demand and receive the amount of such depreciation in
other United States bonds at cash value, or in money, from the association,
to be deposited with the Treasurer as long as such depreciation continues.
Now, if you will simply supplement that measure with the repeal
o f that section, so that any bank that has 2 per cent bonds will not
be subject to a call from the comptroller to put up more bonds, the
relief will be complete.
The C hairm an . I think you are quite right about that.
Mr. H allock. I f you will do that, it will be a perfect measure to
keep the twos at par. You will have the thanks of the whole Ameri
can people. I try to think I am speaking for the whole American
people. And, by the way, about the American people-----The C hairman (interposing). Oh, no; now, we don’t want to hear
about the American people. [Laughter.]
Mr. H allock. That is my very complaint. Mv complaint is that
in the Glass bill you refuse to take the bare hand of the people. You
trust your Federal reserve banks only to take the gloved hand of the
banker.
The C h a ir m a n . Y ou think the bank, then, ought to deal directly
with the citizen ?
Mr. H allock. I am only speaking about your own b ill; that is the
point now.
The C hairm an . I am asking you to tell us how to remedy this bill.
You tell us we do not take hold of the bare hand of the people, and I
am asking you if you think we ought to deal with the citizen directly.
Mr. H allock. D o you?
The C hairman . I) o you think so?
Mr. H allock. His own funds are put into the bank.
The C h airm an . What do you think ought to go into the bill ? That
is the question. Do you think the bank ought to deal directly with
the public?
Mr. H allock, O f course, in a reasonable kind of way. The Bank
o f England does it, the Bank o f France does it, the Reichsbank
does it.
The C h a ir m a n . So they do, all of them.
Senator C rawford. Y ou wmiild amend this bill so that the reserve
banks could do this with the public?
Mr. H allock. Don’t put it that way.
1706
b a n k in g
and
currency.
Senator C rawford. Would you not amend-----Mr. H allock. I am going to ask you to agree upon some simple
measures, and that question I do not have to answer and do not want
to, because it is out of my way.
The C hairm an . All right; we will not compel you to answer a
question which is so complicated.
Mr. H allock. I simply want to tell you what has substantially
been agreed upon by this committee.
Senator Crawford. What have you on this point?
Senator M cL ean . Mr. Chairman, I think he should give us his sug
gestions.
Mr. H allock. What did you say?
Mr. M cL ean . I was hoping you would give us some continuity of
your views of what you feel should be the changes in this bill, or else
supplement it with your ideas.
Mr. H allock. I have given one important provision. There are
two or three more.
The C hairm an . Let us have them, because I will be obliged to leave
you at 3 o’clock, and you have just 25 minutes more.
Senator M cL ean . Y ou have gotten through with the bonds. What
is the next point?
Mr. H allock. The next point is this, and understand these sug
gestions were learned at your table. Here is a suggestion that you
should issue currency on a 50 per cent gold reserve. Why not have a
simple process, which is perfectly practicable, to take the gold cer
tificates the moment the Government gets possession of them, and in
that way obtains the ownership of the gold that is behind them, and
to issue Treasury notes when necessary to pay, for instance, for the
national-bank notes outstanding against these 2 per cent bonds when
they are redeemed, for you become responsible for the currency, of
course. You have got to pay for it in some way.
The C hairman . Y ou mean to cancel the gold certificates and put
the gold in the redemption division— to put the gold against it?
Mr. H allock. Yes; to the extent of $2 to $1.
Senator M cL ean . We have discussed that, and you approve, as I
understand ?
Mr. H allock. Yes; that is that point.
The C hairm an . Y ou approve of that. What is the next point?
Mr. H allock. The only other point is that you shall permit the
bankers, under proper directions, to establish their clearing houses
so as to get the support of the clearing house as a guarantor of the
proceedings with the Government when they want rediscounts, in
order simply to hand out their paper and take over credit, if that is
all they require, or, if they want actual currency, to have the Gov
ernment issue it in the form of gold notes. There you have all that
you need for the solution of the present question.
Senator C r aw for d . Then you simply want to have them take cur
rency or to take a book credit?
Mr. H allock. At their pleasure.
Senator C rawford. At their pleasure?
Mr. H allock. Yes.
Senator C rawford. While this requires them to take currency, you
want them to------■
BANKING AND CURRENCY.
1707
M r. H allocr . Oh, n o; it don't require them to take currency.
Senator C rawford (continuing). Just allow credit?
Mr. H allocr . It don’t matter. It can be either way as the banks
choose.
Senator S hafroth . It can leave it as a deposit, if it wants to?
Mr. H allocr . Certainly; it permits that.
Senator Crawford. Y ou want to disagree with the bill in that re
spect ?
Mr. H allocr . I don’t think it is necessary just now to establish
banks.
