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BANKING AND CURRENCY.
1709
fell below the par value of the circulating notes for which they were
deposited as security.
(4) The issue of gold certificates on a 50 per cent reserve "would
enable the Secretary of the Treasury, if duly authorized by law as
proposed, to meet an emergency by making rediscounts to national
currency associations or banks upon commercial paper and other
securities and by paying the credits given in issues of such gold cer
tificates, if desired, or by furnishing exchange upon almost any point
in the United States, if that were preferred.
(5) The present gold certificates, silver certificates, and national bank notes are not a legal tender in payment of private debts; and
the new form of gold certificates proposed should not be a legal
tender, though receivable for all taxes, customs, and other public
dues.
It is only fair that, having criticized the conduct of the clearing
house committee in 1907, I should indicate what, in my judgment,
the New York Clearing House should have done to prevent the
panic of that year. Fourteen months before the panic I published
in Moody’s Magazine for August, 190G, an article entitled,“ Thoughts
on Clearing Houses,” and there laid down this rule of prevention
which, if followed, would with mathematical certainty have entirety
averted the panic of 1907, to w it:
T H E LESSON OF T IIE P A N IC OF 1 8 9 3 .
To show how unity of action saves and disunity destroys, take as a con
crete example what was done in 1893, when the National Bank of Deposit ap
plied to the New York Clearing House for assistance. Help was refused. The
bank failed. The receiver appointed June 9, 1893, finally closed its affairs
June 15, 1894, after paying depositors 100 cents on the dollar with interest.
In that year the clearing house helped many of its members by rediscounting
bills receivable and securities for them and giving them clearing-house loan cer
tificates in payment. The clearing house could have safely rediscounted the bills
receivable and securities of the National Bank of Deposit, or taken over its
assets and, guaranteeing its deposits, placed them in another New York bank
without depriving depositors or correspondents of their use for a single day.
In 1893 every bank or business man that failed with more good assets than
debts could have been saved by hanks through clearing houses. With such
banks and dealers preserved from failure, there could have been no panic.
Six months after the panic of 1907, being in Washington while
Congress was contemplating legislation to prevent the recurrence
of such an evil, I endeavored to devise a plan by which Congress
could compel the New York banks to act toward one another in
such a considerate manner that no panic would ever result. My
proposal was published in the newspapers of Washington, D. C.,
and is fully set forth in the M ow ing articles:
[From the Washington Herald of Apr. 26, 1908.]
J.
C.
H
W
a tx o c k
A
v o id a b l e
C
it ie s
if
in
to
F
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A
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on
if f ic u l t ie s
O
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A
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o m pe l
B
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eserve
,
E
ven
.
James C . Hallock, of Brooklyn, N. Y., whose father originated the clearing
house in America, and who has himself studied the subject of clearing houses
for many years, said yesterday in an interview with a representative of The
Washington Herald:
“ Thirty-two thousand depositors in Brooklyn, probably 100,000 in Greater
New York, had accounts in failed banks last winter.
1710
BANKING AND CUREENCY.
“ Millions of citizens throughout the Union have come to distrust Wall
Street as a stewpot of panics, which boils over unexpectedly. The American
people would rejoice to see Congress enact a law which would protect the
country against financial disturbance from that quarter.
FAVOKS
LE GISLATIV E
A C TIO N .
“ Possibly a few men in New York would scream as if they were to be killed.
But even in battle many more than are killed think they are going to be.
However, it is true, I wish our Representatives would rise as one man and
render harmless some New York bankers, who could be crushed as easily as a
spider.
“ Understand that the principal banks in the city belong to a union; yet they
let one of their number suspend and deserted five, forcing four to fail, so that
for months there have been closed banks on whose dusty windows the passing
throng have been reading a shameless advertisement of desertion in the soiled
letters. ‘ Member of the New York Clearing House.’
“ Can not even its members be trusted? Now, though these broken banks
suffered losses which their shareholders have had to bear, every one of the
six will resume or pay depositors in full.
“ Their funds would have far exceeded their liabilities to depositors, if a
little time had been allowed them to realize on their assets.
B A N K IN G IN N E W Y O R K SAFE.
“ Bamking in New York is conducted much more safely than people suppose.
Not since the Marine National Bank failed, in 1884, with a net loss to de
positors of $765,800, has a dollar been lost by depositors of failed national
banks in the city of New York. The only other net loss that ever occurred was
$25,612 by the failure of the Croton National Bank, in 1867; that is to say, less
than $800,000 in 45 years of national banking, an average of less than $18,000
a year, with no net loss at all for the past 24 years.
“ St. Louis has had only one net loss from the failure of a national bank.
$38,428, in 1887, an annual average of less than $S60, with no net loss at all for
over 20 years. Chicago has had four small net losses, aggregating $462,453,
since 1875, an average of only $14,000 annually for the past 30 years, with no
net loss since 1893.
“ In short, the national banks of New York are so absolutely safe that they
could guarantee each other’s deposits without practically any risk. When the
runs occurred on the Mercantile National Bank, First National Bank of
Brooklyn, National Bank of North America, and New Amsterdam National
Bank all the other national banks in the city could without peril have offered
to receive checks on them for deposit
W H A T E X IS T IN G L A W REQU IRES.
“ National banks are required by law to receive at par any and all notes or
bills issued by other national banks. Congress, under its constitutional power
to promote the general welfare, should also compel the national banks of New
York to accept checks on any of their number.
“ There can be no question that it would promote the general welfare. His
tory shows that in this country no great panic has started anywhere but in
New York, and there could not be one if at all times checks on every national
bank there were accepted by all.
“ Bank notes are always received, though the bank that issued them may have
failed. So, in New York, checks on national banks should be received by
national banks though the banks drawn on were good or bad, open or closed.
National banks have lost nothing by receiving at par national-bank notes.
And the national banks of New York would lose nothing in the end by receiving
checks on other national banks in the city under all circumstances.
B A N K A S S A S S IN A T IO N S .
“ Investigation would show that more than one of the closed banks in New
York were assassinated by other banks there. The offense of bank assassina
tion is criminal in its nature. To protect depositors against the effects of bank
assassination, the criminal character of refusals to accept checks on other
national banks of New York should be recognized in the law of the land.
1711
BANKING AND CURRENCY.
“ To refuse checks drawn on a New York bank which, though temporarilyembarrassed, has sufficient funds to meet them by any process of liquidation is
a form of malicious mischief which, if it results in closing the bank, may annoy
and injure thousands of citizens, with their wives, children, parents, and
creditors.
“ In New York it is the old story of Cain. ‘ Where is thy brother?’ And he
answered, ‘ I know not. Am I my brother’s keeper?’ Then the Lord said,
‘ What hast thou done? The voice of thy brother’s blood crieth to me from the
earth.’
M U T U A L CONCERN
IN
N EW
YORK.
“ The New York hanks assert the right to be their brother’s keeper. Ever
since June 4, 1884, in the month following the failure of the Marine National
Bank, the clearing-house committee has been empowered, whenever it consid
ered it for the interest of the association, to examine any bank member of the
association and to require from any member securities of such an amount and
character as the committee might deem sufficient for the protection of the bal
ances resulting from the exchanges of the clearing house.
“ Since 1890 every nonmember bank or institution clearing through a member
has had to submit to the same examinations as are required of members.
W HAT
M ETH O D S UNCOVER.
“ Under these conditions, the clearing-house committee can always know
whether a bank is solvent or insolvent and take measures to close it up before
more than the amount of its capital and surplus is lost or dissipated. The com
mittee could give public notice in the newspapers that checks drawn against
funds already in the bank would be received by the national banks in the clear
ing house, but none would be received when drawn on deposits thereafter made.
“ This would fully protect depositors, protect the other national banks of New
York, and put an end to the business of the offending bank.
“ What objection could any Member of Congress from any district outside or
inside of New York have to requiring the national banks of that city to receive
checks on every national bank of New York, whether it were sound, temporarily
embarrassed, or even closed and in process of liquidation?
“ It is not pretended that Congress could constitutionally single out New York
and apply the law only to banks there. To be constitutional the law must apply
to all central reserve cities; that is, to Chicago and St. Louis as well as New
York. Any of them could escape the operation of the law by ceasing to be a
central reserve city.
“ If the national banks of New York, with their intimate knowledge of each
other’s condition, were afraid to be responsible for all checks and drafts of
depositors and correspondents properly drawn on them Congress should, as it
would by the passage of this law, compel them to acknowledge before the whole
country "their want of confidence in themselves and thus warn the public.
“As a matter of fact, there are no safer banks in the world than in New York,
Chicago, and St. Louis. And this law would only give universal publicity to
that fact.”
[From the Evening Star of May
P
l a n
S
to
g ress
— U
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B
eserve
p u l so r y
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8
, 1908.]
M
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eth o d
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ro blem
h e c k s
— W
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Runs on national banks and the financial difficulties attendant thereon can be
prevented, according to J. C. Hallock, of Brooklyn, N. Y., if Congress will lend
a helping hand. Mr. Hallock is here to present his views to the lawmakers and
to describe in detail his plan to guard against financial troubles in the great
cities. Mr. Hallock’s father originated the clearing-house system in America.
pro gress
in
l e g is l a t io n
.
“ The complaint throughout the Union that national banks of New York
refused last fall to furnish currency for needs of interior banks,” said Mr.
Hallock to a Star reporter, “ has been heard by the Republican caucus and a
1712
BANKING AND CURRENCY.
bill recommended that would enable national banks in central reserve and
reserve cities to obtain all the currency they required to supply the needs of
interior banks. This would be progress in financial legislation.
“ But will Congress turn a deaf ear to another crying evil of the times? The
country has unnecessarily suffered from the suspension of banks that have
sufficient assets to pay depositors in full. For years past all national banks
in New York, Chicago, and St. Louis have had such a sufficiency of assets and
been so safely managed that the national banks of these three central reserve
cities would not lose a dollar if Congress compelled every national bank of
New York to accept checks on all the other national banks of that city, every
national bank of Chicago to accept Chicago checks, and every national bank of
St. Louis to accept St. Louis checks, whether the national banks drawn on were
open or closed. This would protect all their depositors and correspondents
everywhere.
“A bold proposition! But no more or less bold than the resolve of the Re
publican Party in 1861 to save the Union. There are only 37 national banks
in New York, 14 in Chicago, and 8 in St. Louis. They are in position to protect
themselves against loss, if made responsible for all legitimate claims of de
positors and correspondents on themselves. Experience during the past fall
and winter has shown the necessity and justice of making them responsible.
“ The chief characteristic of the late panic was distrust of New York banks.
Would there have been any panic to speak of, if there had been no runs on the
Mercantile National Bank, on the Knickerbocker Trust Co., on the Trust Co.
of America, on the Lincoln Trust Co., on the Brooklyn banks? Without those
runs, would interior banks have been frightened?
TH E
SOURCE OF TROUBLE.
“All the trouble came from those runs. Could they not have been prevented?
Surely they could. For example, during the last week of January New Y'ork
concocted runs on four members of the clearing house, which resulted in closing
the National Bank of North America Monday, the 27th; New Amsterdam
National Bank Wednesday, the 29th; Mechanics & Traders’ Bank Thursday,
the 30th; Oriental Bank Friday, the 31st; and the Home Bank of Brooklyn
February 1. There is a way to prevent such runs. The New York banks should
have done for their associates what the Canadian banks did for the Sovereign
Bank of Canada, which went out of existence without closing its doors. That
trick of closing up a failed bank without closing its doors is worth knowing.
“ The Sovereign Bank was a large institution, with many branches and
.$14,000,000 of deposits. On Saturday, January 18, 1908, its president publicly
announced that an agreement had been made with a number of banks by which
nearly all the branches of the bank would open that morning as branches of
other banks; that this arrangement would entail no loss of any kind to the
bank’s depositors or customers; that they could withdraw' their deposits if
they pleased or they could allow them to remain with the bank to w'hich they
had been transferred; that the Sovereign Bank of Canada pass books would be
surrendered and pass books of the new banks obtained, but that borrowing cus
tomers would, of course, have to make other banking arrangements as soon
as possible.
“ The passing of the Sovereign Bank was accomplished without even a ripple
of excitement in the market. An American visiting Toronto at the time said:
“ * Why, if this were New York or Chicago there wmuld be a line of people
r
halfw’ay up the street crow'ding and fighting for position, and not only that,
but there would be crow'ds in front of all the other banks. I don’t know how
you do it.’
DIVIDED T H E AC CO U N TS.
“ The bank and all of its branches opened as usual on that Saturday morn
ing, and a few depositors withdrew their savings, but the transaction of busi
ness went on very much as usual. Every depositor who did not wish to with
draw his savings was given another book issued by the bank that had taken over
that particular branch. It is interesting to note how the bank w partitioned
’as
among the 13 banks that guaranteed the deposits and took over the branches.
The head office and Market Street branch in Toronto were taken over by the
Canadian Bank of Commerce, while the business of the two offices was appor
tioned among seven banks. The Toronto offices were kept open for a month or
BANKING AND CURRENCY.
1713
so, until the business could be wound up, but then closed. The savings accounts
were divided as follows: Nos. 1 to 1299, to the Merchants’ Bank; 1300 to 2899,
to the Dominion Bank; 2900 to 3599, to the Bank of Nova Scotia; and 3600
and on to the Bank of Toronto. For the accunts f custmers outside of
Toronto the following arrangements were made: The Dominion Bank took
over 7 branches; Standard Bank. 8; Bank of Hamilton, 6; Bank of British
North America, 2; Merchants’ Bank. 2; Imperial Bank. 8; Bank of Nova Scotia,
3; Bank of Toronto, 5; Bank of Ottawa, 3; Royal Bank of Canada, 6; Bank of
Montreal, 10; and Canadian Bank of Commerce, 16. Later a few of the 76
branches were redistributed and taken over by the Eastern Townships’ Bank.
“ What was there to prevent closing the National Bank of North America at
New York in that manner? Its deposits had been reduced to $3,500,000 by
previous withdrawals. Divided among a dozen banks in New York the deposits
would not have amounted to $300,000 for each bank. Those deposits will sooner
or later be paid in full, principal and interest. The New York banks would
incur no more risk in taking them over than the Canadian banks did in guar
anteeing and taking over the deposits of the Sovereign Bank.
“ The National Bank of North America, established in 1851. was one of the
banks that organized the New York Clearing House in 1853. In the fifty-fifth
year of its membership, stricken unto death, it resigned from the association
to expire the next day without arrangements for decent burial.
“ The Mechanics & Traders’ Bank, established in 1830, and the Oriental
Bank, established in 1853. have also been members of the New York Clearing
House since its organization. The former had 2 branches in Manhattan and
10 in Brooklyn; the latter a branch in the Bowery. The suspension of the
Mechanics & Traders’ Bank compelled the Home Bank of Brooklyn, which
cleared through it, to close its doors. All these banks and the New Amsterdam
National Bank will pay depositors in full. Why should these 18 banking offices
have closed in one week and left 18 groups of depositors temporarily without
the use of their money?
“ We have seen how in Canada nearly 80 officers of a failed bank, instead of
being closed, were kept open as offices of other banks. Can not the same be
done in the United States?
W HAT
COULD H AV E BEEN DONE.
“ Take the Mercantile National Bank of New York. The clearing house de
termined to get Morse and Heinze out of that bank. The clearing-house
committee could have quietly told those gentlemen that unless they retired the
committee would suspend the bank and recommend to the association its ex
pulsion from membership, with a joint guaranty of its legitimate deposits
and an offer to depositors to accept their checks for credit, and, if desired,
payment at any bank in the clearing house or at a number of designated
banks. That would have ousted Morse and Heinze. protected the depositors, and
caused no distrust in New York banks. The clearing-house committee alarmed
the country by suddenly announcing one day that the Mercantile National
Bank would be supported by the association for only 24 hours longer.
“ There was the Knickerbocker Trust Co. The Clearing House Association
might have informed the public that checks on that company would be accepted
for deposit by every member or by certain ones. Nobody, no bank, in town
or out, would ' ave lost by that, and all distrust engendered by that failure
would have been avoided. The Knickerbocker Trust Co.. Trust Company of
America, and other institutions should have been reorganized without loss or
inconvenience to depositors and without creating the impression throughout
the country that the New York banks were rotten, which they are not.
“ Nobody but the banks themselves are responsible for any run on any bank
in New York or Brooklyn. And if there had been no bank runs, how much of
a panic would there have been in 1907? None at all.
“ On the night before its suspension the president of the Mechanics & Traders’
Bank gave out a statement, in which he said:
“ ‘ The clearing-house committee informed the officers of this bank at 5
o’clock this afternoon that the clearing house had determined to afford no
further assistance to any bank.’
“ Congress should compel the New York banks to stand together for mutual
protection against runs and bank suspensions that cause inconvenience or
loss to their depositors and correspondents throughout the country. Investiga9338° —S D
, oc. 2 3 2 , 63-J—vol 2---- 48
1714
B A N K IN G
AND
CURRENCY.
tion repeals the power of Congress to protect the American people in this
matter.
“ New York bankers are somewhat like the little children in England who
went to a penny show last winter. When the gallery was filled, those on the
stairs were turned back. At a sharp turn in the stairs they met others
coming up. There was first a crush and then a panic in which 16 children
were killed. New York banks have been colliding and crushing one another.
Congress can make them stop that. If before turning the children back some
one had stopped those coming up, there would have been no fatalities at the
show. If Congress makes the national banks of New York accept checks on
other national banks of that city there will never be any more trouble there.”
The cause of the panic in 1907 was the elimination of Heinze,
Morse, and Thomas from banking organizations of New York City
by the clearing-house committee, Sunday, October 20, as chronicled
in the New York dailies and Washington Post of the following day,
as follows:
[The Journal of Commerce and Commercial Bulletin, Monday, Oct. 21, 1907, p. 1.]
$10,000,000
P
ledged
to
S
a ve
B
a n k s
C
— S
l e a r in g
u n d a y
H
o u se
M
e e t in g
of
B
a n k
O
f f ic e r s
a t
.
BELIEVE T H E IR AC TIO N W IL L PREVENT W IT H D R A W A L S OF DEPOSITS FROM B A N K S
U NDER C R IT IC IS M — MORSE RETIRES FROM A L L H IS C H A IN OF B A N K S — PRESIDENT
C U R TIS, OF T H E B A N K OF N ORTH A M E R IC A , RETIRES IN FAVOR OF W IL L IA M F.
H A V E M E Y E R — C U L M IN A T IO N OF T H E M O V EM E N T TO B U Y U P B A N K S TO SECURE
T H E IR LO AN IN G F A C IL IT IE S .
Yesterday— a Sunday—was a history-making day in banking circles of New
York.
The principal developments may be summarized under the following heads:
First. One of the largest and most representative meetings of bank presidents
was held at the New York Clearing House.
Second. A total fund of $10,000,000 was pledged by a score of individual
banks to extend aid to banks and render such assistance to meet their deposits
as the clearing-house committee may think necessary.
Third. Mr. William F. Havemeyer was elected president of the National
Bank of North America in place of Mr. Alfred H. Curtis, who succeeds Charles
W. Morse as vice president.
Fourth. Election of Seth M. Milliken to succeed F. Augustus Heinze as
president of the Mercantile National Bank, and William Skinner and Gerish
H. Milliken as additional vice presidents.
And to those may be added what was really a Saturday development,
namely:
Fifth. The announcement by Charles W. Morse of his withdrawal from any
voice in the management of any banks he has purchased into.
DEVELOPM ENTS A L L CENTER AROUND T H E C U L M IN A T IO N
OF PY R A M ID B A N K IN G .
These important developments all center around a single point, namely, the
culmination of the policy that has been an unfortunate development of the last
decade, that of buying the control of a bank, then putting up the stock repre
senting that control as collateral for funds to buy control of another bank,
and continuing the process with banks and trust companies so that the final
result is a pyramid controlling “ chains ” of financial institutions, the funds
of whose depositors thus become available, in the form of loans for the pri
vate or company enterprises of the shrewd manipulators. There is no denying
that the crisis that the clearing-house banks have come together to avert has
been a serious one; but the clearing house officials are positive they will besuccessful and will at the same time succeed in crushing out an evil that they
have been powerless to deal with until now. But now that the opportunity has
presented itself they will, it is no overstatement to say, make the cure a com
plete one. Thus far they have been called upon to deal with Heinze and
Morse, but it is understood that several other financial institutions of com
paratively small importance are under consideration, and the clearing house
B A N K IN G
AND
1715
CUERENCY.
will render no aid to any institution dominated by other than banking interests
until a complete withdrawal has taken place of the objectionable domination.
C L EA RIN G -H O U SE C O M M ITTE E A T W O R K A L L SA TU R D A Y N IG H T .
The clearing-house committee was at work all Saturday night examining
banks under criticism, and it is when they had explained the situation to the
large meeting of bank presidents at the clearing house yesterday, they were
a practically fagged out company of men. President James T. Woodward, of
the Hanover National Bank, who is chairman of the clearing-house committee,
had returned from Maryland for the purpose of presiding. Among those
present were J. Edward Simmons, president of the Fourth National Bank;
Janies Stillman, president of the National City Bank; William A. Nash, presi
dent of the Corn Exchange Bank; Dumont Clarke, president of the American
Exchange National Bank; Edward Townsend, president of the Importers &
Traders National Bank; A. Barton Hepburn, president of the Chase National
Bank; George F. Baker, president of the First National Bank; James F. Can
non, vice-president of the Fourth National Bank; Samuel Wolverton, presi
dent of the Gallatin National Bank; Alexander Gilbert, president of the
Market & Fulton National Bank; Richard Delefield, president of the Park
National Bank; Robert M. Galloway, president of the Merchants National
Bank, and, in fact, the presidents of nearly all the large banks of the city.
The meeting began promptly at 10 o’clock and did not adjourn until nearly
2 o’clock, when the following official summary of the meeting was prepared
for publication and was also cabled to press associations abroad for publica
tion there.
A committee of the New York clearing house to-day issued a statement de
claring that after having made an examination of the several banks of the asso
ciation that have been under criticism they have found the banks solvent and
have decided to render them assistance if necessary. The statement follows:
“A committee of the clearing house has examined the several banks of the
association that have been under criticism and find them solvent. The clearing
house committee have decided to render them such assistance to meet their
deposits as the committee may think necessary.”
As already noted, Mr. Woodward presided, and the reports of the committee
who had been examining the various institutions was fully discussed. They
found that the National Bank of North America’s capital was fully intact; that
the Mercantile Bank was in a position where they could assist it, and that the
Bank of New Amsterdam was in a solvent condition. It was decided that all
three institutions should be given what aid the clearing-house committee
thought necessary, on condition that the institutions should eliminate from
their boards and from their control the element that had brought their banks
to the condition in which they are now, and, to quote a clearing-house member,
“ Clean house and make themselves respectable.” Under such conditions the
meeting decided that the clearing-house bankers would “ go behind the banks in
question and take care of them.”
TEN
M IL L IO N DOLLARS PLEDGED TO H ELP OUT T H E B A N K S .
The practical action taken by the meeting was to pledge a sum of $10,000,000
for the use of the committee on the lines laid down. This means that the insti
tutions are going to be saved, and it was the belief at the meeting of bank
presidents that the action taken would be sufficiently reassuring to the public
to prevent any large withdrawal of deposits to-day and will relieve the entire
situation.
[The Journal of Commerce and Commercial Bulletin, Tuesday, Oct. 22, 1907.]
T
h e
B
e g in n in g
of
B
a n k
R
e fo rm
.
The clearing-house committee has rendered a most valuable service to the
banking community by coming to the assistance of certain banks in the asso
ciation which had been weakened by bad management and giving assurance
that the interests of depositors would be made secure, but the most important
part of that service lies in the condition upon which it was rendered. This
condition was that the bad management should cease and the causes of it should
be eliminated. As these causes have long been known, it is unfortunate, if
1716
B A N K IN G
AND
CUKKENCY.
not discreditable, that action should be deferred until the evil results were
fully developed and disastrous consequences were threatened. Earlier action
might have been resisted and it might have lacked needed support, but if there
had been sound sentiment and a high sense of integrity and prudence in the
financial community the abuses that were sapping and weakening the banking
system would never have been permitted to grow up, and the clearing house
has always been in a position to prevent them by a vigorous assertion of its
influence.
We have frequently condemned, before this acute situation was revealed by
the failure of a speculative stock operation in which a prominent bank was in
volved, the practice of allowing regularly organized and supervised banking
institutions to pass into the control of promoters, speculators, or great corpo
rate concerns engaged in other business to be used to serve their purposes.
That practice was a violation of sound banking principles and was sure to de
moralize banking methods and lead to dangerous abuses, for it is the duty of a
bank chartered by law and subject to public supervision to guard the interests
of all its depositors and treat all its customers with equal fairness and consid
eration according to their just claims. The relation of directors and officers
to them is one of trust and confidence, and they should not have personal in
terests in conflict with the obligations that such a relation entails. When pro
moters and financiers with schemes of their own to advance or large interests
to serve in which they are personally concerned gain control of a bank or a
“ chain of banks ” for the purpose of using them in their business, there is
sure to be a departure from sound and safe banking methods and other inter
ests are endangered. No countenance should be given to such control of banks
by public authorities having any power to prevent it or by such an associa
tion as that of the New York Clearing House.
The case of F. Augustus Heinze and the Mercantile National was typical,
though an extreme example. When Heinze obtained control he began to use
the bank to promote his own purposes and advance the interests of himself
and thos associated with him, as, considering his past career, it was to be ex
pected that he would. The result is also what was to have been expected
sooner or later, but there are other cases of the same kind, though less flagrant.
The exploits of C. W. Morse in banking are typical in a different way. He was
engaged in large schemes of promoting steamboat and water transportation
enterprises and had use for banks. He instituted the plan, not altogether new.
of controlling “ chains of banks,” more or less interdependent and cooperative,
by buying a large interest in one, using its stock as security for raising funds
to buy into another, and so on until the pyramid of control was complete.
Banks so controlled or largely influenced in their management were sure to
serve first the interests of those exercising the control or dominant influence,
at the risk of sacrificing or imperilling those of other depositors, borrowers,
and stockholders. Requiring a complete change in the direction of the Mer
cantile National Bank and impelling the withdrawal of “ controlling interests ”
in others needing support as a condition of clearing-house assistance to restore
them to confidence was a wise move on the part of the clearing-house com
mittee.
But the process of banking reform ought not to stop there, though its effec
tiveness will depend less upon definite action than upon the influence of sound
and vigorously asserted sentiment on the subject. Every effort should be ex
erted to put our banking upon a basis of sound principle and upright methods,
and making it independent of all sinister influences which would make it sub
servient to special interests of any kind. The control and management of
banks should not be entangled with that of corporate affairs in other lines of
business, such as insurance, railroads, and industrial concerns, in a way to
put them under obligation to serve these and to discriminate against others.
This is an element of evil that has been working insidiously and is widespread.
It is to be feared that its infection has gone far and deep in some of the
strongest members of the clearing house association, but its ravages are most
serious in a class of institutions that are outside of its jurisdiction. Lack of
adequate regulation, supervision, and publicity has made of some trust compa
nies the pliant tools of syndicates, promoters, and speculators until they have
lost their original character and belied their name. In the system of banking
institutions at this financial center there is much that needs reform, but the
greatest need is a reform in sentiment and opinion, which shall elevate the
standard and purify methods, making of banking the conservative power and
directing force that rightly belongs to it, a tower of strength and a rock of
defense for the business community,
B A N K IN G
AND
1717
CURRENCY.
IThe Journal of Commerce and Commercial Bulletin, Wednesday, Oct. 23, 1907, p. 4.]
A T IM E FOB K EEPIN G COOL..
Whether the derangement started by disclosures affecting the Mercantile
Hank and the Knickerbocker Trust Co. is to spread into financial disaster de
pends much upon the temper of the public, as well as the spirit of the financial
community. It is a time for keeping as cool and calm as possible and acting
with prudence. Most of our financial institutions are undoubtedly sound and
safe, and can do much to sustain the whole fabric of credit and carry it
safely through if they are not harrassed by importunate and unreasonable de
mands. Nothing is worse than precipitate “ runs,” for no bank can be instantly
prepared for these.
There should especially be abstention from exciting and disturbing comment.
The voice of the President of the United States at such a time, if uttered
at all, should be reassuring rather than irritating, and the remarks in his
Nashville speech yesterday were most injudicious. It may be true, that the
President’s policies have had no material effect in bringing about the present
trouble, but it is no time for harping upon that and reiterating threats of keep
ing up the effort to punish successful dishonesty.” The press, too, should avoid
aggravating the situation. It is a time just now for cool heads and calm speech
and a prudent treatment of an acute situation.
[The New York Sun, Monday, Oct. 21, 1907, p. 1.]
F
in d s
I
t s
P
b o c ess
N
eed
W.
C
B
a n k s
— B
a s h
o th
W
A
be
T
h o m a s e s
il l
G
S
et
o lven t
I
t
R
— C
l e a b in g
e t ib e d
— A
n y
H
o u se
C
C
o m ple te s
l e a b in g
-H
o u se
D
B
k a s t ic
a n k
T
P
u b g in g
h a t
M
a y
Now.
F. H A V E M E Y E B , PBESIDEN T OF T H E B A N K OF NOBTH A M E BIC A , AN D SE TH M .
M 1L L IK E N , OF T H E M EB C A N T IL E N A T IO N A L ---- C. W . MOBSE CBEDITED W IT H P U TT IN G U P
Q U ITE A F IG H T , BUT T H E CLEABING H O U SE W A S IN S IS T E N T W IT H H I S B A N K S — T H E
T H O M A S E S W E N T A T T H E WOBD GO---- SOLD T H E IE STO C K S, TOO. A S MOBSE DID NOT---BIG CL E A B IN G -H O U SE M EETIN G AND DIBECTORS’ M EE TIN G S ON A SU N D A Y .
The clearing-house committee worked on Sunday, and last night a state of
contentment and satisfaction succeeded the foreboding and disgust created by
the sordid disclosures of the previous half dozen days in certain clearing-house
banks in which the Heinzes, the Thomases, and Charles W Morse were officers.
r.
Every banker important in clearing-house circles was entirely satisfied that the
clearing house had completed its work of purging thoroughly and well. It had
driven out of control of clearing-house banks the elements that were considered
unsound and unsafe, and had vastly improved the banking situation by relieving
it of skyrocket banking.
Moreover, bankers were unanimous in the belief that they had done their
work in time to save all the banks in which the loose banking methods were
practiced. Not only had they done it in time, a clearing-house banker said last
night, but they had done it in abundant time and found the banks solvent.
Therefore, after one of the most important meetings in the history of the
clearing house, a meeting at which there were present a remarkably large num
ber of sound and responsible clearing-house bankers, and at which every phase
of the situation was discussed, the bankers decided to support the National Bank
of North America, the New Amsterdam National Bank, whatever other Morse
banks might need assistance, and the Mercantile National. A thorough exam
ination of the institutions had been made and the examiners reported them
solvent beyond a doubt. The official statement of the decision was expressed
as follows:
“A committee of the clearing house has examined certain banks of the asso
ciation that have been under criticism and finds them solvent. The clearing
house committee has decided to render them such assistance to meet their
debits as the committee may think necessary.”
T H O M A S E S SELL OUT AND RESIGN.
Before this decision was given out, the process of eliminating unsatisfactory
factors had been completed. In the place of Fritz Augustus Heinze, as presi
dent of the Mercantile, there had been selected Seth M. Milliken, a responsible
1718
b a n k in g
and
currency.
and wealthy merchant. The Thomases had given notice of their resignations
from the boards of the two clearing-house banks of which they were directors,
and had not only resigned all other banking offices held by them in this city,
but had announced the sale of their holdings in the only two banks they con
trolled, O. F. in the Consolidated National and E It. Thomas in the Ham
ilton Bank, and had resigned, respectively, as presidents of the two institutions.
These banks are small concerns not members of the clearing house, and the
clearing-house committee had not bothered about them. Nevertheless the news
of the Thomas elimination from them was welcome.
FU RT H E R E L IM IN A T IO N OF C. W . MORSE.
In the case of Mr. Morse, also, the process of elimination had been completed
by tentative arrangements for the transfer of stock control in his banks and
the election of a new president in the person of W. F. Havemeyer at the
National Bank of North America. Mr. Morse struggled hard to avoid the fate
in store for him, but all his efforts were futile against the determination of the
clearing-house bankers. As was stated yesterday, plans for the transfer of
stock holdings were complicated by the fact that so much if not all of the
holdings are hypothecated in various banks for loans.
NOTICE TO B A N K EXPLOITERS TO Q U IT.
“ The gist of the situation is just this,” a banker said last night. “ The clear
ing house has decreed and has enforced the decree that persons who buy stock
control in banks, put the stocks up as collateral for loans in other banks and
borrow the deposits of the banks they and their associates control in order to
float their corporation schemes, shall not do business under clearing-house aus
pices in this town.”
MORSE AN D H E IN Z E LO AN S M U S T BE T A K E N UP.
In connection with loans from banks the clearing-house committee, before It
would announce further aid to the Mercantile, bluntly and flatly told the
Thomases, Mr. Heinze, and Mr. Morse that they must pay back their loans to
that institution. There was no equivocation about it. Those loans must be
paid, and that was all there was about it. They must pay them, too. forthwith;
must pay them if they had to sacrifice their securities at an even lower range
of stock market prices than, largely because of the operations of the Thomases,
the Heinzes, and Mr. Morse, exist at present.
[T h e
B
a n k s
C
le a n
S
tro ng
B
e l ie v e d
CLEARIN G
S
H
o u se
u ppo rt
O
ver
H OU SE
W a s h in g to n
P
— H
e in z e
r o m is e d
P ost,
,
— D
M
M onday,
o rse
a n g er
,
a n d
C
r is is
O ct.
T
21,
1907,
h o m a s e s
in
N
e w
Y
A
p.
ll
o rk
1 .]
A
B
re
N
O
o w
a n k in g
C
u t
—
i r c i .e s
.
W IL L
RENDER A L L
N E C E SS A R Y AID
TO AFFECTED IN S T IT U T IO N S ----
SE TH M . M IL L IK E N ELECTED PRESID EN T OF M ER CA N T IL E N A T IO N A L ---- OUSTED I N
TERESTS REQUIRED TO RE PA Y BORROW INGS A S PR EE SSE N T IAL TO A S S IS T A N C E .
N e w Y o r k , O c t o b e r 2 0 .—The clearing-house committee late to-night announced
that the Heinze, Morse, and Thomas interests had been eliminated from the
banking organizations of New York City, and in the light of this fact, the clear
ing-house association declared its readiness to lend all necessary aid to any of
the banks which have been under suspicion, the investigation having estab
lished their solvency. It is believed that this action will prevent any crisis in
New York banking circles.
At a special meeting of the board of directors of the Mercantile National
Bank this afternoon Seth M. Milliken was elected president of the bank to
succeed F. Augustus Heinze, resigned. At the same time William Skinner and
Gerish H. Milliken were elected additional vice presidents, Gerish H. Milliken
being added to the board of directors. It is understood that the Mercantile
National Bank will undergo a process of slow liquidation.
BANKING AND CURRENCY.
1719
William F. Havemeyer, one of its directors, was to-day elected to the presi
dency of the National Bank of North America, succeeding Alfred H. Curtis, re
signed. This is one of the institutions that had been controlled by Charles W.
Morse.
T H O M A S E S ALSO ARE OUT.
The official statement of the clearing-house decision was expressed as follows:
“A committee of the clearing house has examined certain banks of the asso
ciation that have been under criticism and finds them solvent. The clearing
house committee has decided to render them such assistance to meet their
deposits as the committee may think necessary/'
Before this decision was given out the process of eliminating unsatisfactory
factors had been completed. Orlando F. and E. R. Thomas had given notice
of their resignations from the boards of the two clearing-house banks on which
they were directors, and had not only resigned all other banking offices held by
them in this city but had announced the sale of their holdings in the only two
banks they controlled O. F. Thomas, in the Consolidated National, and E. R.
Thomas, in the Hamilton Bank, had resigned, respectively, as president of the
two institutions. These banks are small concerns, not members of the clearing
house, and the clearing-house committee had not bothered about them.
Following a conference of the directors of the institutions to-night, it was f o r
m a l l y announced that William O Allison would succeed Orlando F. Thomas as
president of the Consolidated National Bank. Mr. Thomas, it was said, had
sold his holdings in the bank to Mr. Allison and Thomas J. Lewis, who already
were large stockholders and active in the management.
REASON FOR r U N I S H M E N I .
“ The gist of the situation is just this,” a banker said to-night. “ The clear
ing house has declared and has enforced the decree that persons who buy stock
control in banks put the stocks up as collateral for loans in other banks and
borrow the deposits of the banks they and their associates control in order to
float their corporation schemes— such persons shall not do business under clear
ing-house auspices in this town. The persons now detected in it are the first
persons who ever got into the clearing house to perpetrate such acts. They
are the first and they will be the last.”
In connection with loans from banks, the clearing-house committee, before it
would advance further aid to the Mercantile, bluntly and flatly told the
Thomases, Mr. Heinze, and Mr. Morse that they must pay back their loans to
that institution.
There was no equivocation about it. Those loans must be paid, and that
was all there was to it. They must pay them, too, forthwith; must pay them
if they had to sacrifice their securities at an even lower range of stock-market
prices than exists at present, largely because of the operations of the Thomases,
the Heinzes, and Mr. Morse.
M ORSE
PROTESTED
DECISION.
Mr. Morse insisted, both at the stormy meeting in the Bank of North
America Saturday night and at other meetings to-day, that he was worth
$11,000,000, even if liquidated at present prices. The retort came easily and
glibly that if this were the case Mr. Morse should have no difficulty in paying
off his loans. Mr. Morse insisted that he could; that his loans were amply
secured, and that he ought not to be obliged to sacrifice his holdings in the
depressed condition of the market.
With F. Augustus Heinze, bankers declared the question of payment of loans
seemed entirely a matter of ability to do so. Mr. Heinze’s borrowings are said
to have been much heavier than those of either Mr. Morse or the Thomases
put together, though there is doubt of this in the case of Mr. Morse. Mr. Heinze
has a loan, secured by Mercantile Bank stock, in the Bowling Green Trust Co.,
of which Edwin Gould, from whom he bought much of the stock, is president.
He also has a loan of $000,000 in a bank in which members of the Heinze party
have an interest. He was notified several days ago—at the time of the collapse
of the United Copper corner, in fact—that this loan must be paid. But it has
not yet been paid.
1720
B A N K IN G
AND
CURKENCY.
DEN IES H E W A S FORCED OUT.
Mr. Morse, when seen at his home at 728 Fifth Avenue to-night, said he had
no further statement to make in regard to his position in the banking situation.
He said very emphatically that no pressure had been brought to bear upon him
to resign from his official position in his New York banks.
“ I was very glad to get out,” he said. “ There was nothing in it for me.
I am satisfied with remaining a stockholder and having nothing further to do
with the management of the banks in which I am interested. I do not intend
to sell any of my holdings of stock in them.
“ My only reason for resigning was that I felt that after all the notoriety
connected with the Mercantile Bank, a formal resignation from the banks with
which my name was officially associated would prevent anything in the form of
a run upon them. There are to be no changes, so far as I know, in the di
rectorate of the New Amsterdam or any other of my banks. I shall devote my
self more now to my other interests.”
Mr. Morse seemed very much amused when he was told that a story was
current that he and his wife, thoroughly disgusted with the situation, intended
to sail for Europe to-morrow.
“ It is ridiculous,” Mr. Morse said.
[T h e
C
l e a r in g
H
World, Monday, Oct. 21, 1907, p. 1.]
o u se
W
il l
S
ta n d
B
a c k
of
A
ll
t h e
B
a n k s
.
Its committee announces that aid shall be extended to any of them needing
if to meet their deposits. Morse, the Thomases, and Ileinze, having resigned
from them and disposed of their stock.
New presidents are chosen for four banks.
W. F. Havemeyer for National of North America, S. M. Milliken for Mer
cantile National. W. O. Allison for the Consolidated National, and W. R. Mont
gomery for the Hamilton.
J. Edward Simmons reassures the public.
J. Edward Simmons, president of the Fourth National Bank, and, in point of
service, one of the oldest members of the clearing-house committee, has au
thorized the World to make the following statement:
“ The action of the clearing-house committee to-day in sustaining the three
banks that have been under criticism ought to reassure the public sufficiently
and allay any further anxiety whatever.”
By a victory absolute, unconditional, and relentless the clearing-house com
mittee yesterday eliminated from the banking business of New York City
Charles W. Morse, E. R. Thomas, O. F. Thomas, and F. Augustus Heinze. changed
the presidents of four institutions, and then pledged the aid of their association
to all the members during any crises that may arise.
Accompanying this pledge was a clean bill of health for all banks that have
been examined and the intimation that all others mentioned in the last week
will be found solvent.
The action of the committee was regarded as most effective and so improved
the general situation that it is believed there need not be a single failure, sus
pension, or liquidation for the present. The statement of the committee given
yesterday morning follows:
“A committee of the clearing house has examined the several banks of the
association that have been under criticism and find them solvent. The clear
ing house committee have decided to render them such assistances meet their
deposits as the committee may think necessary.”
“ O UG H T TO REASSU RE T H E P U B L IC .”
The effect of this statement was summed up last night for the World by J.
Edward Simmons, president of the Fourth National Bank and in point of
service one of the oldest members of the clearing house committee. Said Mr.
Simmons:
“ The action of the clearing house committee to-day in sustaining the three
banks under criticism ought to reassure the public sufficiently and allay any
further anxiety whatever.”
B A N K IN G
AND
CURRENCY.
1721
In this expression Mr. Simmons was heartily supported by all other members
of the committee seen, one bank president saying decidedly:
“ Now that the criticized element has been effaced, there is no reason for
any bank of the city to fail, and I do not think any one of them will go under.
There may be a drain on some institution to-morrow, but that has already been
provided for, and it will be met without difficulty. There will be enough sup
port for any one of the banks to withstand a three days’ run, and by that time
we believe it will all be smoothed over and forgotten.”
The plan under which the clearing house determined, instead of allowing the
Thomas-Morse-Heinze to go under, to go to their assistance was thought of
late Saturday afternoon, when the committee was holding frequent conferences
with the four men mentioned; it was put fortli as the only alternative and was
in this way very tersely stated by the committee:
“ Get out of the business, or you must look after yourselves Monday morning.
“ It was frankly admitted that not one of the institutions or the men them
selves could withstand the run that would follow such a decision, and the four
men agreed to part with their holdings to whoever would be acceptable to the
clearing-house men.”
RE SIG N A TIO N S M ADE.
Charles W. Morse and the other men mentioned wrote their resignations as
directors and officers of a score or more of banks and promised to place their
stock with the committee to be sold. In this there was a slight hitch, for it
was found that all four had at that time hypothecated their stock for loans,
and the shares would not be available immediately.
Mr. Morse resigned as vice president and director of the National Bank of
North America, as a director of the Mercantile National and the Fourteenth
Street Bank, as vice president and director of the Garfield National Bank,
as a director of the Lincoln National Bank, of Bath, Me., as vice president
and director of the New Amsterdam National Bank, and from the New Amster
dam Deposit Co., the New York Mortgage & Security Co., the New York Produce
Exchange, Van Norden Trust Co., and Van Norden Safe Deposit Co.
E. R. Thomas at a later meeting drew up his resignation as president and
director of the Hamilton Bank, as director of the Consolidated National Bank,
as vice president and director of the Mechanics & Traders’ and the Mercantile
National, and offered to withdraw from the Bowling Green Trust Co. and the
Hudson Trust Co.
O. F. Thomas tendered his resignation as a director of the Bank of Discount
and Consolidated National, of which he was president and director; the Hamil
ton Bank, the Mercantile National, and offered to withdraw from the Hudson
Trust Co.
The resignations of Heinze had already been obtained and were added to the
pile. They were from the Consolidated National and Mechanics & Traders’,
and the Mercantile.
With the effacement of the four men from the banking business the clearing
house made the changes they thought necessary in the banks. The committee
in these cases only suggested or approved the suggestions made for new officers.
[T h e
W o r ld ,
T u esd ay,
Clean
O ct.
22,
1 9 0 7 .]
H ouse.
Through its committee the clearing house has eliminated F. Augustus Heinze
and all of Ileinze’s directors from the Mercantile National Bank. Likewise it
has brought about the retirement of C. W. Morse and E. It. Thomas from the
banks with which they were connected.
Why should not the clearing-house committee complete the work it has so
excellently begun and reestablish legitimate banking in New York by treating
Ryan, Rogers, and Harriman as it has treated Heinze, Thomas, and Morse?
If the clearing house can rid the banking business of Heinze, Thomas, and
Morse, it can rid the business of Ryan, Rogers, and Harriman. It can force the
resignation of their dummy directors as easily as it forced the resignation of
Heinze’s. The fact that Ryan, Rogers, and Harriman are exploiting institutions
of far greater financial strength than those manipulated by Heinze, Thomas,
and Morse has nothing to do with the issue of honest banking.
1722
BANKING AND CURRENCY.
[T h e N ew
C.
W .
Y o r k T im e s , S u n d a y , O ct. 2 0 , 1 9 0 7 , p. 1 .]
M
o rse
Q
u it s
t h e
B
a n k in g
F
ie l d
.
H E RESIG NS FROM AL L B A N K S AND TRU ST C O M PA N IE S H E W A S INTERESTED IN
H ERE— ALSO OUT OF M A IN E B A N K ---- CONTROLLER RIDGELY DECLINES PRESID EN CY
OF T H E M ER CA N TILE— FU R T H E R AID GIVEN---- B A N K PO SITIO N CLEARING.
With the resignation last night of Charles W. Morse from all the banks and
trust companies in this city with which he was connected in any capacity what
ever the entanglements arising from the United Copper and Mercantile National
Bank affairs were much unraveled, and the prompt and vigorous measures of
the New York Clearing House to clear up the situation carried well on toward
complete success.
This step was prompted presumably by the fact that Mr. Morse found his
general interests and his banking connections in such practical conflict that his
resignation left the clearing house a freer hand to cope with the entire situation,
which is now looked on as substantially cleared up.
This development, important as it was. was only one of a series, including
the refusal by Controller Ridgely of the presidency of the Mercantile Na
tional, the occurrence of another big debit balance by that bank at the clear
ing house amounting to over $1,000,000, and a conference between the Thomas
and Heinze interests at the Waldorf-Astoria, on which neither F. A. Heinze
nor E. R. Thomas would comment.
At the opening of the banking day yesterday a meetiug of the clearing-house
representatives was held at the clearing house in order to consider the general
banking situation, and more particularly to meet the necessities in connection
with the settlement of the Mercantile National Bank’s clearances.
This meeting was attended by Acting Chairman of the Clearing House
Committee W. A. Nash, president of the Corn Exchange Bank; by Alexander
D. Gilbert, president of the clearing house and the Market & Fulton Na
tional Bank; by A. Barton Hepburn, president of the Chase National Bank;
by Dumont Clarke, president of the American Exchange National Bank; by
J. Edward Simmons, president of the Fourth National Bank; by George F.
Baker, president of the First National Bank, and by Vice President Frew, of
the Corn Exchange National Bank.
M E R C A N T IL E ’ S BA LA N C E M ET.
At this meeting the committee agreed to make up any part of the Mercantile
National Bank’s debit balance of $1,137,000. which the bank itself might not
itself be able to pay. This balance the clearing house was called upon to pro
vide the great bulk of this payment.
In connection with the decision of the clearing-house representatives to
extend this aid to the Mercantile National yesterday as it had extended similar
aid the day before, it was definitely made known that the committee was not
committed to make any further payments on behalf of th*Mercantile National,
and that each day’s clearances were to be considered by the committee inde
pendently of any previous action which it may have taken.
It is, in fact, the understanding in the financial district that the committee
is not disposed to continue assisting the Mercantile National if its debit balances
at the clearing house continue as heavy as they were yesterday. It is known
that the very large amount of the bank’s debit balance yesterday was a surprise
in clearing-house circles. Regarding the committee’s attitude on this point, a
member of the clearing house said yesterday:
“ It is not the intention of the clearing house to pay off the deposits of the
Mercantile National Bank. The action which the committee is taking, by which
we extend temporary aid to the bank, but the bank must in the long run rely
upon its own resources, and the committee can not be expected to go on provid
ing for debit balances as heavy as that returned against the bank to-day.”
Among the banks and trust companies from which Mr. Morse resigns are the
National Bank of North America, of which he was vice president and director;
the New Amsterdam National Bank, director and vice president; the Garfield
National Bank, director; Fourteenth Street Bank, director; New York Produce
Exchange Bank, director; Mercantile National Bank, director; Van Norden
Trust Co., director. He is also in two financial institutions of Bath. Me., his
native town. The officers of most of the institutions named acknowledged the
1723
BANKING AND CURRENCY.
receipt of Mr. Morse’s letters of resignation, and the announcement itself was
made by one of his personal associates.
Developments in the affairs of the Mercantile National Bank yesterday in
cluded the return at the clearing house of a debit balance of $1,137,000 against
the Mercantile National, the bulk of which was made up by the clearing-house
association; the refusal of Comptroller of the Currency Ridgely to accept the
presidency of the bank, which the directors had offered him on Thursday; the
appearance of further evidence of a strained situation between the old manage
ment of the Mercantile National Bank and the clearing-house committee; and,
finally, the definite statement that the clearing house did not mean indefinitely
to extend aid to the institution from which Mr. Heinze resigned as president
two days ago.
[T h e N ew
Y ork
T im e s , M o n d a y ,
Oct.
2 1 , 1 9 0 7 , p . 1 .]
B a n k s S o u n d ; W il l be B a c k e d .
T H E STRENG TH OF T H E CLEARIN G H OU SE PLEDGED TO GIVE A L L NEEDED SUPPORT— T H E
T H O M A S E S ALSO OUT---- SE TH M IL L IK E N H EA D S M ER CA N T IL E AN D W . F. H A V E M E Y E R
T H E B A N K OF N OR TH A M E R IC A — DISTU RBIN G FACTORS Q U IT , AND SPEYER, SC H 1FF,
AN D OTH ER LEADING B A N K E R S AGREE T H A T T H E SIT U A T IO N IS N OW CLEARED U P.
Following a prolonged meeting of the clearing-house committee, which lasted
practically all Saturday night and was continued at the clearing house itself
yesterday morning, announcement was made that the examination which the
clearing house had made of the banks under criticism had shown them to be
solvent and that the committee had decided to extend to them such aid as the
committee might deem necessary to help them meet the demands of their
depositors.
This referred specifically to the National Bank of North America and the New
Amsterdam National Bank, from which Mr. Morse retired to aid in clearing up
their affairs, but the announcement was taken as implying the banking situation
generally.
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 elimi
nated from the banking organizations of New York City, a fact made patent by
the events earlier in the day.
Banking houses of international prominence were agreed last night in the
belief that the clearing house’s measures will successfully meet the situation.
Several bankern in this group, including James Speyer and Jacob H. Schiff,
expressed their views to this effect to The Times.
The C h a i r m a n . I f that is all you have and the committee have no
questions to ask, we will adjourn at this time.
(The following communication, addressed to the committee, was,
at the suggestion of the chairman, incorporated in the record at this
point:)
W a s h in g t o n ,
The
D.
C ., O c t o b e r 3 , 1 9 1 3 .
C u r r e n c y C o m m it t e e ,
U n ited S ta te s S en a te, W a s h in g to n , D . C.
G e n t l e m e n : Believing that you are attempting to get at the real sentiment
of the bankers of this country regarding the proposed currency bill and not de
siring to take too much of your valuable time, and having been requested by the
bankers of the western half of the State of South Dakota to represent them
before your committee, am placing before you, in writing, our objections to the
pending bill.
I believe that the bill will not meet with the approval of the banks of the
State which I represent, and unless very much modified, many of the national
banks will be compelled to leave the national system. We believe firmly in
Government supervision but not in Government control, more especially when
we are furnishing the capital.
Second, we believe that the taking advantage of the plan proposed should be
optional and not compulsory.
Under the bill as it is at present we would suffer considerable financial loss;
take, for instance, the bank of which I am the president, the First National
1.724
BANKING AND CURRENCY.
Bank of Deadwood. S. Dak.; we have a capital of $150,000 ; 20 per cent in
stock in the regional bank would take $30,000; our deposits are in the neighbor
hood of $1,300,000 ; 5 per cent of this amount as a reserve in the regional bank
would be $65,000. On the first-named amount we are to receive 5 per cent
dividend, if the regional bank earns it; with any more than three regional
banks their ability to earn this amount we very much doubt. On the latter
amount we are not to receive anything, so out of our capital of $150,000 we must
have invested in the regional banks $95,000, almost two-thirds of our capital,
which we can not use and on which we receive no return. Then again, the bill
as now constructed takes from us one of our large items of revenue, the item
of exchange. The loss of this revenue to country banks will prove a severe
hardship to them; in our bank this is in the neighborhood of $6,000 a year,
and I believe this a fair average of country banks existing under the same con
ditions as we do.
Before leaving for Washington I solicited nearly every national bank in that
part of South Dakota which I am here representing as to how they consider the
bill as now proposed, and almost every one replied and practically as I have
outlined.
I am thoroughly conversant with the fact that the objections I have made
are not new to your committee and that practically every section of the coun
try have brought the attention of the committee to the same ones, but we are
desirous of stating herein most emphatically that we believe, with the great
majority of the bankers of the United States, that the bill in its present form
is unworkable, and a great many of the banks now in the national system will
refuse to accept the provisions of the same by leaving the national system and
applying for State charters.
Thanking you on behalf of the bankers of South Dakota for any favorable
consideration you may give this communication, I am,
Very sincerely, yours,
N. E. F r a n k l i n .
(The chairman also presented the tables for insertion in the record
which face this page.)
(Thereupon, at 2.40 p. m., the committee adjourned until Monday,
October 0, 1913, at 10 o’clock a. m.)
M O N D A Y , OCTOBER 6, 1913.
C ommittee on B a n k in g and C urrency ,
U nited S tates S enate ,
Washington, D. O.
The committee assembled at 10 o’clock a. m.
Present: Senators Owen (chairman), Hitchcock, Reed, Pomerene,
Shafroth, Hollis, Nelson, Bristow, Crawrford, and Weeks.
STATEMENT OF GEORGE H. SHIBLEY, DIRECTOR AMERICAN BU
REAU OF POLITICAL RESEARCH, WASHINGTON, D. C.
The C h a ir m a n . Gentlemen, I should like to say for Mr. Shiblev
that he has been a long time engaged in the study of public ques
tions. He has been a publicist in, I think, a very patriotic and high
sense and is a man for whom I have a great respect. He was in
vited to appear before the committee, especially in connection with
the probable effect of this bill and what might be possible under this
bill in promoting a more stable price level. He has made a specialty
of studies along that line.
The book you have before you is a book dealing with the whole
sale prices from 1890 to 1912, showing the methods by which the
Government has been trying to ascertain a means of knowing what
I
T able
A . — Tabular su m m ary o f State legislation governing com m ercial banks.
N evada.
A r iz o n a .
A la b a m a .
A r k a n s a s .i
C o lo r a d o .
C a lifo rn ia .
C o n n e c t ic u t .
D is t r ic t o f C o lu m b ia .2
D e la w a re.
F lo r id a .
________________________• _
Id a h o.
I llin o is .
$25 ,000..................................
$10,000 t o $30 ,000............
$15,000 t o $50,000
50 p e r c e n t .........................
A l l ..........................................
........................... ..............................................
N o ::::::::::::::::::::
................................................. 1 y e a r ....................................
10 p e r c e n t ......................... ...................................................
25 p e r c e n t .........................
See p a g e 0 3 ........................ Y e s . : : : : : : : : : : : : : : : : : :
N o t m o r e t h a n 9 ............
H o id $500 o f s t o c k .........
5 m o n t h s .............................
10 p e r c e n t .........................
20 p e r c e n t .........................
Y e s ........................................
A t le a st 5 ............................
A ll c it iz e n s o f U n it e d
S ta te s ; t h r e e -fifth s
r e s id e n ts o f F lo r id a ;
e a c h h o ld e r o f 10
sh a res o f s t o c k .
No
T h r e e -fo u r th s m u s t b e
r e s id e n t s
o f C on
n e c t ic u t .
623,000 Lu $20{J]nnD.......... ] $ 2 5 ,000...........................
20 p e r c e n t ; n o t less
t h a n $15,000.
oO p e r c e n t ..................
5 m o n t h s .............................
10 p e r c e n t .........................
Y e s .........................................
A t le a st 5 ............................
H o ld $500 o f s t o e k .........
4 y e a r s ........................... - - Y e s ; S t a t e t r e a s u r e r ...
A n n u a l ly t o g o v e r n o r .
A n n u a l ly t o g o v e r n o r
a n d b ie n n ia lly to
le g isla tu re .
Y e s .........................................
Y e s ........................................
T h r e e ....................................
c o m m is -
4 y e a r s ..................................
S u p e rv is o r m a y s u e for r e c e iv e r ........................................................... Y e s .............................
S u p e rv is o r m a y ta k e p o s s e s s io n in i n s o lv e n c y , e t c .................. ..................................................
B a n k r e p o r ts : H o w m a n y a y e a r 7...................................................... T w o ..................................
U n c la im e d d e p o s it s m u s t b e p u b li s h e d ...........................................
A n n u a l ly t o g o v e r n o r .
......................... ......................... ...........................
O n e o r t w o ___
M in im u m reserv e:® W h a t p e r c e n t o f d e m a n d d e p o s i t s . . . .
4 y e a r s .................................
Y e s .........................................
Y e s ........................................
T h r e e ....................................
B i e n n i a l l y ..........................
B ie n n ia lly
e rn o r.
to
gov-
Y e s ........................................
Y e s ........................................
T h r e e ....................................
...................................................
T w o ....................................... T w o .......................................
Y e s ........................................
F i v e .......................................
T w o .......................................
Y e s .........................................
H o ld
10
sto c k .
sh ares
of
R e s e r v e : ® W h a t fr a c t io n m a y b e i n d e p o s i t ................................
Y e s ; C o m p t r o lle r of
t h c C u r r e n c y (U .S .).
Y e s ; c o m p t r o l l e r ...........
Y e s ; S t a t e t r e a s u r e r :: :
25 p e r c e n t .....................
Y e s ....................................
3 t o 9 .................................
H o ld
5
sh a res
i
stock .
Y e s ................
Y e s ..............
T w o ..............
Y e s ........................................
...........
...........................
T w o .......................................
................................................... ...................................................
Y e s ..................
Y e s ..................
F o u r ............................. : : : :
T h r e e -fift h s ............
ass?
Y e s .........................................
Y e s .........................................
.............
Y e s ..
A t le a st 5 . .
H o ld fr o m
sh a res.
2
to
5
50 p e r c e n t ........................
............ 1 y e a r ..........
10 p e r c e n t
............J 10 p e r c e n t
50 p e r c e n t
............1 20 p e r c e n t
Y e s ..............
............ Y e s ..............
5 t o 13.........
R e s id e n t s
of
th e |
.........................
c o u n t y ; h o ld e r s e a c h
o f $500 o f s t o c k .
Y e s : S t a t e a u d i t o r ____
Y e s ; S ta te a u d it o r ..
B ie n n ia lly
tu r e .
Y e s .........................................
T w o .......................................
B i e n n i a l l y .........................
by
E le v e n -fift e e n t h s ...........
10 p e r c e n t , w it h e x
c e p t io n s .
Y e s ........................................
Y e s ........................................
20 p e r c e n t .........................
Y e s ........................................
.........!
.........j
.........!
.........
......... !
.........
A t s u p e r v is o r ’ s d is
c r e tio n .
15 p e r c e n t a n d 10 p er
cen t.
Y e s ........................................
F o u r ......................................
t o legisli
Y e s ....................................
Y e s ....................................
A t s u p e r v is o r ’ s
c r e tio n .
E x a m in e r s o n l v .
____
N o ...
5 to 7.
S t o c k h o ld e r s ;
c it
zen s o f M a r y la n d .
U n it e d
S ta te
e x a m in e r
S ta te b a n k s.
1 y e a r ....................
7 o r 9 t o 12..........
C it iz e n s
of
M assa
ch u setts;
h o ld e r s
o f 5 sh a res, e t c .
Y e s ; S t a t e a u d i t o r ------
B ie n n ia lly
ern or.
to
gov-
Y es
Y es
F o u r ............................'____
B ie n n ia lly
e rn o r.
to
gov
Y e s .........................................
Y e s ........................................
F o u r ......................................
Y e s ........................................
F o u r ....................
A n n u a l l y ...........................
B a n k c o m m is s io n e r . . .
3 y e a r s .................................
.................................................
Y e s ; S t a t e t r e a s u r e r .. .
3 y e a r s .................................
T o a c e r t a in e x t e n t ;
b o a r d o f b a n k in
c o r p o r a t io n
(b a n k
c o m m is s io n e r , trea s
u re r, r e c e iv e r g e n e r
a l, a n d c o r p o r a t io n
c o m m is s io n e r ).
A n n u a l l y t o le g isla
tu r e .
t o leg isla -
Y e s .........................................
B ie n n ia lly
tu re .
t o leg isla
Y e s ............
A n n u a l l y ............................
O n e ...
Y es.
Y es.
F i v e ..........
A n n u a l ly .
O ne.
B r a n c h e s .. .
........... .................................................
S. D o c . 2 3 2 , 6 3 - 1 — v o l 2 .
( T o f a c e p a g e 1 7 2 4 .)
to
............................ ...................................................
N o. 1
$10,000 t o $25,000.
M on ta n a .
$10,000
to
$100,000;
m a x i m u m , $5,000,000.
$20 ,000..................................
N ew
Hampshire.
N e w Jersey.
$10,000 t o $15,000.
50 p e r c e n t ................
5 m o n t h s .. .
10 p e r c e n t .
20 p e r c e n t .
Y e s ................
A t le a st 5 . .
H o ld
10 shares
stock .
A l l ................................
$10,000 t o $15,000.
5 m on th s
of
20 p e r c e n t
20 p e r c e n t
Y e s ..............
A t lea st 3 .
H o ld $300 t o $500 o f
stock .
50 p e r c e n t ....................... .
1 y e a r .........
10 p e r c e n t
20 p e r c e n t
N o ................
3 t o 2 1 .........
R e s id e n t s
of
M is
s o u r i; e a c h h o ld e r
o f 2 sh a res.
A l l ...........................................
10 p e r c e n t ...................
20 p e r c e n t ...................
Y e s ..................................
N o t m ore th a n 1 3 ..
C itize n s
of
U n it e d
S ta te s ; 3 r e s id e n ts
o f M on ta n a ; each
h o ld e r o f 10 sh a res.
N e w M e x ic o .
N ebraska.
.
$25,000 t o $100,000.
A ll.
A l l ..................................
50 p e r c e n t ____
P r o b a b ly a l l .
. I 20 p e r c e n t
. 20 p er c e n t
. Y e s ..............
. 3 t o 15.........
R e s id e n t s
of
lota :
c o u n t y ; h o ld e r s o
s p e c ifie d
am ou n t:
o f stock , etc.
2 y e a r s ____
10 p e r c e n t
20 p e r c e n t
N o ................
3 t o 13.................................
M a jo r it y r e s id e n ts o f
c o u n t y ; e a c h h o ld e r
o f s p e c ifie d a m o u n t
o f s t o c k , e tc .
..
20 p e r c e n t
_ ,, _
----------- , A t le a s t 5 ..........................
H o ld a t o 10 sh a res o f
M a jo r it y r e s id e n ts o f
stock .
N e w Jersey; each
h o ld s 5 sh a res.
P r o b a b ly y e s ........
N o t m ore th a n 9 .
S e m ia n n u a lly b y c o m
m it t e e .
C o m m i s s io n e r of
b a n k in g d e p a r t m en t.
4 y e a r s .................................
20 p e r c e n t a n d 25 p e r
cen t.
O n e -f o u r t h .........................
O n e -t h ir d .
A n n u a l e x a m in a t io n
by
co m m itte e
of
s t o c k h o ld e r s .
Examiners only.
4 y e a r s ..................................
3 y e a r s ____
Semiannually............. Semiannually by com
mittee.
S t a t e b a n k in g b o a r d
(g ov ern or and 4 a p
p o in t e e s ).
2 y e a r s .................................
Board of bank com- Commissioner of bankm
issioners.
ing and insurance.
T r a v e lin g a u d it o r and
b a n k e x a m in e r .
3 years.......................
2
Semiannually...........
B a n k c o m m i s s i o n e r . ..
S u p e r in te n d e n t of
ban ks.
Q u a rte rly .
Y e s ; S ta te e x a m in e r ..
Y e s ; S ta te a u d it o r ..
Y e s ........................................
Y e s ................- .....................
F o u r ......................................
R e p o r t t o C o m m is
s io n e r e v e r y 3 y e a rs.
T w o ......................................
A n n u a l ly t o g o v e r n o r .
A n n u a l ly
tu re.
to
le g is la
A n n u a l ly
to
t a r y o f s ta te .
F our
Y e s .......................................
Y e s ......................................
T w o .....................................
T w o ..............
O n e ................
Y e s .........................
Y e s .........................
F o u r .......................
Y e s .......................
Y e s .......................
F o u r ....................
Y e s ..
Y e s ..
F ou r.
A p p a r e n t ly
Y e s ..............
O ne.
seere- Annually to legisla
ture.
Yes...
T h r e e -fo u r t h s ...................
T w o - t h ir d s ........................
S e v e n te e n
fifth s .
20 p e r c e n t ; 50 p e r c e n t
o n m o r tg a g e .
15 p e r c e n t ................
30 p e r c e n t .
20 p e r c e n t , u n le s s s e
cu red.
Y e s ........................................
Y e s ........................................
Superintendent of
S e m i a n n u a ll y .................. I
E x a m in e r s o n l y .
ban ks.
years....................... 3 years......................
Y es.
____
A n n u a l ly
tu r e .
to
Y e s ; S t a t e e x a m in e r
a n d b a n k in g b o a r d
(g o v e r n o r ,
secre
t a r y o f s ta te , a u d
a t t o r n e y g e n e r a l).
leg isla
Y es
Y es
F our
. Y es
Y es
F iv e
T w o.
O ne
O ne
p e r c e n t , 20 p e r
c e n t , a n d 15 p e r
cen t.
T h r e e -fift h s , o n e -h a lf,
t w o -fift h s .
T w o - fift h s ,
o n e -h a lf,
th r e e -fifth s .
15 p e r c e n t .
20 p e r c e n t .
Two-fifths..
T w o -fift h s ..
Three-fifths.
T h r e e -fift h s .
25 p e r c e n t a n d 40 p e r
cen t.
Y e s ..........
Y e s ..........
T w o ..
A n n u a l ly
A t s u p e r v is o r ’ s d is O ne.
c r e tio n .
15 p e r c e n t ......................... ..............
O ne
T w o.
15 p e r c e n t a n d 25 p e r
cen t.
15 p e r c e n t a n d 20 pei
cen t.
O n e -h a lf.
Two-fifths..
T w o - t h ir d s .
O n e -h a lf.
T w o - t h ir d s re s id e n t s
o f N o rth D a k o ta ;
e a c h h o ld e r o f 10
sh a res.
25
Yes....... ; ; ; ; ................
Four................. : : : : : : :
O n e -th ir d ..
tw e n ty -
Y es
Semiaunnally...........
15 p e r c e n t .
O n e -h a lf.
50 p e r c e n t . . .
5 m o n t h s .........
10 p e r c e n t . . .
20 p e r c e n t . . .
Y e s .....................
10
Y e s ..............................
F o u r ...........................
A n n u a l l y .................
15 p e r c e n t .
15 p e r c e n t a n d 20 p e r
cen t.
E ig h t t w e n t y -fift h s .
$10,000 t o $50,000 .
50 p e r c e n t
Y e s ; c o r p o r a t io n c o m
m is s io n .
T w o.
Y e s ................
F o u r ..............
10 p e r c e n t
20 p e r c e n t
Y e s ..............
A t le a s t 5 .
C it iz e n s
of
U n it e d
S ta tes;
t h r e e f o u r th s
re s id e n ts
o f N e w Y o r k ; hold
c e r t a in s t o c k .
Yes; State bankinf
board
(governor
auditor, and attor
ney general).
..
A n n u a l ly to g o v e r n o r .
3 years......................
S5,000 t o $25,000 .
5 m on th s.
1 y e a r ..................
*T 10 p e r c e n t
No
North Dakota.
N o r t h C a ro lin a .
N ew Y ork .
$50 ,000.................................. i $30,000 .
$10,000 t o $200,000
80 p e r c e n t .
Three-fifths.
T w o -fift h s ..
A ll.
A p o r t io n a t d ir e c t o r s ’
d is c r e t io n .
T h r e e -fift h s .
25 p e r c e n t ..............
O n e -h a lf.
20 p e r c e n t .
20
A l l ...........................................
Y e s ........................................
Y e s ........................................
Y e s ........................................
p e r c e n t , u n less
a m p l y se c u r e d .
Y e s .........................................
Y e s ................................
Y e s ................................
D e p o s it s , 10 t im e s .
Y e s .........................................
Y e s ........................................
Y e s ................
Y e s ................
Y e s ........................................
P o s s ib ly a l l o w e d ............
Y es
....................................................
P r o h i b i t e d .........................
...................................................
............................ .........................
Y e s ...................
....................................................
Y e s .........................................
Y e s ....................................
R e s t r ic t e d in ca se <
d ir e c t o r s , e t c .
Y e s ................................
I n d i r e c t l y ..................
1 I m p o s s ib le t o s u m m a r iz e A r k a n s a s .
. ..
^. . .
2 O th e r th a n th e n a t io n a l b a n k in g a c t , th e r e is n o s t a t u t e in fo rc e in t h e D is t r ic t o f C o lu m b ia p r o v i d i n g for t h e o r g a n iz a t io n o f c o m m e r c ia l b a n k s .
* T h e e q u iv a le n t o f S ta te b a n k s t a t u t e s is . i D M a in e , u n d e r t r u s t c o m p a n ie s .
4 T h e M assa ch u setts b a n k s t a t u t e s h ere t a b u la t e d are o b s o le t e .
4 T h e r e is n ° le g isla tio n o n S t a t e b a n k s in V e r m o n t .
Y e s ......................................
A p p a r e n t ly a l l o w e d . .,
A llo w e d .
A l l o w e d o n in crea se
o f c a p it a l, etc.
............................
Y e s ..................
............................ ...................................................
V o l u n t a r y ........................ .
.................................................... ...................................................
per cent
30 p e r c e n t ..................
R e s t r i c t e d ...................
Y e s ..................................
L o a n s , t w i c e ..............
10 p e r c e n t a n d 20 p e r
15 p e r c e n t a n d 20 p e r
c e n t o n m o rtg a g e , e t c .. ,
cen t.
Y es.
.1 Y e s .........
Y e s ...........
Y e s ..
Y e s .......................
Y e s ..............................
Y e s .............................
...... !
N o t o v e r 50 p e r c e n t o f
c a p it a l, etc.
P r o h i b i t e d .........................
is in cre a s e d .
..........................................................
D e p o s it o r s ’ g u a r a n t y s y s t e m .................................................................
...............................................
O n lv
fo r b id d e n
officers.
M isso u ri.
M is s is s ip p i.
20 p e r c e n t .
F ir s t lie n s o n l y ...............
O v e rd ra fts f o r b id d e n ...................................................................................
$20,000 t o $400,000.
25 p e r c e n t .
N o t m o r e t h a n 10 p er
cen t.
15 p e r c e n t a n d 25 p er
cen t.
T h r e e - f o u r t h s ...................
A ll.’ ..................
A n n u a l ly t o g o v e r n o r .
T w o ...............
O n e -fo u r t h .
10
E x a m in e r m e r e l y ..........
B ie n n ia lly
tu r e .
10 p e r c e n t a n d 15 p e r
cen t.
20 p e r c e n t .........................
B a n k c o m m i s s i o n e r . ..
Y e s ; s e c r e ta r y o f sta te .
di
O n e -t h i r d . .
of
4 y e a r s .................................
B a n k co m m is s io n e r.
15 p e r c e n t .........................
T h r e e -fift h s .......................
90 d a y s . . .
10 p e r c e n t
20 p e r c e n t
N o ................
7 t o 15..........
C itize n s
of
S ta te s , e t c .
M in n e s o ta .
$10,000 t o $50,000.
$50,000
to
$300,000:
$100,000;
m a x im u m ,
m a x i m u m , $500,000 | $1,000,000.
t o $2,000,000.
$50,000 t o $300,000..........i 50 p e r c e n t ........................
50 p e r c e n t .
M ich ig a n .
S e m ia n n u a lly b y c o m
m it t e e .
Tw o.
T w o -th ir d s .
M a s s a c h u s e t t s .1
c o m - ; Q u a r t e r ly ,
...............................................
F o u r -fift e e n t h s ................
M a r y la n d .
j
$15,000 to $100,000......... 1 $10,000 t o $100,000.
4 y e a r s .............................
15 p e r c e n t .........................
T h r e e -fift h s .......................
10 p e r c e n t ..................
A ll.
.............................................
T w o - f i f t h s ..........................
T w o - fi ft h s .............
E x a m in e r s o n l v .........
4 y e a r s ..................................
A n n u a l ly t o g o v e r n o r .
O n e -f ift h .............................
I n d iv id u a l b o r r o w e r ’s lia b il i t y lim it e d t o w h a t p e r c e n t o f
capital.®
L o a n s o n t h e b a n k ’s o w n s t o c k f o r b i d d e n * ..................................
B a n k fo r b id d e n t o p u r c h a s e its o w n s t o c k * .................. ...............
T o t a l lo a n s o r d e p o s it s r e s t r ic t e d t o w h a t p r o p o r t io n t o
c a p ita l.
E x a m in e r s o n l y ..............
...................................................
15 p e r c e n t o r 20 p e r
cen t.
R e s e r v e : 6 W h a t fr a c t io n m u s t b e i n c a s h ......................................
com
A n n u a l ly t o g o v e r n o r .
15 p e r c e n t ............
.
R e s e r v e : 6 W h a t p e r c e n t o f t im e d e p o s i t s ....................................
B a n k c o m m is s io n e r .. .
Y e s ; in su ra n ce
m is s io n e r .
M a in e .3
L o u is ia n a .
Q u a r t e r l y ........................
2 b a n k c o m m is s io n e r s .
Y e s ; a u d it o r o f T e r r i
tory .
S u p e rv is o r r e p o r t s t o g o v e r n o r o r le g is la t u r e ................................
S ta te b a n k
sio n e r.
K en tu ck y .
$10,000 t o $50,000............
A l l ...............................
Q u a r t e r ly
m it t e e .
S u p e r i n t e n d e n t of
ban ks.
T e r m o f o ffic e o f s u p e r v is o r .....................................................................
S u p e r v is o r y d u t ie s a s s ig n e d t o a n o t h e r o ffic ia l...........................
$25,000 t o $50,000.
6 m o n t h s ........................
A n n u a l l y ............................
A n e x a m in e r o n l y .........
K ansas.
________________________ _
P rop erty
w orth
$10,000 t o $100,000.
Y e s .......................
3 t o i 5 .......................... : : : :
H o ld 1 sh a re o f s t o e k ..
Iow a .
I n d ia n a .
-----------------------------------------
$15 ,000 t o $25,000
W h e n r e m a in d e r m u s t b e p a i d .............................................................
S u r p lu s : P er c e n t o f n e t p r o fits t o b e d e d u c t e d .........................
U n t il w h a t p e r c e n t o f c a p i t a l ..........................................
D o u b le lia b ilit y o f s t o c k h o l d e r s ...........................................................
D ir e c to rs : H o w m a n y ........................................ - .....................................
D ir e c t o r s : Q u a lific a t io n s ..........................................................................
G e o rg ia .
Y e s .:::::::
per cent................
Y e s ......................................
Y e s ......................................
Loans, 8 times..........
10
Yes........................
Yes..........
Y e s ..................................
L o a n s , 8 t im e s ..........
per cent.
- • Y e s ........................................ i y e s .
• --- Y e s .......................................... Y e s .
Y e s ........................................
A p p a r e n t ly a l l o w e d . . .
Y e s ........................................ Y e s .........................................
A l l o w e d for 90 d a y s . . . ...................................................
Y e s ................
Yes........................... Apparently allowed...
Apparently allowed..
Y e s .........................................
Y es
Forbidden to officers, ...... .
d ir e ct o r s , e tc .
P r o h ib ite d .
P r o h i b i t e d ................
Yes............................
Yes............................
percent..
Y e s ....................................
Y e s ....................................
15 p e r c e n t ..................
Y e s ..................................
Y e s ..................................
Restricted.
L a n d m u st be w orth
t w i c e t h e lo a n .
Y es.
Y e s ................................
10
P r o h ib ite d .
P r o h ib ite d .
C o m p u ls o r y ....................
V h ere m o r e t h a n o n e fig u re is g iv e n i n a n s w e r t o t h e q u e s t io n , i t is g en era lly b e c a u s e t h e s t a t u t e p r o v id e s d iffe r e n t ru les for b a n k s in c o m m u n it ie s o f d iffe r e n t sizes. I n reserv es t h e d iffe r e n c e is s o m e t
V
a -r 5 e reP°Ct ? ancl e x a m in a t io n s h e re t a b u la t e d are o n lv t h e reg u la r rep orts t o S ta te o ffic ia ls a n d t h e re g u la r e x a m in a t io n s b y S t a t e o ffic ia ls . T h e n u m b e r g iv e n is u s u a llv t h e m in im u m p er y e a r ; m a n y S t a
.,
j h e p r o v is io n s r e s t ric t in g i n d iv id u a l lia b il i t y v a r y g r e a tly . T h e p e r c e n t is s o m e t im e s o f c a p it a l, s o m e t im e s o f p a id -in c a p it a l, s o m e t im e s o f c a p it a ) a n d s u r p lu s , e t c . L i a b i l it y o f a n i n d iv id u a l fir m o r e o r p o i
s ia e r e d in c r e a s e d b y t h e d is c o u n t o f b ills o f e x c h a n g e d r a w n i n g o o d fa ith a g a in st e x is t in g v a lu e s n o r b v t h e d i s c o u n t o f c o m m e r c ia l p a p e r a c t u a lly o w n e d b y t h e p e r s o n n e g o t ia t in g i t . W h e r e th e r e are fu r t
s e c u r it y is g i v e n ) , a n e ffo r t i s m a d e i n t h e t a b le t o s u g g e s t th is .
es t h a t b e t w e e n a r e s e rv e d e p o s it o r y a n d a b a n k n o t d e s ig n a t e d as o n e
1 p r o v id e for s p e c ia l r e p o r t s a n d e x a m in a t io n s a t t h e s u p e r v is o r ’ s d is c r e t io n
I o n fr e q u e n t ly in c lu d e s t h e lia b il i t y o f m e m b e r s . C o m m o n lv lia b il i t y is n o t e o n -r e x c e p t io n s (a s in s t a t u t e s w h ic h a llo w lia b il i t y b e y o n d t i e p er c e n t n a m e d i f
*
F ir s t lie n o n l y , e t c ____
Yes............................. Yes.
Apparently allowed...
Yes........................
In efiect forbidden.
Allowed in home city
on increasing capi
tal, etc.
T a b l e B .— Tabular su m m ary o f State legislation governing savings banks.
G e n e r a l n o t e : I n m a n y S ta tes th e s ta tu te s c o n t e m p la t e t h a t s a v in g s b a n k b u s in e s s b e d o n e b y c o m m e r c ia l b a n k s , n o t b y in s t it u t io n s d e v o t e d e x c l u s iv e l y t o s a v in g s b a n k in g . I n s u c h ca ses t h e s ta tu te s a p p lic a b le t o c o m m e r c ia l
b a n k s are a g a in t a b u la te d h e r e , a lt h o u g h t h e y m a y s e e m in ce rta in r e s p e c ts in a p p lic a b le t o s a v in g s b u s in e s s — a s, for e x a m p l e , w h e r e re se rv e s a re r e q u ir e d t o b e a p e r c e n ta g e o f d e m a n d d e p o s its .]
K ansas.
A la b a m a .
A r iz o n a .
C o lo r a d o .
C a lifo rn ia .
A r k a n s a s .1
C o n n e c tic u t .
D is t r ic t o f C o lu m b ia .
D e la w a re .
F lo r id a .
G e o rg ia .
Id a h o.
Y e s .........................................
Y e s ........................................
P r a c t ic a lly , n o ................
V e r y b r i e f l y ......................
B r i e f ly ..................................
N o ...........................................
V e r y b r i e f l y ......................
Y e s ,.
I n a few r e s p e c t s ............
ban ks.
M u tu a l, n o t s t o c k , c o r p o r a t io n s p r o v i d e d f o r ..............................
I f s t o c k , w h a t m in im u m c a p it a l *.......................................................
A p p a r e n t ly b o t h ............
$15,000 t o $25 ,000............
...................................................
la t e d
fo r
sep a r a t e ly .
B o t h ......................................
$25 ,000..................................
A l m o s t e n t i r e l y ..............
Q u e r y ...................................
Y e s .........................................
Y e s ...
In
............
Y e s ................
Y e s ........................................
$26,660..................................
$25 ,666..................................
....................................................
.................................................... ...................................................
$10,000 t o S100,000.......... $25,000 t o $200,000..........
Y e s .........................................
....................................................
s i s ,666 t o 'i i o o ’o o o .
'
'$16,060 to $5 0,000 .......
In
m u t u a l, m u s t b e
m em b ers an d deposito r s .
A t le a s t 3 ............................
M u st b e s t o c k h o l d e r s .. ................................................... ................................................... ....................................................
A t le a st 5 ............................
A l l c it iz e n s o f U n it e d ...........................
S ta te s ;
t h r e e -fifth s
r e s id e n t s o f F lo r id a ;
e a c h h o ld e r o f 10
sh a res o f s t o c k .
A t le a s t 5 ............................
H o ld $500 o f s t o c k .........
H o ld
10
stock .
sh a res
of
E x a m in a t i o n s : H o w m a n y a y e a r 6..................................................
Y e s ........................................
T w o .......................................
Y e s ........................................
Y e s .........................................
T h r e e ....................................
............................. : ...................
O n e o r t w o ........................
O n e .......................................
Y e s ........................................
Y e s ........................................
T h r e e ....................................
B i e n n i a l l y ..........................
O n e ........................................
Y e s ........................................
Y e s ........................................
T h r e e ....................................
T w o . , ..................................
Y e s ........................................
O n e ........................................
A nnual
rep ort
to
c o m p t r o lle r .
T w o .......................................
m ittee'.
Y e s ........................................
Y e s ........................................
T w o .......................................
................
d is-
Y e s ...
Y e s .........................................
T w o .......................................
B i e n n i a l l y .........................
F o u r ......................................
O n e .........................................
....................................................
...................................................
A t s u p e r v is o r ’ s
c r e tio n .
Y e s ........................................
Y e s ......................................... Y e s ........................................
Y e s ........................................ ...................................... ............ ...................................................
F i v e ....................................... T w o .......................................
At
d is c r e t io n
C o m p tr o lle r
C u rren cy.
of
of
T w o .......................................
O n e ........................................
O n e .. .
T w o -fift h s
c a s h ,
th re e -fift h s
d eposits o r b o n d s .
C a sh o r d e p o s it s .............
in
Yes___
Y es
com
Y e s ......................................
Y e s ......................................
F o u r ...................................
page
A t le a st 5 . .
R e s t r ic t io n s o n o ffic e h o ld in g
in
oth er
ban ks.
5 to 7...........................
A n n u a l ly
by
m it t e e o f 5.
com
Y e s ..
Y e s ........................................
Y e s .........................................
F ou r.
Y e s ..............
Y e s ..............
F o u r ............
T w o ......................................
A n n u a l l y ...........................
F i v e ..................... .................
B ie n n ia l
report
to
c o m p t r o lle r .
O n e ........................................
O n e .......................................
T w o ...............
I n s o m e m a t t e r s ------
50 p e r c e n t o f a ll lo a n s
m u s t b e first lie n s
o n A r iz o n a l a n d ,
e tc.
I n v e s t m e n t s p r e s c r ib e d ............................................................................
R e a l e sth te h o ld in g s lim it e d « ................................................................
Y e s ........................................
F ir s t lie n s o n l y , e t c —
F u l l y ....................................
Y e s .........................................
F ir s t lie n s o n la n d
w o r t h t w ic e t h e
lo a n .
B r i e f ly ..................................
Y e s ........................................
$1,000 a n n u a l ly ................
F ir s t lien s o n C o n n e c tic u t la n d w o r t h
t w ic e th e loa n .
$ 3 ,0 0 0 ....................................
F ir s t lie n s o n F lo r id a
r e a lty o n l y , e t c .
lo a n .
F u l l y ....................................
" i e s ........................................
F u l l y ....................................
th re e -fo u rth s
p o s its.
p o s it s .
1 I m p o s s ib le t o s u m m a r iz e A rk a n sa s.
2 T h e c o n fu s e d c o n d it io n o f t h e L o u is ia n a s ta t u t e s h a s m a d e a s u m m a r y o f s a v in g s b a n k a n d tru st c o m p a n y p r o v is io n s s e e m u n p r o fita b le .
S. D oc. 232, 6 3 -1 — v ol 2.
(T o
f a c e p a g e 1 7 2 4 .)
N o. 2
Y e s .........................................
Y e s .........................................
$.500 a n n u a l l v ...................
F ir s t lien o n I n d ia n a
r e a lt y w o r t h t w ic e
t h e lo a n .
Y e s .........................................
N evada.
N e w H a m p s h ir e .
N ot
m e n t io n e d
in
I
s ta tu te s .
. P e r h a p s in s o m e m a t
ters.
j
Y e s ......................................... Y e s ____
A fe w p r o v i s io n s .
Yes...................
O n ly w it h r e s p e c t t o
s u p e r v is io n , e t c .
A lm o s t e n t ir e ly ..
A lm o s t e n tire ly .
In a v e ry
s p e c ts .
In p a rt,
A t le a st 5 ............................
Hold 10
stock.
A n n u a l ly
m it t e e .
by
com
Y e s .......................................
Y ...........................................
O n e ......................................
E v e r y 5 y e a r s ................
shares of
Semiannually by com
mittee.
$10,000
to
$100,000;
m a x im u m , $5,000,-
$100,000;
m a x im u m ,
$5 .0 ,0 0 0 .
Yes........................... .
Yes.........._________
Four......................... .
Report to commis^ sioner every 3 years.
O n e ’. ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! -
T w o .....................
O n e ......................
Q u a r t e r ly ,
F o u r ...............................
Y e s .........................................
de
O n e -h a lf c a s h ,
h a lf b o n d s.
one-
Y e s .........................................
Y e s .........................................
la n d w o r t h
th e lo a n .
N o t m o r e th a n 1 3 ..........
C itiz e n s
of
U n it e d
S t a t e s ; th r e e -fo u r th s
re s id e n t s o f M o n
t a n a ; e a c h h o ld e r o f
10 sh a res.
3 t o 1 5 .................................
H o ld 5 sh a res o f s t o c k ,
e t c ..
3 t o 1 3 .................................