The C hairm an . Y ou do not think it is necessary to establish banks?
Mr. H allocr . A s an agent of the Government.
The C hairm an . Y ou do not want any reserve banks?
Mr. H allocr . Well, that is a detail.
The C h a ir m a n . Are you in favor of it or against it?
Mr. H allocr . That is for you to settle one way or the other. It
is a detail. I do not care.
Senator C rawford. It is in the bill. Would you strike it out?
Mr. H allocr . Not strike it out in the sense of abandoning it
altogether. What I ask you is to agree on these few things and to
pass that measure and go home and take a vacation, which I think
you all need, and then if you want to take up the evolution of a
great banking scheme, you ought to devote months to do that.
Senator M cL e a n . What is your next point ?
Mr. H allocr . I am through, with this exception—there is only
one thing left, and that is this: Gov. Shafroth’s proposition would
make a large increase in the legal tender paper money of this country.
Now, that is something-----Senator S hafroth (interposing). You mean to take up the na
tional-bank notes by it. That is the only increase.
Mr. H allocr . Yes. That, you know— I do not know whether you
propose the rediscounting feature or not, but, of course, you would
not object to that.
Senator S hafroth. I have not proposed the rediscounting feature.
Mr. H allocr . N o ; but the proposition is to increase the legaltender issue. Now, on that, of course, this committee is not agreed;
therefore I drop that and select something else. I then propose to
take from your bill this feature that you have here—that notes shall
be made receivable for all taxes, customs, and for other public dues.
You can all agree to that, every one of you, and then you have no
increase of the legal-tender paper money.
Senator C rawford. That virtually makes them legal-tender paper.
Mr. H allocr . It makes them virtually legal tender, true. But as
far as increasing legal-tender paper money is concerned, you can not
agree, and I certainly would not agree to it. either. That the notes
should be made legal tender is absolutely unnecessary. There are
very few uses for a legal tender. Occasionally a lawyer has a con
tract in which he has to make a tender of money. He then has to be
careful under such a contract to tender actual legal-tender money
in some form. He then may use gold coin, silver dollars, or legaltender notes. I am speaking practically. For this only real use of
legal tenders you may leave the present issue of United States notes
at $346,000,000, as it is, and then you have the gold or the silver
1708
BANKING AND CURRENCY.
dollars, which will supply the people with all the circulation required
for actual tenders of lawful money.
Senator S iiafroth. What objection is there to making currency a
legal tender?
Mr. H allock. Well, sir, you have the objection of the great masses
o f the people in New York and about there. As a rule, a great many
there are opposed to it.
The C hairm an . Have not they got some mental obsession on that
question ?
Mr. H allock. I personally concede the propriety of issuing Gov
ernment paper money, but can not agree with Gov. Shafroth that it
ought to be legal tender.
Senator Crawford. Even then it is not money; it is currency; it
is not money.
Mr. H allock. Put it that way, if you like.
These are all the propositions that I have to make, and, put to
gether, they would enable you to frame a measure that the whole
country would approve.
The C hairm an . I f that is all you have, and the committee have
no questions to ask, we will adjourn at this time.
Mr. H allock. In conclusion permit me to add that, though it may
not be generally known or acknowledged, the establishment of a
central bank in the United States under Government control is an
accomplished fact. No new law is required to have one. It already
operates under provisions of existing law as construed by the Treas
ury Department. Under the present administration, during this
first session of the Sixty-third Congress, this Government bank has
for the first time rediscounted commercial paper for banks. The au
thority of law for doing so in the manner adopted is not disputed.
The Treasury Department, directed by the Secretary of the Treas
ury, is our Government bank. That some of the banking powers ex
ercised by it are strictly according to law is unquestioned; for in
stance, the issue of circulating notes (gold certificates) upon deposits
of g oli, the issue of certain circulating notes in an emergency upon
deposits of commercial paper and other securities (act of May 30,
1908), the redemption of United States notes in gold coin and the
maintenance of a gold reserve for this purpose.
The five points of financial legislation suggested by me for enact
ment without delay at this special session conform closely to the au
thorized practice of the Treasury Department:
(1) The issue of $10 in gold certificates upon any $5 of gold (129
grains of standard gold) that are in or come into the ownership of
the United States would provide a 50 per cent reserve in gold against
such certificates, all o f which certificates would be redeemable on de
mand in gold at par dollar for dollar.
(2) Such issues of gold certificates on a 50 per cent reserve would
obviously make practicable the purchase or redemption of the 2 per
cent bonds at their face value by the Government whenever requested
by national banks that had national-bank notes outstanding and se
cured by such bonds.
(3) The market price of these 2 per cent bonds would probably
go to and stay at par if Congress withdrew from the Comptroller of
the Currency his discretionary power to require additional deposits of
bonds or lawful money in case the market value of the 2 per cents
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