M a jo r it y r e s id e n ts o f
c o u n t y ;
each
h o ld e r
of
c e r ta in
s to c k , etc.
......
j . . . . . . . . . . . . . . . . . ...........................
9 t o 1 5 ...................................
M a jo r it y re s id e n ts o f
co u n ty
and
free
h o ld e r s
in
N ew
Jersey, etc.
N o t m o r e t h a n 9 .............
Y e s ......................................
Y e s ...................................... .
F o u r .....................................
Y e s ........................................
Y e s ........................................
F o u r ......................................
Y e s ........................................
A n n u a l ly
m it t e e .
T h r e e ....................................
E v e r y 5 y e a r s ..................
Y e s .........................................
O n e .......................................
O n e ........................................
A n n u a l l y ............................
Y e s .........................................
Y e s ........................................
T w o .......................................
A n n u a l l y ............................
E v e r y o t h e r y e a r ...........
O n e ........................................
i
25
5 p e r c e n t ..................
15 p e r c e n t ..................
One-third cash, twothirds deposits.
One-third c a s h , twothirds deposits.
I n c a s h o r d e p o s i t s ____ I n c a s h o r d e p o s i t s ____
I n a v a ila b le fu n d s .
I n a fe w r e s p e c t s ............
.'!
Y e s .................... .................. 1 Y e s . .
Y e s .................. . .................. ! Y e s . .
O n e .................... .................. F o u r .
15 p e r c e n t o f
assets.
Yes....... ;;
F ir s t lie n s o n l y on
M assachusetts
r e a lt y , e t c .
F ir s t lie n s o n r e a ity
w o r t h tw ice t h e
loa n .
A t g r e a t l e n g t h ................
Y e s ........................................
Fully___
Fully.........................
Y e s . .................... i ...............
Y e s ........................................
Y es.
IS p e r c e n t
I
per cen t.
j
$2,000....................................
E l a b o r a t e l y .......................
Y e s .........................................
tota l
$ 5 ,000....................................
F ir s t lien s o n M in n e
s o t a la n d , e t c .
and
P r a c t ie a llv , n o ................
N o ...........................................
I n p a r t .................................
Q u e r y ...................................
Y e s .........................................
Y e s .......................................
$ 16,’666 t o $56,'6 6 6 *.’ !.’ .'
by
com
............................
A t le a st 13..........................
R e s id e n t s o f N e w
Y o r k ; fin a n c ia lly re
s p o n s ib le , e t c .
T w o - t h ir d s re s id e n ts
o f N orth
D a k ota ;
e a c h h o ld e r o f 10
sh a res.
B r i e f l y ..................................
N o ...........................................
W ith resp ect to
p e r v is io n , e t c .
O n ly w it h r e s p e c t t o
s u p e r v is io n .
P r o b a b l y , y e s ..................
T w o .......................................
A n n u a l rep ort to su
p e r in t e n d e n t .
E la b o r a t e ly —
Y e s .........................
$ 5 ,0 0 0 ....................................
1 F ir s t lien s o n N e w
J e rse y la n d w o r t h
t w ic e lo a n , e t c .
F u l l y ....................................
Y e s ........................................
R e s t r ic t e d b y v a lu e o f
th e la n d m o r tg a g e d .
P r a c t ic a lly n o t ..............
Y e s ......... ..............................
su
W a s h in g t o n .
W e s t V ir g in ia .
W is c o n s in .
W y o m in g .
A fe w p r o v i s io n s ............
P r a c t i c a ll y , n o ................
Y e s ........................................
Y e s .........................................
Y e s .........................................
1
Y e s .........................................
Y e s .........................................
I n p a r t .................................
2
$10,666..................................
P r o p e r t y w o r t h $10,000 t o $100,000.
$ 2 5 ,666..................................
3
4
7 t o 1 1 ...................................
N o o ffic e in a n o t h e r
s a v in g s b a n k , e t c .
T exas.
A t le a s t 5 ............................
M a jo r it y c it iz e n s o f
V ir g in ia ; e a c h h o ld e r
o f $100 o f s t o c k .
A t le a st 3 ............................
M ust
each
h o ld
5
sh a re s o f s t o c k .
S e m ia n n u a lly b y c o m
m it t e e , a n d b e fo r e
d iv id e n d s .
Y e s ........................................
Q u a r t e r l y ...........................
S e m ia n n u a lly b y c o m S e m ia n n u a lly b y c o m
m it t e e o f d ir e c t o r s
m it t e e .
o r s t o c k h o ld e r s .
Y e s ........................................ Y e s ........................................
Y e s ...........................
A p p a r e n t ly , y e s .............. Y e s ........................................
T h r e e .................................... F o u r ...................................... F i v e .......................................
B i e n n i a l l y .......................... A n n u a l l y ............................ ...................................................
V e rm o n t.
U ta h .
A t le a s t 1 3 ..........................
R e s id e n t s o f P e n n s y l
v a n ia , e t c .
Q u a r t e r l y ...........................
A n n u a l l y ............................
A n n u a l ly
m it t e e .
Y e s .........................................
Y e s ........................................
L i k e n a t io n a l b a n k s . .
B i e n n i a l l y ..........................
Y e s ........................................
Y e s ........................................
Y e s ........................................
T w o .......................................
E v e r y 5 y e a r s ..................
F o u r ......................................
T w o .......................................
No
................
Y e s ...
V ir g in ia .
Y e s .........................................
................
$ i o ,66o"
t o $56,6 60;
m a x im u m , $5,000,000.
5 t o 1 3 ...................................
S t o c k h o ld e r s ; a m a jo r i t y
c it iz e n s
of
T exas.
A t le a st 9 ............................
Y e s .........................................
I n p a r t .................................
A re d ep a rtm en ts o f
banks
and
tru st
c o m p a n ie s .
Y e s .........................................
A t lea st 3 ............................
H o ld $500 o f s t o c k .........
$10,606 t o
$166,0 00;
m a x im u m , $ 1,000,000.
Y e s .........................................
......... ..................................
Y e s ........................................
15.............................................
C it iz e n s o f W e s t V i r g in ia .
Y e s .........................................
...................................................
A t le a st 9 ............................
5 t o 9 .....................................
C itize n s
of
U n it e d
S ta te s ; m a jo r it y resid en ts o f W y o m in g ;
h o ld e r s o f c e r t a in
stock .
5
6
O n e .........................................
............................
S e m i a n n u a ll y ..................
A n n u a l ly
m it t e e .
Y e s .........................................
Y e s .........................................
F o u r ......................................
Y e s ........................................
Y e s ........................................
F i v e ......................................
Y e s .........................................
O n e ......................................
by
com
............................
F o u r ......................................
T w o .......................................
A n n u a l l y ............................
A t s u p e r v is o r ’ s
c r e t io n .
20 p e r c e n t o f a ll d e
p o s it s .
15 p e r c e n t o f a ll d e
p o s it s .
3 per cen t o f dem an d
a n d 2 p er c e n t o f
t im e in c a s h ; th e
s a m e in se cu ritie s;
t h e rest d e p o s it e d .
F ir s t lie n s , e t c .
Fully.......................... Very briefly................i Briefly
Yes............................. Yes.............................1.................. . ............
Y e s .........................................
5 t o 3 0 ...................................
T h r e e -fo u r th s
re si
d e n t s o f O h io ; e a c h
h o ld e r o f 5 sh a res.
O n e ......................................
S e m ia n n u a lly b y c o m
m it t e e .
$ 4 ,0 0 0 .................................... ...............................................................................
F ir s t , a n d in s o m e
ca s e s , s e c o n d lien s,
etc.
Y e s .........................................
T en nessee.
S o u t h C a ro lin a .
$ io,’66o t o $56,0 6 6 ! . ! . . .
’ $25,'666.’ . ” ! ‘. ! ! ” ! ! ! ! ”
‘
T w o - f i f t h s cash,
t h r e e -fift h s
depos
its.
First liens on land First liens on land First, and in some
worth twice the ■ worth tw
ice the; cases, second liens,
loan, etc.
loan.
I etc.
R h o d e I s la n d .
P e n n s y lv a n ia .
O re g o n .
Y e s .........................................
p o s it s .
3 D if fi c u l t v in d e t e r m in in g w h a t s ta tu te s a p p ly t o s a v in g s b a n k s in O k la h o m a .
« W h e r e m o r e th a n o n e fig u re i s g iv e n i n a n s w e r t o t h e q u e s t io n , i t is b e c a u s e th e s t a t u t e p r o v id e s d i ff e r e n t r u le s fo r i n s t it u t io n s in c o m m u n it ie s o f d iffe r e n t sizes.
Y e s .........................................
$5,066 t o ’ $25,’66o’ : . ! ! ! ! !
’
O n e -t h ir d c a s h , t w o t h ir d s d e p o s it s .
t w ic e
V e r y b r ie fly ......................
Y e s ......................................
sii'ooo to* $36 ,6 6 6 .’ .”
S e m ia n n u a lly ..................
T w o ................................
O h io .
O k la h o m a .3
Y e s .........................................
H o ld 5 t o 10 sh ares o f
sto ck , etc.
Q u a r t e r l y ..........................
T w o ..............................
N o rth D ak ota.
Y e s .........................................
Semiannually.
E v e r y o t h e r y e a r ............j O n e ........................................
N o r t h C a ro lin a .
P r a c t i c a ll y , n o ................
B e fo r e e a c h d i v i d e n d
is d e c la r e d , e t c .
15 p e r c e n t .
F ir s t lie n s on M a in e o r
N ew
H a m p s h ir e
r e a lt y , e t c .
Y e s ____
Y e s .........................................
N ew Y ork .
re
$15,000 t o $75 ,000............, $10,000 t o $50,000............
1 percent.
0
per cent.
N e w M e x ic o .
Y e s .........................................
5 t o 1 3 ...................................
S t o c k h o ld e r s ; a m a jo r i t y
c it iz e n s
of
Missou ri.
issoi
A t le a s t 7 . . . ....................
R e s id e n t s i n
th e
c o u n ty , etc.
A n n u a l ly t h r o u g h a n
a ccou n ta n t.
fe w
B o t h ......................................
000.
A t le a st 1 1 . .
N e w Jersey.
Y e s ......................................
E v e r y o t h e r y e a r ...........
p er cen t.
F ir s t lie n s o n la n d
w o r t h tw ice t h e
.
$ 16,660 t o s i s ,6 6 6 ............
*20,660’ t o $466,0 6 6 .’ :.’ . !
’
$2,000..............................
M a x i m u m d e p o s it a llo w e d a n i n d i v i d u a l ......................................
L o a n s o n re a i es ta te r e s t r ic t e d ..............................................................
N ebraska.
Y e s ........................................
Y e s .........................
S t o c k h o l d e r s ; c it iz e n s
o f M a r y la n d .
com
Y e s ....................................
8 p er c e n t .
m a n d lia b ilitie s .
le n t,
o n e -h a lf
cu rren cy .
by
....................................................
20 p e r c e n t .........................
t w o -fift h s
Q u a r te rly
m it t e e .
(S e e
A n n u a l lv
by
m it t e e ' o f 2 .
c o u n t y ; e a c h h o ld e r
o f $500 o f s t o c k .
20
d e p o s it s .
p o s it e d ,
ca s h .
A t le a s t 5 ....................... ..
H o ld s fr o m 2 t o 5
shares.
Q u a r te rly .
A n n u a l ly th r o u g h a u d it o r s .
S u p e r v is o r m a y s u e for r e c e iv e r ..........................................................
S u p e r v is o r m a y ta k e p o sse ssio n in i n s o lv e n c y , e t c ..................
B a n k r e p o r ts : H o w m a n y a v e a r 3.....................................................
R e p o r t s o f u n c la im e d d e p o s it s m u s t b e p u b l i s h e d ...................
M ust b e a p p ro v e d b v
a ju d g e .
p a rt.
236.)
B o t h .............. ........................
$50,000
to
$300,000;
m a x i m u m , $.500,000
t o $1,0 00 ,0 00 .
--
................................ ...................
D ir e c t o r s : H o w m a n v ................................................................
D ir e c t o r s : Q u a lific a t io n s .................................................................
S o m e w h a t ..........................
A few provisions........
Y e s ....
In p a rt.
. . . , .
M
ontana.
M is s o u ri.
M ississip p i.
M in n e s o ta .
M ic h ig a n .
S ou th D ak ota.
! Y e s .......
T o a c e r ta in e x t e n t ____
M a ssa ch u se tts.
M a r y la n d .
Yes.
I N o ..........................................
Y e s ........................................
M a in e .
L o u is ia n a .1
K en tu ck y .
Iow a .
I n d ia n a .
I llin o is .
$ 3 ,000....................................
F ir s t lie n s o n l y , e t c . . .
F ir s t lie n s o n l y , e t c ___
P r a c t ic a lly n o t ............ ..
Y e s .........................................
Y e s ........................................
Y e s .........................................
d e m a n d , 10 p e r c e n t
o f t im e .
h a l f s e cu ritie s.
t h ir d s d e p o s it s .
R e s t r ic t e d i n t o t a l
a m o u n t, etc.
E l a b o r a t e l y .......................1 P r a c t ic a lly n o t ..............
Y e s ........................................! Y e s ........................................
7$
20 p e r c e n t .........................
per cen t
d e p o s it s .
of
d is
by
B y c o m m i t t e e , b e fo r e
d e c la r in g d iv id e n d s .
B e fo r e e a c h d i v i d e n d
and
a n n u a lly
by
c o m m it t e e .
Y e s ........................................
Y e s ........................................
T w o ....................................... T h r e e ....................................
................................................... ...................................................
Y e s ........................................
F o u r ......................................
O n e ........................................ O n e ........................................
E v e r y 6 y e a r s .................. ....................................................
E v e r y o t h e r y e a r ...........
com
O n e .......................................
T w o .......................................
15 p e r c e n t
assets.
t im e
Y e s ........................................
B r i e f ly ..................................
Y e s .........................................
O n e -h a lf c a p it a l a n d
o n e -h a lf d e p o s i t s
m a y b e s o lo a n e d .
E l a b o r a t e l y ......................
Y e s ........................................
P r a c t ic a lly n o t ................
Y e s ......................................
o f tota l
I n reserv es, t h e d iffe r e n c e is s o m e t im e s t h a t b e t w e e n a r e s e rv e d e p o s it o r y a n d a b a n k n o t d e s ig n a t e d as o n e .
$4,000....................................
F ir s t lie n s o n la n d
w o r t h tw ice t h e
lo a n .
P r a c t ic a lly n o t ................
B r i e f ly .......................
Y e s .........................................
8
9
10
11
O n e ........................................
O n e ........................................
O n e ........................................
12
15
5 p e r c e n t ...........................
10
sav
13
C a sh o r d e p o s it s .............
14
F ir s t lien s o n l y ................
15
16
V e r y b r i e f l y ......................
l e s .........................................
17
18
per ce n t o f dem a n d lia b ilitie s .
P r a c t ic a lly n o t ................
Y e s ......... ..............................
Y e s .........................................
Y e s .........................................
per cen t o f d e
m a n d d e p o s it s .
T w o - f i f t h s cash ,
th re e -fift h s
depos
its .
$ 1,000 a y e a r ......................
F ir Ftirlie n s o s o n n la n d in
s s t lien n la d in
W e s t V ir g in ia o r a d c e r ta in S ta te s , e t c .
j o in in g S ta te s , e t c .
$2,0 0 0 ....................................
F ir s t lie n ; lo a n o n l y
t h r e e -fifth s o f v a lu e
o f la n d , e t c .
P r a c t ic a lly n o t ................
Y e s ........................................
h e n u m b e r g iv e n is u s u a lly t h e m in im u m p e r y e a r ; m a n y S ta te s p r o v i d e fo r s p e c ia l r e p o r t s a n d e x a m in a t io n s a t t h e d is c r e t io n o f t h e s u p e r v is o r .
T h e r e p o r ts a n d e x a m in a t io n s h e re t a b u la t e d are o n ly t h e re g u la r r e p o r t s o f S t a t e o ffic ia ls a n d t h e re g u la r e x a m in a t io n s o f S t a t e officia ls.
'F o r f T y p ica l l im it a t io n o n ran ie s ta te h o ld in g , see t h e p r o v is io n s o f t h e N e w J e rs e y s ta tu te s .
Y e s .........................................
Y e s .........................................
F o u r ......................................
O n e ........................................
C a sh , c h e c k s , a n d d e p o s it s .
F ir s t lie n s o n l y , e t c . . .
7
20
O n e ........................................
C a s h , d e p o s it s , a n d
n o t m ore th a n onet h ir d b o n d s .
$.5,000....................................
F ir s t lien s o n P e n n
s y lv a n ia la n d ; lim
ite d in a m o u n t .
P r a c t ic a lly n o t ................
Y e s .........................................
H o ld 10 s h a res o f s t o c k .
P r a c t ic a lly n o t ................
Y e s ........................................
Y e s ........................................
Y e s ........................................
V e r y b r i e fl y ......................
Y e s ........................................
per cen t o f
in g s d e p o s it s .
T able
I
K ansas.
K en tu ck y .
D e la w a r e .
D is t r ic t o f C o lu m b ia .
F lo r id a .
G e o rg ia .
Id a h o.
I llin o is .
I n d ia n a .
Iow a .
Y e s ........................................
T o a c e r t a in e x t e n t ___
N o ..........................................
Y e s .........................................
N o ..........................................
I n a fe w m a t t e r s ............
Y e s ........................................
N o ..........................................
Y e s .........................................
Y es
Y e s .........................................
Y e s .........................................
V e r y b r i e f l y ......................
Y e s ....
$200,000......................
$50,000 t o $250,00 0..........
$ 1,000,000 t o $ 1,200,0 00 .
$25,000:
not
$ 2,000,0 00.
V e r y b r i e f l y ......................
I f t h e y d o b a n k in g
b u s in e s s .
825,000; p e r h a p s also
s a m e r e q u ir e m e n t as
for b a n k s .
825,000
to
$100,000;
m a x i m u m , 82,000,000
810,000 t o $.50,000...........
$100,000;
A l l ..........................................
50 p e r c e n t .........................
20 p e r c e n t ; n o t less
t h a n $15,000.
A l l , i f n o t o v e r $100,000.
A l l ..........................................
20 p e r c e n t .
Y e s ........................................
1 year
6 m o n t h s ...............
10 p e r c e n t ...........
50 p e r c e n t .................................
Y e s ...................................... Y e s
5 t o 15............................................
M a jo r it y r e s id e n t s oi.........
K a n s a s ; e a c h h o ld e i
o f $ 1,000 o f s t o c k .
L o u is ia n a .2
M a in e .
M a ssa ch u setts.
M a r y la n d .
M ic h ig a n .
M is s o u r i.
M o n ta n a .
N ebraska.
N evada.
N e w H a m p s h ir e .
Y e s .........................................
In r e sp e ct to s u p e r v i
s io n , e t c .
$ 100,000;
m a x im u m ,
810,000,000.
Y e s ........................................
I n p a r t .................................
N o ..........................................
N o ..........................................
N o ..........................................
Y e s .........................................
$ 100,000;
m a x im u m ,
$ 10,000,000.
Y e s .......................................
I n resp ect- t o r e p o r t s ,
e x a m in a t io n s , e t c .
810,000 to $ 5 0 , 0 0 0 . . . . . .
50
p er cen t o f su b
s c r ib e d c a p it a l.
$100,000; 50 p e r c e n t .
80 p e r c e n t .........................
10 p e r c e n t
20 p e r c e n t
N o ................
5 t o 25.........
a ruaS t o c k h o ld e r ;
jo r ity
c it iz e n s
of
M is s o u r i.
10 p e r c e n t . . .
20 p e r c e n t . . .
P r o b a b ly y es.
3 t o 25...............
S t o c k h o ld e r s ; a m a
jo r it y
c itiz e n s
of
M on ta n a .
2 y e a r s ................................
10 p e r c e n t .........................
20 p e r c e n t .........................
N o ...........................................
3 t o 13....................................
M a jo r it y r e s id e n t s o f
c o u n t y ; e a c h h o ld e r
o f s p e c ifie d a m o u n t
o f sto ck , etc.
M is s is s ip p i.
M in n e s o t a .
N e w Jersey.
N e w M e x ico .
N ew Y ork .
N o r t h C a ro lin a .
T r u s t c o m p a n ie s le g is la t e d for s e p a r a t e l y ......................................
T r u s t c o m p a n ie s s u b j e c t t o la w s g o v e r n in g c o m m e r c ia l
ban ks.
M in im u m c a p i t a l 4.....................................................................................
P e r c e n t p a id in w h e n b u s in e s s b e g u n ...........................................
Y e s ................................
Y e s .................................
Y e s ...
Q u e r y ...............
$ 2 5 ,000 t o $100,000.
A ll.
over
1 y e a r ....................................
W h e n r e m a in d e r m u s t b e p a i d ..........................................................
S u rp lu s: P e r c e n t o f n e t p r o fit s t o b e d e d u c t e d . '....................
U n t il w h a t p e r c e n t o f c a p it a l........................................
D o u b le lia b il i t y o f s t o c k h o ld e r s .........................................................
D ire cto rs: H o w m a n y ..............................................................................
D ir e c to rs : Q u a lific a t io n s ........................................................................
......... | 10 p e r c e n t .................
......... 25 p e r c e n t ................
.........
Supervisor may sue for a receiver.............................
Supervisor may take possession in insolvency, etc—
trust company reports: How many a year 3.....................
Minimum
!.!" !." ” " ! ! ” ” "
Y e s !!!!!!!!!!!!!!!!!!!
9 t o 30....................................
S t o c k h o ld e r s ;
oneh a lf
c it iz e n s
of
D is t r ic t o f C o lu m b ia .
T h r e e -fo u r th s
m u st
be
r e s id e n t s *
of
C o n n e c t ic u t .
H o l d $500 o f s t o c k ..........
Y e s ........................................
5 t o 15....................................
H o l d a t le a st 1 sh a re
o f sto ck .
Y e s .........................................
N o t fe w e r t h a n 6 ............
M a jo r it y c it iz e n s o f
I n d ia n a ;
each
h o ld e r o f 10 sh a res.
Y e s ........................................
Y e s ........................................
T h r e e ....................................
Y e s ........................................
F i v e .......................................
Y e s ........................................
Y e s ........................................
T w o ......................................
Y e s .........................................
Y e s ........................................
F i v e .......................................
Y e s .........................................
Y e s .........................................
F o u r ......................................
a year *.............................................
T w o .......................................
T w o .......................................
reserve:1 What per cent of demand deposits—
Reserve:4 What per cent of time deposits...........................
reserve:4 What per cent of all deposits..............................
A t s u p e r v is o r ’ s d is c r e tio n .
15 p e r c e n t a n d 10
p e r cen t.
15 p e r c e n t o r 20 p e r
cen t.
T w o - fi ft h s ..........................
Reserve:4 What fraction may be in deposits.......................
Y e s ........................................
Y e s .........................................
Y e s .........................................
T w o .......................................
O n e ........................................
O n e ........................................
Y e s ........................................
Y e s ........................................
F o u r ......................................
Y e s ____
In p a rt.
$25,000
to
$150,000;
m a x i m u m , $ 1,000,000
A l l ......................................
10 p e r c e n t ..............
25 p e r c e n t ..............
Y e s ..............................
N o t fe w e r t h a n 5 .
T w o - t h ir d s re s id e n t s
of
M a in e ;
each
h o ld e r o f 10 sh a res.
F o u r - f if t e e n t h s ................
T w o .......................................
25 p e r c e n t .........................
O n e ........................................
Y es.
5 to 7
S t o c k h o ld e r s ;
o f M a r y la n d
Y e s .......................................Y e s
Y e s ................................
F o u r .................................... F o u r
Y e s ..............
T w o ............
A n n u a lly .
T w o ....................................... ...................................................
15 p e r c e n t .........................
T w o .....................
O n e ..............
25 p e r c e n t ____
O n e .........................................
$200,00 0____
6 m o n t h s .. .
10 p e r c e n t .
20 p e r c e n t .
Y e s . --------- A t le a s t 7 . . .
H o ld 10 sh a res o f s t o c k
S to c k h o ld e r s ’
c o m - ...............
m it t e e
e x a m in e s j
a n n u a lly .
Y e s .........................................! Y e s . . .
Y e s ...........................................................
N o t m o r e t h a n 5 ............ F o u r . .
Y e s ..............
O n e ..............
$ 200,000:
50 p e r c e n t .........................
M a jo r it y r e s id e n t s o f
M a ssa ch u setts
e a c h h o ld e r o f 10
sh ares, etc.
A n n u a l ly b y c o m m i t
te e o f 2 .
Y e s ......................................... P r a c t i c a ll y n o .
I n s o m e m a t t e r s .............; Y e s ........................
$150,000 t o $300,000;
m a x i m u m ,$5,000,000
10 p e r c e n t
25 p e r c e n t
Y e s ..............
15 p e r c e n t
O n e ...............................
O n e .............
15 p e r c e n t
p er ce n t.
...................................................
and
m a x i m u m , I 8100,000.
$ 2,000 ,000 .
A ll.
A t lo a st 3 ............................
R e s id e n t s o f M in n e
sota : e a ch
h o ld e r
o f 10 s h a re s.
Q u a r t e r ly .
Y es.
O ne.
F our
S to ck h o ld e rs ’
com
m it t e e
e x a m in e s
a n n u a lly .
Y e s ................
A t s u p e r v is o r ’ s
c r e tio n .
. . . J R e p o r t e d t o c o m m is - j............
I
s io n e r e v e r y 3 y e a rs .
. . . O n e ........................................ ! T w o .
I O n e .........................
20
j 15
dis-
j
20 p e r c e n t o f m a t u r e d
o b lig a t io n s .
$100,000 t o $ .5 0 0 ,0 0 0 ....
A ll...
A ll
H o l d 5 t o 10 sh a res o f
s to c k , etc.
$.50,000 a n d $ 100,0 0 0 . . .
Q u a r t e r l y ...........................
T w o - t h ir d s .........................
O n e -h a lf ..............................
A l l ...........................................
O n e -f ift h .............................
O n e -h a lf ..............................
T h r e e -fo u r t h s .
.........
j T w o - t h ir d s
T h r e e -fo u r t h s .
A ll
.........
! O n e -t h i r d .
T w o - fi ft h s ; a n d o n e - 1 O n e -f o u r t h ____
h a lf.
T h r e e -fift h s ; u n d o n e T h r e e -fo u r t h s .
h a lf.
Y es.
P r o b a b l y y e s ....................
Y es
I n p a r t .................................
I n s o m e m a t t e r s .............
$100,00 0................
I n s o fa r as t h e y d o
b a n k in g b u s in e s s .
$10,000 t o $ 5 0 .000............
$ 5 0 ,000.......................
N o.
P r o b a b ly 5 m o n t h s ..
13 t o 30....................................
H o ld 10 sh a res o f s t o c k . .
P r o b a b ly y e s . . .
$ 100,000...............................
50 p e r c e n t .........................
2 y e a r s ..................................
P r o b a b ly 10 p e r c e n t . .
P r o b a b ly 20 p e r c e n t . .
9 to is.'.! ! ! ! ! ! ! ! ! ! ! ! ! ! !
M a jo r it y c it iz e n s o f
N orth D a k o ta ;
e a c h h o ld e r o f 10
s h a re s.
S e m ia n n u a lly .....................
Y es
Y es
Four
O ne
Y e s ........................................
Y e s .........................................
F o u r ......................................
T w o .......................................
Y e s .........................................
A p p a r e n t ly 7 ...................
O n e ........................................
p e r c e n t ..........
Y e s ......................................... Y e s . . .
Y e s ......................................... Y e s . . .
T w o ....................................... T w o .......................................
A t s u p e r v is o r ’ s d is c r e t io n .
15 p e r c e n t .........................
O n e ____
P r o b a b ly y e s ___
......... d o .......................
F o u r .........................
F o u r ......................................
Inof u^ borrow
diIld t
er’s
2^
20 per cent.
....
Y e s ................
p l y secured.
limited to what per cent .
s e m ia n n u
Y e s .........................................
P r o b a b ly y e s ....................
F i v e .......................................
R°ans on corporation’s own stock forbidden7....................•
loans or deposits restricted to what proportion to
Y e s ........................................
Y e s .........................................
...................................................
Y e s .........................................
and
10
.
P r o b a b ly o n e . . .
O n e ............
Y e s ........................................
F o u r ......................................
T w o .......................................
O n e -f i ft h .............................
T w o -f lf t h s ..........................
F o u r - f if t h s .........................
T h r e e -fift h s
A l l ; t w o -t h ir d s ; a n d
o n e -h a lf.
N o n e ; o n e -t h ir d ; a n d
o n e -h a lf.
F ir s t lie n s o n l y ...............
.........
os R°rP°ration forbidden to purchase its own stock7.............
Y e s .........................................
F i r s t li e n s o n C o lo r a d o
re a l e s t a t e o n l y .
'Y e s ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! !
P e r m it t e d i f
in c re a s e d .
c a p it a l
’Y e s !!!.!;.;!!!!;!!;!!;
Y e s .........................................
Y e s ........................................
Y e s ........................................
Y e s .........................................
! " ” " " ” ! ! ! ! ! ” ...........
" " V O n iy fo r b id d e n t o o ffi
c e rs.
B ra n ch es.............................................................................................................
R e s t r i c t e d .................
P r o h i b i t e d .........................
P r o h i b i t e d .........................
A l l o w e d on in cre a s e o f
c a p it a l, e tc .
Y e s .........................................
O n ly f o r b id d e n t o o ffic e r s , d ir e c t o r s , e t c .
Y e s .................. . .............. Y e s .
.............. Y e s .
Y e s ...........................
Y es.
R e s t r ic t e d b y lo c a t io n
a n d c a p it a l.
A l l o w e d ...............................
..........................
Y e s ................................
Y e s ................................
Y e s ...........................
L o a n s , 8 t i m e s .................
O n e b r a n c h in h o m e
c it y .
Y e s .........................................
Y e s ........................................
Y es.
F i r s t li e n s on M o n t a n a
r e a lt v .
Y es
Y e s ..
A p p a r e n t ly a llo w e d
Y es
F o r b id d e n ..
Y e s ..............................
Y e s ............
A p p a r e n t ly a l l o w e d . . .
$ 2 5 ,0 0 0 ....* ........................
$25,000 t o $100,00 0.........
A l l ...........................................
T exas.
A l l ...........................................
..
..
Y e s .........................................
H o ld $500 o f s t o c k . . . . .
N o .........
10 p e r c e n t .........................
20 p e r c e n t .........................
A e s ........................................
H o ld 10 sh a res o f s t o c k
10 p e r c e n t .........................
30 p e r c e n t .........................
Y e s ........................................
A t lea st 5 ............................
M a jo r it y r e s id e n t s o f
S o u th D a k ota ; each
h o ld e r o f 5 sh a res.
W e s t V ir g in ia .
W is c o n s in .
W y o m in g .
A ' e s ........................................
Y e s .........................................
Y e s ........................................
Y e s ........................................
L a r g e l y ................................
I n p a r t .................................
1
2
$100,000
$10 000 t o $100 ooo
3
50 p e r c e n t .........................
4
5
6
7
8
9
10
V ir g in ia .
V e rm o n t.
U ta h .
Y e s ........................................
L a r g e l y ...............................
B r i e f l y .........................
I n p a r t ........................
$50,000;
m a x im u m ,
$ 10,000 ,000 .
$25,000 to $100,000.
$50,000.
A l l .................................
A l l ....................
Y e s .......................
Y e s .......................
Y e s ............
A l l ..........................................
10 p e r c e n t . .
50 p e r c e n t . .
Y e s ..............
5 t o 25.............
S t o c k h o ld e r s ; a m a
jo rity
c it iz e n s
of
T exas.
Y es
Y es
.
. i .A t . le a. s t 5 ...........................
.
10 p e r c e n t .........................
20 p e r c e n t .........................
Are s ...........................
7 t o 30....................
H o ld 10 sh a res o f s t o c k .
....................
Y e s ........................................
| P r o h i b i t e d .........................
O n e ........................................
p e r c e n t a n d 25
p er cen t.
10 p e r c e n t .........................
15 p e r c e n t . .
T w o -fift h s ...
T h r e e - f if t h s .
P r o b a b ly 20 p er c e n t .
P r o b a b ly t w o - f i f t h s ..
3 p er c e n t o f d e m a n d ; 2
p e r c e n t o f t im e .
15 p e r c e n t o f a ll, m in iw
fi p e r c e n t o f d e m a n d
a n d 4 p e r c e n t o f t im e
Y e s .........................................
i Y e s .......................................
F o r b i d d e n t o o ffic e r s,
d ir e c t o r s , e t c .
Y es.
Y e s ..
P r o b a b ly t h r e e -fift h s .
O n e -t h i r d ...........................
T w e - t h ir d s .........................
10 p e r c e n t .........................
20 p e r c e n t .........................
Y e s ........................................
10 p e r c e n t ____
P r o b a b ly 15 p e r c e n t . .
20 p e r c e n t .......................
P r o b a b ly y e s ....................
Y e s ........................................
P r o b a b ly o n l y
lie n s , e t c .
A l l o w e d in h o m e c i t y
o n in c r e a s in g c a p ita l, e t c .
P r o b a b ly y e s .
Y e s .....................
F o u r ......................................
A n n u a l l y ............................
S a v in g s d e p o s it s e v e r y
...................................................
A t s u p e r v is o r ’ s d is c r e t io n .
15 p e r c e n t .........................
first
P r o b a b ly y e s ....................
Y e s .........................................
F o r b i d d e n t o o ffic e r s,
d ir e c t o r s , e t c .
L i m it e d
etc.
in
Y e s ........................................
Y es
Four
Y e s .....................
O n e ....................
Y e s ................
25 p e r c e n t w i t h e x c e p t io n s .
Y e s ........................................
Y e s ........................................
T w 'o .......................................
Y e s ........................................
T w o .. . . . .
O n e ........................................
T w o .......................................
Four
O ne
A t s u p e r v is o r ’ s d is c r e tio n .
20 p e r c e n t .........................
T w o ...................
Y e s .........................................
F o u r ......................................
O n e ........................................
O n e ........................................
O n e ........................................
15 p e r c e n t .........................
T h r e e -fift h s .
A ll
w £55£?E 5S ^ ^
S. H o c. 232 , 6 3 -1 — v o l 2.
(T o
fa c e p a g e
1 7 2 4 .)
N o. 3
“ la
s T h e r e p o r t s a n d e x a m in a t io n s h e re t a b u la t e d a re o n l y t h e r e g u la r r e p o r t s t o S ta te officia ls a n d th e re g u la r e x a m in a t io n s b y S t a t e o ffic ia ls . T h e n u m b e r g iv e n is u s u a lly t h e m in im u m p e r y e a r ; m a n y S ta tes p r o v i d e for s p e c ia l r e p o r t s a n d e x a m in a t io n s a t t h e d is c r e t io n o f t h e s u p e r v is o r .
6 T h e p r o v is io n s r e s t r ic t in g i n d iv id u a l lia b il i t y v a r y g r e a t ly , as w il l a p p e a r o n r e fe re n ce t o t h e b o d y o f t h e d ig e s t. T h e p e r c e n t s s o m e t im e s o f c a p it a l, s o m e t im e s o f p a id - in c a p it a l, s o m e t im e s o f c a p it a l a n d s u r p lu s , e t c . L i a b i l it y o f a n in d i v id u a l fir m o r c o r p o r a t io n f r e q u e n t ly in c lu d e s t h e lia b il i t y o f m e m b e rs. C o m m o n t v lia h ilit v k nnt e n n s id e r e d
in c re a s e d b y t h e d i s c o u n t o f b ills o f e x c h a n g e d r a w n in g o o d fa ith a g a in st e x is t in g v a lu e s , n o r b v t h e d i s c o u n t o f c o m m e r c ia l p a p e r a c t u a lly o w n e d b y t h e p e r s o n n e g o t ia t in g it. W h e r e th e re are s t ill f u r th e r e x c e p t io n s (a s if t h e p e r c e n t m a y b e e x c e e d e d in t h e c a s e o f s e c u r e d lo a n s ) th e t a b le a im s t o suggest its in c o m p le t e n e s s
bf»k«.d t r j s t c W P—
S.lSS't. p r o v i d e
ru le s to r c o r p o r a t io n s In c o m m u n it i e s o l d iffe r e n t s ite s .
I n r e s e r v e s , th e d lt le r e n c c Is s o m e t im e s t h . t helve,
i a r e s e rv e d e p o s it o r y a n d a c o r p o r a t io n n o t a u t h o r iz e d t o r e c e iv e re s e r v e s o f o t h e r s o n d e p o s it .
.................................
....................
10 p e r c e n t w it h e x c e p t io n s .
15 p e r c e n t w i t h e x c e p t io n s .
25 p e r c e n t .......................
15 p e r c e n t ....................... .
.........................
5 p e r c e n t o f d e p o s it s ,
e tc.
Y e s ..............
D e p o s it s , 10 t i m e s . . .
Y e s .........................................
L o a n s , 10 t i m e s ...............
Y e s .........................................
f ir s t , m o r tg a g e s o n
U ta h la n d
w orth
t w i c e t h e lo a n .
A p p a r e n t ly a llo w e d
e x c e p t t o o ffice rs
etc.
Y e s .......................................
A p p a r e n t ly a l l o w e d . .
F o r b id d e n .
T h e l im it a t io n s o n a b a n k h o ld in g its o w n s t o c k , e ith e r as c o lla t e r a l o r o u t r ig h t , is c o m m o n l y s u b je
, , t 0 lie t h u s t a k e n u s u a lly r e q u ir e i t t o b e s o ld w it h i n a c e r t a in t im e — s i x m o n t h s , a y e a r , e t c .
1 o r a t y p i c a l l im it a t io n o n r e a l es ta te h o ld in g , see t h e p r o v is io n s o f t h e M ic h ig a n s ta t u t e s o n p . 302.
18
19
20
A ll.
............................. ..
20 p e r c e n t .........................
Y e s ........................................
21
22
23
24
Q u e r y ...................................
Y es” ” ” ” ! " ! " ” ! "
F ir s t lie n s o n l a n d
w o r t h t w i c e t h e lo a n .
F ir s t l ie n ; l o a n n o t t o
exceed
t h r e e -fift h s
v a lu e o f la n d , e t c .
Y e s ..................................
A’ e s .........................................
Y e s ...................
Y e s .........................................
20 p e r c e n t .........................
25 p e r c e n t .........................
Y e s .........................................
O n e -h a lf c a p it a l a n d
o n e -h a lf d e p o s i t s
m a y b e s o lo a n e d .
.
16
..........................
T w o - fi ft h s ..........................
A l l ..........................................
.
12
13
14
17
15 p e r c e n t .........................
Y e s .........................................
Y e s ........................................
L i m it e d t o 5 p e r c e n t
o f d e p o s it s .
A llo w e d
if
in c re a s e d .
c a p it a l
in c re a s e d .
1 The eranfusMOTndtUoifoAl^L^lsiana statutes h a s
Y e s .........................................
15
A l l .........
.
Y e s ........................................
Y e s .....................
Y e s ........................................
F i v e ......................................
10 p e r c e n t .........................
l o p e r c e n t a n d 25 p e r i...................................................
cen t.
T w o - fi ft h s ..
am ou n t,
Y e s ........................................ *
Y e s ........................................ Y e s .......................................
Y e s ........................................
Y e s ........................................
F o u r ......................................
I T w o . ’ . ’ . .*."!
’
25 p e r c e n t .........................
30 p e r c e n t . . .
Y e s ........................................
11
E v e r y 6 y e a rs
Y e s .........................................
.........................
Y e s .........................................
5 t o 9 ......................................
C itize n s
of
U n it e d
S ta tes;
m a jo r i t y
r e s id e n t s o f W y o m in g ; e a c h h o ld e r
o f c e r ta in s t o c k .
B i e n n i a l l y ..........................
7£ p e r c e n t .........................
O n e -t h ir d o f d e m a n d
r e se rv e .
A l l n o c h e ld in c a sh
or b on d s.
F o u r ......................................
Y es.
Y es.
Two
10 p e r c e n t .........................
20 p e r c e n t .........................
Y e s ........................................
A t le a st 3 ............................
S t o c k h o ld e r s ; m a jo r i t y re s id e n t s o f W is c o n s u l.
S e m ia n n u a lly b y c o m m it t e e o f d ir e c t o r s
o r s t o c k h o ld e r s .
Q u a r te rly . .
m a n d a n d t im e res e rv e s.
Y e s ........................................
Y e s ..............
A p p a r e n t ly a l l o w e d . . .
T w o .......................................
Y e s .........................
Y e s .......................
F i v e .................................. . .
15 p e r c e n t .........................
R e s t r i c t e d ..........................
Y e s .........................................
Y e s .........................................
A p p a r e n t ly a l l o w e d . . .
T w o .......................................
Y e s ........................................
$50 non tn
s io n ooom a x i m u m , $5,000,000
A l l ..........................................
......... ! M a jo r it y c it iz e n s o f
V ir g in ia ;
each
o w n s $100 o f s t o c k .
.........
Y e s ........................................
Y e s ..................................
L i k e n a t io n a l b a n k s . . .
p e r c e n t o f t im e .
cen t.
Y es.
Y e s ........................................
F o u r ......................................
15
30 p e r c e n t .........................
L o a n s , 10 t i m e s ..........
B o t h , 10 t i m e s .................
..
T e n n e s s e e .3
Q u a r t e r l y ...........................
15 p e r c e n t !! . ! ! ! ! ! ! ! ! . .
T w o - t h ir d s .........................
20 p e r c e n t ................
Y e s ................................
P r o b a b l y n o t ...................
A l l ...................................... . .
B i e n n i a l l y ..........................
O n e -f i ft h . . .
10 p e r c e n t t o 25 p e r
c e n t u n le s s s e c u r e d ,
e tc.
Y e s ........................................
A n n u a l ly b y c o m m i t tee.
P r o b a b ly y e s .
......... I Y e s .........................................
26 Loans on real estate restricted............................................|
•
30
—
20 p e r c e n t .........................
S o u th D a k ota .
N o ..
Y e s ...........................
P r a c t i c a ll y n o ____
Y e s ....................................
$50,000;
m a x im u m ,
$ 2,000,000.
50 p e r c e n t .........................
0 m o n t h s .............................
10 p e r c e n t .........................
20 p e r c e n t .........................
D o u b l e u n p a id s t o c k . . . . . . . . . . . . . . . . . . . . . .
5 t o 25.................................... A t le a st 3 ............................
M u s t b e s t o c k h o l d e r s .. H o ld $500 o f s t o c k .........
S o u t h C a ro lin a .
W a s h in g t o n .
6 m o n t h s .............................
Y e s ........................................
I n m a n y r e s p e c t s ...........
R h o d e I s la n d .
6 m o n t h s .............................
T w o ......................................
15 p e r c e n t
p er cen t.
O n e - t h i r d ...........................
A ll....
P r o b a b ly
a lly .
Reserve: What fraction m ay be in securities...........................
20 p e r c e n t .........................
, 5 m o n t h s .............................
10 p e r c e n t .........................
20 p e r c e n t .........................
N o ..........................................
5 t o 30...................................
T h r e e - fo u r th s
resid e n t s o f O h io ; e a c h
h o ld e r o f 5 s h a re s.
$ 100,000 t o $ 200,000;
m a x i m u m ,
$ 10,000,000.
50 p e r c e n t .........................
P e n n s y lv a n ia .
m it t e e .
15 p e r c e n t .........................
O n e -fo u r t h ____
O regon .
A l l ..........................................
10 p e r c e n t ......................... 10 p e r c e n t .........................
20 p e r c e n t ......................... 20 p e r c e n t .........................
Y es. ..
A t lea st 5 ............................ A t le a s t 5 ____
H o l d 5 sh a res o f s t o c k . M a jo r it y c it iz e n s o f
N ew ' M e x ic o ; ea ch
O k la h o m a .
P r o b a b ly y e s . . . . : . . . .
I n c e r t a in r e s p e c t s ____
$ 100,000................................ ? 100,000 a n d $ 2 5 0 ,0 0 0 ...
O h io .
P r o b a b ly 50 p e r c e n t . .
Y e s ......................................... Y e s . . . .
W ith r e s p e c t to su p er-
10 p er c e n t ------
O n e -t h ir d ...........................
E l e v e n -fift e e n t h s ............
A t c o m p t r o l l e r ’ s d is c r e t io n .
•
I---
Y es.
Y e s ...
N o rth D a k o ta .
$5,000 t o $ 2 5 ,0 0 0 ..............
$50,000
to
$300,000; j $100,000 t o $200,000;
m a x i m u m , $500,000
m a x i m u m . $1,000,000
t o $ 2,000,000.
$50,000 t o $300,000............\ A l l ...........................................
..
15 p er c e n t .........................
T h r e e -fift h s .
Reserve:4 What fraction must be in cash...........................
50 p e r c e n t
Y e s ....
B i e n n i a l l y .........................
B i e n n i a l l y ..............
____! T w o .............................
O n e ..............
m a x i m u m 815,000 t o 4200,000.
$ 1,000,000.
Q u a r te rly .
Y e s ..............................
T h r e e .........................
Unclaimed deposits must be published......................................
How m any
n o
A n n u a lly .
1 Directors: Must examine how often.............
1
Examinations:
...................... .
Y e s !!!!!!!!!!!!!!!!!!!
N o t fe w e r t h a n 3 ............
5 m o n t h s .............................
10 p e r c e n t .........................
20 p e r c e n t .........................
Y e s ........................................
A t le a s t 5 ............................
H o l d $500 o f s t o c k .........
Y e s .........................
Y e s .........................
s
vi
c
C o n n e c t ic u t .
i
C o lo r a d o .
Y e s .........................................
E x c e p t w h e r e le g is
la t e d fo r s e p a r a t e ly .
A r k a n s a s .1
A r iz o n a .
<
N
w
C a lifo rn ia .
A l l ...........................................
A la b a m a .
C.— Tabular su m m ary o f State legislatiori^governing trust com panies
a d e q u a t e a t t h e t u n e ; t h e s t a t u t e s a llo w in g s t o c k
. d e b t p r e v i o u s ly c o n t r a c t e d o n s e c u r it y t h o u g h t a
Y e s .........................................
Y e s .........................................
A flo w e d fo r 90 d a y s . . .
26
Y e s .........................................
Y e s .........................................
27
28
29
30
BANKING AND CUKRENCY.
1725
the price level really was. Mr. Shibley will refer to this volume in
discussing this matter, and for that reason it is placed before you
and the request is made that you make it a part of your files, taking
the copy with you, so that you may have it available in studying
the proposed bill.
Mr. Shibley. Mr. Chairman and gentlemen of the committee, it is
usual, I believe, to state something as to one’s experience with the
subject before you.
The Chairman. I should be glad to have you put it in the record.
I.
Mr. Shibley. For five and a half years I have devoted my entire
time to the money question from the public standpoint, and for the
past five months have devoted my entire time to the question before
this committee. For 19 years I have devoted my entire time to
public questions from the people’s standpoint without holding public
office, and T have more than paid mV own way, and have perhaps
expended $100,000 besides giving my time.
Senator Crawford. Have you been teaching or publishing a maga
zine or paper? In what capacity have you been doing this work?
Mr. Shibley. I will come to that in a moment. I have been asked
to go back into business, with a salary of from $G,000 to $10,000 a
year and business profits, but that has not enticed me away from
this work.
My experience leading up to this public work has been this: First,
I graduated in law in Illinois in the year 1888, and I have since
become a member of the bar of the United States Supreme Court.
My training besides has been that which I have gained in legal
research and law publication. In fact. I helped to build the Amer
ican and English Encyclopedia of Law to volume 15 of the first
edition. At that time I was able to retire from work with a com
petence. I then engaged in legal research, and took up regular
courses in political economy, political science, and social science in
general.
In 1899 I founded in New York City the Bureau o f Economic
Research, and associated with me were Profs. John R. Commons
and Edward W. Bemis. Prof. Commons is now in the University
o f Wisconsin and Prof. Bemis is working as a municipal expert from
the people’s standpoint.
Back in those days of 1899 the entire country was in the grip of
“ machine rule,” the dominating power being composed of the worst
elements in society. What we set out to do was to try and find a
feasible program for the progressive Democracy and its allies in
the two other progressive parties, namely, the Silver Republican
Party and the People’s Party. My department was that o f money
and banking. We measured the price level for the preceding 21 years,
at a cost to me of $3,000. This measurement was for the purpose o f
getting a sure basis from which to work. Then, preparatory to the
holding of the progressive conventions of the year 1900, I put for
ward the idea that as the monetary principle in the Democratic plat
form of 189G was against an appreciating money and for stability,
that therefore the 1900 declaration in the face of a depreciating pur
1726
BANKING AND CURRENCY.
chasing power for money, ought to be for stability, and I secured the
adoption of my plan, first, by Mr. Bryan’s acceptance, and he secured
its adoption by the Democratic national convention, which provided,
as I shall presently show, that as fast as silver money should come
into being, coined at our mints under free coinage of silver, an equal
amount of paper money issued by the national banks should be
retired.
I cite this to show my experience in proposing a practicable plan
for establishing stable money, and a plan which, when placed in
operation, would be so equitable as to remove the money question
from politics.
During 1895 and 1896 I compiled a volume of 740 pages, entitled
“ The Money Question,” with a subtitle including the name “ Stable
Money,” that being the keynote to what I found to be desirable. The
official journal of the French Bimetallic League gave the volume a
high testimonial; and I also especially prize a letter received from
a professor of Cambridge University, England, Prof. Foxwell, a
specialist on the money question, who said:
This volume is certainly the best for its purpose known to me. Only those
who have themselves worked at the history of money will fully realize the
enormous labor its compilation must have required.
Senator Jones, of Nevada, who in his day was probably the widest
read man on the money question of anyone in the United States
Senate, wrote:
I find it the best and most comprehensive work on the subject that I have
ever seen.
Those statements describe my fist book on the subject 17 years ago.
Since then I have compiled a large amount of data and it has been
issued in various forms.
The facts and principles that are not generally known and which
will be helpful for this committee to have before it, I will outline
in as terse a way as possible, and then will be glad to answer
questions.
II.
To give you an idea of the way I have gone about the examination
of the money question, I will state that while I was engaged in my
legal researches after having retired from business, I took standard
courses in political economy and the other social sciences, as I have
said. I studied at the University of Chicago. At the head of the
department of political economy was Prof. J. Laurence Laughlin.
When I finished my course in political economy I was an ardent gold
monometallist. That was in 1894, at a time when debate on the
money question was approaching its height.
But I saw a reference to the proceedings of the British Gold and
Silver Commission, and a close reading of the testimony of the men
who appeared before that commission showed me that for more than
a century the market price of gold and silver had been at a practi
cally constant market ratio, due to the laws in the Latin Union;
that is, France, Italy, Belgium, Switzerland, and Greece, and also
in the United States of America. These laws granted free coinage
to both metals, and there was the further fact that both gold and
BANKING AND CURRENCY.
1727
silver money circulated side by side in the Latin Union and the
United States, at least for the greater part of the time. The result
of the concurrent circulation of gold and silver money was that
when, during the first half of the century, gold became comparatively
scarce the heaviest gold coins were culled out, melted, and exported
to the gold-using countries; the place of the culled-out gold coins
was taken by silver coins, which flowed in through the mints. Later
in the century, and at a time when the gold coins in the circulation
of the countries having concurrent circulation had been pretty
nearly exhausted, gold was discovered in Australia and California,
and gold flowed into France and the other countries having bimetallic
laws, and silver coins "were culled out and exported in proportion
as it paid to do so.
This process continued until 1873, when the action of the Latin
Union, through the closing of the mints to silver, broke the link
that had previously tied the two metals together at a practically
constant market ratio, and when this link was broken the silver
market was open to all of the factors which go to affect the price of
a commodity.
This breaking of the link resulted in the existence of two separate
monetary standards, the silver standard and the gold standard, and
the two were in nowise constant to each other, so that there existed
a broken par of exchange between the gold-standard and silverstandard countries, greatly to the injury of the gold-standard coun
tries, as they went into an era of falling prices, while the price level
of the silver-standard countries remained comparatively stable.
These facts were set forth in the unanimous report of the British
Gold and Silver Commission in 1886, and the evidence on which the
report was based is clear and absolutely convincing.
But the American university to which I had paid my money had
deliberately swindled me. I use that term advisedly, for half truths
had been told me, and half truths are the worst sort of falsehoods,
because they have a semblance to the truth.
Further examination also showed the further astounding fact that
all university professors in the standard institutions in this country
who had appeared in print upon the subject were evading the issue
concerning bimetallism or else were deliberately falsifying the facts,
whereas in Europe the professors all knew of the facts and were
freely telling them to the people.
The explanation of this remarkable difference in the so-called
scientific institutions of Europe and the United States was the method
whereby the professors were selected, employed, and paid.
III.
In Europe, where the university sj7
stem had had to struggle for
an existence, on one side there being dogmatic theology and on the
other plutocratic governments, there had developed a system in which
the experts in the universities were free to tell the truth—academic
T
freedom existed. This freedom was and is maintained in Europe by
providing that the selection of professors shall be by fellow experts;
second, that their term of office shall continue during good behavior;
and, third, the funds for the payment of salaries shall in nowise be
1728
BANKING AND CURRENCY,
dependent upon the donations of those who are selfishly interested in
the subjects handled by the professors.
But in the university system in the United States, from the
beginning, the professors have been hired by boards of directors
composed of business men, principally, and, with the exception
of the few State universities that have come to be developed, the
universities and colleges have had to shape their teachings so as to
get endowments from the wealthy; and, third, the boards of directors
have retained in themselves the power to drop a professor’s name
from the pay roll at the end of any year except as a few special con
tracts have been made for a term of years. The consequences have
been that the conservative and reactionary rich people in the United
States—reactionary in so far as desiring to keep the people from ex
ercising self-government and thereby controlling the wealth of the
country—have dictated much of the political and economic teachings
in the colleges and universities in this country. These rich patrons
of the colleges and universities have insisted upon “ sound” teach
ings; meaning by the word “ sound” that the teachings must con
form to what they conceived to be sound.
The result has been deceit and falsehood in much of the political
and economic teachings in the universities, the excuse being that the
telling of the truth to the people would cause the people to hurt
themselves. On that point I quote from a book issued by Prof.
Francis A. Walker, of Yale University, published in 1889. The book
is entitled, “ Money, Trade, and Industry.” One of its chapters is
entitled “ The Abuses of Government Paper Money,” in which the
author says:
The single liability to abuse, in the case of Government paper money, is
found in the tendency to overissue. To this and the fiscal exigencies of govern
ment are likely to combine with a popular passion for a money of a diminishing
value (p. 224).
Note the assertion that the people possess “ a passion for money
of a diminishing value.” In other words, that by nature they are
robbers and, therefore, unfit for self-government.
Next note the following admission. Prof. Walker, in a chapter
dealing with the effects of contraction, says:
Especially with regard to the effects of contraction have economical writers
been greatly influenced by the attitude in which they have come to regard them
selves as preachers instead of teachers; as in some degree responsible for the
conduct of affairs rather than as simply bound to investigate economic phe
nomena fearlessly and impartially. Having satisfied themselves that there is
great political danger from the instincts of repudiation and confiscation, they
seem to feel it their public duty to divulge nothing that, either by being under
stood or misunderstood, could minister to those instincts.
And he added:
This is not the only department of political economy in which much has been
written in the same spirit as if the chemist should refuse to disclose the secrets
of poisonous agencies lest men should take advantage of them to perpetrate
crimes (p. 105).
Here we have an admission by a noted and frank professor that
vital truths were being concealed from the people because, as he
asserted and believed, the people were possessed of “ instincts of
repudiation and confiscation.”
Senator W eeks . Mr. C h aim an, may I interrupt the speaker at
this point to say that I knew Prof, Walker, to whom he refers, very
I
BANKING AND CURRENCY.
1729
well. He was a distinguished soldier of the Civil War. At the time
he wrote the treatise which is being quoted he was a professor at Yale
University, and was later the distinguished president of the Massa
chusetts Institute of Technology. I think I am safe in saying that
Gen. Walker did not intend to convey the impressions which, the
speaker has obtained from the quotations which he has read. I
just want to insert that statement, because Gen. Walker can not de
fend himself; he is dead; and I want to make that statement with
respect to his memory.
The Chairman. The witness will proceed. I perfectly well com
prehend the attitude of mind of both the writer and the critic of the
writer, and I do not think the writer exceeded in any degree the
integrity of mind of the critic.
Senator Nelson. I supposed that this question of bimetallism had
been settled long ago.
The C h a ir m a n . I t has; but I think the witness ought to be allowed
to develop his own argument. I t has an intellectual coherence that
deserves to be considered.
Senator W eeks. I did not want to interrupt the witness at all. I
simply wished to say that because of my personal acquaintance with
Gen. Walker.
The Chairman. There are many upright and excellent men who
do proceed upon the theory that the people can not be trusted, and
who do proceed upon the theory that the issuance of paper money is
a very unsafe and unwise thing, because the people will require their
representatives to issue it in excess, and to an excess which will prac
tically mean depreciation and therefore an unfair dealing with
others.
Mr. Shibley. Mr. Chairman, I am using quotation marks and
giving exact reference to the pages so that the references can be
examined. I have stated that Prof. Walker was exceptionally frank
and open in this matter.
Senator Crawford. I suppose we can all draw our own conclusions
as to what Gen. Walker really ment.
Mr. Shibley. Most assuredly; the words are there.
I well remember the effect upon me when I came upon this con
fession and assertion. I at once set to work to examine the facts
presented which were said to prove that the people are by nature
mere robbers, and thus not fitted for self-government. As I was
a lawyer and of mature years I started in to carefully weigh the
evidence. I found that the professors were in error. The people
have at times clamored for paper money, it is true, or the restoration
of the bimetallic standard, but I found that when they did so it was
when they were being robbed and industry was being paralyzed.
That was clearly the situation in this country following 18G8 when
a deliberate plan of contraction to extend over a series of years was
entered upon, which brought on a terrific depression, which led to
civil war in Pittsburgh in 1877. The way to have returned to a
specie basis was to have done so quickly and" then deal justly with all
debtors, as was done at the close of the Revolutionary War in this
country. This plan of the Revolutionary-War times was favorably
passed upon by the United States Supreme Court in 1803. In earlier
times, between 1750 and 1760, a similar reform had been wrought
in some of the northern colonies.
9328°— S. Doc. 232, 63 -1— vol 2------ 49
1730
BANKING AND CURRENCY.
I have just said that when the people have demanded paper
money or the restoration of the bimetallic standard, it has been when
they were being robbed and industry was being disorganized. But
in most of the universities in this country and among the bankers
and others, the wrongful assertions have been and are being con
stantly made that the people are by nature mere robbers, and there
fore that the people should be deceived into being kept from the
control of the volume of money. This is the inside meaning of
“ sound money.”
But this assertion against the people’s honesty is a base falsehood,
as history shows, and therefore deceit and falsehood are the basis
o f the u sound money” doctrines. From the time of the Revolu
tionary War in this country, when a large percentage of the wealthy
people were Tories, the teachings in the universities and colleges have
conformed to the assertions of the wealthy supporters of these insti
tutions that the people are by nature mere robbers, and therefore
that self-government by the people should not be permitted. Espe
cially should the control of the volume .of paper currency be kept
from the people.
This has been the textbook teaching which every man has received
in the privately owned universities in this country and in most of the
State universities. Uusually the statement has been put forth in so
smooth-a manner as not to shock the students, as does Prof. Walker’s
statement and explanation.
The way I came to find out that the people had demanded paper
money or bimetalism only when they were being wronged was through
the findings of a scientific system whereby the purchasing power of
money was being measured accurately. The system is termed the
index number of average prices, or general prices, or the price level.
Permit me to set before you an outline of how, through this system,
as provided for in the Owen-Glass bill and approved by the adminis
tration, the currency question can be definitely and finally settled in
the forthcoming law, thereby providing an absolutely equitable
monetary system and one that will result in a much greater pros
perity for the country and for the entire world than anything yet
experienced. This is a remarkable claim, but what I have to present
will bear me out.
IV.
I now present the development of what has become a scientifically
accurate gauge for determining the proper volume of money in cir
culation.
In section 15 of the Owen-Glass bill there is provision that the
gauge to be used by the boards of directors in the Federal reserve
banks in determining the proper interest rate for the rediscount of
commercial paper to the banks shall be such as to promote a stable
price level. The wording of this provision is as follow s:
Every Federal reserve bank shall have power * * * ( d ) to establish each
week, or as much oftener as required, subject to review and determination of
the Federal reserve board, a minimum rate of discount to be charged by such
bank for each class of paper, which shall be made with a view to accommodat
ing the commerce of the country and promoting a stable price level. (Sec. 15.)
The meaning of a “ price level ” is “ purchasing power of money,”
so that the aim of the national board of directors and of the boards
BANKING AND CURRENCY.
1731
of directors of the regional reserve banks, under the Owen-Glass bill,
is to aim at stability in the purchasing power of money.
Doubtless the query arises in your mind, What is meant by the
purchasing power of money ?
I present an official answer by the United States Government, and
it agrees with the statement by the Liberal Government in England
and by the Liberal Government in Canada, and it agrees with the
scientists.
Senator N elson . Yes; but it never agrees with the facts. Why is
it this year, for instance, that corn is nearly twice as high as it was
last year ? Is it owing to the money question ?
Mr. S h ib le y . N o, sir; not at all. The volume of money affects
the average prices, and the prices each year for the particular
commodities change among themselves in relation to supply and
demand, just as changes in the supply and demand of money affect
the average of prices.
Senator N elson . Those academic figures of yours are no measure
at all, unless you take into consideration all these other factors—
supply and demand, the failure of crops, whether crops are abundant
or not. But go on.
Mr. S h ib l e y . That has reference to prices among themselves, and
is accounted for by all scientists, and this that I have stated is
accepted the same as the multiplication table is by the economic
associations.
Senator N elson . Why it is nothing but the quantitative theory of
money; that is all.
Mr. S h ib le y . The measurement of the price level is entirely
separate from the quantitative theory.
On the table before you are copies of a publication by the United
States Government entitled “ Wholesale prices, 1890 to 1912.”
Please take them up and notice that the publication is by the De
partment of Labor, through its Statistical Bureau.
Kindly turn to page 10, whereon is a chart showing to the eye
in graphic form the history of the purchasing power of money in
this country from 1890 to 1912, inclusive.
I ask that a copy of this chart be inserted in the record and pub
lished. (Agreed to.)
This chart is entitled “ Relative prices of all commodities 1890 to
1912.” (See p. 1732.)
Senator C rawford. Professor, I do not want to interrupt you, but
in connection with section 15, where this board is given the right to
establish the rate or adjust it according to the price level, would it
not be just the same in effect as what the Bank of England does in
fixing the rate of discount, or what one of the European banks does
in fixing the rate of discount?
Mr. S h ib le y . That is an excellent point.
Senator C rawford. Would not its effect be no more and no less
than the effect that follows the exercise of that power in those for
eign banks?
Mr. S h ib le y . There are two factors in the clause I have read; one
is not present in the system of England. The matter of controlling
the price level is exercised by the Bank of England and the criterion
1732
BANKING AND CURRENCY.
toward which the bank operates as concerns the purchasing power of
money is to retain within the country the proper volume of gold.
The difference between England and the United States is that we
have a larger amount of gold and are just beginning to intelligently
control our price level, and now, adding our power to their excellent
control, we can maintain stability in the price level.
Senator C r a w f o r d . I supposed the purpose of this bill—you will
pardon me— was also to permit these banks to purchase gold, and it
Relative prices of all commodities, 1890 to 1912.
[Average for 1890 to 1899=100.0.]
also requires them to keep a certain amount of gold in reserve, so
that all the relation of this system to gold is practically the same as
the relation of the English system and these other systems.
Mr. S h i b l e y . Precisely, with the exception that this bill says that
the aim shall be to promote stability in the purchasing power, so that
the chart line shall not zigzag as it does under the English system.
Senator C r a w f o r d . I do not want to divert you unnecessarily.
Mr. S h ib l e y . Y ou do not do so at all. So that in the future, if
this proposed system becomes the established policy, instead of hav
BANKING AND CUEBENCY.
1733
ing a zigzag line representing the purchasing power of money the
line will be stable, the same as the number of cubic inches in a bushel;
in other words, the proposal is to stabilize the purchasing power of
the standard of value.
Senator N elson. Your theory then is that the level of prices is
simply a question of the volume of money ?
Mr. S hibley . That is one factor, and that factor the Government
controls.
Senator N elson. According to your theory that is the chief factor?
Mr. S hibley . Oh, n o; that is only one factor, but the Government,
having control of it, can absolutely control the price level. Onethird of our money is paper-----The C hairman (interposing). That is, it can “ promote” the price
level.
Mr. S iiibley . That, perhaps, is the better term; but I call attention
to the fact that the Government, through its proposed system for the
control of the interest rate for money, combined with a vast volume
of paper currency in existence that can be retired at will to make
room for gold money, and with the further power in the Government
to issue paper currency, can absolutely control the price level.
Senator N elson. I always supposed that the price level was fixed
by the production and depended on the climate and the weather.
Last year, for instance, potatoes were so abundant that the price was
next to nothing. This year in some localities they are scarce and the
price of potatoes is very high throughout the country. That is the
case with corn. What has the price level got to do with that?
Mr. S hibley . For a certain month it has nothing to do with this
fluctuation-----Senator N elson (interposing). This is, for a certain year—a cer
tain season.
Mr. S hibley . But if you take it for 16 years-----The C hairman (interposing). What is meant by that term “ price
level ” in the present Government bulletin is a price level of 255 ar
ticles, as follows: Twenty articles of farm products, 55 articles of
food products, 65 products of clothes and clothing, 13 products of
fuel and lighting, 38 of metals and implements, 28 of lumber and
building materials, 9 articles of drugs and chemicals, 14 articles of
house-furnishing goods, and 13 miscellaneous.
Senator N elson. My idea about that, Senator, is that possibly in
in infinitesimal degree this quantitative theory of money may affect
it, but after all it is a question of supply and demand. It is after all
a question of production; some years our production is excessive and
prices drop; other years it is scant and prices go up. Any figuring
like that that does not take that into account is of no value at all.
The C hairm an . It takes these things into account.
Senator N elson. There is nothing in the book to show it.
The C hairman . I f you will look in the book, I think you will find
you are mistaken. You will find it goes down through a period of
years with comparative regularity, and then goes up again.
Senator N elson. It does not show that it takes into account the
volume of supply and demand.
Mr. S hibley . Oh, absolutely they do, and one of those great factors
is the supply of credit and money as a whole, and Prof. Laughlin
now admits it.
1734
BANKING AND CURRENCY.
This chart is entitled “ Relative prices of all commodities, 1890
to 1912.” The words “ relative prices ” are the equivalent of “ price
level.” On page 9 of the publication it is said :
The relative price [that is, the price level] used in this table is simply a per
centage. The base on which the relative price is computed is not the price
for any one year, but the average of prices for 10 years—from 1S90 to 1899,
inclusive.
I will add that the way this average of prices for the 10 years has
been attained is explained in this and various publications. It ap
pears that the market prices for 255 commodities at wholesale were
carefully collected for the years 1890 to 1899, inclusive, and that the
average for this 10-year period was given the basic number 100.
Then by properly combining all of the 255 commodities the average
for the 10 years was given the basic number 100.
Now, let us see just what it is that this index number of 100 repre
sents :
It is an index number that represents the average of the prices of
commodities at wholesale. It is an equation. On one side are com
modities and on the other side are the prices for which they were
actually sold in the markets. It is an equation; on one side are com
modities and on the other are the prices in monetary denominations.
In that way the purchasing power of money is measured. On one
side is money and on the other side are commodities. The average
for the 10 years, 1890 to 1899, inclusive, is given the index number
100, as I have said. Then for each of the 10 years the average is as
follows for 1890 to 1897, inclusive: 1890, 112.9; 1891, 111.7; 1892,
106.1; 1893, 105.6; 1894, 96.1; 1895, 93.6; 1896, 90.4; 1897, 89.7; al
ways on the down grade.
The year 1897 was the low point for prices for commodities at
wholesale. It was 89.7. This was the average for the entire year.
The next two years the index numbers were 93, and then 101, a
gain of 8 points in a single year. That was for 1899.
Beginning now with 1899, it was 101, and the following year it went
up 9 points, taking the year as a whole. But during the summer
and autumn of 1900 the price level started downward and continued
falling well into 1901, going down 3 or 4 points. For 1902, as a
whole, the rise, as compared with 1901, was 4 points higher. For
1903, as a whole, the price level was nearly stationary, although for
part of the year there was a considerable fall. For 1904 the average
for the year was about the same as for 1903. The next year, 1905,
the price level went up 2 points, then up 7 points in 1906,"and again
the next year up 7 points more. These 14 points of rise in the years
1906 and 1907 were for the entire period, and we know that from
September, 1907, to the end of the year there was a serious fall in
prices, due to the collapse of our monetary system, including the ces
sation of specie payments. For 1908 the average of prices for com
modities went down 7 points, and much more if the reckoning is from
September, 1907. For 1909 prices went up nearly 4 points, to 126.
The following year up 5 points more, and the next year, 1911, down
2 points, and for 1912 up 4 points, the high point for the price level
to that time and higher than to-day, doubtless.
A glance at the chart as a whole shows that during the 23 years,
1890 to 1912, inclusive, there have been two main periods, one of
falling prices, the other of rising prices. Stated another way, the
BANKING AND CURRENCY.
1735
period of falling prices for commodities was a period of increasing
purchasing power for money, and the period of rising prices for
commodities was a period of decreasing purchasing power for money.
The ideal is stability in the purchasing power of money year after
year.
Presently I will show in detail why this is so. At this time I
desire merely to point out that there is a system whereby the pur
chasing power of money is being measured scientifically. Permit me
to outline briefly the development of the system to the present time,
when we find that the Government of the United States is measuring
the purchasing power of money, and has been doing so since 1902.
Also the Governments of England and of Canada are officially meas
uring the price level, and all statisticians are agreed that the basic
principles are sound.
The development of the mechanism for measuring the purchasing
power of money is as follows:
In the year 1886, a time when the gold-standard world was in the
depths of an industrial depression, due to serious changes in the pur
chasing power of money, as afterwards conclusively appeared, the
British Association for the Advancement of Science appointed a
committee of distinguished economists—
for the purpose of investigating the best method of ascertaining and measuring
variations in the value of the monetary standard.
The committee appointed consisted of Mr. S. Bourne, Prof. F. Y.
Edgeworth (secretary), Prof. H. S. Foxwell, Mr. Robert Giffen,
Prof. Alfred Marshall, Mr. J. B. Martin, Prof. J. S. Nicholson,
Mr. R. H. Inglis Palgrave, and Prof. H. Sidgwick.
The next year, 1887, the committee reported, and also the following
year, and again the third year.
In the second report it is pointed out that during the preceding
centuries methods had been devised for measuring the monetary
standard and with fairly good success. About the year 1700 a book
was published by Bishop Fleetwood, in which had been collated the
records of such of the prices of commodities as—
happened to remain, and using a plan of means in which each article was con
sidered to be of equal importance, showed approximately that the value of
money had changed from century to century; that, as measured by the common
articles of trade and consumption, a sovereign did not go as far in the time
of that book as it did several centuries before; that it only commanded a sixth
part of the average of leading commodities which it had commanded several
centuries previously. The whole calculation was very rough, but it conveyed
a sound historical idea that was useful and fruitful in the absence of a better.
A dam Smith [1 7 2 3 -1 7 9 0 ], substituting w heat alone as a standard, w as able
to show changes in the purchasing power of money, though, o f course, it would
have been better to use more articles. Still the conclusion for w heat alone,
considering its great importance in those times, w as good enough to prove a
change in the value of money.
Sir George Evelyn’s index number, submitted to the Royal Society in 179S.
led to a broad conclusion not substantially different from those of Adam Smith
and Fleetwood.
In later times the researches of Prof. Jevons and the index number of the
Economist, Sauerbeck, and others, have demonstrated conclusively that there
has been a common movement in prices of the leading wholesale commodities,
proving a variation in the value of money, relative to an aggregate of these
leading commodities, which can, no doubt, be made use of by historians and
economic students when they wish to give meaning to the money expression
of the different periods.
1736
BANKING AND CURRENCY.
The report then passed to a discussion of the various ways whereby
the index number can be constructed, and recommended that the
British Government should officially record the prices in England,
and from these figures construct an index number of average prices,
and also that individuals and corporations should be authorized to
specify in their contracts for payment of money that such sums
shall be paid as will transfer precisely the same purchasing power
as the money would buy at the time the contract was entered into,
the calculation to be made by the use of the Government index num
bers. The report concluded with a recommendation that the com
mittee be continued another year to more fully consider and report
upon these things.
The following year the committee presented specific recommenda
tions for the above-described proposals, and said:
The main thing to get into the public mind is the notion that a monetary
“ standard ” is itself a thing whose variations may require measuring for prac
tical purposes. (Report of British Association for the Advancement of Science,
1889, p. 486.)
In other words, the gold dollar is our standard of value, but its
purchasing power has varied greatly.
This statement should be indelibly stamped on the memory of each
student of the money question. The so-called standard has been ex
ceedingly variable, as we all know.
Since the issuance of the foregoing scientific reports by the British
Association for the Advancement of Science, the British Government
has commenced the publication of official records of prices and the
issuance of an official index number for commodities thereby show
ing the variations in the purchasing power of money. This is being
done through the British Board of Trade. The Canadian Govern
ment is doing likewise through its labor department, and so is the
United States Government. This shows the development of an idea.
Science has been applied to the money question.
That the purchasing power of money can be measured is as certain
as that 2 and 2 make 4. It is recognized by every one who is trained
in figures concerning prices. In every economic association the mem
bers discuss price levels with the same acknowledged existence of
them as a fact as they would discuss the multiplication table should
such a question arise among them. I have shown that the United
States Government is officially measuring the price level or pur
chasing power of money, as also is the British Government and the
Canadian Government. The only debatable point is as to the most
just method for constructing the index number, but that question
is in no wise connected with accepting the general idea that the
purchasing power of money is being measured.
The most complete treatise, doubtless, as to just which way is the
most preferable in constructing the index number is Prof." Irving
Fisher’s book entitled, “ The Purchasing Power of Money,” published
by the Macmillan Co. Prof. Laurence Laughlin, one of the leading
“ sound-money ” advocates, now admits that the purchasing power of
money is being measured and properly so. In a paper read by him
at the annual meeting of the American Economic Association, Decem
ber, 1910, he used as a basis for his remarks the table o f average
prices of the Department of Labor of our Federal Government
BANKING AND CURRENCY.
1737
(p. 31), and then proceeded to discuss the causes of the changes in
the purchasing power of money.
I have gone into this general subject quite fully so as to forestall
any claim that the purchasing power of money can not be measured.
The bankers, as a general thing, dp not know that the purchasing
power of money can be measured, else they would support the admin
istration’s proposal to guard against undue inflation, because undue
inflation is just what the House committee has planned for, evidently,
as its bill plainly shows. The percentage of reserves that are to be
kept in cash are to be cut in two (figures are quoted later), thereby
providing for wild inflation, except as the national board shall decide
otherwise; the whole great question being placed in the discre
tionary power of the President’s appointees, which means that the
President himself would become personally responsible for deter
mining whether or not the looked-for inflation should go forward.
y.
Having shown that there is a scientific system for measuring the
purchasing power of money and that the Government of the United
States is actually taking the measurements and announcing the
results, as we have seen in the chart, I next call your attention to
another monetary principle, and that is that the administration bill
provides for a unified control of the purchasing power of money in
the United States.
Senator C rawford. Professor, right on that point I am inclined
to agree with you that the purchasing price of the gold dollar has
been diminished because of the increased production of gold, and
that that diminishing purchasing power can be expressed by setting
over against it the commodities, etc. Yet, I do not quite see how you
can rectify it unless you increase the number of grains of pure gold
in this thing you call a dollar, so as to establish a parity between the
gold dollar and these commodities you are setting over against it.
I do not know how a board of control or a supervisory board can get
down to that basic question unless the Congress of the United States
undertakes to change the gold dollar by requiring an additional
number of grains of pure gold to go into a gold dollar.
Mr. S hibley . My argument leads right up to that point.
Senator C rawford. It seems to me that is a very vital point in this
question of maintaining price levels.
Mr. S hibley . It is, and I am leading up to that point; that is, the
quantity of gold in this country and how to control our price level
in the future.
Senator N elson. Professor, let me suggest this to you: We have
about the same volume of money and the same character of money
this year as we had a year ago.
Mr. S hibley . Yes.
Senator N elson. There is not any difference in the quantity, in
the value, or character of it. Now, why is it that corn and potatoes
are worth nearly twice as much this year as they were worth last year,
and why is it that cotton is worth so much more? What has the
quantitative theory to do with it?
1738
BANKING AND CURKENCY.
M r. S h ib l e y . I t is because of the supply and demand for those
particular articles to other articles.
Senator N elson . I f jmu do not take those facts into account, your
whole scheme falls to the ground.
The C h a ir m a n . They are all taken into account; every item is
taken into account, and he is going to give the proportionate part
according to the volume.
Senator S hafroth . D o you want to be interrupted now, or would
you prefer that we wait until you get through ?
The C h a ir m a n . I think if Mr. Shibley is permitted to continue
under the rules we have established heretofore it would be better,
because he will give the points that will be anticipated by the ques
tions of the members of the committee.
Mr. S h ib le y . I am speaking of the unified control of the price
level, which I consider to be a necessity.
A national board the members of which are to be appointed by
the head of the Government, whom the people have elected, are by
the bill directed to establish each week, or as much oftener as required,
the rate of interest at which commercial paper is to be rediscounted
by the 12 banks of issue to be located in various regions of the
United States on the mainland.
The principle herein provided, that of a unified or central control
of the interest rate for money, and thereby determining the height of
the price level or purchasing power of money, has been in use in
Europe for a long time. So effective has this system been that it
had been adopted now in every country in Europe except Scotland.
In Scotland various banks of issue compete with each other in fixing
the interest rate and issuing paper money. This Scottish system
exists in Canada and here in the United States.
With us the control of the interest rate for money, and thereby
the control of the price level for commodity, is principally in the
25,000 banks, a few of which are tremendously powerful and their
managers are stock speculators or interested in stocks dealt in
on the stock exchange. Thus the great speculative banks in this
country are controlling prices on the stock exchange. This method
of controlling stock-exchange prices is not generally realized.
To understand something of the way the speculative banks in this
country have regularly “ milked ” the stock market, one has only to
compare the interest rate for money on the New York market with
the interest rate for money in a country where its control is in a board
of directors or the Government. In France during the 20 years 1886 to
1907 the interest rate for money was changed only 29 times; in Ger
many, 116 times; in England, 186 times; whereas in New York City
the rate was changed thousands of times, and the rate has been as
high as at the rate of 1,000 per cent per year, and even at that rate
many people were utterly unable to borrow money; while in France
the rate did not go above 7 per cent and money could always be had
by those who had security and were willing to pay the going rate.
Senator W eeks . May I suggest that you are comparing the rates
of the Government banks with the rates of the joint-stock banks in
the United States.
Mr. S h ib l e y . Yes; but they could always get money at that rate.
Sometimes the rate is lower in the joint-stock banks over there, but
never higher, and there existed a market in which a person could
BANKING AND CURRENCY.
1739
always go and get money if he needed it, if he had security, whereas
under our system, with the control in the speculative banks, the
people have been at the mercy of these banks.
Senator C rawford. Is not the prime motive of these Government
banks in England in fixing the rate of discount to fix it higher than
the stock banks so as to invite gold to come in? O f course, they
would not fix it lower, and they fix it higher because they have a cer
tain object in view in making it higher. In other words, their func
tion is always to raise the interest rate instead of to reduce it.
Mr. S h ib le y . Those central banks in Europe have absolutely con
trolled the price level within their respective countries; that is, the
interest rate for money has been kept from going as high as it might
otherwise have gone. In other words, a unified control of the pur
chasing power of money is absolutely essential.
But in the United States the private money lenders have and do
control the interest rate for money through their control of the vol
ume of money; at times the President of the United States, through
his Secretary of the Treasury, has temporarily controlled the money
market by taking money from the Government’s treasury and putting
it into the banks, or by directing that the money on its way to the
Government Treasury shall be retained in the banks. Also, under
this general system, the foreign Governments and foreign bankers
have controlled at will our money market, thereby controlling our
stock market and the price level.
In no other great country except the United States has the wel
fare of its people been left to the discretionary power of the money
lenders of the world. But under the new power that is controlling
our Government, the progressive Democracy, there is about to be
established, I believe, a unified control of the price level. The provi
sion is incorporated in section 15 of the Owen-Glass bill, as I have
said.
Senator N e l s o n . Let me set you right about that. Let me call
your attention to the fact that the bill as it passed there, has elimi
nated that provision.
Mr. S h ib le y . I am coming to that.
Senator N elson . They have eliminated that provision that you
quoted.
Mr. S h ib le y . The House Committee on Banking and Currency
has approved the plan for a unified control of the price level, which
the House caucus has adopted, and so has the House. Evidently
the time has come when the greatly needed unified control of the
price level in this country is to be established.
YI.
Next, I desire to lay before you the reasons why the unified control
of the price level in this country should be in the people’s Govern
ment and not in the bankers and why stability in the purchasing
power of money should be maintained.
The reason why the people’s Government should control the price
level is experience demonstrates that the self-interest of the bankers
is promoted by an increasing purchasing power for money, except
as the ensuing depression injures them. On the other hand, ex-
1740
BANKING AND CURRENCY.
perience demonstrates that the self-interest of the people, through
their Government, when that Government really reflects the people’s
will, is for stability in the purchasing power of money, and therefore
the people, through their Government, should control the purchasing
power of money. In other words, the control of the purchasing
power of money, the standard of value, should be in the Government,
thereby representing the interests of society as a whole, and not a
special class, as is the case where the bankers control the purchasing
power of money.
That the principles that I have named actually exist among us I
shall now demonstrate. First, I will show by analysis the importance
of stability in the purchasing power of money.
Money is used as a medium of exchange and thereby becomes a
common denominator or measure of value in terms of which we esti
mate the value of other things. Money is also a measure of value for
deferred payments and for the performance of other obligations in
the future; for example, the payment of street car fares and other
prices fixed by law, and the payment of prices which, under estab
lished custom, remain stationary year after year.
It follows that the purchasing power of money should be kept as
stable as possible. An appreciating money—that is, falling prices—
robs the debtors and also such of tne business men as are in lines of
business whose prices are fixed by law or custom. Furthermore, fall
ing prices for commodities cause business men in the pursuit of
profits for themselves to discharge more and more of their help be
cause of lack of orders for goods. This “ running-down ” process
continues and increases in proportion to the length of time that fall
ing prices continue. Therefore it is clear that a fall in prices for
commodities taken as a whole is injurious to society.
On the other hand, rising prices for commodities taken as a whole
stimulates production and give to the business men a large profit
at the expense of the people whose wages and other forms of income
do not increase as rapidly as do the prices of the things they must
purchase.
Senator N elson. Y ou should have presented that view before the
tariff bill passed.
Mr. S hibley . This condition is known as “ the high cost of living,”
the condition being that wages do not rise, on the average, as rapidly
as do the prices of the things which the business men sell and the
wage earners must buy. Thus something like nine-tenths of the
people lose through the high cost of living, while the other one-tenth
of the people reap an undeserved profit, due to the increase in the
volume of money and credit which produce the rising prices for
commodities taken as a whole.
The proper thing for the people’s representatives to do is to pro
vide a system whereby the purchasing power of money shall be kept
stable. With such a purchasing power of money year after year
the wage earners would be benefited and the business men would be
treated fairly.
Now that the Department of Labor in the Federal Government
is regularly measuring the purchasing power of money and a national
board will be determining from week to week the interest rate
whereby the purchasing power of money will be determined, the
inevitable result will be that the national board will be compelled to
BANKING AND CURKENCY.
1741
so control the interest rate that it will maintain stability in the price
level.
Senator C rawford. Right there-----Mr. S hibley (interposing). May I not go on?
Senator C rawford. Yes; I will not interrupt you until after you
have finished.
Mr. S hibley . Should the national board take steps that shall result
in a 4 or a 5 per cent rise in the average prices for commodities,
thereby robbing nine-tenths of the people in the interest of the
business public, the result would be that the party leaders responsible
for the action of the national board would be defeated at the direct
primaries, or should that remedy fail the people they would defeat
their enemies at the polls. The direct primary, combined with the
other reforms in the system of government, has placed the people
in power, and this fact, combined with the official measurement of
the price level, insures that after a unified control of the price level
is established in a national board, that board must so act as to main
tain a practically stable purchasing power for money or be turned
out of office.
These facts have not been laid before this committee, I believe,
except as I have done so in Senate Document No. 135, of this Con
gress. But the facts are as I have stated, as anyone can see who
during the past 20 years has been through the campaigns on the
money question. Therefore the advice of the bankers to this com
mittee has been such that if accepted and then be accepted by the
majority in the Senate and by the administration it would result
in their defeat in the forthcoming primaries or in the contest with
the opposing party leaders.
Senator H itchcock. Y ou say the bankers’ advice has been such?
Mr. S hibley . Yes. The advice of the bankers to this committee
has been such that if accepted by this committee there would be such
an inflation that the people would not stand for it.
Senator H itchcock. Because the standard is to-day based on the
commercial paper?
Mr. S hibley . N o, sir; because the quantity is to be large, with no
adequate methods for controlling it.
Senator H itchcock. Y ou are going to set forth how it should be
limited ?
Mr. S hibley . Exactly.
The bankers are principally members of the opposing reactionary
party, and therefore would be delighted to see the progressive Demo
cratic leaders defeated provided the reactionary party leaders should
be placed back in power.
Furthermore, the professors of economics in our American univer
sities who have appeared before you have all advocated that the law
should not place in the people’s Government the control of the pur
chasing power of money. It follows that in proportion as their
advice is accepted the result would be that the bankers would control
the purchasing power of money, which would result either in undue
contraction or undue expansion, depending upon whether their in
terests should be greatest in the trusts and other business affairs or
greatest as creditors, as were the conditions when silver was surrep
titiously demonitized. Whichever course the bankers would take
1742
BANKING AND CURRENCY.
the result would be that the people would be injured and protect
themselves at the next primaries, or failing to defeat there the men
who were responsible for their miseries, would defeat them in the
general election.
That I am not crediting the people with greater acumen and po
litical power than they really possess I refer you to the remarkably
effective nonpartisan campaign for reforms in the system of govern
ment, through the systematic questioning of candidates and the
publication of their replies, so that the voters have been able to pro
tect their interests. That same system can be applied to oust from
office such of the party leaders now in power as shall fail to really
represent the people.
It is clear that I am speaking of an actual political condition and
not a theory. Already 2,000,000 of the wage earners of the country
are organized in a single dues-paying nonpartisan organization, the
American Federation of Labor, which would constitute one of the
strong elements should it become necessary to take action to secure
stability in the purchasing power of money. The day is here when
conditions are such that the people of this country are in a position
to absolutely protect themselves.
Fortunately, too, this Senate committee, the Senate, the adminis
tration and the House of Representatives can be depended upon to
provide the needed stability in the purchasing power of money with
out being forced to do so. The progressive democracy is in power.
Presently I will lay before you proof showing that the progressive
Democrats in the year 1900 declared for stability in the purchasing
power of money and pledged themselves to establish the needed
mechanism. Before taking up this subject, I desire to present fur
ther proof as to the need for Government control of the purchasing
power of money, and the need for placing in operation an effective
system for establishing and maintaining real stability in the pur
chasing power of money.
In outline I desire to lay before this committee the history of the
instability in the price level since 1873 and the causes which pro
duced the fluctuations.
In 1865 an ijiternational monetary conference was held, the coun
tries represented being those of the Latin Union—those using the
franc system—France, Italy, Belgium, Switzerland, and Greece.
A proposal to adopt the gold standard was discussed but was not
carried.
Early in the same year, 1865, the English officials of the Indian
government proposed to close the Indian mints to silver and make
gold the measure of value.
These proposals in Government circles to demonitize silver were
partly the result of the rising flood of gold from California and Aus
tralia, which caused some of the creditor class to fear that the pur
chasing power of money would be depreciated.
In 1867, two years after the international conference of the Latin
Union and of the proposed closing of the Indian mints to silver,
another monetary conference was held at Paris, known as the Inter
national Committee of 1867. Senator John Sherman, chairman of
the Finance Committee of the United States Senate, appeared in
Paris, not as a member of the committee, but, as subsequent events
BANKING AND CURRENCY.
1743
showed, to influence its action toward the demonetizing of silver. He
came there after having visited the headquarters of the creditor class
in London. In a letter written at his hotel in Paris at that time to
our delegate, Mr. Ruggles, of the International Committee, he said:
France will surely abandon the impossible effort of making two standards of
value. Gold coins will answer all the purposes of the European commerce.
(S. Doc. No. 14, 40th Cong., 2d sess., pp. 107-110.)
This letter was presented by our delegate to the Emperor, Louis
Napoleon, and to the International Committee. Shortly afterwards
the Government of France sent out invitations to the several Gov
ernments of the world asking them to appoint delegates to a more
authoritative conference concerning the unification of coins. Dele
gates from 20 Governments met in Paris on June 17, 1867, and con
stituted the International Monetary Conference of that year.
That conference considered and voted not only upon the unifica
tion of coinage but upon the all-improtant question of the volume of
money. The conference voted to adopt—
the exclusive gold standard, leaving each State at liberty to keep its silver
standard temporarily. (S. Doc. No. 14, above referred to.)
This was in 1867.
Thus, delegates who were appointed to plan for coins of like
weight and fineness decided at once that the volume of money should
be largely decreased through the use of gold alone. The conference
did not discuss in public nor for publication in the record of the
proceedings the probable effect of destroying the two-metal stand
ard—bimetallism— and ultimately demonetizing silver, leaving the
world a volume of money made up of gold alone except as supple
mented with paper money.
Thus was accomplished the first great step in one of the most
horrible conspiracies against mankind which the world has ever
witnessed. The subsequent history of the periods of falling prices
for commodities bears out my assertion.
Senator H itchcock. What year do you start ?
Mr. S hibley . 1865 to 1867. In 1867 they declared for the demonitizing of silver. As is usual with conspirators against humanity, the
representatives of the creditor class declared to those whom they
were deceiving that their aspirations were “ enlightened and benevo
lent.” And the concluding remarks at the conference were:
We are all animated by the true spirit of civilization and modern progress.
With this cry they went forward to secure plunder by increasing
the purchasing power of the standard of value; that is, lowering the
general prices of commodities and thereby increasing the value of
credits.
There was no excuse for demonetizing silver, as subsequent events
demonstrated, for it was known that the United States, Italy, Russia,
and Argentina were on a paper basis and would soon endeavor to
get their price levels down to a point where specie would flow in
T
and large quantities of specie be then attracted from the other
countries.
The most hurtful results from falling prices are that they produce
industrial depression, which includes the nonemployment of labor,
strikes, and in many cases real civil war.
1744
BANKING AND CURRENCY.
In 1868, at the meeting of the next Congress of the United States,
Senator John Sherman introduced a bill in relation to the coinage
of gold and silver “ with a view,” the bill recites, “ to promote a uni
form currency among the nations,” but in enumerating the coins to be
minted in the United States the bill stated that “ the coinage of silver
pieces of $1, 5 cents, and 3 cents shall be discontinued.”
Here was the first open attempt to demonetize silver in the United
States. It was in 1868. The bill was reported favorably, and
Chairman Sherman wrote the report urging its adoption, but he no
where raised the question of stability in the purchasing power of
money. Yet two years before in a speech he had declared: “ To con
tract the currency ” is to produce a “ strain upon the people,” and
“ cripple the industry of the country.” (John Sherman’s Recollec
tions, vol. 1, pp. 380, 382.)
In Germany in 1868 at a German commercial convention a resolu
tion was adopted to secure monetary unity in Germany, and upon—
the single-gold standard in pursuance of the principles recommended by the
International Monetary Conference of Paris jo. its report of the 6th of July,
1867. (Silver in Europe, by Horton, p. 238.)
In France the Government appointed a commission to take evi
dence on the money question and report.
Also, in 1868, in Scandinavia, a movement was started to change
their money from silver to gold. (Horton, p. 238.)
In the other nations represented at the conference of 1867 there
was doubtless an active propaganda for the gold standard along the
same line as in Germany, the United States, and the Scandinavian
countries. In 1869 the French monetary commission took evidence
and reported the same year. In the official summary of the argument
set forth by those who wished to demonetize silver, it was stated that
“ the tendency of the two metals is to depreciate.” This false state
ment of fact was not expbsed, although in the testimony before that
French commission there is a statement by M. le Baron de Rothschild
that “ I f we should demonetize silver and our example should be
followed by other nations,” it “ would amount to a veritable destruc
tion of values without any compensation.” (Reprinted in U. S.
Monetary Commission report of 1876, p. 16.)
But this international conspiracy went forward, and as the gov
ernments of the world were in the hands of the unscrupulous few,
who operated by means of “ machine rule” party government, the
people were powerless. The things that took place detrimental to
the public interests were, in brief, as follow s:
In 1870 in England the power of the Crown to reopen the mints
to silver, provided the Privy Council should join in the proclama
tion, was surreptitiously taken away. A bill was brought in to
revise the mint law and the power of the Crown was stricken out,
yet when the bill was up for passage no mention of the great change
was made—at least nothing appears in the debate reported by
Hansard. (Vol. 199, col. 730.) Again, in the house the members were
assured that the object was simply to perfect the mint law; and
the same false statement was made in the House of Lords. The facts
in detail have been stated by Alexander Del Mar and reprinted in
my book, The Money Question, pages 293, 294.
In the United States the same trick was played that had operated
so effectually in the British Parliament. Twenty-four days after the
BANKING AND CUKKENCY.
1745
revised mint law of England was passed John Sherman introduced
in the Senate of the United States a bill of 71 sections compiling fully
all the laws relating to the mint, assay offices, and coinage, and in
one of the sections the silver dollar was dropped from the list of
coins to be struck at the mint. The statements in connection with the
bill concealed the fact.
Senator H itchcock. What year was that?
Senator N elson. 1873.
Mr. S hibley . This was 1871.
Senator N elson. I thought it was 1873. “ the crime of ’73.”
Mr. S hibley . We are coming to that, Senator.
The bill was referred to the committee of which Mr. Sherman was
chairman, and he reported it favorably with an amendment. When
the bill came up in Committee of the Whole no mention was made of
the vital change. On the final vote Senator Sherman voted against
the bill, but he knew it was going to pass, the vote standing: Nays,
14; yeas, 36.
In the House the bill was referred to the committee on coinage,
which reported it back with an amendment in the nature of a substi
tute, and the bill was not heard from again at that session, which
ended seven days later.
That same year in Germany a bill became law which provided for
the free coinage of gold and that large silver coins, corresponding
to our silver dollar, should no longer be minted. The law further
stated that it was the intention to retire in the future the large
silver coins from circulation. Thus the free coinage of silver in
Germany was terminated. The -plan was to retire the silver coins
from circulation as rapidly as possible.
The same year, 1871, a Swedish monetary commission advised the
adoption of the gold standard.
That same year, also, Japan enacted a law giving to gold unlimited
coinage along with silver, but at a ratio such that only gold would
enter the mints.
In the United States this same important year of 1871, in the new
Congress, a revision of the mint law was again attempted; and again
the same trick of dropping out the silver dollar from the list of coins
given free coinage was attempted, but it failed. Hon. Clarkson
Potter, of New York, pointed out that an attempt was being made
to substitute as legal-tender money the “ coin of only one metal in
stead, as heretofore, of two.” (Cong. Rec., 1871-72, pt. 3, p. 2306.)
The opposition to the proposal was so strong that the leaders in
power declared that they would abandon the project and brought
in a so-called substitute which it was attempted to put through with
out being read. It was finally decided, so the Congressional Record
shows, that the bill should be read. It finally became law; but not
until three years later did Senator Colliding, of New York, learn
that the free coinage of silver had been terminated by that law, be
cause at that time the country was on a paper-money basis. The
Congressional Record of March 30, 1876, contains the following
statement by Senator Conkling:
Will the Senator [Bogy] allow me to ask him or some other Senator a ques
tion? Is it true that there is now by law no American dollar? (p. 2062.)
9328°— S. Doc. 232, 63-1—vol 2----- 50
1746
BANKING AND CURRENCY.
Further evidence showing that leading statesmen in the nation did
not know of the demonetization of silver until years after is set
forth by me in The Money Question, pages 302, 303. The President
who signed the bill, President Grant, did not know that the bill
demonetized silver. Proof of this is the fact that eight months
after he signed the bill he wrote a letter to Mr. Cowdrey, which
clearly shows the fact that he did not know that the law for the free
coinage of silver had been repealed. The letter is in McPherson’s
Hand Book of Politics for 1874, pages 134-135.
Two years after the surreptitious demonetization of silver by the
“ machine rule ” Congress of the United States, another Congress of
the same character, representing the people’s enemies and their
oppressors, surreptitiously provided that specie payments should be
resumed in one metal alone, gold. The bill was handled in “ ma
chine-rule ” fashion, there being no hearing and not even an oppor
tunity in Congress itself for the Members to learn what was in the
bill. In discussing the bill Senator Bogy, of Missouri, impliedly
assured the Members of the Senate that both silver and gold were
to be the basis for specie payments in 1879. His words are:
Gold and silver are the only two measures of value, not only here, but
throughout the world.
The balance of his remarks show that he did not know that the
mints were to be closed to the unlimited coinage of silver. (Congres
sional Record, Dec. 22, 1874, p. 200.) The bill was put through the
Senate the same day that the Members received the printed bill.
In the House it was rushed through in two days and the Members
did not know that silver was demonetized. (Congressional Record,
Dec. 23, 1874, Jan. 7, 1875, p. 229.)
This closes my outline of the way the American people and the
people of the entire world were tricked in the demonetizing of silver.
I have stated it for several reasons, first, because a somewhat similar
trick is being attempted here in this Senate committee. The bankers
of the country and their experts are endeavoring, through con
cealment of important facts, to get this committee to consent that
the bankers shall control the 12 banks of issue that are provided for
in this bill. This bill provides that six of the nine members of the
board of directors of each of the 12 banks of issue are to be elected
by the bankers.
This proves that the proposal is that the bankers shall control
the banks of issue that are to regulate the interest rate and put
fortn the paper money, also determine the amount of gold that shall
exist in our circulation, there being, however, a veto power as to
certain matters in the national board which is to represent the
people. But the administration bill has been shorn of important
features by the Democratic House committee. The exact facts in
this connection I will take up in due time in my remarks.
The second reason why I have presented this history of silver
demonetization and the resulting outrage on humanity is to point out
that the larger part of the university professors in economics in Eu
rope sided with the people and told them the facts, but not so in this
country, because our university system was such that the only pro
BANKING AND CURRENCY.
1747
fessors in economics who could hold their positions were those who
sided with the creditor class and the plutocratic government. To
day the same university system prevails, except in Wisconsin and
possibly a few other Western States a declaration for academic free
dom has been made; but not one of the professors of economics in
these universities has seen fit to aid Congress and the administration
in securing for the people the proper solution of the currency ques
tion. I f I am in error, I shall be glad to be corrected. I recite
these facts that this committee may know the exact facts in deter
mining the reliability of the testimony in these hearings.
Now, as to the history of the control of the money market and price
level in the United States by the bankers and foreign Governments,
I invite your attention to additional facts showing the imperative
need for standing by the proposal of the chairman of this committee
and the proposal of the administration, that the people through
their Government shall control the purchasing power of money and
that the aim shall be to promote stability therein.
What I propose is to briefly prove to you just how the purchas
ing power of money in our great country has been controlled by
the powerful speculative banks of the country, except as foreign
bankers and foreign Governments have interfered or as the Presi
dent of our country has interfered.
The daily control of the money market in this country has been in
the powerful speculative banks in New York City, except as inter
fered with by foreign bankers, foreign Governments, and the Presi
dent of the United States. Usually the speculative banks have been
in control of the money market, thereby determining the height of
the price level for commodities and the prices for stock within
narrow limits.
But the great foreign creditor class and the Governments of Eu
rope have put forth lines of policy extending through months and
even years, knowing weeks in advance just what the main plans were,
thereby being in a position to buy and sell stocks and bonds with an
absolute assurance that immense profits would result. In this way
the immense fortunes of the banking class in Europe and the United
States have largely been built up. The basis has been their power
to control the price level in the United States and throughout the
gold-standard world. Herewith is an outline of just what they have
done:
The demonetizing of silver was brought about by the powerful
creditor class, as I have pointed out. The ringleaders were the first
to know where demonetization was taking place, and, accordingly,
they were posted on the forthcoming trend of the price level. What
actually took place in connection with that price level for the years
1873 to date is graphically set forth in a chart that I have had pre
pared showing the price level from 1782 to the present time, which
1 would like to have incorporated in the record.
The C hairman . Without objection, the chart may be inserted.
(The chart referred to is as follows:)
INDEtf
OP PRICE
l-E v e t
ZB
Ot
195
I 85
17S
165
155
145
135
1*5
C h a r t I . — H i s t o r y o f c h a n g e s i n p u r c h a s i n g p o w e r o f m o n e y , 1 7 8 2 —1 9 1 2 .
[T h is h is t o r y s h o w s th e im p e r a tiv e n e e d f o r s t r ic t c o n t r o l o f th e v o l
u m e o f p a p e r m o n e y a n d o f b a n k c r e d it s .
T h e p la n p r o p o s e d in th e
D e m o c r a t ic b ill m e e t s t h e s e r e q u ir e m e n ts .
U n it e d S t a t e s G o v e r n m e n t fig u r e s f o r w h o le s a le p r ic e le v e l, 1 8 6 0 t o
1912.
P r o f . J e v o n s ’ s fig u r e s , 1 7 8 2 t o 1 8 6 0 .
T h is c h a r t is c o n t in u e d o n
n e x t p a g e .]
PER
INDEX
/Q€0
c a p i t /HOF PRICE
LEVE L
c ir c u
l a tio n
£lsx
2 . £.50
0
fin 2£JS
JO Q
S .& O
j LZ1
£0
vJQ f.*ro
Z£X
L£5
10.
KQ65
1970
IS 7 5
/8 8 0
>883
/8 9 0
>895
>900
/9 0 3
>9/0
|9/5
Ch a r t I— C o n tin u e d .
O b s e rv e t h a t w it h
a d e c r e a s in g
v o lu m e o f m o n e y th e r e a r e fa llin g
p r ic e s .
T h is r e s u lts in a d is o r g a n i
z a tio n o f p r o d u c tio n a n d tr a d e , a s
is e v id e n c e d b y a s h r in k a g e in b a n k
c le a r in g s a n d a n in c r e a s e in b a n k
r u p tc ie s .
B u t w it h
an
in c r e a s in g
v o lu m e o f m o n e y th e r e a r e r is in g
p r ic e s a n d s tim u la tio n o f p r o d u c t io n
a n d tr a d e ; h o w e v e r , it is in ju r io u s
t o v a r io u s g r o u p s in s o c ie t y .
The
id e a l is s t a b ilit y in t h e p r ic e le v e l,
a n d s u c h is t h e p la n in t h e D e m o
c r a t ic b ill.
17 4 8
BANKING AND CURRENCY.
This chart shows that there took place in the United States from
1865 to 1897 a terrific fall in the price level, except as occasional let
ups were brought by the bankers in Europe, whose action I will now
proceed to describe.
The policy of contraction was pursued by the ruling power in
Europe until the year 1879.
Senator R e e d . What year?
Mr. S h ir ley . 1879. At that time the people in the United States
had become so aroused and so wise as to the cause of the depression
that the foreign bankers saw that there would have to be a temporary
let-up or the people would get control of the Federal Government.
Accordingly, during 1879, the Imperial Bank of Germany began
inflating with paper money, as also did the Bank of France; and
these two national depositories reduced their coin reserves, as did
the Bank of England.
The amount of these reductions in the gold hoards is stated in the
New York World, December, 1879, at $104,000,000, and the paper
circulation in Germany and France increased $72,000,000.
Senator H itchcock . H ow could the Bank of England reduce these
reserves by reducing their interest?
Mr. S h ib l e y . The reserve was lower.
Senator H itchcock . The notes are issued against the gold, and
the only way she could reduce her reserve wrnuld be to lower the rate
of interest.
Mr. S h ir ley . It might be that way, or it might remain stationary.
But the gold reserve was reduced to the amount of $104,000,000, and
paper money was issued to the extent of $72,000,000.
The price level in Germany for the last six months of 1879 rose
3 per cent on the average (Soetbeer’s Table of Prices; for the same
period of time the average of prices in England rose 2 per cent
Sauerbeck’s Table of Prices), and gold flowT to the United States.
ed
During the last five months of 1879 the amount of gold poured into
the United States was $78,000,000 (Appleton’s Annual Cyclopedia
for 1879, p. 370), while for the preceding year the net amount of
gold imported into the United States had been but $1,000,000.
With this increase in the volume of money in the United States,
combined with the increase from the silver purchase law of 1878,
the price of products rose, and with rising prices there came, as
usual, prosperity to the producing classes.
Senator W eeks . D o you not think the shipments of gold to the
United States at that time were to make effective the resumption
of the specie payment act, and that our Government had nothing to
do with the bringing in of that gold?
Mr. S h ir ley . Our Government had nothing to do wdth the reduc
tion of the gold reserves in Europe and the issuing of paper money
in Europe.
Senator W eeks . It had to come from some place, and they had to
supply the circulation.
Mr. S h ib l e y . The European bankers and Governments raised the
price level of the gold-standard world by reducing the gold reserve
and issuing paper currency, and the result was an inflation of bank
credits and a rise of prices, just as is shown in the Table of Average
Prices.
BANKING AND CURRENCY.
1749
Senator Crawford. I agree with you in this, that gold is an inter
national money, and an international standard of value, but, unless
we abandon our basic money, how in the world is a reserve board
going to control the value of the international money standard of
the world, especially when we are an exporting Nation, and the
price of our commodities is fixed largely by the foreign markets?
There you have commodities sold at the prices fixed, world-wide,
and you have an international monetary standard prevailing every
where; and how in the world is a reserve board going to fix the
control of these prices as expressed in this international monetary
standard?
Mr. Siiibley. I have shown you how the foreign Governments of
Europe have been controlling it, controlling the volume of money,
and our proposed national board, if given sufficient authority, can
maintain stability by retiring paper currency whenever necessary and
make a place for gold. We can do for the world of our day what
France did for the world under bimetalism. We should so control
the volume of money as to maintain stability.
Senator Crawford. But you say that France and Germany and
England played the game and sent gold over here at this critical
period, but I do not see, if they were so committed to it, how, if such
a theory can be maintained, that they pursued an opposite course
in establishing paper-money value.
Mr. Shibley. 1 have said that in 1879 the people of the United
States were about to get control of their Government, unless falling
prices and depression should be terminated, and the creditor class
set about to protect themselves, and they succeeded.
The Chairman. I think you had better proceed.
Mr. S h ib le y . In the national election of 1880 the candidates of
the party that championed the system under which the falling
prices had occurred were elected. The party which had fought
against the falling prices of the preceding years was defeated, and
the following reason for it was assigned by President elect Garfield
in a letter to John Sherman:
The distrust of the solid South and the adverse financial legislation have
been the chief factors in the contest. (John Sherman’s Memoirs, p. 789.)
In France and Germany there was the usual prosperity which
results from an increasing volume of money and rising prices. But
the bankers and the other beneficiaries of fluctuating prices and
falling prices so controlled the press and other sources of knowledge
that the people were led to believe that the cause of the prosperity
was the recently enacted protective tariff, whereby the prices of
agricultural produce had been raised. These protective duties in
France and Germany had been levied to appease the land-owning
element, and the people were led to believe that the falling prices
of the preceding years were due to competition and not to a decreas
ing volume of money.
In England, with its free-trade policy, a different excuse was
foisted on the public.
During the three years 1879 to 1882, inclusive, the per capita
circulation in the United States increased 40 per cent. (U. S. Sta
tistical Abstract.)
1750
BANKING AND CURRENCY.
Senator Reed. During what period was that?
Mr. S h ib l e y . From 1879 to 1882.
Senator H itchcock . What was the increase?
Mr. S h ib le y . Forty per cent in three years. I refer to the United
States Statistical Abstract for the figures.
But the prosperity for the producing classes was short lived, for
in Europe paper money was withdrawn and the gold hoards were
increased. The dominant power in Italy and other European coun
tries purchased gold for use as money. This contracted the volume
of money and tended to produce falling prices and hard times. The
Bankers’ Magazine, of New York, for July, 1884, in an editorial on
“ The monetary circulation ” set forth that for the year the increase
in monetary circulation within the country had been only $10,000,000.
whereas the expansion of population was such as to call for at least
$40,000,000, if the price level was to be maintained.
Falling prices continued throughout the gold-standard world.
Commissions on the depression of industry were appointed. In
England such a commission reported to Parliament in 1886 and
called attention to the falling price level and the broken par of ex
change with silver-using countries, and asked that a special commis
sion be appointed to examine into the matter.
Senator R eed. Did it occur in England at the same time it oc
curred here?
Mr. S h ib le y . At the same time, for the gold standard of prices
is international. In England a gold and silver commission was ap
pointed. It began taking evidence November 12, 1886, and the bene
ficiaries of falling prices were not slow in recognizing that something
must be done to relieve the depression for a time or the public would
demand a change in the monetary system. Accordingly the volume
of money in Europe was so increased that for 1887 the net import
of gold into the United States was $33,209,414, whereas for the pre
ceding year the exports of gold from the United States had exceeded
the imports by $22,208,842. The rise in prices in the United States
for 1887, averaged seventh-tenths of 1 per cent. The next year the
net import of gold into the United States was $25,558,000 and the
rise in general prices was 1£ per cent. In England the rise in general
prices for 1888 was 3 per cent, and probably about the same in the
other gold-price countries.
The effect of rising prices was to again set in motion the wheels
of industry in all the gold-price countries.
During 1893 and 1894 there were severe falls in the price level,
with a proportionate disorganization of industry. This disorganiza
tion in the autumn and winter of 1894-95, caused by stringencies in
the money market, was brought about by those who were attempting
to secure the retirement of the greenbacks and place in the bankers
greater power to issue the paper currency.
But the efforts to retire the greenbacks were unsuccessful; and, in
order to stem the rising tide of discontent with the falling prices
and hard times and the growing favor accorded to the remedy of
free silver, there was in Europe an inflation of the volume of money
and credit and a partial restoration of prices throughout the goldstandard world.
In the contract with President Cleveland for gold it was agreed
that $31,000,000 in gold should be imported and no gold exported
BANKING AND CURRENCY.
1751
before October, at which time it would be needed to move the crops,
and shortly afterwards the German Government began issuing paper
money through the Imperial Bank, reduced its coin reserve, and ex
panded its credits. In this way the German Government increased
the volume of money in use $101,000,000 by October 1; credits were
expanded in all countries and, of course, prices rose. In England
the rise in prices of products averaged 5 per cent, and in the United
States from January 1 to July 1 the rise was 8 per cent.
But the restoration of good times for the producing classes did not
last over the presidential election, owing to the action of the Russian
Government. About July 1 it reached out and at one fell swoop took
from the market $79,000,000 in gold and placed it in its war chest.
The “ shiver
which this produced throughout the entire goldstandard world is chronicled in the daily press. The rise in prices
was checked, and they began to fall in October and continued fall
ing, with only slight reactions, all through the ensuing months and
up to the presidential election. Owing to the falling prices and
hard times the representatives of the producing classes were able
to capture the Democratic organization and make a fight against
contraction and falling prices. So close was the contest that a change
of 20,000 votes properly distributed would have elected their presi
dential nominee, William Jennings Bryan.
During the year 1890 and the first six months of the following
year the Governments of western Europe, Russia, and the United
States withdrew from circulation more than $200,000,000, thus more
than offsetting the increase in the volume of money from the gold
mines. As the population of the world was increasing and the vol
ume of money did not increase prices continued to fall. But the in
dustrial conditions were again so “ hard ” that a measure of pros
perity had to be restored to the producing classes or the Govern
ments would pass into the hands of their representatives.
Accordingly we find that gold hoarding in Europe practically
ceased, thus permitting the stream of new gold to increase the vol
ume of money. At the same time the output of gold increased
throughout the world and these facts, together with the gold dis
coveries in the Klondike, led people to believe that falling prices
were stopped for a time, and that the usual inflation of credit and
prices would follow. And such was the case.
During all this time the people of the United States and of the
other great countries were practically helpless, for there was almost
no self-government by the people, although men voted, the will of
the voters being defeated through a system of machine-rule party
government.
I desire to place in the record a chart prepared by Prof. John R.
Commons, and published in 1900 by the Bureau of Economic Re
search. It shows in graphic form how, during the years 1891 to
1894, inclusive, the European absorption of gold was such that not
only was there nothing for the United States from the gold mines
but that even some of the gold we then had was taken from us. Then
the European bankers and governments changed their policy so that
the circulation in the gold-standard world received accessions from the
mines and prices rose and industry was stimulated.
BANKING AND CTJRBENCY.
1752
The C h a i r m a n . Without objection, the chart to which you referred
will be put into the record.
(The chart referred to is as follows:)
Ch
G
old
P
roduct,
art
II.
Eu r o p e a n A b s o r p t
S urplus
Po u r - Y e a r P e r i o
io n
aad
Av e r a g e s
tor
WORLDS PRODUCT
m m rn m m
d s
.
1887
E R P A ABSORPTION
UOE N
TO
SURPLUS
1890
W3RLD5 PRODUCT
1891
tm tm AB50RPTI0M
5URPLU5
i
1894
H
1895
WORLDS PRODUCT
E B P A ABSORPTION
UDC N
TO
____________ 1
TO
1898
SURPLUS
.
NOTE IN CONNECTION W I T H C H A R T I I .
1. 1 8 8 7 - 1 8 9 0 .— During the four shears ending with 1890 the gold product of the
world averaged $115,000,000 per year. Of this amount Russia, Austria-Hungary,
France, and Germany absorbed, through home production and net imports,
$25,000,000 per year, leaving $90,000,000 per year, or $360,000,000 f o r f o u r y e a r s ,
f o r th e a rts a n d o th e r co u n tr ie s.
2. 1 8 9 1 - 1 8 9 ) .—During the four
,\
years following 1890 the world’s average prod
uct of gold had increased to $154,000,000 per year, b u t t h e s e f o u r c o u n t r i e s i n
c r e a s e d t h e i r a b s o r p t i o n m o r e t h a n s e v e n f o l d , reaching the average of $180,000,000 per year, t h u s t a k in g n o t o n l y t h e e n t i r e p r o d u c t o f t h e p e r i o d b u t
$26,000,000 p e r y e a r i n a d d i t i o n . This not only left nothing for the arts,
which therefore had to draw from the world’s stock, b u t a l s o d r a i n e d $100,000,000 IN FOUR YE A R S FROM O TH ER COU NTRIES.
EFFECT IN U N ITE D STATES.
This extraordinary absorption of gold by these continental countries e x p l a i n s
th e lo ss o f g o ld b y th e U n ite d S ta te s , a lo ss w h ic h w a s o ffe r e d a s a n e x c u s e f o r
r e p e a lin g th e S h e r m a n A c t , w h i c h
w as
a d d in g
to t h e
volum e
of
m oney,
whereas, in the first period, 1887-1890, above mentioned, the United States im
ported $80,000,000 net and produced $130,000,000, m a k i n g a n e t a b s o r p t i o n o f
$210,000,000, yet in the i>eriod 1891-1894 the United States exported $160,000,000
net and produced $140,000,000. s u f f e r i n g a n e t l o s s o f $20,000,000. The net ex
ports were about equal in amount to the Treasury notes issued under the Sher
1753
BANKING AND CURRENCY.
man Act. Had this gold, when it went abroad, gone into circulation, it would
have increased the money supply of Europe, and would have kept up gold
prices, just as was done by American gold in 1861-1865, when driven to Europe
by paper money at home. As soon as prices had risen, this would have checked
the export of gold from this country. B u t , i n s t e a d , t h e g o l d i v e n t o u t o f
c ir c u la tio n ,
b e in g
absorbed
by
th e
three
l e a d in g
E uropean
pow ers,
and
15 t o 23 p e r c e n t i n six y e a r s . There was a scarcity of
gold, because these four countries took not only the entire gold output, but also
a large part of that exported from the United States, and locked it up in war
chests and treasuries or substituted it for paper money. Russia alone, in 10
years ending 1897, took $500,000,000 in gold and destroyed $500,000,000 of her
paper money. Austria also displaced paper with gold, and France, Germany,
and England, in order to protect themselves, increased the gold reserves in
their State banks far beyond what nad been known before. From December,
1889, to December, 1897, the gold held by the five State banks of the leading
countries increased from $830,000,000 to $1,382,000,000, an increase of $550,000,000. At the same time notes and deposits increased from $2,312,300,000
to $2,548,900,000. an increase of only $236,600,000. In other words, while in
1889 the gold reserves of the five State banks amounted to 3 6 p e r c e n t o f t h e
n o t e s a n d d e p o s i t s , in 1897 the gold reserves had been increased to 54 p e r c e n t
o f th e n o te s a n d d e p o s its .
The greater part of these increased gold reserves
was. therefore, just so much extracted from commercial use and in effect repre
sented to that amount a c o n t r a c t i o n o f t h e w o r l d 's c u r r e n c y .
Beginning in 1897 exactly the opposite movement occurred:
3.
1 8 9 7 - 1 9 0 0 . — In that year Russia finally adopted the gold standard and
began paying out gold for paper. She continued, indeed, her heavy importa
tions into the country, but the gold in her treasury fell off $300,000,000 from
December, 1S97, to September, 1899. Altogether the gold held by the five
principal banks decreased $164,000,000 in the 21 months from December, 1897,
to September, 1899. T h i s is e q u i v a l e n t to a n i n c r e a s e i n t h e w o r l d 's a v a i l a b l e
g o l d s u p p l y o f $ 9 5 ,0 0 0 ,0 0 0 p e r y e a r .
During this year the notes and deposits
remained practically stationary, and the ratio of gold reserves fell from 54
per cent to 44 per cent.
At the same time a new factor appeared and began to augment still further
the gold supply. This was the enormous increase in the world’s production of
gold. The product of 1897 was double that of 1890; the product of 1898 in
creased $50,000,000 above that of 1897; and the product of 1899 amounted to
about $315,000,000, which was an increase of $200,000,000 per year above the
average product of 1897 to 3890. This astonishing production of gold, coupled
with lessened absorption by the four continental countries, left a large surplus
for other countries. The surplus in 1895 was $125,000,000, whereas there had
been an average deficit of $26,000,000 for the four years preceding. The surplus
in 1896 was $90,000,000; in 1897, $80,000,000; in 1898, $203,000,000. The average
surplus of these four years (1895-1898) was $124,000,000 per year, against an
average deficit of $26,000,000 per year for the preceding four years. ( See Chart
II.) This explains the absorption of gold by the United States, which in 1897
was $102,000,000 and in 1898 $169,000,000, against a loss of $26,000,000 in 1896,
and a loss of $160,000,000 in the four years from 1891 to 1S94.
gold
p r ic e s
fell
However, in the trust era of 1897 to the present time the restric
tions were such that the wages of the people did not increase as
rapidly as the price level rose, and the result was that real wages
were lessened, with a corresponding increase in the profits of the
business men.
Senator P omerene . I s the Prof. Commons to whom you have re
ferred Prof. Commons, of Wisconsin University?
Mr. S iiib le y . Yes, sir. That is “ the high-cost-of-living ” problem.
The causes of the high prices are largely the rising price level plus
the trusts and the monopoly tariff. The tariff has been satisfactorily
dealt with by the progressive democracy, and now the currency law
should provide for stability in the price level so that the wages of
the country can catch up and become normal. That condition ought
to be attained during the coming two years. I f the Democratic
1754
BANKING AND CURRENCY.
leaders fail, then they should be turned out of power and another
set of progressive leaders be placed in charge of the Government.
The people are patiently waiting to see what the leaders in power
will do. The extortions from the high cost of living are being en
dured patiently, but if relief is not forthcoming the voters will make
a change.
Senator N elson . Could we reduce the cost of living by reducing
the volume of currency?
Mr. S h ib le y . We have to maintain stability, whatever may be
required. At times it will mean expansion and at times contraction.
Senator C r a w f o r d . D o you propose to change this basic gold b}'
putting more grains of gold into it?
Mr. S h ib l e y . I am coming to that in just a moment. I am going
to deal with that.
In tracing the control of the price level in the United States by
the foreign bankers and foreign Governments plus the increase in
the output from the gold mines w e had reached the year 1900. On
^
March 14, 1900, a law was enacted by the trustocracv providing for
an immense inflation by paper money on top of too much gold.
Up to that time the creditor class had been a balance of powT in
er
the “ machine-rule ” party government of the United States and so
had prevented the passage of any law tending to increase the volume
of money and thus depreciate the purchasing power of debts.
Senator R eed. What is that law you referred to?
Mr. S h ib l e y . The law of March 14, 1900; the law which produced
$500,000,000 of bank paper on top of too much gold. It is called the
gold-standard law by its friends.
Senator N elson . I did not understand it provided for the issue of
more paper currency.
Mr. S h ib l e y . $500,000,000 came out under it, as I will now de
scribe.
Senator N elson . That was under the silver-purchasing act.
Mr. S h ib le y . It was under the law of March 14, 1900, which is
sometimes called the gold-standard lawT Six -weeks after that law
.
was passed I went into the Wall Street district and asked the bankers
how much expansion would come from this law, and they told me.
“ Well, it may be $100,000,000 or it may be $500,000,000.”
Senator N elson. The paper was issued on the basis of silver
dollars?
Mr. S h ib l e y . The money I am referring to is bank notes.
Senator H itchcock . It made it more advantageous for national
banks to issue their notes?
Mr. S h ib le y . Yes; and they issued $500,000,000 on top of too much
gold.
Senator H i t c h c o c k . The law raised the percentage from 90 to 1 0 0 ?
Mr. S iitbley. Yes: and I will show you that while the trustocracy
was doing this the progressive democracy declared for stability.
I was showing how the creditor class were under foot in 1900.
Under the trust development a new era was reached, and the credi
tor class was ousted from its being a balance of power, and inflation
was provided for, even though the volume of gold was sufficient. The
great difficulty, however, was that a temporary recession of prices
had set in and the bond-secured currency could not be made elastic
in volume. Accordingly provision was made for a large increase in
BANKING AND CURRENCY.
1755
the volume of bank money. I use the term “ bank money ” advisedly,
for the so-called national-bank notes are real paper money, being a
legal tender for certain purposes, and I now quote the exact words
of the statute, that they may appear in the record. The wording is
as follows:
The notes shall be received at par in all parts of the United States in pay
ment of taxes, excises, public lands, and other dues to the United States except
duties on imports; and also for all salaries and other debts and demands
owing by the United States to individuals, corporations, and associations within
the United States except interest on the public debt and in redemption of the
national currency (R. S., sec. 5, 1S2).
also every national bank is compelled by law to accept those nationalbank notes. (R. S., sec. 5, 195.)
Senator N elson . Were the notes issued by the national hanks
notes issued in place of the silver-----Mr. S hibley (interposing.) No.
Senator N elson . The only increase, as I recall it, was that instead
of allowing them to issue on 90 per cent of the par value of the
bonds they allowed them to take out an issue up to the full par value.
That is my recollection.
Mr. S h ib le y . Exactly. And so the volume of paper money in
creased from about $250,000,000 up to $759,000,000, on top of too
much gold.
Senator H itchcock . D o you recall whether, under the last law
passed about a year ago, the national-bank notes may now be re
ceived for customs and taxes?
Mr. S h ib le y . I believe not.
Senator H itchcock . Certified checks can be used.
Mr. S h ib l e y . Might not that be as the result of an order of the
Treasury Department ?
Senator H itchcock . No; Congress passed an act amending the act
which made gold only receivable, and provided that certified checks
should be made receivable, and I thought, probably, bank notes had
been included.
Mr. S h ib l e y . I can not say.
Senator H itchcock . I am not sure that it is so; I am asking you
about it.
Mr. S h ib l e y . This paper money of which I am speaking was
issued by the “ machine rule ” party government, and presented,
almost as a gift, to the private corporations known as national banks,
and these private interests have not even been obligated to redeem their
paper money in gold, merely redeeming it in the paper money issued
by the Government. This is on a par with the Government’s action
in supplying to these private corporations, free of charge, millions
and millions of Government deposits, which when borrowed by the
people have borne interest.
Senator H itchcock . Y ou realize that under the practice all bank
notes are redeemed at the Treasury and are redeemable in gold or
legal tender?
Mr. S h ib l e y . The law says they shall be redeemable in lawful
money and can be redeemed in the paper money of the Government.
No gold redemption has been obligatory under that language.
Senator H itchcock . The statistics show that 87 per cent of the
national-bank notes are redeemed every year at the Treasury.
1756
BANKING AND CURRENCY.
Senator S hafroth . $600,000,000 last year.
Mr. S h ib l e y . In lawful money—paper money, redeemed in paper
money. I am quoting the law which gave them the power, and did
not even compel them to redeem it in gold.
But this has been done only by the “ machine rule ” party govern
ment, which was turned out of office in the elections of 1910 and 1912,
and the people’s interests are being worked for by the present Gov
ernment, which has reduced the tariff, is charging 2 per cent interest
for the Government’s money that is deposited with the banks, and
now in the bill before us there is a plan for stabilizing the purchas
ing power of money. I have quoted the provision for stability. In
a moment I will prove that this proposal for honesty in the monetary
system is not a new idea with the Democracy. I will do this after
I have pointed out that the $500,000,000 inflation in paper money
from the act of March 14, 1900, and subsequent acts, is one-twentieth
of all the money in the gold standard world, and, therefore, the effect
has been to raise the price level in the gold standard world about
one-twentieth, or 5 per cent. In other words, the price level has been
unjustly raised 5 per cent. This sly shifting of the purchasing power
of the standard of value has been by the political leaders who, when
the creditor class was in power served them, and prevented the people
from putting a stop to the falling prices.
The evil effects from the 5 per cent depreciation in the purchasing
power of money can be traced in outline.
Senator C rawford. D o you think this inflation has been unduly
favorable to the debtor class?
Mr. Shibley. The inflation?
Senator C rawford. Yes.
Mr. Shibley. Certainly.
Senator C rawford. Y ou think it has been unduly favorable to the
debtor class?
Mr. S h ib le y . I do.
Senator C rawford. Y ou think that in the earlier years the credi
tors got more than they should have had out of monetary legislation,
and then later on, with this inflation, the debtor class was unduly
favored ?
Mr. Shibley. The political power shifted under the development
of trusts. The trusts got what they wanted, and they got more
money. They wanted prices for commodities to go up, and they did
go up.
Tracing, in turn, the effect of the 5 per cent depreciation in the
purchasing power of money, the $1,000,000,000 of national bank
capital was depreciated 5 per cent, or $50,000,000. As between
debtors and creditors as a whole in the United States, the unjust
shifting of the purchasing power of the standard of value amounted
to hundreds of millions of dollars, being a legalized robbery. Taking
the entire gold-standard world as a whole, the extent of the unfair
loss is almost unthinkable.
One of the worst results has been as to life insurance. In the
United States along there is something like $28,000,000,000 of life
insurance, laboriously paid for for the use of the families when the
bread winners shall have passed on. The 5 per cent inflation by the
trustocracy took from it 5 per cent of its purchasing power, amount
ing to $1,400,000,000—this was taken from the widows and orphans.
BANKING AND CURRENCY.
1757
This huge sum was 1.4 times the immense war indemnity which
Germany wrung from the entire French Nation. This for the
United States alone.
Also, this 5 per cent inflation has robbed every man, woman, and
child, and youth who has been earning wages. In this trust era,
with artificial restrictions on every side, the wages have not gone up
as rapidly as have the prices of the things which the wage earners
have purchased. This is the “ high cost of living ” problem. Living
has been and is high as compared with incomes. The losses to the
wage earners of the United States from the 5 per cent inflation have
averaged something like 1 or 2 per cent of the wage earners’ incomes,
probably, and this sly taking from the workingman’s pay envelope
has been going on for years, amounting in all to possibly a billion
dollars for the United States alone. Through the inflation law the
trust magnates unjustly transferred to themselves and to the other
business interests a tremendous sum.
I have been speaking about the paper-money inflation in this
country since March 14, 1900. I f we consider the entire inflation
since 1897 the losses to the wage earners of to-day is doubtless from
10 to 20 per cent of their incomes. That is the principal part of the
high cost of living as compared with incomes. The incomes have
not climbed as fast as has the average of prices for commodities due
to inflation.
In England, in a report just issued by the Government on the
“ Working-class rents and retail prices,” it appears that since 1905
wages in England have risen on the average only about one-half as
much as have the cost of the things the wage earners purchase.
Thus undue inflation through the volume of money robs the wage
earners. This subtle system of robbery is one that the Congress of
the United States can effectually guard against by simply inserting
in the forthcoming law the rule that the aim of the monetary boards
shall be to promote stability, and then providing them with sufficient
authority to retire paper money.
Senator C rawford. Then England has been on an inflation basis?
Mr. S h ib le y . Yes; but England and the European countries have
been helpless, because they have had to keep gold as a weapon of
war. They have to get all the gold they can and hold it. The
most they can do is to take to themselves just as much gold as they
can get, and keep things while so doing as staple as possible. We,
being away from the armed camp of Europe, can provide for stabil
ity, because one-third of all our money is paper, and if this bill will
provide that enough paper money shall be retired to maintain sta
bility. we can maintain it.
During the past 16 years the losses to the wage earners of the
United States through inflation has amounted to billions of dollars,
a sum so large that one can scarcely comprehend it.
The ones who got what the wage earners lost were the people who
composed the business public, the ones who have been receiving
profits. Profits in business enterprises have been increased by the
unseen shifting of the standard of value. A trick, part of which
was intentionally brought about by the trustocracy through the bankmoney inflation. The $500,000,000 inflation has robbed the wage
earners of probably twice or three times that sum, and the benefici
1758
BANKING AND CUBEENCY.
aries of life insurance have been slyly robbed of about $1,500,000,000.
In othe^ words, for each dollar of inflation the widows and orphans
have had filched from them three times as much, and it has gone into
the pockets of the business world, while the wage earners and all
others with practically fixed incomes have been robbed of probably
$6 for each inflation dollar. The gold standard world outside of the
United States has been equally wronged.
I want to add right here that Prof. Jevons, of England, a very
conservative man, said that the great trouble has been paper-money
inflation. He pointed out that when countries at war issued paper
money in large quantities, they thereby drove metallic currency out
of the country. We have been having the greatest trouble in the
world from inconvertible paper money, followed by the retirement
of enough of it to draw in large volumes of specie. Thus, through
the alternate issuance and retirement of paper money, the greatest
sudden changes in the volume of money have been brought about.
The only proper way to do, now that a gauge for measuring the
price level has been developed, is to use the gauge, and so control
the volume of paper money in combination with the gold standard
as to promote stability in the purchasing power of money. There
ought not to be any attempt to automatically regulate the price level,
as has been proposed to this committee.
Senator R eed. Y ou do not take any stock in the automatic busi
ness?
Mr. S h ib le y . It is absolutely useless except as a limitation. Ger
many has something like 60 per cent gold reserve. France has more
than 50 per cent, and the aim is to keep all the gold they can get, and
when Germany tried to keep 33;\ per cent, under the law of 1876,
the time came in 1907 when she was unable to keep that, and be
cause she had fixed a limit she went off the gold standard tempora
rily, and was an outcast in the eyes of the world.
Senator C rawford. Y ou charge that for a long series of years,
down to 1900, the Government, with a sort of sinister purpose in
view, legislated in favor of the creditor class?
Mr. S h ib l e y . Exactly. Within the “ machine rule ” party gov
ernment the creditor class was the balance of power.
Senator C rawford. Then the Government turned around in 1900,
with a similar sinister purpose in view and legislated for the pur
pose of aiding the debtor class?
Mr. S h ib l e y . The trusts became the controlling power, and the
principal aim, I believe, was to stimulate business and increase busi
ness profits.
Senator C rawford. That is, the Government switched over and
changed its exploitation, and directed it against the debtor class?
Mr. S h ib le y . The trust element was so strong that it controlled
the Government, thus assisting the creditor class.
Senator N elson . The trusts ousted the creditor class?
Mr. S h ib ley . Yes, sir.
Senator N elson . That is strange; they are always supposed to be
on the other side.
Mr. S h ib le y . They are supposed to be. The creditor class was
ousted in 1900 by that law.
BANKING AND CURRENCY.
1759
Senator N elson . I have looked through that law and the only infla
tion I can see in that law is that it allowed the national banks to
issue currency up to the par value of the bonds. Before that it had
been only 90 per cent. Is there any other inflation provided in
that law?
Mr. S h ib le y . I can not say without examining the law ; and I
simply point to the bill and the ensuing results. At present there is
about $759,000,000 of bank money.
Senator R eed. You hold that having given the banks the right
to issue 100 per cent instead of 90 per cent, that that changes the
situation in this way; that whereas they could not make much money
by issuing 90 per cent, and therefore only issued the small amounts,
that when that additional 10 per cent was added, then the whole
issue became profitable and they issued the entire amount?
Mr. S h ib l e y . That is my understanding.
Senator Reed. They tied up no part of their capital in doing it,
so that is was not an addition merely of 10 per cent, but by adding
the 10 per cent to their privilege, they then exercised the entire
privilege, which previously they had not.
Mr. Shibley. That is my contention.
Senator N elson . A s a matter of fact, the national banks have
never issued all the circulation that they are entitled to.
Senator R eed. I think that is true.
Senator N elson . I f you will look up the statistics, you will find
that the smaller banks have, to a large extent, issued up to their
capital—that is, the limit—while the great city banks in the reserve
cities have only issued a limited amount. That is my understanding.
The Chairman. That is correct.
Senator H itchcock [reading]. The national bank gold circulation
up to 1899 had increased slowly to $237,000,000 annually. It was
smaller at that time than it had been 15 years before, but the next
year it increased to $300,000,000, and the next to $345,000,000, and
two years later to $399,000,000, and the next year to $433,000,000,
and the next year to $480,000,000, and in 1909 it was $665,000,000.
Evidently something had happened in the way of legislation.
Senator Pomerene. From what w
rere you reading?
Senator H itchcock . From the National Monetary Commission’s
report, page 158.
The C h a i r m a n . With the permission of the committee, I will
state that a bank with which I was connected telegraphed to the
Hanover National Bank to buy $100,000 worth of 2 per cent bonds on
our account, and then to take those bonds to the Comptroller of the
Currency and get a like amount of our funds in bank notes. The
result was we acquired $100,000 of bonds and paid for them with
bank notes, and thereafter we collected interest without having in
vested anything except a premium of 2 or 3 per cent.
Mr. S h ib le y . That is an illustration of how it works; of what
takes place.
Senator W eeks . The issue of bank circulation is very largely de
pendent on the profits which the bank can make out of that circula
tion. When they had to put it into a bond bearing the rate of 2
per cent, and only got 90 per cent back, there w as no profit in the
T
circulation. When they were permitted to issue 10 per cent more
9328°— S. Doc. 232, 63-1— vol 2------51
1760
BANKING AND CURRENCY.
circulation, or as much as they put in, then there was a profit in
circulation, and that is one of the reasons; other things have con
tributed, but that is one of the reasons why national-bank circula
tion has increased, because there has been at all times some profit in
circulation, or an issue on circulation.
The Chairman. That is the reason.
Senator H itchcock. Your argument, Mr. Shibley, is that if the
national-bank circulation showed this enormous increase because it
was profitable for banks to operate through it, then under the pend
ing bill it is profitable to discount notes, and we will also have an
other inflation of currency from that source ?
Mr. Shibley. Unless there is a provision in the law directing the
national board to retire paper money as fast as necessary.
Senator Reed. Y ou then hold that there is no such thing as an
automatic regulation; that there has to be a human regulation ?
Mr. S h ib l e y . Absolutely.
Senator Reed. And that regulation must be wise and prudent at
all times?
Mr. Shibley. Exactly.
Senator N e l s o n . Can y o u describe the methods and how we can
do that bv statute?
Mr. Shibley. I will show how this committee can frame a mecha
nism whereby stability in the price level can be maintained.
Senator Nelson. Y ou can show how by statute we can get good
men, but you can go no further.
Mr. Shibley. We will see presently.
In speaking of this question of possible inflation under the bill
before you, I will say that that is a situation we must face. The peo
ple of this country are patiently waiting for the party in power to
remedy the high cost of living, and the only way to do it is to main
tain stability in the purchasing power of money so that wages can
catch up. That is the situation.
For the progressive Democracy of the year 1913 to provide for
stability and honesty in this standard of prices will not be a new
thing for the party. In the year 1900, after there had been three
years of rising prices and it was evident that the volume of gold
would continue to increase, the national Democratic convention re
affirmed its demand for stability in the purchasing power of money
by saying:
We reaffirm and indorse the principles of the Democratic platform adopted at
Chicago in 1896.
Carefully note the wording, “ We reaffirm and indorse the prin
ciples of the Chicago platform,” which is that stability in the pur
chasing power of money should prevail. In 1896 there existed non
employment and distress, due to falling prices, and the remedy,
manifestly, was more money.
Beginning in 1897 the volume of money increased rapidly, and
then in 1900 the Democratic Party reiterated the principle battled
for in 1896 and then declared for free silver, and that as fast as full
legal-tender silver money should be coined that a dollar of bank
money should be retired. The exact wording of the platform is as
follows:
The retirement of national-bank notes shall take place as fast as Government
paper or silver certificates can be substituted for them.
BANKING AND CURRENCY.
1761
There you have i t ! Bank notes to be retired as fast as silver should
be issued. Free silver without inflation was declared for. Full
legal-tender metallic money was to be substituted for fiat bank
money.
Stability for the future was pledged for in the following words:
We reiterate tlie demand of the Chicago platform for an American financial
system, made by the American people for themselves, which shall restore and
maintain a bimetallic price level.
The word ‘“maintain” means keep stable, and was so intended by
Mr. Bryan. He did not get an opportunity to explain the general
plan for the issue before the country became Anti-Imperalism, and
both wings of the party got together.
It may be well to add that a 120-page book which I issued was the
principal medium through which a mass of facts w
rere presented that
led to the declaration for retiring the bank money as fast as silver
money should be coined.
1 wish to emphasize the principle declared for in the Democratic
platform of 1900, that the volume of paper currency in connection
with the gold standard should be so controlled as to maintain sta
bility in the purchasing power of money. One can readily see the
practical nature of this principle. About one-third of the volume of
our money is paper, and, therefore the total volume of money in the
gold-standard world can be absolutely controlled by the people’s
Government in the United States, provided the proper mechanism is
supplied. The administration bill proposes the proper mechanism,
namely, a unified control of the price level of the country, together
with an instruction that the aim shall be to promote stability in the
purchasing power of money. When the crops are to be moved the
volume of paper currency is to be temporarily increased, followed
by a gradual retirement as rapidly as the demand slackens. At the
first of each month the volume of paper currency is to be enlarged
and then gradually be retired.
Senator Nelson. I s that in the bill ?
Mr. S h ib l e y . That is what the bill provides. Furthermore, at any
time that depositors may demand their money from the banks, then
the volume of elastic paper currency will provide whatever money
shall be needed, to be followed by its gradual retirement. I f the
output of gold from the mines is so large as to tend to cause an in
flation, then the national board in control in the United States should
retire whatever amount of paper currency is necessary.
Senator B ristow . Y ou w ould not leave that to the judgment of
T
this national bftard ?
Mr. Siitbley. Not by any means. Under this proposal discretion
ary power is removed from the national board by the rule that is in
the administration bill that stability in the purchasing power of
money shall be promoted. I f there is too much gold, then you must
retire some of the paper money.
Senator C rawford. Does the volume of this paper money, which
is only partial legal tender, have anything whatever to do with the
purchasing power of gold ? Does not the purchasing power of gold
depend entirely upon the attitude of the world toward gold and the
amount produced each year added to the world’s stock of gold, and
does this paper money have anything to do with the purchasing
power of gold?
1762
BANKING AND CURRENCY.
Mr. S h ib l e y . The purchasing power of gold is shown in the market
reports of the world. Therefore the paper money has something
to do with the purchasing power of gold. The paper money does
its work the same as bank credits and it helps to affect the price level.
The fact is that the Government controls the volume of paper money
and therefore controls an important factor.
Senator C rawford. S o this volume of paper money does affect the
purchasing power of gold ?
Mr. S h ib l e y . Absolutely.
Senator C rawt
ford. Y ou think it does?
Senator H itchcock . The volume of paper money is not on a gold
basis?
Mr. S h ib ley . Oh, yes; but it is. I would ask the Senator to tell
us if we should retire at once the $759,000,000 of bank money, would
the price level fall, do you think?
Senator H itchcock . It might, relatively, in different localities.
Mr. S h ib l e y . That means that the value of gold would increase
through the withdrawal of paper money.
Senator H itchcock . What I had in mind is that, taking England,
the use of bank notes is apparently growing less and the use of
checks is growing larger all the time, and the credits that are used
are simply gold credits. Would the increase in the volume of Eng
lish bank notes or the decrease of the volume of English bank notes
have any effect on the purchasing power of gold, where gold is the
basis, and is really the only money of ultimate payment ?
Mr. S h ib l e y . Surely the purchasing power of money must be af
fected when you withdraw paper money.
The C h a i r m a n . Y ou had better proceed w
rith your argument.
Mr. S h ib l e y . A s I said, probably 100 millions of dollars of paper
currency may have to be retired next year in order to maintain sta
bility. That retirement of the 100 millions of dollars, should it be
come necessary, would prevent a tremendous amount of injury to
the people, both of the United States and the rest of the gold-stand
ard world. We have seen that each dollar of wrongful inflation takes
from the wndows and orphans three times as much from their life
insurance money, while the w
rage earners and all others with fixed
incomes are robbed of $6 for each inflation dollar.
There is a tremendous need, therefore, that the forthcoming cur
rency law shall properly provide for the retirement of paper money
in proportion as the gold in circulation tends to inflation. There is
in circulation in the United States 759 millions of dollars of bank
money, so that should 100 millions of dollars be retir<M each year to
make a place for gold money it would result in stability in the price
level for seven years, and long before that time would elapse an ar
rangement could be made with the outher progressive governments
of the wrnrld to reduce somewhat the mint price for gold and thereby
lessen the output of gold from the mines; second, it would increase
the use of gold in the arts because of the lessened price; and third,
greatly lessen the volume of nev^ money coined from gold from the
mines. This lessened volume wrnuld result, therefore, from the three
causes—first, the lessened output of g old ; second, the increased use
of gold in the arts; and third, the increased quantity of gold in each
gold coin.
BANKING AND CURRENCY.
1763
Thus there is a practical method whereby the governments of
the world which the people now control can provide a mint price for
gold that will result in stability in the purchasing power of money
through the intelligent control of the volume of the paper currency.
The system is as simple as A B C when once the factors are stated
and understood. The Democratic National Convention of 1900 de
clared for this system and now the Democratic administration of the
year 1913 has put forth a bill embodying the necessary mechanism
and instructions, when there is incorporated a provision for the
retirement of paper currency as occasion requires.
There are several tactical advantages for the party in power by
establishing the proposed system for this country.
First. It will settle one of the biggest questions which heretofore
has bothered us. The money question will be settled and settled
right, thus removing it from politics.
Second. The national board would then become a scientific board
rather than a political board. It would be a political board were it
to decide the political question of the amount of inflation or contrac
tion from week to week; but by placing in the law a criterion or aim
whereby this great issue is to be settled, it will settle it effectively
and leave the national board free for the decision of the scientific
questions such as the details of how the measurement of the purchas
ing power of money shall be made, and details in connection with the
management of the 12 reserve banks.
It follows, I believe, that under this proposed system for scientific
work by the national board it should be composed solely of scientific
men chosen because of their special knowledge of the subject and
demonstrated ability. O f course, they should be selected by the head
of the Government by and with the advice of the Senate, and be sub
ject to recall at any time by the President, and each decision by the
board should be subject to a veto power by the Secretary of the
Treasury, who is the President’s spokesman in the Treasury Depart
ment.
This general subject is so broad that some study must be given to
my proposal in order to grasp the details.
I f the law shall declare that stability in the purchasing power of
money shall be the aim toward which the national board shall work,
then the said board will have no discretionary power in the matter.
The situation would be quite like it is should a fireman be directed to
carry steam at 100 pounds pressure; he has no discretion as to the
main point, and therefore must shovel in coal at certain times and at
other times open the drafts. So it will be when the national board in
control of the price level or purchasing power of money in this coun
try shall be directed to keep the index number of average prices
at 100.
The control of the price level is to be through the control of the
interest rate for money; namely, the rediscount rate for commercial
paper in the reserve banks. I f the interest rate is properly adjusted
it will be continued from week to week with no change whatever.
For example, the Bank of France during the 20 years 1886 to 1907
changed its bank rate only 29 times. As most of those changes were
made to meet the panicky conditions in the United States or England,
it follows that when we have a better system even than that of the
1764
BANKING AND CURRENCY.
French people it may be that our bank rate will be continued year
after year with scarcely a change.
But whenever our index number of average price tends to fall it
will show that our interest rate for money is a little too high; and
whenever the index number of average price tends to rise it will show
that our rediscount rate is a little too low. After a time our national
board will become experienced and will be able to gauge with great
accuracy our rediscount rate. They will do sharpshooting the same
as our men do who are using the 13-incli guns.
In each country in Europe the interest rate is carefully controlled
by a national board just as is proposed in the Owen-Glass bill, but in
Europe the aim within each of the leading countries is to accumulate
as much gold as possible, as gold is a weapon of war. In case a war
should be declared by one or more of the leading powers of Europe,
their Government would borrow gold from the gold reserve and send
it abroad for the purpose of purchasing munitions of war and food
supplies.
Here in the United States, however, where gold is not being
hoarded as a weapon of war, nevertheless we are to increase our hold
ings of gold provided we stand for stability in the purchasing power
of money, as it doubtless will cause us to retire paper money to make
a place for more gold.
I have thus gone over the ground to demonstrate the practica
bility of the proposal in the Owen-Glass bill for the unified control
of the purchasing power of money and that stability in the purchas
ing power of money should be the aim.
But this proposed system in the Owen-Glass bill has not been
understood by the bankers. The bankers, being a creditor class, are
extremely desirous of preventing depreciation in the standard of
value, and therefore should heartily approve the proposal in the
Owen-Glass bill that stability in the standard of value shall be main
tained. This means that the rising flood of gold of which I pre
sently shall speak must not be permitted to raise our price level and
thus "depreciate the purchasing power of money.
Another thing which the bankers have not understood is that
should the law lay down the rule that stablility in the purchasing
power of money shall be the aim, then that great issue will have been
settled. The bankers have not realized this, but have been fearing
that the national board appointed by the head of the party in power,
would result in a political control as would surely be the case if it
were free to decide whether or not the rediscount rate for commer
cial paper should be low or high. Fortunately the conditions will
be such that the national board as the representative of the party
in power will be obliged to work for stablility in the index number
of average price. This index number will be issued from time to
time and will be looked at by many people with growdng interest.
Reviewing what I have just set forth it is clear that the tactical
advantages for a declared stability in the purchasing power of money
will b e:
First, that it will settle the money question, the biggest and most
intricate question that has bothered us; second, the national board
will then become a scientific board rather than a political board.
In the European countries there is no money question because there
is a control in the Government, or in a board which does as the Gov
BANKING AND CURRENCY.
1765
ernment wishes, and the Government in its earnest efforts to promote
the strength of its people acts wisely. Therefore, there is no money
question in the politics of any of the leading European countries.
We likewise will so eliminate the money question from politics when
the Owen-Glass bill as worked out in Congress becomes law.
But an issue that should come squarely to vote is, Shall the law
expressly lay down the rule at present in the administration bill,
placed there at the initiative of the Senate committee chairman and
stricken out in the House bill, that the rediscount for commercial
paper shall be at such interest rates as will tend toward stability in
the purchasing power of money ?
Under the rule proposed there can be neither undue inflation nor
undue constraction. This would mean “ stable money.” I f this
principle accords with the principles of the “ sound-money ” advo
cates it will be accepted. I f they refuse, it will be prima facie evi
dence that they are secretly planning an inflation. They never tell
the public at what they actually are aiming, but profess one thing
while aiming at another, because they know that the people who are
supposed to be the ruling power would object. But the issue can be
squarely drawn by this Senate committee, and no man in Congress
at this stage of public enlightenment and direct primaries would
dare to openly vote against stability in the purchasing power of the
standard of value. Common honesty requires stability, and therefore
the sleight-of-hand system which the money lenders and the trusts
have fostered should be terminated. Nine-tenths of the people Avould
be seriously injured by further rises in the price level for com
modities; for then the incomes would become adjusted, thereby ter
minating the larger part of the high-cost-of-living problem. Possibly
one-ninth of the people would be benefited by inflation, these oneninth being the business men who are employing labor and are selling
the products of labor; but all of the business men who have prices for
their products that we practically fixed, such as the railways, are
most seriously injured by a rising price level; and now that the
industrial trusts are about to come under strong control by the Gov
ernment they too will find that they must keep their prices practically
stable and will loudly call for a stable price level. It would seem that
we have reached a point where legislation will declare for stability
in the price level.
I believe that this committee will decide to support the adminis
tration’s proposal that the aim of those who control the interest
rate for money in the Federal reserve banks shall be to promote sta
bility in the purchasing power of money.
For more than a generation the people of this country have been
battling over the money question the grater part of the time, and
now if Congress will place in the forthcoming law a declaration for
stability and honesty in the standard of value it will be just and
right, and will remove the money question from politics, and the
party now in power will continue to control the Government.
But the issue is so clear that even though Congress should not
place in the law a declaration for stability, yet the President’s na
tional board would find that the existence of the chart showing from
month to month the purchasing power of money would practically
compel the said board to notice it and use it as a gauge. Place your
selves in the position of this national board and consider yourselves
1766
BANKING AND CURRENCY.
as debating the proper height of the rediscount rate for commercial
paper. Suppose the tendency were for the price level to rise, thus
showing an injustice to nine-tenths of the people of this Nation, and
a hearing should be asked for and the case presented, you would be
obliged, politically, to decide justly; otherwise the case would become
an issue at the primaries. So, I say, the case is so clear that now that
a national board is to be charged with the control of the height of
the price level, that control must be just. The voters are now in con
trol which insures justice for the people.
Only a few of the students of the money question are keeping their
eye on the index number of average prices, but those of us who
do so know that we can, if necessary, prove our case before the forth
coming national board, and even should it refuse to act justly we can
T
take the case before the voters and win. Such is the power of truth
among a self-governing people.
I believe that this Congress will declare for stability and that will
settle it. But there is an issue that will be handed on to the national
board and that is as to how the index number of average prices shall
be constituted. That is a debatable question and a most important
one. The conflicting interests, such as debtors and creditors, business
men and wage earners, will raise issues when the national board
comes to construct the index number for the measurement of the pur
chasing power of money. Therefore, the members of that board
should understand the science that they will be called upon to de
velop ; and public hearing should be had, written decisions should be
rendered, and published reports should be issued.
Senator W eeks . Public hearings for what purpose, Professor?
Mr. S h ib le y . Public hearings to determine just how the index
numbers should be constituted. Let me explain here that there are
two great factors in constructing this index number. The price of
farm products tends to rise as society progresses, and the prices of
manufactured products tend to go down. They are charted here
in the Government publication, and I should like to add another
chart to show how the prices of particular articles change as the years
go by.
Some 14 years ago the great problem we found in constructing our
irdex number was what should be the proportion between those
commodities that are appreciating in price year after year and the
prices that are depreciating. So you see it is a close question, and
there are probably two or three volumes on this general subject. The
English scientific societies began considering it in 1886.
Senator W eeks . Y ou would be in favor of public hearings to de
termine what the index number should be?
Mr. S h ib le y . T o determine how the index number should be con
structed.
Senator W eeks . And that would be really your standard of value?
Mr. Shibley. Yes; the real standard of value when you get it con
structed. I wish to call your attention to the fact that Prof. Irving
Fisher has stated to this committee that he believes this index num
ber of our Government, constructed in 1902, does not show the price
level as high as it ought to be shown; in other words, that the busi
ness men under whose administration that index number was con-
1767
BANKING AND CURRENCY.
structed had it constructed in their own behalf.
thing to be looked into------
There is another
Relative prices of raw and manufactured commodities : 1890 to 1912.
[Average for 1890 to 1899=100.0.]
Senator H itchcock (interposing). Is there any material difference
between the construction of the index numbers in Europe?
1768
BANKING AND CURRENCY.
Mr. S h ib l e y . Yes; there is a very great difference.
Senator S haeroth . In England one takes in 45 commodities and
the other, I think, 103.
Mr. S h ib l e y . That is my understanding.
Senator C rawford. We would be at a great disadvantage because
of not having some uniform and commonly accepted basis upon which
to rest our statistics from foreign countries as well as our own.
Mr. S h ib l e y . All of the price levels agree in the main. The fact
that money is increasing in volume and that its purchasing power
is decreasing is demonstrated by all.
Senator H itchcock . What has the Government used in its com
putation? What number of commodities?
Mr. S h ib l e y . I can not say offhand.
Senator N elson . Your idea then is that the discount rate should
be fixed by this index number showing the price level?
Mr. S h ib le y . Absolutely.
Senator N elson . Would you put that provision in the bill?
Mr. S h ib l e y . Oh, yes; it is in the bill now. It is in the GlassOwen bill, but was stricken out in the House bill.
Senator N elson . Would you put in this phrase: The Federal re
serve board shall prepare or cause to be prepared an index level of
prices, and when such an index level of prices is prepared from time
to time it shall be their guide in fixing the discount rates?
Mr. S h ib l e y . That would be the substance of it.
Senator N elson . Well, would you put that in the law?
Mr. S h ib le y . Certainly.
Senator N elson . Your theory is that would solve the whole ques
tion ?
Mr. S h ib le y . Yes; and in the administration bill there are the
words: “ The rate shall be so fixed as to promote stability in the price
level.” That is all that is necessary; all the rest is incidental.
Senator Crawford. That is not the bill as it passed ihe House?
Mr. S h ib l e y . N o.
Senator H itchcock . I see the Government uses 255 commodities.
Mr. S h ib le y . That is for the price level as a whole, and I think
that number is probably too large. We found that we could get only
about 66 articles having grades and market reports therefor that
could be traced for a considerable number of years.
Senator S hafroth . Prof. Sauerbeck’s tables took in 89 per cent of
all the commerce of the country.
Senator W eeks . Not in number of articles?
Senator S hafroth . Oh, no; in value.
Mr. S h ib le y . The fact is, monetary science has reached a point
where the money question can be settled in this country, if Congress
will restore in the bill the four or five words in the administration
bill that the interest shall be so controlled as to promote stability
in the price level.
The C h a ir m a n . I took a good deal of pains to have that put in the
bill. I was very much interested in it, because I thought the great
thing we needed in this country, both for the creditor class and for
the debtor class, was stability, that they might know their relations
to each other, and so that they might know there would be no change
of contract by a change in the purchasing value of the dollar. For
BANKING AND CURRENCY.
1769
that reason I insisted upon its going into the original draft of the
bin.
.
,
Senator B ristow . I f it should appear that the quantity of the
money does not control the prices, then your theory would fall down ?
M r S h ib le y . Absolutely fall down; but we have shown by the his
tory of the world that if you take out enough money you can influ
ence the price level, and if you put in enough money you can influ
ence the price level. European Governments exercise this control
through their control of the gold reserve and the paper currency.
These are the two factors by which the Governments of Europe abso
lutely control the price level within certain limits.
Senator C rawford. Then you are regarding this paper currency,
whether legal tender or not, as money in the sense in which it enters
into this question of appreciation or depreciation of purchasing
power ?
Mr. S h ib le y . Let me state it this w ay: Paper currency has an effect
on prices and so do the bank credits. Our Government will not con
trol the volume of bank credit except through regulations concerning
the bank reserves, but through its control of the volume of paper
currency it can withdraw $100,000,000 every year, if necessary, until
we can get an agreement by the European nations to lower the mint
price, if necessary, to maintain stability.
The working people of England are now a balance of power in
their Government, which they did not have prior to 1906. So that
now when the money question shall be brought up and the British
Government is shown that by changing a few words in their law they
can provide for stability in the purchasing power of money, and will
do it.
Senator C raivford. There is no law that requires this Bank of Eng
land to fix the discount rate. It simply does it because it is control
ling the world market for gold, but it is a private bank after all.
Mr. S iiib le y . It is an arm of the Government, one of the most im
portant functions-----Senator C rawford (interposing). It is an accommodation to the
Government, but, after all, it is running that part of it as an in
independent bank over which the Government has no control in that
respect.
Mr. S h ib le y . But if that bank did not handle that thing satisfac
torily to the Government they would change it so that it would be
satisfactory.
Senator H itchcock . Y ou think the people would like to have the
currency contracted so as to check the rise in prices and, perhaps,
produce a reduction of prices?
Mr. S h ib l e y . They want to keep the average of prices stable;
they do not want robbery either on one side or the other.
Senator H itchcock . Taking into account that we sell to Europe
so much more of products than we buy from Europe, or from the rest
of the world, do you think the American people would like to see a
change in our currency which would produce a reduction in the
price of the goods we sell?
Mr. S h ib le y . Not to reduce the prices, but to keep them stable.
The point is to prevent future inflation.
Senator H itchcock . Y ou want them to maintain the present level?
1770
BANKING AND CURRENCY.
Mr. S h ib l e y . Exactly.
Senator P omerene . That assumes that the present level is a proper
level ?
Mr. S h ib l e y . Well, we are here, and that is all there is to it, in
my judgment. Should we lower the price level w would bring on
re
hard times and trouble.
Senator C rawford. Suppose there should be a widespread famine
or an abnormal crop next year. You can not be governed by the
price level this year in fixing the price level next year.
Mr. S h ib l e y . Those changes would make a difference in compari
son with the prices of other commodities, but we are speaking of the
average purchasing power of money as affected by all of the exist
ing factors.
Senator P omerene . Your position, in brief, is this: That the ratio
of the volume of money to all products combined should be one
and the same thing year in and year out ?
Mr. S h ib ley . That is the idea exactly.
Senator R eed. Then, if production were cut down money would
have to be cut down?
Mr. S h ib l e y . Yes.
Senator R eed. And if production were increased money would
have to be increased?
Mr. S h ib le y . Exactly.
Senator R eed. S o that the purchasing power of the dollar would
be controlled by the wheat produced in the world in a year?
Mr. S h ib le y . Y ou nowr are speaking of a single article, I am deal
ing with the average of all prices.
Senator R eed. And if we had no wheat and no corn, then we ought
not to have any money?
Mr. S h ib l e y . Something as to the effect of the size of the crops
is shown when we go to move the crops. I f we have large crops, we
must have more money, but if you have no crops-----Senator R eed (interrupting). Let us take an extreme case. I f
we had no wheat, no corn, and no potatoes, and right at that time
we wiped out the money, what would become of the debts ?
Mr. S h ib l e y . We would not wipe out too much money. The price
level would be kept stable, but the price of potatoes would go away
up high, and those who had potatoes would make money out of them.
Senator R eed. H ow could the price go up high if you had no
money ?
Mr. S h ib l e y . I say we must have enough money to keep a stable
average.
Senator R eed. T o keep the price the same.
Mr. S h ib l e y . T o keep the average o f prices stable.
Senator R eed. Suppose there were a world shortage.
Mr. S h ib l e y . The price of that product would go up.
Senator R eed. I mean a world shortage of everything in the way
of agricultural products.
Mr. S h ib le y . Then those prices would go up as compared with manu
factured articles. And there should be placed, either in the bill or
in the regulations concerning it, that when this national board sets
out to construct the index number of average prices proper allow
ances should be made as to what shall be done when we have a
short crop and when we have a large crop. That is a detail that is
BANKING AND CURRENCY.
1771
to be worked out. But we know we should have stability in accord
ance with the rules laid down. Here is an instance I will give you
as to one of the details: In saying that there shall be a stable aver
age of prices, that means a practically stable average of prices, be
cause in order to carry the crops the average of prices should go up a
little each month. The prices of wheat, corn, and of all agricultural
products must rise from harvest time until the next harvest time in
order to get the cost of carrying them, and therefore the price level
should rise a little. Doubtless the national board will after a time
lay down a rule that it may require a 1 per cent rise from harvest
time to harvest time, and then when the next harvest time comes
and the price of those products fall in the market, that then the price
level should go down that 1 per cent.
Senator N elson. The price of cotton, corn, and potatoes is un
usually high, compared with last year. Would you change the cur
rency on that account? Would you contract it?
Mr. S hibley . N o ; you must have enough currency to meet the
demands, and we should find out what is right when we have large
crops and short crops. That is to be worked out. That is a scientific
problem, but it does not effect the main proposition.
Senator N elson. N ow , we are a great exporting Nation. We ex
port immense quantities of cotton, breadstuffs, and meats to foreign
lands. Now, how can our level of prices here and our regulations
based upon that affect the prices that we get for our products in
countries abroad? Do you not require an international index of
prices ?
Mr. S hibley . I f we will keep our average of prices stable there
will be a practically stable average all over the gold-standard world,
because gold is shipped back and forth.
Senator N elson. Oh, yes; that is your theory?
Mr. S hibley . Yes.
Senator Crawford. But it is difficult to get an international state
ment. because their quantities are expressed in different terms; we use
a bushel, and they use something else, and the ratings and the quan
tities are different; and that is why Prof. Fisher is so anxious to have
some international standard of statistics.
Mr. S hibley . Those things will all work out readily if we will
simply declare in our law for stability and empower the board to
go ahead and take the proper steps.
Senator N elson. Y ou have not finished your statement. Perhaps
you had better go on and give us the whole of it.
Mr. S hibley . N ow, I have followed the problem to where the
real contest comes in, as to how the index number shall be constructed.
It may be, however, that the advocates of the House bill will say
they admit that stability in the purchasing power of money is the
ideal and that the national board appointed by the Government
should in its management of the interest rate and the control of the
volume of gold and of paper money aim to promote stability in the
purchasing power of money, but that the national board should be
free to use its own judgment in the matter.
I reply that this is not satisfactory. Why object to stating the in
struction in the law itself? In fact, the proposal is that there shall
be an instruction as to the height of the rediscount rate, namely,
1772
BACKING AND CURRENCY.
that “ of accommodating the commerce of the country.” (Sec. 15,
par. d.) That is capable of being given any meaning that the power
in control may choose to say, for it has no technical meaning as has
stability in the price level.
So the House committee has stricken out a plain direction, leaving
in a direction that can be the basis for rank inflation if the directing
power shall so decide.
Senator R eed. Y ou say there is a provision in the House bill?
Mr. S hibely . Yes. It says that the interest rate for rediscounting
commercial paper shall be such as to accommodate the commerce of
the country, and that means nothing. It means whatever the indi
vidual may choose to have it mean.
Senator R e e d . It means what that man thinks will accommodate
the commerce of the country ?
Mr. S hibley . Yes.
Senator R eed. That depends upon whether he is a bull or a bear?
Mr. S hibley . Certainly. The business interests want inflation, and
the House committee has provided that the volume of reserves which
the national banks shall be required to keep shall be cut in two (pp.
65-66, report of House committee), which means a wild inflation,
except as the national board shall interpose a veto. For the national
board to do this it would have to withstand pressure from the
business men. Inflation would greatly benefit the business men and
injure nine-tenths of the people, including the bankers and all of
the creditor class. All doubt as to what the national board will do
should be set at rest by restoring in the forthcoming law the rule
that stability in the purchasing power of money shall be the aim.
Thereupon, at 12.55 o’clock p. m., a recess was taken until 2.30
o’clock p. m.)
after recess.
The C hairm an . Mr. Shibley, you may proceed.
STATEMENT OF GEORGE H. SHIBLEY— Resumed.
Mr. S hibley . Mr. Chairman, before taking up the next subject,
the probable volume of gold in the near future, I would like to
amplify just a little the point we were talking about before the
recess, and that is as to the price level and its relation to particular
prices. I was asked by the Senator from Missouri as to what wouM
be the effect if they have a shortage in the crops and should there be
a contraction in the volume of the money. Now, I was speaking of
the price level, and he brought up a particular price, and those two
things are not capable of being compared.
Senator H itchcock. Have you any estimate about what the effect
on the price level would be of a change in the price of wheat ?
Mr. S hibley . N o.
Senator H itchcock. It would be infinitesimal?
Mr. S hibley . Yes. We have such a large quantity of articles in
the index number of average prices, but each article is given a pro
portion according to its value.
Senator H itchcock. Potentially?
BANKING AND CURRENCY.
1773
Mr. S hibley . Yes; so wheat would be given a very large value.
Senator H itchcock. Con pared to some others.
Mr. S hibley . Yes; as compared with the other commodities; to
some others.
Senator H itchcock. After all it would only be one of 70, 80, or
90 articles?
Mr. S hibley . Yes; that is the way. Now, as to the effect of in
creasing the volume of money or of decreasing the volume of money,
it is the same as if you pour water into a large tank. You put in
the water and the price level goes higher and higher and higher. In
the British Association for the Advancement of Science an investiga
tion showed that 200 years ago prices were only one-sixth as high
on the average as they now are.
Senator Crawford. Where you have a single gold standard and all
real money is convertible into that gold standard, then how does it
make much difference how much this paper money on demand must
be converted into gold—how much there is of it? Does not the
volume of the gold really determine the question after all ?
Mr. S hibley . No; I think not. It is the volume of gold plus the
volume of paper money, plus the credit that is on the one side and
on the other side the things against which these things exchange,
and that is brought out beautifully by a chart of Prof. Irving Fisher,
of Yale University.
It may be found in Prof. Irving Fisher’s work The Purchasing
Power of Money, at page 307, where the following statement is
made:
What, then, in brief, are the facts of history? They are that prices have
increased by two-thirds between 1896 and 1909, that this has been in spite of
a doubling in the volume of trade, and because of (1) a doubling of money,
(2) a tripling of deposits, and (3 and 4) slight increases in the velocities of
circulation.
The C hairman . I wdll ask you to put in the tables indicating the
price levels in England, Germany, and France, as far as they have
been made up.
Mr. S hibley . The facts are as follows:
The gold standard of prices is international, gold being shipped
from one country to another at the mint price plus the cost of trans
portation, interest, etc. In Germany the rise in the average of prices
at wholesale has been practically the same as in the United States—
namely, a 42 per cent rise in Germany for the 13 years from 1896 to
and including 1909 as compared with a 40 per cent rise in the United
States and a 30 per cent rise in France and a 21 per cent rise in
England. Two years later in England the rise amounted to 31 per
cent. (Sauerbeck’s Index Number for England and Hooker’s for
Germany and for France, quoted in Journal of the Royal Statistical
Society, London, December, 1911, p. 35; and in same journal for
March, 1912, p. 412.) The larger rise of prices in the United States
and Germany is partly due, doubtless, to the larger development of
private monopolies.
Senator S hafroth. Are you through with your direct statement?
Mr. S h ib le y . N o ; not as yet. VII. I have reached the point
where I was about to consider the question of the rising flood of gold
that doubtless is facing us in the future and the legislation required.
1774
BANKING AND CURRENCY.
The chart of the Department of Labor of our Government shows
that for che past 16 years the purchasing power of money has been
shrinking and shrinking. That is, the prices of commodities have
been going up and up and up—the average of prices— and we have
decided, I hope, that from now on there should be stability. I f so,
the direction of the chart line will have to be changed from what it is
now. Instead of continuing to go up, up, up, it ought to go just
straight like that [indicating], and it can be made to go straight if
the Government of the United States so wills.
The C hairm an . D o you think it will require the cooperation of
other nations?
Mr. S hirley . Only in the event of gold continuing to increase in
quantity, and if it does, then after we, for a couple of years, have
maintained stability for the gold-standard world, then we should
ask the aid of other nations, simply that they change the mint
price of gold. It is now $18.60 an ounce, nine-tenths fine, troy
weight. It is coined into money at that rate. Now, if the rate
should be changed to $16 an ounce, you see it would produce farreaching effects in the gold-mining industry. The first effect would
be that the poorest mines in use would no longer be worked.
Senator H itchcock. Could you not produce the same effect by an
agreement to limit the gold currency?
Mr. S hibley . Then you would lose the gold standard—lose the
system whereby the merchandise price for gold is practically the
same as its mint price.
Senator S hafroth. I received a circular the other day from some
body in New York on gold production, which was to the effect that
this year—that is, the year ending June 30, 1913, I think—it was
less than the previous year; that the maximum limit of gold pro
duction had been reached and that the demands on gold were per
fectly enormous; that India, instead of hoarding silver as it used to,
is now hoarding gold, and it was sinking it at the rate of $250,000,000
a year. Is there anything in that circular?
Mr. S hibley . I think he is going to the extreme, because all peo
ple who have studied the question, as far as I have seen their state
ments, think it probable that we are going to have an excess in the
volume of gold. For the past two or three years Prof. Fisher each
year has been predicting what is likely to be the trend of average
prices. He has predicted that the trend would be upward, and such
has proved to be the case. Now, as to the effect of changing the
mint price. You see, that would at once have a far-reaching effect
on the production of gold.
Senator H itchcock. What Senator Shafroth was referring to is
in the Transvaal. Apparently a limit has been reached of the out
put of gold, and in the United States we are producing four or five
millions of dollars less this year than we did last year. There seems
to be a check in the increase in the production of gold and a great
increase in the demand for gold in India.
Mr. S hibley . That is very hopeful. I f we are not going to have
too much gold, then the United States can maintain the average of
prices. Through the control of the volume of paper currency we
can control the price level. The greatest difficulty will be to refrain
from getting too much gold.
BANKING AND CURRENCY.
1775
One great result of our getting a good currency system will be to
increase the volume of business, and that would require more money;
so it may be that we will find no trouble and may not need any
change in the mint price.
The Governments o f France, Germany, and England are run in
the interest of the people as a whole, and the wageworkers in those
countries are now a balance of power, and those Governments will
not permit an inflation to take place if they can help it. And those
countries are creditors of the rest of the world, and that is another
reason why they will not permit money to depreciate.
Senator H itchcock. All those European countries are a purchas
ing class, too.
Mr. S hibley . Yes. Now, I wish to state that the national board of
control, in order to promote stability in the price level, will depend
upon the following factors:
First, they will depend upon the broadening out of the volume of
business in this country and abroad. That will surely take place,
for quite soon the experts in money and prices will realize that
because the United States has started in to scientifically control the
price level it will mean real stability as aimed at, which will justify
business men in relying upon it and make certain long-time con
tracts which heretofore no sane man would think of making. This
will cause the volume of business to broaden out and require the
use of more money. It may take up all of the gold that is coming
out of the mines, so that there will be no tendency to a rising price
level. Time alone will tell. Certainly the volume of gold will be
so great as to at least fill up the channels of trade and keep the price
level from falling.
Second, the national board of control, in order to maintain stabil
ity in the price level, will surely be obliged to prevent any inflation
from reductions in the volume of the national-bank reserves during
the dull season. That is beyond any reasonable doubt, because the
volume of gold from the mines is so large.
I want to amplify that point a little by saying the present bill
provides for the reduction of the reserves of the banks, very properly.
The banks can get along with a smaller volume of bank reserves, and
very properly, but it will enable the banks to tremendously increase
the volume of credits, and thereby increase prices tremendously
unless the national board shall be given authority to retire as much
paper currency as necessary to maintain stability. I f they find
things tend to soar up, they should draw in some of the paper cur
rency and thereby maintain stability. It is just like giving enough
food to stock, and not too much.
Third, the national board must likewise prevent any inflation from
the new paper money during the dull season if stability is to be
maintained. Thus, when the dull season shall arrive next summer,
then every dollar of the new paper money put out to help move the
crops will have been retired if stability is the aim. We are putting
out now $25,000,000 to $50,000,000 to move the crops, and when the
dull season comes it ought to be drawn out of circulation in order
to be ready for the next autumn, just as we have extra freight cars
to move things.
1776
BANKING AND CURRENCY.
These are self-evident facts to one who keeps in his mind’s eye the
rising price level for the preceding years and is intent on maintain
ing stability.
For the people’s representatives on the national board to depre
ciate the standard of value would be inexcusable. Each 1 per cent
depreciated would mean a terrific amount of injustice throughout
the entire gold-standard world, as I have demonstrated.
We are taking upon ourselves our portion of the work in helping
to stabilize the purchasing power of money throughout the entire
gold-standard world, just as every other country that is using gold
is also affecting all of the other countries. These other countries try
to maintain stable conditions in the main, year after year, and so
we for the first time in our history are to enter upon a really scientific
control of the standard of value, as England has been doing since
1844, France since 1848, Germany since 1876, and Switzerland since
1905.
Senator H itchcock . What has that showing been ?
Mr. S h ib l e y . Those countries started in to have scientific money
systems at those dates.
Senator N elson. Will you read the countries and the dates again,
please ?
Mr. S hibley . I will, gladly. The other countries, the countries
other than ours, have been trying to maintain stable conditions in
the main, year after year, and so we, for the first time in our history,
are to enter upon a really scientific control of the standard of value,
as England has been doing since 1844, France since 1848, Germany
since 1876, and Switzerland since 1905.
Senator H itchcock . There has been inflation in both Germany
and France since that time.
Mr. S h ib le y . Certainly. They have had a unified control, but
until comparatively recent years the ruling power has been the few
and a balance of power has been the creditor class, as I have shown.
Senator H itchcock . The figures show that Germany greatly in
creased the volume of currency, and naturally, from your argument,
it contributed to the rising prices.
Mr. S h ib l e y . Yes. But since 1876 they have had a unified control
and have been working for their own interests as they thought best.
Nowhere in these European countries have they permitted the banks
to put the prices up and down as has been done in this country,
Canada, and in Scotland. That is the difference between a unified
control of the interest rate for money and control by the banks them
selves. In Germany the chancellor has absolute control of that in
terest rate. He can put it up or down, just as he likes.
Senator H itchcock . The interest rate, or the volume of currency ?
Mr. S h ib le y . The interest rate, and thereby change the volume of
currency that will be in circulation.
Senator H itchcock . Neither Germany nor France depends on the
interest rate to check the volume of currency. France has an arbi
trary standard, and Germany limits it to three times the gold reserve.
Mr. S h ib ley . It is a secondary limitation. The immediate limita
tion in each of those countries is the interest rate for money. That
is shown in the Bank of England. When it finds that the country
must have more gold it raises the interest rate and that tends to
B A N K IN G
AND
C T JK R E N C Y .
1777
reduce the prices of stocks and of commodities, and gold flows into
England. So I say the control of the iterest rate by the Bank of
England controls absolutely the volume o f gold. Some of us wonder
why the Bank of England can do such mighty work, having such a
small volume of reserves, and it all comes about through the control
of the interest rate. That is the main factor. Thereby they control
the price level, which controls the volume of gold and determines
whether they are going to have more currency or not. In France,
they have the additional factor of saying that the bank of issue shall
not issue any more paper currency than a certain quantity, and
they don’t get up to the limit because the other factor is at work, and
when they do the law puts the limit a little farther off.
Senator H itchcock. Notwithstanding these limitations, there has
been a considerable rise in the price level in Germany and in France,
and to some extent in England.
Mr. S iiibley . They do not aim at maintaining stability for a
series of years but simply guard the gold supply and the average of
prices goes up and down according to the changes in the volume of
gold and the other factors.
Senator H itchcock. I thought you were arguing their systems
were calculated to maintain stability of prices?
Mr. S iiibley . In a general way they do so, but because they
must hold gold as a weapon of war that has been, and is, the prime
object with them, rather than to aim at stability in the purchasing
power of money for the gold-standard world. But a secondary
object in the issuance and retirement of paper money has been to
maintain stability in the purchasing power of money, as is demon
strated by the manner in which the Bank of France, and the other
banks of issue have controlled their elastic volumes of paper money.
Senator H itchcock. I hardly agree with you there, on that. 1
think that as long as there are periods of inflation, followed by
periods of depression, in which the loss is heavy, there will have to
be proportionate an increase in the volume of money.
Mr. S hibley . A s pointed out this morning, the gold-standard
countries have caused great changes in the price level from the
hoarding of gold. For the past 50 years they have been doing that.
And as the United States is so large and we have out so much paper
money, we are in a position to absolutely insure the stability in the
gold standard world’s price level for a couple of years, and by that
time the other nations, such as England, France, Germany, and the
other countries will take hold with us, if necessary, and thenceforth
the desired end will be attained.
I have just said that we have out so much paper money that we are
in a position to absolutely insure-----Senator N elson (interposing). How do you figure the paper
money ?
Mr. S hibley . The volume of greenbacks and bank notes.
Senator N elson. How much does that amount to?
Mr. S iiibley. About one-third of our total circulation. Therefore
we now are in a position to insure stability in the world’s price level
for a couple of years. What I mean is that we are in a position to
gradually retire some of our paper money and thus make room for
what otherwise would be too much gold and a rising price level.
Senator N elson. Y ou don’t think we have too much money now?
1778
BANKING AND CURRENCY.
Mr. S h ib l e y . Suppose that stability should require that next year
we retire $100,000,000 of the bank money or its substitutes. We
ought to do it. Five hundred million dollars of paper money has
been unjustly issued since 1900 and now is in circulation. Let us
recognize the equities and be prepared to act.
That will require that the forthcoming banking and currency
law shall authorize the national board to order the national banks to
retire some of their paper money month by month. Soon after
January 1 of next year there should commence the permanent re
tirement of as much paper money as there will have been an increase
in circulation from the decrease in the amount of the bank reserves,
some $450,000,000. We now propose to lessen the banks’ reserve
tremendously, and by next February we should be able to retire
enough of the paper money to maintain a stability.
Senator N elson. In the country banks we only lessen the reserves
3 per cent, and in the case of the central reserve banks and the reserve
banks in the city 7 per cent.
Mr. S hibley . I believe the reserves are cut down from $900,000,000
to $450,000,000, practically cut in half, as it ought to be.
Senator N elson. N o ; they are not cut in two. The country banks
are cut from 15 to 12 per cent, and the other banks are reduced to
18 per cent. I mean, that is the ultimate plan.
Senator S hafroth. Yes, Senator; but the provision in the law is,
for instance, in the central reserve banks, that half of that 9 per
cent, only half of it, needs to be kept in the reserve bank, and that
makes a credit reserve of about 4£ per cent, only, whereas now it is
12^ per cent. But of course they have got to keep the balance in
their own vaults, and I do not see it makes much difference.
Mr. S hibley . The figures I rely on are in the report of the chair
man of the House Committee, Report 69, Sixty-third Congress, first
session, page 65. The statement in the report is that the reduction
in the required reserves in the national banks may amount to
$452,000,000, out of the present total of $950,000,000 (p. 66), which
would be nearly a cutting in two of the required bank reserves; and
the Government funds amounting to $200,000,000 of $250,000,000
would be placed in circulation. This Government money is to be
loaned out by the Federal reserve banks. Thus there would be a
tremendous inflation, except as the Federal reserve banks should
stack up cash in their vaults.
I point out that the law should provide that this national board
shall be directed to maintain stability in the price level and that
proper authority be vested in this board to retire paper money.
I f it shall become evident that under the new regime of stimulated
industry the gold supply is to be too great for stability, then the
head of our Government should be directed to communicate with the
Governments of the other gold-standard countries and suggest that
by mutual agreement the mint price of gold be somewhat lowered,
enough so to result in a stable measure of value in the gold-standard
world without being obliged to retire noninterest-bearing paper cur
rency to make a place for gold money.
A certain amount of paper currency can be used by each country
because it saves a large amount of interest.
Senator H itchcock. I f ^ou undertake to change the mint price of
gold, you will have to recoin all the gold money.
BANKING AND CURRENCY.
1779
Mr. S h ib le y . No; for the gold coins would be a little heavier.
Thus the coins in circulation would continue in use. Much of the
gold is represented by gold certificates.
Senator N elson. Yes; but our gold certificates represent our pres
ent quantity of gold, and you would have to have a new coin in pro
portion as the coins would be heavier.
Senator H itchcock. Y ou could not have two gold coins in circu
lation for the same paper—one of one weight and the other of an
other weight.
Mr. S hibley . Each represents so many dollars. For instance, you
have silver dollars that only have 50 cents’ worth of silver in them.
Senator H itchcock. I f you have two classes of coins in circulation,
the heavier coin, worth a dollar, will be driven out of the country
and the lighter coin remain.
Mr. Shibley . The idea is that all the other countries will have the
same mint price, so as to have no driving from one country to the
other.
Senator S hafrotli. What would you do with contracts made for
the present weight in gold—the present weight and fineness of gold;
what would you do with those contracts?
Mr. S hibley . I think the people who made them made a great
mistake. They should have been made payable in dollars.
Senator S hafroth. I thought so at the time.
Mr. S hibley . I f we should strike a mountain of gold, they would
simply lose almost all the value, whereas if they had relied upon the
Government and said dollars, they would have been protected by the
Government.
Senator N elson. What would you make the new gold dollars?
Mr. S hibley . Make them a little heavier.
Senator N elson. I f you made them a little heavier, it would take
more gold.
Mr. S hibley . Yes; that is the idea.
Senator H itchcock. Could not your idea be carried out much more
effectively simply by placing a limit on the amount of coinage each
year?
Mr. S hibley . Y ou would just have a surplus of gold, and what
would you do with it?
Senator N elson. At all events you are satisfied you could not do
anything in that matter unless the other countries agreed?
Mr. S hibley . We could do nothing alone, except to retire our
paper currency up to the limit, and ask the other countries to help;
but their self-interest, now that liberal Governments are in power
in most of the countries of Europe, would be against inflation. Thus
we would at once secure international cooperation.
Senator N elson. But here, Professor, as I understand it, it is
generally conceded that for ordinary purposes our currency we have
now, paper and gold, is about sufficient to do the business o f the
country. What we need is a currency bill that will provide for more
currency in cases of emergency.
Mr. S hibley . When I say we have had too much money, I refer
to this chart, the first one in my statement, which shows we have
been having too much money.
Senator N elson. H ow long has that condition been?
1780
BANKING AND CUBRENCY.
Mr. S hibley . Since 1897.
Senator N elson. Since 1897?
Mr. S hibley . It began at that time.
Senator P omerene. What do you say should be the per capita
circulation ?
Mr. S hibley . The per capita will be affected-----Senator P omerene (interposing). You say there is too much now.
What, in your judgment, should be the per capita circulation now?
Mr. S hibley . It is now up to 162 per cent of what it was 16 years
ago. It has been climbing up, up, up-----Senator P omerene (interposing). Along about 1896 it was $23
and something per capita. Now it is $34 and something per capita.
How much in excess of the proper amount do you think that $34 is ?
Mr. S hibley . I f we could have kept the stability of the price
level of 1898 or 1899, it would have been ideal-----Senator P omerene (interposing). That still does not answer my
question. I did not ask whether it would be ideal, or not, but how
much is it now in excess of what it ought to be?
Mr. S hibley . It will have to remain at 162 per cent plus what
ever is necessary to maintain stability. When we are going to move
our crops, we shall require more money, and when we are through
moving the crops the per capita will drop down below what it was
during the active season. We will simply have to go on with the
level where we are now. We can not go back.
Senator S hafroth. That is, to 1896?
Mr. S hibley . We can not go back to the price level of 1896, 1899,
or 1900.
Senator S hafroth. What is it from 1890?
Mr. S hibley . One hundred and twenty-five per cent or 130 per
cent.
Senator S hafroth. What is it from 1873? It is about even with
1873, is it not?
Mr. S hibley . I suppose that is about right. So at least we have
gone high enough. We have now got to the point where we should
maintain stability.
Senator H itchcock. He does not believe in regulating the supply
of the circulating medium by the per capita, but he believes in regu
lating the volume o f money with stability in the price level as the
object.
Senator S hafroth. Senator Pomerene is speaking about the per
capita. You are not taking that as a standard?
Mr. S hibley . N o.
Senator P omerene. I understand, of course, what his position is.
He says we have got too much money now. We have got thirty-four
dollars and some cents per capita.
What, in your judgment, would be the right amount, assuming the
conditions as they now are?
Mr. S hibley . When I said there was too much money, I was refer
ring to the period since 1896, during which time the price level has
been going up. Now we have got to keep what we have; we can not
go back.
Senator P omerene. In 1896 did we have too much ?
BANKING AND CURRENCY.
1781
Mr. S h ib le y . We had too little, then. Things had gone down,
down, down, and we had too little. Now, the price level has been
going up, and we are going to make a start from just where we are,
using the present volume of money.
Senator H itchcock . Y ou say, in your opinion, some currency
would have to be retired to correspond to the increase coming from
gold?
Mr. S h ib le y . Yes.
Senator H itchcock . D o you think that with an increased gold sup
ply we could maintain prices somewhere near the present level?
Mr. S h ib le y . Yes.
Senator N elson . I think Prof. Fisher said there would not be a
gold inflation.
Mr. S h ib le y . I believe that you are mistaken in that. He is per
haps the best authority we have on that question in the United
States. He has paid great attention to it; has been getting together
all the factors and is keeping in touch with them. But his plan for
getting a stabilized price level is to change the quantity of gold in the
gold dollar, and that the Government should not regulate the volume
of the paper currency. I would stabilize the price level through
Government control of the volume o f paper currency. I would sug
gest the following section in the banking and currency b ill:
Sec. —. Th;it for the prevention of depreciation in the purchasing power of
money from the reduction in the volume of reserves to be carried by the banks
the Federal reserve board is authorized and directed to retire at the proper
time as much of the existing bank notes or their substitutes as may be necessary,
and for the retirement of Federal reserve notes shall issue bonds, etc.
Senator P omerene (interposing). Issue what?
Mr. S h ib le y . Issue bonds. I f bank notes shall have been substi
tuted by Federal notes, then in some way we must issue bonds to
retire part of those notes.
Senator N elson . Why issue bonds?
Mr. S h ib le y . In order to retire paper money. I f we have $759,000,000 of federal reserves notes out in place of the bank notes, when
the time comes to take some of it in we should have bonds on deposit
with the national board to be issued and retire some of the paper
money.
Senator P omerene . Suppose those notes were the regional reserve
banks already—the bank notes or Treasury notes or Government
notes, as you call them. You propose to retire that money which is
in the regional reserve bank by the issuance of bonds and giving those
bonds to the regional bank?
Mr. S h ib le y . I f the money is all locked up in those banks it will
not be in circulation, and so no bonds would have to be issued. But
under the plan 1 am proposing of no capital stock and a small amount
of bank reserves in the banks of issue—just enough to settle the daily
balances— there could be no retirement of the paper money now in
circulation, except through the issuance of bonds. The national
board would hold $759,000,000 of United States bonds for reissuance
provided the existing bank money is retired by substituting Federal
reserve notes.
Another paragraph I propose is as follows:
For the prevention of depreciation in the purchasing power of money from
too much money from the coinage of geld or other cause, the Federal reserve
1782
BANKING AND CURRENCY.
board is authorized and directed that if necessary it shall from time to time
retire some of the existing bank currency or its substitutes, as much as shall be
required, but not to exceed a total sum of $500,000,000.
If al any time $100,000,000 shall thus be withdrawn, the President is directed
to communicate with the Governments of the gold-standard countries and sug
gest that by mutual agreement the mint price of gold be somewhat lowered,
enough to result in a stable measure of value in the gold-standard world with
r
out being obliged to retire noninterest-bearing paper currency to make a plac e
for gold money.
Now I would ask the Senators to compare the other methods pro
posed for controlling the purchasing power of money and note how
inadequate they are. In neither of the bills that are before this com
mittee is there any provision for retiring paper money to offset the
increase in the volume of money that will come from lessening the
percentage of money to be held as bank reserves. There ought to
exist in the national board a power to retire as much paper money as
the maintaining of stability shall require. None of the bills before
this committee have in them the necessary provisions, and, therefore,
are vitally defective. The House committee’s bill has stricken from
it the requirement that stability shall be maintained and then pro
vides no way whereby paper money can be retired permanently.
Furthermore, in neither of the bills is there any plan for meeting
an excess volume of gold.
But I have faith that this Senate committee, composed of you men,
who for a lifetime have battled for stability in money, and at a time
when to do so was likely to prove unprofitable to you personally, can
now be depended upon to provide for stability in the bill to be re
ported to your colleagues.
V III.
I am now ready to take up the administration’s proposal for the
establishment of a Federal clearing house for the banks of our
country so as to provide for the free transfer of money and credits
throughout the Union, or that only a small charge shall be made.
This proposed system is largely copied from a system in Europe.
In Germany, for example, any depositor in the main office of the
Bank of Germany or any of its 493 branches can transfer credit to
any other of the said offices without cost. The explanation is that the
bank has the full use of the money during the time it is in its pos
session. The bank or branch issues a red check which transfers the
title to a credit; that is, the party who receives the transfer is cred
ited with the amount. I f cash is required, then a very small charge
is made. This small charge for cash results in the more frequent
transfer of credits, thus increasing the number who are placed on the
books of the bank as depositors, and in that way the business of the
bank is increased. This system of free transfer of credits is one of
the principal attractions of the Bank of Germany. (S. Doc. 508,
for 1910, p. 171.)
Senator H itchcock. H ow would you get that to be made here
where there are no individual depositors in the reserve banks?
Mr. S hibley . I am coming to that in just a moment, Senator.
This system of free transfer of credits is one of the principal attrac
tions of the Bank of Germany; but a handicap is placed upon this
bank of issue by not allowing it to pay interest on deposits.
BANKING AND CUBBENCY.
1783
Mr. N e l s o n . This bill, you mean?
Mr. S hibley . I am speaking now of the German system.
France, Austria-Hungary, and the other countries that possess a
central bank and branches have a similar system for the free transfer
of credits throughout the nation. The Swiss were without this form
of a bank until 1905. The amount of free transfers in little Switzer
land for the first nine months of 1908 was 7 billion 612 million francs,
the equivalent of
billion dollars. This is a remarkable showing.
This Swiss system and the other European systems are merely be
tween the central bank and its branches. Our proposed Federal re
serve bank plan is an improvement, for it should place in a -single
system all of the 25,000 privately owned banks, but only for the pur
pose of simplifying the expense of transferring money and credit
and for supplying the banks with an elastic volume of money. The
system should be such as to establish competition in the loaning of
money. The 25,000 banks should be coordinated for the purpose of
more cheaply transferring money and credits. To this end 12 regional
reserve banks should be established throughout the United States on
the mainland, and each of the privately owned banks that join should
keep with the reserve bank of its district a deposit sufficient to pay
the daily balances against it. That would not call for any more
funds of the private banks than their business shall require, and I
suggest that the Federal board be required to specify from time to
time just what the amount of reserves shall be, instead of stating the
percentage in the bill. In that way more of the State banks and
trust companies will join the clearing-house system; in fact, the plan
as a whole should be made so inviting that every bank in the country
will join, being obliged to do so in order to meet the competition of
the banks that are in the system. The State banks and trust com
panies can be in a class by themselves in so far as the rediscounting
of commercial paper is concerned, as I presently will point out.
There is another feature in the bill which should be changed, I be
lieve; it is the provision fixing the rate at which the banks shall
transfer funds throughout the country. The declaration is that “ it
shall be the duty of every Federal reserve bank to receive on deposit,
at par and without charge for exchange or collection,” certain checks
and drafts. (Sec. 17, p. 33, of House bill, lines 13-19.)
My suggestion is that the decision as to the rates to be charged
should be by the national board after examining the facts in the case.
That would conform to established principles. For example, the
Interstate Commerce Commission conducts hearings as to what shall
be the proper rates to be charged, and then a decision is rendered;
also, rates require changing, and nothing short of a commission or
board can handle the situation. Congress ought not to attempt to
do it. The fact is that in the proposed banking and currency law
the city bankers have secured in the bill a benefit for themselves at
the expense of the country bankers, as was admitted in the hearings
before this committee. Mr. Wexler and Mr. Reynolds stated that the
existing plan would do as I have stated, and both gentlemen recom
mend that the naming of the rate in the bill be stricken out.
I wish now to compare the proposed Federal clearing-house system
with the subtreasury plan.
1784
BANKING AND CURRENCY.
In order to establish a Federal clearing-house system there must
be provided the Federal reserve banks, or their equivalent, to act as
clearing houses for the several States and districts, forming them all
into a single organization with deposits by the banks in order to pay
the daily balances. But no capital stock is required for this clearing
house system, nor any more bank deposits than sufficient to pay the
daily balances. I am speaking of this clearing-house system. The
other functions of the reserve banks I will consider presently.
Let us compare the subtreasury plan. It is clear that the sub
treasury plan does not provide for the greatly needed clearing-house
system* for the entire Nation, and the simple and effective method
which the subtreasury plan would provide for issuing the elastic
volume of paper money and retiring it can be provided for in the
Federal reserve banks. And these banks would have the additional
advantage that each would be controlled by a board of directors
representing the people in the several regions of the country.
For these reasons I am unqualifiedly for the Federal reserve bank
system.
I now pass to other features in the Owen-Glass bill and will com
pare them with the successful systems in Europe.
IX .
I wish to direct your attention to the fact that European experi
ence has completely demonstrated that an elastic volume of paper
currency is of great benefit in connection with the gold standard.
England has no such system, while France and Germany have. The
comparative results are that while England changed her bank rate
186 times in 20 years, the French people with their elastic volume of
paper currency in connection with their gold money changed the
bank rate only 29 times, and in Germany the number of changes was
but 116.
Senator P omerene. What length of time?
Mr. S hibley . Twenty years.
The C hairman . The fluctuation in the bank rate was not great in
Germany and France.
Mr. S hibley . That is so; that is very important.
Senator H itchcock. I believe that the bank rate changes only once
a year in France?
Mr. S hibley . Only 29 times in 20 years, and this was largely
caused by trouble in this country and in England.
The C hairman . I will call the attention of the committee to the
fact that I have put into the record the changes in the interest rates
in these various banks for the information of the committee. That
was put in several days ago.
Mr. Shibley . O f course, the more frequent the changes in the bank
rate the greater the disturbance to business.
Furthermore, in England the changes in the bank rate have been
more violent than in France.
These facts demonstrate that an elastic volume of paper currency
in connection with the gold standard is a great benefit. Therefore
the Owen-Glass bill with its provisions for an elastic volume of paper
currency in connection with our gold standard is in line with modern
monetary science.
BANKING AND CURRENCY.
1785
X.
Furthermore, the experience of every nation in Europe demon
strates that an elastic volume of paper currency should be based on
short-time commercial paper, the same as is proposed in the OwenGlass bill. It is the cheapest and most effective way for enabling our
business men to produce goods and distribute them; and, as we are
in competition with the countries of Europe, we should supply our
business men with the same cheap and effective system.
A paper currency that requires the purchase of bonds by the banks
will not do because the banks would be required to invest a portion
of their capital in bonds to hold for the times when they temporarily
would need more money. Such an investment in bonds would trans
fer part of the bank’s capital from commerce, where it is greatly
needed at present, to a fixed investment, and no aid could come to
commerce only when a temporary need for an enlarged volume of
paper currency should arise; whereas, to expand the volume of paper
currency upon the ample security afforded by short-time commercial
paper and the indorsement of the banks will result-in the use of
the bank’s entire capital in commerce all of the time. That is a deter
mining factor. It is the system used in Europe by our people and
we should do equally well by our people.
X I.
In the next topic I shall be obliged to point out wherein the bill
before this committee is not in line with the successful currency sys
tems of Europe, and before going into that I desire to briefly review
the points considered and show that I am in complete harmony with
the main features of the proposed system.
The basic principle in the proposed system is that the people
through their Government shall control the purchasing power of
money and do so in such a way as to maintain stability therein. The
establishment of this system will mark the greatest advance in mone
tary science for the ]Dast 100 years.
Another far-reaching improvement is the proposal to place the
private banks of the country in a unified system for the entire
country for cheapening the cost of transferring funds—the Federal
clearing house.
X II.
But the Democratic House Committee on Banking and Currency
has stricken out the instruction in the bill that the control of the price
level shall aim at stability. And several other important features of
the administration bill have been stricken out by the Democratic
House committee. The House caucus accepted the leadership of the
House committee, and so the administration bill has been changed so
that it provides that the people through their Government will be
less able to protect themselves.
First, the House committee has provided that of the members on
the national board who are to be appointed by the head of the Gov
ernment, who himself was elected by the people and is responsible to
them, two of the four on the said national board shall be of the
1786
BANKING AND CURRENCY.
parties which the people rejected at the polls. The wording is that
“ of the four members thus appointed by the president not more than
two shall be of the same political party.” That is lines 13 to 15,
section 11.
This proposal is that the people shall not name a board that fully
represents them, but shall name two of the four who shall represent
the parties which the people rejected. The people at the polls re
jected the Republican organization and the Bull Moose organization,
yet the Democratic House committee has proposed that the adminis
tration bill shall be emasculated by providing that these rejected
organizations shall have two representatives out of the four who are
to be appointed. Thus the people’s victory at the polls last Novem
ber is being lessened.
Senator H itchcock . Y ou are ignoring the fact that there are three
from the Cabinet.
Mr. S h ib l e y . But of the four who are to be appointed, one-half
are to be members of opposite parties.
Senator H itchcock . Would you think it wise to have a Senate
solidly of one party? Is it not better, in Government affairs, to have
a minority voice represented ?
Mr. S h ib l e y . Yes; but what does a majority do? It goes off by
itself in caucus and simply comes in and says, “ Take this bill or
nothing.”
Senator H itchcock . Not with my consent.
Mr. S h ib l e y . The party caucus is a necessity, if platform pledges
are to be carried out.
Senator N elson . Y ou know that on the Interstate Commerce Com
mission we have always had both parties represented.
Mr. S h ib le y . W e ll, but that may not be ideal.
Senator N elson . We are not after ideal things; we are after prac
tical things.
Mr. S h ib le y . Gentlemen, there has been a great change in this
country. The people have now come into power, and they are going
to stay in power, as they have a direct primary which they will use
effectively, if necessary.
The Democratic House Committee on Banking and Currency went
much farther against the people’s interest than the instance I have
just cited. It has provided that either one of the members of the
parties rejected by the people may, in times of emergency, absolutely
veto any proposal by the national board that one or more of the
Federal reserve banks not in the zone of trouble shall aid the others.
You will find that in line 12, page 21, of the bill.
Senator R eed. In that connection, you notice that on the Federal
reserve board when the plan is in full operation, each member goes
in for eight years, so that you might have a board that had been
named by a President representing one national policy, and there
might be an election, completely, as far as the people could, turning
that administration out and changing the policy, and yet this board
would remain there and would not be affected by that change unless
they were arbitrarily removed.
Mr. S h ib ley . My suggestion is that the President be authorized to
recall any of his appointees on that board in order that the people
through their Government shall control. I f the people elect a man
BANKING AND CURRENCY.
1787
to carry out their policies, and then he is unable to do so, the people
will have been euchred out of their rights.
Senator B ristow . Who will recall him?
Mr. S h ib l e y . The people will attend to that at the primaries.
Senator Bristow. Suppose they can not do that for four years;
what will happen?
Mr. Shibley. That is the existing system of government.
Senator R eed. The point I am calling attention to is this, and I
think the committee ought to seriously consider i t : It is proposed to
establish a board, and when the law is in full operation you will
have a board of seven men. One of those men will hold for two
years, one for four years, one for six years, and one member will
hold for eight years. Under this plan a President’s successor will
have no appointment for two years. So that this board, when once
made up, might be composed of men all of whom believed in a cer
tain financial policy. It might prove detrimental to the country in
the opinion of the people. They might make an issue of that before
the country, and then there might be an overwhelming vote against
the policy which the board believed, and yet the President, unless
he arbitrarily removes the members, would be powerless to change
that policy, even though the people had voted for this change.
Mr. S h ib le y . That demonstrates that the proposed system is en
tirely wrong, and I call attention to the German system, in which
the chancellor himself controls the price level. Here in this country
we should do the same thing by making the President’s appointees
subject to recall; and they control the price level, because the most
important thing in this country is the control of the price level
through which our business is conducted.
Senator B ristow . Y ou say that the chancellor in Germany con
trols the price level? Do you mean he controls the rise and fall in
prices ?
Mr. S h ib l e y . He controls the bank rate.
Senator Shafroth. He influences the bank rate?
Mr. S h ib le y . Yes.
Senator B ristow . But there is a rise and fall in prices there, the
same as in this country.
Mr. S h ib le y . He controls the bank rate.
Senator B ristow . Does he put it up and down himself ?
Mr. S h ib le y . He possesses a veto power as to where it shall go.
Senator H itchcock . But the membership of the Direktorium does
not change; it consists of men appointed for life.
Mr. S h ib l e y . My understanding is that the chancellor has the
controlling power to say what the bank rate shall be.
Senator H itchcock . My recollection is that the Direktorium con
sists of men whom the Kaiser appoints for life.
The C h a ir m a n . The curatorium consists of the chancellor of the
Empire and the first minister of finance and three members of the
Bundesrath, corresponding to our Senate.
Mr. S h ib le y . With the committee’s permission, I will insert the
exact facts later in the record.
Senator H itchcock . My recollection is that the Direktorium con
trols the rate of interest, and the Central Ausschuss has the power of
veto on the decisions of the Direktorium so far as they affect loans
1788
BANKING AND CURRENCY.
to the Government; and the Direkt-erium, I think, is elected by the
Bundesrath, which corresponds to our Senate, so that the Kaiser
practically selects one board and the Bundesrath another and the
stockholders another.
Mr. S h ib le y . That is so, but that does not decide who it is that
controls the bank rate. I think the law states that the chancellor
shall control the bank rate, because the control of the bank rate pro
tects the very vitals of the German Empire.
Senator B ristow . I understood that you claim that the chancellor
of the German Empire could control the price level by the control
of the volume of this currency. I f he can do that, and if his ideas
are carried out, and he properly administers this power, there would
be no fluctuation of prices in Germany.
Mr. S h ib le y . His idea is to keep all the gold they can get.
The C h a ir m a n . What you intended to say was that he influences
prices, and not absolutely controls them so that they never fluctuate
at all, did you not?
Mr. S h ib l e y . N o ; you are-----The C h a ir m a n (interposing). The Senator understood you to say
there was no fluctuation of prices because the chancellor controlled
them. You inteded to say he could influence them by fixing the rate?
Mr. S h ib le y . He controls the price level, because he controls the
rate.
The C h a ir m a n . Y ou mean he influences them, not controls them,
do you not?
Mr. S h ib le y . He controls the price level inside the German Em
pire. I f he puts the rate up to 10 per cent, he controls the price
level.
Senator S hafroth . The price level of wheat, for instance, is con
trolled by the London market.
Mr. S h ib le y . I am speaking about the purchasing power of money.
I am speaking about the price level in Germany.
Senator N elson . His theory is we can control it in this legislation.
Mr. S h ib le y . What does the Bank of England do? It raises the
interest rate; and does not that drive the price level down ?
Senator S hafroth . It has that tendency, but it would not affect
the price of wheat.
The C h a ir m a n . He is not speaking of an individual item; he is
only speaking of a great group of items. He is speaking of the in
fluence upon it, and not the absolute control of it. The chancellor
may influence it, but to say that one man absolutely controls the
prices, I think is wrong. It can not be done.
Mr. S h ib le y . I a m speaking about the price level, and the Sena
tor from Colorado is speaking about the price of a particular com
modity. In using the word “ control,” I think we should get into our
minds thoroughly the fact that the Bank of England exercises that
power when it raises the interest rate. When they make a rate of
10 per cent, it makes prices drop somewhat. That is control within
that country. Thus the Bank of England is able at will to draw gold
from all over the world, just as the German chancellor is able to draw
gold.
Mark you, gentlemen, the proposal in the House bill is that the
people’s control over the Federal reserve system in time of trouble
shall absolutely be discontinued by providing that any one of the
BANKING AND CUEEENCY.
1789
representatives of the party not in power in the land shall become
the controlling power in the monetary system. Could a worse pro
posal be offered?
Thus, the Democratic House Committee on Banking and Currency
have seriously emasculated the administration bill, and the House ac
cepted the committee’s leadership. Nine of the Democrats voted
against the bill, having fought for the restoration of measures for
protecting the people’s interests.
In connection with what I have shown, please bear in mind that
the House committee, against the protests of a minority of the
Democratic members, further restricted the power of the people’s
representatives on the national board by providing for a national
committee of the representatives of the bankers to sit with the peo
ple’s representatives, and not providing that the merchants and the
manufacturers, wage earners, and others be accorded representation
along with the bankers. This special privilege for the bankers is
utterly opposed to the doctrine of self-government by the people,
and nowhere in Europe, as we have seen, are the bankers given the
control in any way over the organization whereby the monetary
system is regulated. Thus the people of Europe are protected. That
is the European system.
X III.
And it is the system which the administration in this coun
try is aiming at, and the chairman of this Senate committee is
vigorously championing it. For example, in answer to Banker Tal
bert, of New York City, the chairman of this committee said:
The bankers have no more right to ask to take charge of the governing
functions of the United States proposed to be exercised by the Federal reserve
board than the railroads would have a right to demand control of the Inter
state Commerce Commission, which is intended to regulate them in the interest
of public justice. The bankers have no more right to ask control of the Federal
reserve board than the beef packers of Chicago to demand the right to ad
minister the pure-food act, which is intended to regulate beef packing in the
public interest.
That is a true statement of the situation.
I also especially commend the following by the chairman of this
Senate committee in his reply to the New York bankers:
I ask you in return, “ Shall the control and domination of the banking business
of the United States, including note issues, bank credits, and the cash reserves
of the banks, be retained unconditionally in the hands of certain men like your
self for mere money-making purposes without responsibility to the people of
the United States, and shall men like yourself exercise an invisible govern
ment over the commerce and industry of the United States and without control? ”
The issue is well drawn by you. Either a half dozen private persons in the
United States will continue the control and domination of the banking business,
of the credit business, and therefore of the commerce and industry of the United
States, or the Government of the United States must assume so much control
as is essential to safeguarding the commerce and industry of the Nation in
the interest of all the people including the banks.
You ask me, “ Is there wisdom O safety in placing such power in the hands
r
of a board of seven individuals having no personal interest in the banks?”
I ask you, in return, “ Is there wisdom or safety in leaving such power in
the hands of a like number of bankers in Chicago and New York, having a
personal interest, but who have no personal responsibility to the people of the
United States and who have demonstrated their inability, if not their un
willingness, to protect the stability of the commerce of the United States?”
1790
BANKING AND CURRENCY.
The very fact the Federal reserve board has no personal interest, but acts
from a governmental and altruistic standpoint in the interest of all of our
people, in the interest of every branch of commerce and industry of the United
States, the banks especially included, is the best answer to your objection. It
is true there are quite a few thousands of bankers, but there are 90,000,000
people under our flag who are not bankers. (S. Doc. 144, 63d Cong., 1st sess.,
P - 4, 5.)
P
I am presenting facts which show that a fundamental difference
exists between the administration and the House Committee on Bank
ing and Currency, whose leadership has been accepted by the Demo
cratic House.
X IV .
In this connection please note the change which the House com
mittee has made in the bill, proposing that the rate of interest which
the bankers shall receive on their investments in the Federal reserve
banks shall be excessive. Even the Aldrich bill proposed only 5 per
cent return, because there would be no risk from loss, such as there is
when capital is loaned in commerce. Government bonds will float at
3 per cent, and that probably is the rate at which the people would
gladly take the investment proposed in connection with the Federal
reserve banks. But the House committee proposes that upon the in
vestment which it is proposed that the bankers shall make by the
transfer of some of the commercial paper on hand the rate of profit
shall be 5 per cent plus 40 per cent of the net earnings above the
maintaining of a 20 per cent surplus by the reserve banks. I refer
you to section 7, page 13, lines 5 to 9 of the bill.
Bad as this seems it is much worse, for that 40 per cent for the
bankers would be not alone on what their capital would earn, but
includes the huge profits from the issuance of paper money and the
use of Government deposits.
I have not yet finished pointing out the changes in the adminis
tration bill by the House committee. Look at section 19, entitled
“ Refunding bonds.” The administration was liberal with the na
tional banks in this section, but the Democratic committee went
much further and struck from the bill the words “ without the con
sent of the Secretary of the Treasury,” in connection with the pro
vision for the retirement of bank money, so that the bill as amended
reads:
No national bank shall in any one year retire more than 5 per cent of its
special-privilege bank money.
That is line 1, page 35. Thus the Secretary of the Treasury is not
to be permitted, if the Democratic House can have its way, to per
mit the retirement of more than 5 per cent annually of the bankers’
money. But that favor to the bankers is small as compared with the
proposal inserted by the House at the end of the administration’s
section on this general subject. Here is what the House committee
proposes:
Meanwhile every national bank may continue to apply for and receive circu
lating notes from the Comptroller of the Currency, based upon the deposit of 2
per cent bonds or of any other bonds bearing the circulation privilege, but
no national bank shall be permitted to issue other circulating notes except such
as are secured as in this section provided or to issue or to make use of any sub
stitute for such circulating notes in the form of clearing-house loan certificates,
cashier’s checks, or other obligation.
BANKING AND CURRENCY.
1791
This illustrates the tendency of the majority of the Democrats in
the House Committee on Banking and Currency. The Democrats
in the committee who stood for the people’s interests became in
surgents, and it is up to this Senate committee to pass upon the
emasculated administration bill.
XV.
I now take up again the consideration of the successful elements
in currency and banking in Europe, and will compare the proposals
in the administration bill.
Beginning in 1870, during the Franco-German War, the paper cur
rency in France became full legal tender, and the results have been so
beneficial as to cause Germany, in 1909, to adopt the same system.
Therefore we should study with great care the reasons why Ger
many changed from a nonlegal-tender bank note to one that is a full
legal tender. First, let us note how France has built up her won
derful gold reserve, the largest pile of gold anywhere in the world.
The way the French Government has built up its gold reserve of
4,000,000,000 francs, amounting to $800,000,000, has been by exchang
ing legal-tender bank notes for the gold. That is a very simple
process. Wherever the bank of issue through which the Govern
ment has operated has been able to buy gold it has done so.
In England, too, a full legal-tender paper money is issued in ex
change for gold coin and bullion, and the amount of the precious
metal thus on hand August 9 of this year in the Bank of England
was the equivalent of $177,000,000, or less than one-fourth as much
as the French gold reserve.
In Germany until four years ago the bank notes of the German
Imperial Bank, through which the German Government operates,
were not legal tender, and it placed Germany at a serious disadvan
tage, for the gold reserve could not be built up so well. The banks
and the people took the gold because it alone would legally pay debts,
whereas in France the paper currency was equally good with gold
in paying debts, and so the banks and the people willingly kept
the paper currency, and their Government took the gold as fast as
it could get hold of it, and issued against an equal amount of legal
tender paper money, and now that Government possesses the largest
pile of gold in the world, although within the borders of France there
is less gold than in Germany. On the other hand, the German Gov
ernment, after 30 years of use of this nonlegal-tender paper currency,
ran onto financial rocks in 1906 and 1907, and an inquiry was there
upon ordered by the Government. At the inquiry the head of the
German Imperial Bank pointed out the disadvantages that had been
experienced from the nonlegal-tender character of the paper money
and earnestly asked for a legal-tender paper money in connection
with the gold standard. This request and the discussion thereon by
the commissioners is published in the volume entitled “ The German
Bank Inquiry of 1908.” This volume is in the series published by the
Aldrich Monetary Commission, while the subject matter is indexed
under the title “ Legal tender.” Also5 in the volume of the Aldrich
commission entitled “ Renewal of Reichsbank Charter” the official
utterances of the Government in proposing the legal-tender provi
sion are set forth, pages 97 to 103, and the resulting law is stated on
9328°— S. Doc. 232, 63-1— vol 2----- 53
1792
BANKING AND CURBENCY.
page 264. Important quotations I wish to include in my statement, if
that may be done.
The C h a ir m a n . I f there is no objection that permission will be
granted.
Mr. S h ib ley . After the legal-tender bank notes were supplied in
Germany, the gold reserve was steadily built up and in four years
it was twice the size it was in 1906 and 1907. On August 9, this year,
the volume was $350,000,000, being nearly 70 per cent of the out
standing paper currency, as compared with about 331 per cent in
1907, the date when the German monetary system was on the rocks,
as I have said.
And yet, in the Owen-Glass bill, approved by the administration,
the proposal is that here in the United States we shall use a crippled
legal-tender paper currency, making it receivable for public dues
only, and not a legal tender for private debts, and therefore inferior
to the gold money. To establish such a system will bring upon us
the same difficulties that the German people experienced for 30 years.
The explanation of this proposal in the Owen-Glass bill, approved
by the administration, is that Chairman Owen and the others who
framed the bill did not have before them the facts that I have pointed
out. The Senate committee had only just been named, and the de
tails concerning the German experience was not known to the framers
of the bill. In fact, the German experience was not placed before
this committee until a few moments ago. Am I right?
The C h a ir m a n . I will say in that connection that I think these
notes ought to be legal tender for the reason you have stated, and
because it has been found by England, France, and Germany that
legal-tender notes were the better public policy.
Mr. S h ib ley . Has the record contained the facts that I am stating
before the committee at this time?
This question is a new one in connection with the proposed banking
and currency law for the United States. Such being the case, each
point is to be carefully weighed. In that connection I simply direct
your attention to the incontrovertible fact that the German monetary
system resulted in such difficulties in Germany in 1907 that there was
an official Germany bank inquiry. A commission was appointed
and experts were examined. The commission then discussed the
situation, and then the German Government proposed a bill for the
amendment of the German act, and it was adopted in 1909.
In that proposal it was asked that the notes of the central bank of
issue be made legal tender, and the law so declared. This is
article 3 of the law of June 1, 1909, concerning changes in the bank
act. A literal translation of the wording of the German law is:
“ The notes of the Reichsbank are legal tender.” You will find
that on page 264 of the Renewal of the Reichsbank Charter, Senate
Document 507, of 1910.
That was the principal chamre in the law, and the results of the
change were that no longer was it at all difficult to increase the volume
of the central gold reserve. The banks and the people were con
tent to use the paper currency, because it was full legal tender. Up
to the time of the change, however, nothing but gold was a legal
tender, and the consequence was that as the gold could not be in
the tills of the banks and in the central reserve at the same time the
central reserve had to suffer. The principle is self-evident. The
BANKING AND CURRENCY.
1793
reason why this principle was not recognized in the German law of
1876 was that the bankers and their helpers interfered, just as they
are interfering here in the United States. Then, after 30 years of
use of the bankers’ plan by the people, the system broke down com
pletely, while the neighboring countries were possessing larger and
larger gold reserves. On this point I quote from the address by
Dr. Wagner as a member of the commission that carried on the
German bank inquiry of 1908:
If we sum up all this, we find that these great banks and bank systems of
Europe received, between 1890 nad 1902, 4 billion and 300 million kilograms of
gold, but in this improvement the German Reichsbank has no share whatever.
And he added:
Well, this is certainly something to think about. If, in a period of the most
gigantic augmentation of gold through new production known to history, a
period in which the increase is still continuing to progress, the Reichsbank
has not permanently augmented its gold supply, or could not augment it, we
can see what a difficult position we are in. We must reckon with the facts.
You will find that in the German Bank of Inquiry of 1908, page
398 of volume 1 of the edition of the National Monetary Commission.
The reason why the banks of issue in the leading countries other
than Germany have been able to build up central gold reserves was
that the paper currency issued in exchange for gold was legal tender,
thereby permitting the gold to stay where it belonged—in the central
reserve—ready for use. These facts concerning the legal-tender paper
were outlined briefly by one of the German commissioners in the
German Bank of Inquiry. He enumerated France, England,
Austria-Hungary, Italy, and Africa, saying:
In short, we could point to the fact that it is the almost universal practice of
the leading nations of Europe, as regards their central banks and the notes
issued by these, that they shall be legal tender.
That statement ought to be indelibly fastened upon the mind of
each member of this Senate committee, namely, that the almost
universal practice of the leading nations of Europe has been and is
to protect the central gold reserve by using a legal-tender paper
currency.
Senator N elson . That there may be legal-tender paper currency
redeemable in gold?
Mr. S iiib le y . Surely that is what it ought to be here.
Yet, with these indisputable facts before us, and also the fact that
Germany actually lost the gold standard temporarily because of
a failure to provide a legal-tender paper currency, the university
professors in the United States who are specialists on money and
banking have not come forward and told you these facts. There
has been a “ conspiracy of silence,” except as they have taken active
steps to falsify this European history.
Senator P omerene . Why should they be interested in it?
Mr. S iiib le y . They must be “ sound-money ” professors or they
would not hold their jobs.
Senator P omerene . D o you make that charge general against all
these professors of finance?
Mr. S h ib l e y . The difference between the American system and
the European system is that in Europe the professors are appointed
by their fellow experts. In this country they are selected by boards
of directors composed largely of business men, who get their dona
1794
BANKING AND CURRENCY.
tions from the rich, and the professors have to express sentiments
that will draw the money of the rich. There are a great many
private corporations, such as the Chicago University, the Rockefeller
University, that are of that type.
Senator P omerene . Rockefeller is not a general rule.
Mr. S h ib le y . We have all these institutions supported by private
wealth, and the professors are selected by the board of directors and
can be discharged at the end of the year, and therefore they have got
to keep in touch with that sentiment.
Gentlemen, in this connection I wish to say that in 1898 there was
called to my attention the fact that there was published in the Chi
cago Tribune one morning a two-column article by a university
trustee of Northwestern University in which he laid down principles
which he thought should govern the hiring of professors in American
universities. He said that the only proper method was to see that
the professors of political economy should be kept within the lines
laid down by the board of directors. He said that was the only
proper system.
I went out to interview him. He stated that he had received from
all over the United States very favorable comments in regard to that
method of controlling the teachings in the universities. I called on
the other members of the board of trustees, and in every case they
said the professors must keep within the lines or walk the plank.
After that I interviewed the trustees of the various large universi
ties of the country, and I found, without exception, that they said in
each case, when it comes down to these close hot questions, the board
of directors have got to control, whereas in Europe the professors are
left absolutely free, having been selected by fellow specialists. They
are given a life tenure, and they are free to say what they choose.
So on the question of bimetalism I found that in the United States
the university professors had concealed the fact which the British
commission had stated or were falsifying the fact.
I quoted Gen. Walker as to why it was. The excuse is that the
people are not to be trusted to control the volume of paper money.
I brought this forward to show you how little value you can place
upon the testimony of these men. They have not come forward and
stated to you these facts about Germany. I know of at least on in
stance where there has been an attempt to conceal the facts. For ex
ample, in these hearings Prof. Sprague interrupted Banker Reynolds
and said:
Mr. Chairman, might I be permitted to make a statement at this time?
The chairman said:
Yes; gentlemen, this is Prof. Sprague, of Harvard University,
who then said:
Prof. S p r a g u e . The issues of the Reichsbank of Germany were made legal
tender only three years ago in the last revision of the charter. They had been
accepted quite readily by the other banks, and the proposition to make them
legal tender was in no sense a banking proposal.
They were made legal tender because it was thought that in case of war the
notes would be more serviceable for the Government, since In case of war a
very large issue of Reichsbank notes will unquestionably be made. It was
thought desirable to insure the general acceptability of those notes for that
reason and for that reason alone.
BANKING AND CURRENCY.
1795
Similar is the case of the Bank of France. The notes were made a legal
tender at the time of the Franco-German War, in 1870, in order to secure their
general acceptability throughout the country. The Government was at that
time, through the Bank of France, making large loans, and the notes were going
into circulation in enormous quantities, and were not, at the moment, redeem
able in gold.
Senator S h a f r o t h . That was considered, then, the strengthening feature to
the currency, was it not?
Prof. S p r a g u e . Yes; but not for banking purposes at all (p. 297).
In Germany the Government, even after the actual breakdown of
the plan for building up a large central gold reserve was met with
opposition by the bankers and their so-called experts, who craftily
worked against the establishment of legal-tender bank notes for the
bank of issue or any other bank. Thus in Germany there were
and are to-day the same class of “ sound-money ” advocates as here in
the United States, men who falsely assert that the reason why it is
inadvisable to issue legal-tender paper currency is because the peo
ple, if they know how to do it, will, through their Government, over
issue it, in order to rob creditors. The existence of this conspiracy
in Germany, largely through a conspiracy of silence, is testified to
in the following words by the chairman of the 1908 commission on
the German bank inquiry, when he came to address his fellow com
missioners on the subject of legal tender. He said:
I would call you attention, for the purpose of full consideration of the ques
tion, to several aspects of the legal-tender question which the experts whom we
have hitherto listened to have either not discussed at all or have only touched
the surface.
There you have it. The German committee that sat and listened
to the “ experts ” found that in the German bank ipquiry of 1908 the
said experts did not at all discuss the thing which afterwards proved
to be the remedy, or they merely touched the surface.
Upon the main point at issue, the protecting of the central gold
reserve, the president of the German Bank of Issue and the chair
man of the commission of inquiry said;
At the hearing of the experts last spring they treated this question of gold
reserve almost exclusively from the standpoint of an enlargement of the Reichsbank stock of gold and with regard to times of peaceful and normal economic
development and scarcely considered that the legal-tender quality of the notes
may also perhaps be of importance in protecting the store of gold in possession
of the bank, particularly in political or economical crises.
This is as severe an arraignment of bank experts as could be made.
Subsequent events have demonstrated that these bankers were so
badly influenced by their previous teachings and their banking en
vironments that they deliberately recommended to the nation that
which would have made bad conditions much worse. The original
trouble came from accepting the advice of their fathers, who had
been connected with the bankers 30 years before. You may be ask
ing in your minds how bad were the conditions in Germany in 1908.
I will quote the utterance of the president of the German bank, who
was legally responsible for maintaining the gold reserve. I will
quote the words which he placed in the published report of the com
mission of inquiry. He said:
Last year [that is 1907] we were not far from a one-third covering of our
notes. The Reichsbank dispelled the danger at that time by drawing in gold,
making great sacrifices to do so, but it had not at its disposal any means of
1796
BANKING AND CURBENCY.
keeping tiie danger off unconditionally. I hope and wish that we may be
preserved from the recurrence of such a crisis.
Gentlemen, at that time a host of suspicions were spread about by foreign
newspapers relating to our general condition. It was declared that the entire
economic development of Germany was facing a great collapse; it was prophe
sied that our great institutions would not be able to maintain their solvency;
it was predicted that the Reichsbank would no longer be in a position to pro
tect the gold standard, to maintain the one-third covering of the notes; it was
asserted that the Empire itself was in such confusion and disorder that it did
not have sufficient means at its disposal for its domestic and current needs and
that it could not raise them owing to the lack of the spirit of sacrifice on the
part of the Reichstag and of the people; the feeling was sought to be aroused
that if the Empire was unable to meet even the needs of a time of peace it
would be in no condition at all ever to provide the means to carry on a war.
(P. 702.)
Such were the statements in some of the foreign papers, and I
now will give you an inkling of what actually occurred.
The managers of the Reichsbank concealed from the public how
little gold it had on hand against its paper money by publishing each
week a statement giving its combined holdings of gold and silver.
That this existed, this refusal to publish the amount of gold on hand
is admitted in the published report of the German bank inquiry at
pages 395 and 703. So you see the German gold standard was ac
tually down and out temporarily. But by providing for legal-tender
paper in combination with the gold standard all trouble was over.
At this time Germany as a whole possessed more gold than the French
Nation and more than any other country in Europe (p. 42, S. Doc.
507, 1910), yet the lack of a proper paper currency threw Germany
into the difficulties that I have just described.
The president of the Reichsbank, in his argument to the members
of the commission that was to decide upon the proposal for legaltender paper to cure the trouble, said to the commissioners:
We are after all doing only what England and France did long ago. We have
every inducement to win back the respect for German conditions, which has
now and then been impaired abroad through malicious libels. (P. 704.)
Let us profit by those bitter experiences of the German people.
It appears that back in 1874 several of the commission that drafted
the bill for a unified control of the German monetary system pro
posed a legal-tender currency in combination with specie, but the
bankers succeeded in overruling them. The bankers acted selfishly.
Now, after 30 years of struggle with a crippled paper currency in
combination with metallic money, the German people in the year
1909, after the bankers’ crippled system had collapsed, put in the
legal-tender currency in combination with the gold standard, and all
went smoothly. To-day the German central gold reserve is 70 per
cent of the volume of paper currency, while in 1907 the volume of
gold was probably less than the legal limit of 33^ per cent.
Here in the United States the people’s representatives, the progres
sive Senators and Congressmen, should profit by this German expe
rience. Especially should we profit by the determination of the
German Parliament to no longer pay any heed to the slanders and
libels of the bankers that the people, even o f the Teutonic subrace
o f the great Aryan stock, are robbers by nature and will overissue
the paper currency, unless they are deceived by the bankers and other
b a n k in g
and
currency.
1797
teachers as to what paper money is. The president of the German
K-eichsbank in meeting that issue diplomatically said:
Gentlemen, I do not for a moment fail to recognize the seriousness and
weight of the objections that have been urged against th;s measure. You are
familiar with them also, gentlemen, and I refrain therefore from presenting
them once more in detail. (Page 704.)
It is high time that the baseless libels by the bankers against the
people’s capability for self-government shall be exposed. The bank
ers and their assistants will of course object to legal-tender bank
notes in the United States in connection with the Federal reserve
banks. Mark you, I said “ legal-tender bank notes,” for our paper
currency should be the obligation of the Federal reserve banks and
not be Treasury notes, for reasons which I presently will state.
'What is needed is legal-tender paper currency in connection with
the gold standard, and a refusal to provide it would doubtless place
our country in the same difficult position that Germany experienced
for many years. Therefore to listen to the bankers and refuse to
provide a legal-tender currency would be criminal. The effects of
a monetary system can now be foretold with almost absolute cer
tainty, for we have at hand the facts of history concerning currency
and banking in the leading nations. The difficulty, however, is that
this Senate committee is bombarded by the bankers and others who
are doing their utmost to keep from you the real facts of history.
For example, the bankers stoutly denied for a time that the govern
ing board of the Bank of England was controlled by the merchants
and others who are not bankers, and there has been “ a conspiracy of
silence ” about the collapse of the gold standard in Germany because
of the crippled form of the paper currency. However, this Senate
committee has pierced through the fallacies of much that has been
placed before it, and will not succumb, I am sure.
I will insert at this point verbatim statements by leading Germans
concerning the need for legal-tender paper currency.
At a session of the commissioners of the German Bank Inquiry of
1908 (Oct. 15, 1908) Hon. Chairman Havenstein, president of the
Keichsbank Direktorium, said:
Permit me, gentlemen, before we enter into the discussion, to make a few
introductory remarks upon one of these points, and that is the making the
notes a legal tender, in regard to which, should it ever be enacted, the Bundesrat
will soon be called upon to decide. And pardon me if, in view of the impor
tance of this point, I should for once transgress to some extent the personal
reserve which I must here impose upon myself. I am convinced, gentlemen,
that the investing of bank notes with the quality of a legal tender is out of
the question unless we assume first of all, as a matter of course, that our gold
standard is to be absolutely maintained. The rocher de bronce of the gold
standard is the redemption of notes in gold; no tampering, under any circum
stances, can be premitted here. Consequently, I regard the theory of Dr.
Arendt, even from the standpoint of bank policy, if the bank is not itself to
destroy confidence in its good faith, as beyond the pale of discussion, besides
being firmly convinced that it is absolutely untenable as a matter of law— the
theory, namely, that the redemption of 1,000,000 marks in 1,000-mark notes or
20-mark notes could be broken up into 1,000 separate transactions relative to
1,000-mark notes or even into 50,000 relative to 20-mark notes. But, gelitlemen,
assuming the absolute maintenance of the gold standard, the redemption of the
notes in gold and the discarding, therefore, of the idea of forced circulation,
I would call your attention, for the purpose of a full consideration of the
question, to several aspects of it which the experts whom we have hitherto
listened to have either not discussed at all or have only touched on the sur
1798
BANKING AND CURKENCY.
face. In this body, whose counsel is of particular importance to the preliminary
deliberations of the Bundesrat concerning the supplementary bank law, I am
anxious that this question should be elucidated on every side and that its seri
ous aspects should by no means be left out of account.
At the hearing of the experts last spring they treated this question almost
exclusively from the standpoint of an enlargement of the Reichsbank’s stock of
gold and with regord to times of peaceful and normal economic development,
and scarcely considered that the legal-tender quality of the bank notes may
also perhaps be of importance in protecting the store of gold in possession of
the bank, particularly in politically or economically critical periods. And even
where one or another did touch upon such critical times, he fixed his attention
mostly upon a war, and then only upon the period immediately following its
outbreak, pointing out that it was a question at the utmost of only a few criti
cal days, which could be weathered, and that making the notes legal tender and
possibly the forced circulation of them might then become a necessity, but that
it would be time to enact those measures then, and that they could be legally
passed in a few days by the Reichstag and the Bundesrat—for the power of
issuing an emergency decree is not provided for by the constitution of the Em
pire. But the possibility that we may have grave political crises when legal
measures can not at once be enacted, and that a war does not necessarily break
out overnight, but may be impending for weeks and months, producing con
stantly increasing uneasiness in the business world, hardly one of the gentle
men seemed to have thought about.
But, gentlemen, it is not necessary in this connection to think of war at all;
we may go through protracted political or economic hard times in peace also.
Are we really so absolutely sure that with us an economic crisis, a failure of
confidence, an intense demand for money, a run upon savings or other banks,
may not, under a conjecture of untoward circumstances, occur, even though,
thanks to the elasticity of our central bank of issue, hardly to the same extent
as in the United States?
The question whether we do not need the same defensive apparatus with
which all our great neighbors, and particularly England and France, have
long since provided themselves may at any rate be worthy of earnest considera
tion, «ven if we leave an actual panic that may seize upon the people at large
and the business community entirely out of account. And it is very obvious
that at such times every individual strives to put himself into a strong position
financially, to have his resources mobile and available; that every bank, every
public fund, every disbursing officer, savings bank, cooperative institution, and
whatever else they may be called, will, or at least may, make a strong effort
to secure for themselves the means of meeting all possible demands for pay
ment, and therefore for greater amounts than are needed in normal times. It
may likewise be assumed as certain that efforts to secure those means to pay,
on the part of private persons as well as of the banks and other payment
institutions, will be directed toward procuring as much as possible of that
kind of money regarding which the possessor is sure that he can use it in pay
ment under all circumstances—that is, money that is legal tender. Up to the
present, however, gentlemen, it is only gold that plays this part.
That in such periods of long-continued, steadily aggravated crises an acute
feeling of insecurity and unrest may pervade the business community in gen
eral, precisely because the creditor demands of his debtor the only uncondi
tional kind of money—that is, gold—is conceivable; that this endeavor, mani
fested in larger or smaller strata of the population, these necessary efforts
of the banks, disbursing offices, savings banks, etc., to procure this sole abso
lutely valid and disposable form of money, gold, may react strongly, and under
certain conditions, to a dangerous extent, upon the Reichsbank and its stock
of gold, is at least possible and perhaps probable; and this would happen par
ticularly at a time when it must strive to guard its stock of gold with the
utmost care, while as matters now stand it has no means of really protecting it.
Now, it seems plain that the investing of our bank notes with the legal
tender quality would remove the chief motive which, under present conditions,
impels great numbers of private individuals and notably banks and disbursing
offices, to provide themselves specifically with gold and that in great quantities;
and the number of people who will then apply to the bank to have notes re
deemed will not, I believe, under any circumstances be a dangerous one, so
long, of course, as the credit of the bank is maintained.
Gentlemen, it may be doubted—and I concede this at once— whether these
possibilities will become realities, and how far the uneasiness and the imperil-
BANKING AND CUBBENCY.
1799
ing of business and the imperiling of our gold will extend in such crises. But,
gentlemen, in forming your decision you will have to put this question to your
selves also: Whether the bodies that are responsible for the utmost possible
security of business—and for the present, you, too, are among them— should
not consider, judge, and prepare the measures required for such grave emer
gencies from the standpoint of the pessimist and of the man who goes, it may
be, to the furthest limits of caution?
Gentlemen, it will have to be considered, too, whether it can be assumed as
certain that we can not experience such crises in the next 10 years and whether
the enactment of the supplementary bank law is beyond doubt the most appro
priate means of attaining this security for our financial and economic dealings.
For, gentlemen, that any special act, any special law would spread this uneasi
ness in tenfold measure, both within the country and abroad, can not be a
subject of doubt.
And there is still another aspect, gentlemen, which likewise has not been
touched upon. Last year we were not very far from a one-third covering of
our notes. The Reichsbank dispelled the danger at that time by drawing in
gold, making great sacrifices to do so, but it had not at its disposal any means
of keeping the danger off unconditionally. I hope and wish that we may be
preserved from the recurrence of such crises. But is it wholly inconceivable
that such a crisis, and even a graver one, may again come upon Germany?
Gentlemen, at such times if our notes were legal tender it might prove a power
ful aid to the Reichsbank. Just think of it, gentlemen; the ministers of finance
of the Empire and of the Federated States would only have to express their
readiness—and they would surely do that at once—at the request of the Reichs
bank to direct the state treasuries and public depositories to pass over their
stock of gold for a few days to the Reichsbank. If this were done a few days
before a day of heavy payments all danger that the Reichsbank might, even at
the time of heaviest drain, fall below the one-third covering would be at once
removed.
Finally, gentlemen, even in times when economic conditions are perfectly nor
mal, the banks and other disbursing places would not need to keep as large a
stock of gold on hand as they are now obliged to do on account of gold being
the only legal tender; and this, gentlemen, might also have the effect of directly
and permanently strengthening the Reichsbank’s stock of gold.
Now, gentlemen, in the deliberations of the experts a great many objections
were raised; objections, in the first place, based upon Dr. Arendt’s theories.
I think I may leave those aside. Much more weighty and grave were the objec
tions expressed in a very distinguished quarter that such a measure might pro
duce a very serious and undesirable effect in foreign countries as regards their
judgment of our entire economic situation and their reception and valuation
of bills drawn on Germany It was, however, at once pointed out by more
than one person that an objection of this character could apply only to the
question of the timeliness of such a measure in view of the grave attacks which
had so recently been made abroad upon our entire economic organization.
Gentlemen, in this connection I would beg you to consider whether, even if
this objection should have been accorded full weight if we had proposed such a
measure at the close of 1907 or in January or February, 1908, the same weight
is to be attached to it now after the interval of a year and with the possibility
that it may be months before the law is taken up in the Reichstag. Gentlemen,
at that time a host of suspicions were spread about by foreign newspapers re
lating to our general condition. It was declared that the entire economic de
velopment of Germany was facing a great collapse; it was prophesied that our
great credit institutions would not be able to maintain their solvency; it was
predicted that the Reichsbank would no longer be in a position to protect the
gold standard, to maintain the one-third covering of the notes; it was asserted
that the Empire itself was in such confusion and disorder that it did not have
sufficient means at its disposal even for its domestic and current needs, and
that it could not raise them owing to the lack of the spirit of sacrifice on the
part of the Reichstag and of the people; the feeling was sought to be aroused
that if the Empire was unable to meet even the needs of a time of peace it
would be in no condition at all ever to provide the means required for carrying
on a war.
Gentlemen, we have in the meanwhile grown a year older, and what is
actually left of these libels to-day? This year has taught, here and abroad,
that our economic development, though it has again struck ebb tide, is, on the
whole, undoubtedly sound; that the banks have not announced their insol-
1800
BANKING AND CURRENCY.
vency—this year it is to be hoped, will show that the balance sheets of our great
banks will present a different appearance from that of last year; the Reichsbank is stronger by half a billion; and the criticism that it can no longer
maintain its one-third covering and the gold standard will, at all events, lose
its whole force if the Reichsbank decides, either at the same time or before, to
give to the public separate accounts of its holdings of gold and silver, and show
that it does not, and need not, fear criticism.
The conditions in our country assume a different aspect, too, through the
circumstance that the Imperial Government is about to submit a great scheme
of taxation, and flsks the Reichstag to place the Empire in a position of inde
pendence. I earnestly and confidently hope that the Reichstag will not be deaf
to this appeal, and that the Empire will, speaking broadly, next year stand
financially on its own feet.
Gentlemen, all these are elements which can not even by a malicious spirit
be looked upon as signs of weakness and unsoundness, but as displaying, on
the contrary, the marks of vigor and health, of determination and ability to
act; and this may be the very thing to strengthen confidence in the Reichsbank
notes, in the maintenance of our monetary standard, and in the soundness and
security of bills drawn on Germany. We are, after all, doing only what Eng
land and France did long ago. We have every inducement to win back the
respect for German conditions which has now and then been impaired abroad
through malicious libels, but perhaps the best way to do this is to show deter
mination, and to show that we are not afraid of criticism.
Gentlemen, I request you to consider also—particularly those gentlemen who
raised the objections half a year ago, and they were men of great prominence—
whether those objections would not in their eyes, too, perhaps, lose some of
their weight if the bill were to be brought in, not within the next fortnight,
but only after the lapse of some months; and if, in that time, our German
economic conditions continue their healthy development, the Reichsbank re
mains strong, the German banks make a different showing to the public from
that of the last hard year, the Bundesrat has submitted its great financial
reform measure, and the enactment of this measure by the Reichstag may be
looked for.
Gentlemen, I do not for a moment fail to recognize the seriousness and
weight of the objections that have been urged against this measure. You are
familiar with them also, gentlemen, and I refrain, therefore, from presenting
them once more in detail. I have only wished to bring before this body, upon
whose advice the Bundesrat lays great weight—particularly as it is on the eve
of deciding whether it should incorporate the legal-tender proposition in the
laws or not—considerations which have hardly been referred to, and which
may be of some consequence in relation to the measure, and to ask you to take
them into account in arriving at a decision. I present them to your judgment,
and would be very grateful if that judgment were to remain a thoroughly inde
pendent one. We shall on our side, too, endeavor to learn from your arguments,
and I can assure you that the dissenting voices also— the opinions of those who
are opposed to this measure, and the reasons that they adduce—will now be
doubly weighty with us. (German Bank Inquiry of 1908, pp. G96-704, Report of
the National Monetary Commission.)
In connection with the draft of the bill proposed by the German
administration for the amendment of the German bank act there is
published an “ explanatory brief,” as it is termed, the third part of
which is as follows:
Section 2 of the bank act states expressly that there is no obligation to accept
bank notes for payments which legally are to be made in currency. As can be
seen from the report of the eighth commission on the draft of a bank act (No.
195 of the documents, 2d period of legislature, 2d sess., 1874. p. 22), when the
bank act was under discussion the suggestion to make the notes of the Reichs
bank legal tender did not meet with general approval. The report of the com
mission assigns as a particular reason for this the circumstance that such a
measure could not be considered, because shortly before, at the time of the dis
cussion of the bill regarding imperial treasury notes, this quality had been
denied the notes issued directly by the Imperial Government. The disinclina
tion shown here to making the notes of the Reichsbank legal tender can be
explained principally by the earnest desire then prevailing to do away with
the existing paper regime and to place the metallic currency on a firm founda-
b a n k in g a n d c u r r e n c y .
1801
tion. This aim has been realized to such an extent that at the present time
Germany’s metallic circulation, and particularly that of gold coin, is abundant
and sufficient for all demands of trade. On the other hand, bank notes also
are regularly taken in payment, and for payments of large amounts they are
used almost "exclusively. It can not be denied that the present legal status of
this mode of payment is somewhat uncertain. The legal disadvantage of the
existing situation for the debtor is, in the first place, that the creditor has the
privilege to refuse the acceptance of bank notes, which may put the debtor into
demur. Even if thus far there has been no trouble of any consequence in this
connection, nevertheless such institutions which have to make numerous pay
ments, banks especially, generally feel obliged for precautionary reasons to pro
vide themselves with a considerable stock of gold in order to be prepared for
any demand for gold that they may have to meet.
Although the situation as created by section 2 of the bank act has not been
such as to demonstrate the imperative necessity of an amendment of this pro
vision, still the fact can not be overlooked that the present state of the law
makes it possible that, as a result of contingencies that can not be foreseen,
epecially such as are connected with financial crises, our monetary intercourse
will be very injuriously affected, in such a way as to threaten the depletion of
the stock of gold in the Reichsbank.
The bill, in making the notes of the Reichsbank legal tender, is simply giving
a firm legal basis to the existing situation, i. e., the acceptance of notes as
instruments of payment in all monetary transactions. The obligation of the
Reichsbank to redeem its notes remains unchanged, as a matter of course. The
essential characteristics of the bank notes—their security, the method of emis
sion, the possibility of adapting the amount of their circulation to the fluctuat
ing demands of the market—remain unchanged, as well as their legal character,
which embodies a claim on the Reichsbank. The investment of the notes of the
Reichsbank with the quality of a legal tender can not possibly result in any
harm to the currency system, while it has the advantage of preventing trickish
behavior on the part of creditors and of securing for critical times a discharge
of pecuniary obligations in accordance with existing methods.
In proposing this measure the bill follows the examples of England and
France. In England the notes of the Bank of England have been legal tender
since January 1, 1834. In France the notes of the Bank of France were in
vested with this quality by the acts of August 12, 1870, and August 3, 1875. '
ITie conferring of the legal-tender quality upon the Reichsbank notes does
not in any way affect the maintenance of the gold standard, as is proved by
the example of the Bank of England. In order to emphasize this more strongly
the words “ legally current German money,” in paragraph 18. have been'replaced
by “ German gold coin.” This expresses beyond a doubt that even a single note
of the denomination of 20 marks must be redeemed in gold, although the amount
of 20 marks conies still within the limit up to which imperial silver coin is
decreed a legal tender in article 9 of the currency act of July 9, 1873. (IleichsGesetzbl., p. 233.) That on the presentation of a number of 20-mark notes the
amount exceeding 20 marks must on demand be paid in gold would, as it is,
follow from the existing provisions pure and simple.
In view of the fact that the private banks of issue are not permitted to
issue any notes of the denomination of 20 marks, it seems unnecessary to enact
a provision with reference to them in accordance with the amendment of para
graph 18. The provision, therefore, in regard to the redemption of the notes of
the private banks of issue remains unchanged; that is, according to paragraph
44, section 1, No. 4, of the bank act, redemption has to be effected in legally cur
rent German money. The unambiguous language used leaves no doubt but
that “ current German money” means metallic coin solely and not the notes of
the Reichsbank, which are to be invested with the legal-tender quality; that is,
moreover, expressly confirmed by the tenor of paragraph 8, section 2, of the
bank act, which mentions current German money as part of the metallic stock.
Heretofore the Reichsbank has, indeed, as far as the provisions of section
18b allowed it free action, complied without exception to all legitimate demands
of business. The necessity of maintaining unimpaired credit of the bank notes
and the absolute stability of the gold standard demands that this remain
unchanged. The management of the bank, therefore, will at all times earnestly
endeavor in the discharge of the obligations imposed upon it with respect to
redemption to act in accordance with the wishes of business.
I
1802
BANKING AND CURRENCY,
The action of the Bank of England is restricted by the provision that in
payments made by the bank itself its own notes are not a legal tender. On
account of the peculiar nature of the giro business (the system of payments
by means of transfers to and deductions from accounts current) and the large
number of branches of the Reichsbank, there are serious objections to embody
ing a like provision in the bank act. The Reichsbank might otherwise be under
the necessity, in the transfer of sums from one account to another, to make
gold payments at its branches up to any amount, although it is altogether
impossible for the bank to keep at all times and in all places gold reserves
exceeding the regular demand in order to provide for such emergencies. Fur
thermore the organization of these branches, which are in most cases man
aged by a single official, necessarily limits the amount of their gold reserves.
Until now such demands have not been made upon the Reichsbank; they may,
however, occur in future. Under these circumstances the clause, which seems
fair as regards the Bank of England, in view of its different business methods
and the small number of branches, appears inapplicable in the case of the
Reichsbank, just as, for like reasons, it could not very well be applied in the
case of the Bank of France. Furthermore the obligation of the Bank of
England to redeem its notes is limited in practice almost exclusively to London,
the obligation of its branches to redeem the notes issued by them being rela
tively of slight importance.
It goes without saying that the Reichsbank will continue in the future, as it
has done heretofore, to endeavor to make all payments as far as possible in
the kind of money desired by its clients.
The objection raised by the commission which drafted the bank act against
investing the notes of the Reichsbank with the quality of a legal tender on the
ground that this was denied to the imperial treasury notes can not be sus
tained. At the present time the imperial treasury notes, which by the act of
June 5, 1906 (Reichs-Gesetzbl., p. 730), have been limited to denominations of
5 and 10 marks, count for very little now in the circulation compared to the
large issues of the Reichsbank notes. It should be particularly noted in this
connection that already at the time of the debates relative to the draft of the
bank act in the year 1874, according to the report of the commission (Reichs
bank Documents, 1874, II, No. 195, p. 22), “ a number of the members of the
commission declared themselves to D of the opinion that it would be advisable
e
to invest the notes of the Reichsbank with the legal-tender quality, and that
such a step would have great advantages and no disadvantages for the public.”
It is necessary in the interest of uniformity in the German currency system
that the quality of a legal tender be reserved for the notes of the Reichsbank.
If these privileges were to be extended to the notes of the private banks of
issue, the result would be the creation of various kinds of money for Germany,
and the uniformity of the German currency system, so laboriously acquired,
would be again destroyed. Regard for the interests of the private banks of
issue does not justify such a measure. In order, however, to enable the private
banks to exploit the privilege of issue more thoroughly, the bill provides that
the Reichsbank shall not only continue to accept in payment the notes of the
private banks according to paragraph 19 of the bank act, but shall also ex
change them for Reichsbank notes within their natural zone of circulation. By
means of this provision, which insures to the holders of notes at all times the
possibility of exchanging their notes for legal tender at all of the Reichsbank
branches within their State limits, the notes of the private banks will be rendered
much more available for the purposes of business than they have been up to the
present. (Renewal of Reichsbank Charter, pp. 97-103, S. Doe. No. 507 for 1910.)
X V I.
Mr. Shibley. I now take up another issue. I point to the fact
that if this committee of the Senate will provide in the administra
tion bill that the paper currency to be issued shall be legal tender, as
in Europe, it will open the way for the establishment of complete
harmony in all parts of the administration bill.
The administration bill has several incongruous features due to the
fact that important facts of history were concealed from those who
framed it, this concealment being part of the “ sound-money ” deceit
BANKING AND CURRENCY.
1803
and falsification that has been taking place. But, now that' the facts
of history are being laid bare to this Senate committee, the way is
open for the establishment of complete harmony in all parts of the
bill. And such a proceeding will result in a banking and currency
system that will be an assured success in the highest sense and will be
approved by the people in next year’s campaign.
One of the most incongruous features in the administration bill
is that while it proposes that the people through their Government
shall control the national board, yet in the same bill there is a pro
posal that the bankers shall control the boards of directors of the 12
banks of issue. I use the term “ banks of issue” in order that the
exact facts in the case will clearly appear.
This proposal that the bankers shall control the banks of issue in
this country, except as their acts may be vetoed by the national board,
is not fair to the people, and probably would not be consented to by
the people at next year’s primaries nor at the general election. And
they ought not to consent, for the reasons that I am presenting.
Senator C rawford. Why should not the people be allowed to sub
scribe ?
Mr. Shibley. I shall come to that matter, and show you that there
should not be any capital stock in a public corporation.
And the people ought not to consent, for the reasons that I am pre
senting. Furthermore, in not one of the leading countries in Europe
are the bankers permitted to control a bank of issue, subject to a veto
power in a Government board. In other words, in Europe it is rec
ognized, as it ought to be, that a bank of issue should be controlled by
a board of directors representing the entire State and not represent
ing merely the money lenders.
And in our great country there is every reason why our 12 banks
of issue to be located in the various regions of the country should be
controlled in the interests of the people, and not be controlled in
behalf of the selfish interests of the money lenders.
I am confident that you gentlemen of this committee are seeing the
situation from the people’s standpoint, and will be truly their repre
sentatives.
The way out, and it is a simple and practicable road to travel, as I
will fully demonstrate, is to recast section 3 of the bifl and outline
therein all of the principal powers and duties of the Federal reserve
banks, in place of the existing section 3 which provides that capital
stock be supplied by the bankers, in what should be a public corpora
tion. That plan for capital stock to be contributed by the bankers in
connection with banks of issue is the fundamental fallacy. Permit
me to give my views as to how that fallacy came to be incorporated
in a bill which, in its outlines, is the most progressive of any that has
ever been considered by any nation.
I have outlined to you the trickery whereby the creditor class pro
moted their self-interests from 1867 to the year 1900, when that class
lost its balance of power in the “ machine rule ” government of the
United States, the result being that the trustocracy provided for a
$500,000,000 paper-money inflation on top of too much gold money.
Senator C raavford. I s not this trustocracy the creditor class?
Mr. Shibley. No ; they are down and out.
Senator C rawford. Who? The creditor class?
Mr. S h ib le y . Yes.
1804
BANKING AND CUBRENCY.
Senator C rawford. The trustocracy, is it a debtor class?
Mr. S h ib le y . Yes; they own the great industries of the country,
and when they issued paper currency they stated as the reason, “ We
have a large quantity o f undigested securities.”
Senator C rawford. But this trustocracy is a capitalistic class.
Isn’t it of that creditor class ?
Mr. S h ib l e y . N o ; not the creditor class; they are a debtor class.
They are owing money; they have issued bonds-----Senator R eed (interposing). You have several times said that the
trustocracy said, “ We have a lost o f undigested securities, and there
fore we want more money.” Now, when did they say that and who
said it?
Mr. S h ib le y . About the year 1900, when this bank-money inflation
took place.
Senator R eed. I s that a mere assumption of yours, or did some
man who is a representative of those interests make that statement?
Mr. S h ib le y . I can not recall the man who stated it, but I recall
that it did take place, and you will find it incorporated in the litera
ture of the year 1900.
Senator W eeks . Don’t you know that most o f the so-called trusts
have never issued any bonds?
Mr. S h ib l e y . They have issued preferred stock probably, and that
is a better form of security for those who issue it.
Senator W eeks . There is a vast difference between stocks and
bonds.
Mr. Shibley. Yes; but this debtor class secured the passage of the
law for inflation.
Senator N elson . It is that class o f men that is in control now?
Mr. S h ib le y . In control o f the trusts; yes.
Senator N elson . The debtor class?
Mr. S h ib l e y . That is my opinion.
I will further state that during those years, from 1867 to 1900.
the people were political slaves, the power in control committed
legalized robbery in every direction, one of the methods being to
increase the purchasing power of money by destroying the two-metal
standard of prices, putting in its place for Europe and for the United
States the gold standard of falling prices and a fluctuating par of
exchange with the silver-using countries. I f you want all the facts,
examine the report of the British Gold and Silver Commission, and
you will find there the whole terrific trouble that took place in the
world.
Senator B ristow . What years were those ?
Mr. S h ib le y . 1867 to 1900. From the time of that monetary con
ference in Paris in 1867 to 1900 we had that standard of falling
prices with the creditor class in power.
Senator B ristow . D o you think there has been more trouble in the
world since then than ever before?
Mr. S h ib l e y . That is pretty hard to say.
Senator C rawford. But during that period this class of buccaneers
went in with the creditors and got legislation for them; then, in
1900, they switched over and went into this conspiracy with the
debtors; that is your claim?
Mr. S h ib l e y . Yes. “ The king is dead; long live the k in g ” !
Senator N elson . H ow can we get rid of that king?
BANKING AND CURRENCY.
1805
Mr. S h ib l e y . We have gotten rid of him to-day. The people are
in power this very day, and have been since March 4, 1913-----Senator Nelson (interposing). That is some consolation.
Mr. Shibley. And the legislation that has taken place demon
strates it, in my opinion. Gentlemen, I have worked for this 20
years. When I* found that the Baltimore convention had provided
that in 1916 we shall have a direct primary, with a preferential vote
for President and Vice President of the United States, I said,
“ Hurrah! The fight has been w on; the people are in power from
this day hence.”
Senator R eed. But, really, that has not very much to do with
this question of banking.
Mr. S h ib le y . It all depends upon where the basis o f political
power is. I f the creditor class were in control in this Congress we
would have a creditor-class bill, but I do not believe the creditor
class will get what they want. The fact is that up to this moment
the committee has not had before it the facts concerning legal tender
in Europe. They have not had many other facts that are of im
portance. I will give you more of that a little later.
During the years of the existence of the gold standard of falling
prices, the ruling power worked through a monetary system which
enabled it to control the price level, putting it up at times, in order
to allay the people’s discontent, then to be followed by terrible fall
ing prices, a disorganized industry, and an increasing weight of debt,
through the slight-of-hand shifting of the standard of value. The
method whereby this shifting of the standard of value has taken
place I have explained to you. The facts are of such a broad nature
and are stated in the current records of the several years, so that there
is no possible mistake as to their existence.
Beginning during the latter part of 1897 a rising price level set
in in the gold-standard countries, principally due to the tremendous
increase in the output of gold from the mines, and along with this
change there came the remarkable development of private monopo
lies in industry in the United States, the trust era. In this trust era
the ruling power was opposed to the creditor class, and the result
was a wild inflation of paper money on top of too much gold money.
In the year 1907, at a time when the people were getting control of
several of the State governments and throughout the country were
securing laws restricting the free-booters who were managing the
railroads, and at this time, also, the administration in the Federal
Government was pushing for reforms in the people’s behalf, one sec
tion of the trustocracy, that headed by the Standard Oil group,
repeated the tactics of earlier times by producing a panic for money,
in the meantime having sold stocks and in other ways having pre
pared to reap profits in the stock markets and to ruin competitors
and afterwards buy in their plants and close them out.
The Morgan group of interests were not in this conspiracy, and the
success of the panic for money caused the Morgan group of interests
to lose terrifically, in my judgment.
After the panic was over the head of the Morgan group set out
to establish in this country a unified control of the money market
and price level and thereby prevent a repetition of the terrible
doings in 1907.
1806
BANKING AND CURRENCY.
A short time after the panic Senator Aldrich introduced a bill to
put an end to the power of the Standard Oil group to force panics.
The day that the bill came up for discussion the head of the Morgan
group came to the National Capitol and sat in the Senate gallery
and listened to the statement by Senator Aldrich.
That bill provided first for an emergency currency for temporary
use. Second, it established the National Monetary Commission, the
aim being to prepare the way for the establishment of a unified con
trol of the money market and price level for this country, the man
agement to be in a national board of directors representing the bank
ing interests. Subsequent events demonstrated that this was the
plan.
Senator H itchcock . But I understand you to say the Morgan
faction in New York had nothing to do with the panic of 1907?
Mr. S h ib le y . I believe not; I think they were terribly hurt.
Senator N elson . It was that crowd that had a hand in it to start?
Mr. S h ib l e y . The Standard Oil crowd did the panic w ork; that
is my opinion, because, as I have stated, the head of the Morgan
group secured the Aldrich-Vreeland law.
Senator R eed. It is interesting to have your opinion that the
Standard Oil group did that. I am no friend of the Standard Oil
group, but I would like to know what you base that on.
Mr. S h ib l e y . Why, the fact that the head of the Morgan group
came down here and applauded the Aldrich bill.
Senator R eed. That does not prove that the Standard Oil group
produced the panic—that Mr. Morgan wanted this bill.
Mr. S h ib l e y . I think it does.
Senator R eed. That does not prove it at all. What are the other
facts ?
Mr. S h ib l e y . The fact that we had in the industrial world at that
time two contending industrial forces—the Morgan group and the
Standard Oil group; and the Morgan group came down and got the
Aldrich-Yreeland law.
Senator R eed. But still you have not proved anything. Admit,
now, that there were two great industrial forces contending against
each other. Admit that the panic came. Admit that one of those
forces appeared in Congress applauding the Aldrich bill. How
does that prove or tend to prove that the one that was not in the
Senate gallery that day produced the panic ?
Mr. S h ib le y . Well, I leave it to the gentlemen here-----Senator R eed (interposing). I am interested, because if you know
facts showing that any group of men actually deliberately designed
and brought about that panic—whether it w as the Morgan group,
T
the Rockefeller group, the Kuhn-Loeb group, or any other group—
it is an important fact that we ought to have, and it might be a
very important fact to consider in relation to the whole credit sys
tem. But vague opinions would hardly do as a basis for drawing a
bill.
Mr. S h ib le y . Perhaps you have not caught the significance of the
fact I stated, that they planned for a unified control, so that no longer
could a panic be forced, so that the Morgan group put in operation
the Aldrich-Vreeland law-----Senator R eed (interposing). But it does not follow that it was in
order that a panic should not be forced. It might have been in order
that a panic could not come------
1807
BANKING AND CURRENCY.
Mr. S hibley (interposing). V ery well-----Senator R eed (interposing). I do not want to be misunderstood.
I am not here trying to defend the Standard Oil Co. now, but when
you made that assertion I thought perhaps you had some proof, and
when I can get any proof against the Standard Oil Co. I am looking
for it.
Mr. S h ib le y . I would refer to a speech delivered by the Senator
from Oklahoma, which appeared in the Congressional Record-----Senator R eed (interposing). The Senator may have produced some
evidence in his speech.
Senator N elson . Yes; that would be good evidence.
The C h a ir m a n . Just here, for the convenience of the committee,
I will insert a table showing the fluctuation of the 20 principal
stocks during 1907. It will show the most violent fluctuations of the
interest rate, the most remarkable and astonishing fluctuation of the
prices of these stocks, beginning in January. I call attention to
Amalgamated Copper, with a capital stock of $153,287,900. That
started on January 12 at 119f, and dropped to 86f by June 8, going
steadily down. I call attention to the Allis-Chalmers Co., with
$19,820,000 capital, that went from 43 on January 12 down to I l f
in May and lOf in June.
Senator B ristow . Did not one of these two great industrial crowds
control those respective concerns?
The C h a ir m a n . I will call attention to United States Steel, of
$508,495,200 capital stock. It went from 49f in January down to
34f in June-----Senator N elson (interposing). That was common?
The C h a ir m a n . Yes; common stock. And it went down to 24f
in November. The fluctuations of stock show the constrictions of
credits and the violent fluctuations of interest because of the control
of credits in the hands of the gentlemen in control of the leading
banks there— and I think it included both crowds; I think they were
in a common plan to make as much money as they could out of the
stock market, and I believe they were able to control the fluctuation
of credit up and down, and in that way, by controlling credit, con
tracting and expanding credits by millions of dollars, month by
month, which is shown by the record I submit and by the Pujo
report. I will also put in the record the fluctuation of loans, in
dividual deposits and reserves, as shown by the bank reports, showing
how the panic was brought on from January down to October. At
a later date I will discuss it more fully.
(The tables referred to are as follows:)
R e p o r ts o f N e w Y o r k C ity ba n ks fr o m J a n u a ry, 1 907, to J a n u a ry, 1 9 0 8 , sh ou n n g
l o a n s , i n d i v i d u a l d e p o s i t s , a n d r e s e r v e s d u r in g t h a t p e r i o d .
Banks
Date of call by office of the comptroller. reporting.
Tan
9.fi
1907
......................................
Mar 22, 1907 .....................................
Mav 20, 1907..........................................
TW 3,
1 9 0 7 ...
......................................
Loans.
I
Reserves
held.
40 $728,319,528 $857,875,410 $230,116,200
37 688,703.472 803,590,176 211,379,340
39 752,566,083 866,332,979 233,329,867
38 712,121,058 825,703,785 22i;349,657
40 775,181,207 8 4 394; 509 180,448,128
2^
*
9328°— S. Doc. 232, 63-1— vol 2----- 54
Deposits.
Per cent
of
reserves.
26.82
26.30
26.93
26.81
21.89
1808
F l u c t u a t i o n o f p r in c ip a l stocks d a rin g 1 9 0 7 .
Value of stock.
Name.
Capital.
Jan. 12.
Apr. 6.
May.
*19,820,000
43
153,287,900
119*
15,000,000
2}
1
18*
18}
19,029,400
85
83
8
1
131,551,400
152,165,500
112,379,900
149,577,300
178,292,100
119,900,000
5,000,000
22,563,600
38,760,000
16,000,000
195,479,100
130
119*
42}
1834
132}
31}
128J
115"
34*
166J
125}
26}
12
2
11
0}
144
29}
13
2
99*
24}
1365
116}
2*
1
4
1
145
29
141}
508,495,200
38,000,000
29,996,350
37}
14*
146*
14*
13*
125
115
105
11
1
10
1
97*
96
8}
6
16}
15*
1
3
80
72*
12
2
180
32
117*
171}
109}
33}
159*
124}
25}
51}
147
32}
116*
170}
494
174
149*
43}
16*
150
435
14}
150
158
35}
June 8.
25}
138
10
2}
2*
2
10
1
July.
Hi
92}
Sept. 7.
Oct. 5.
1
0
6
}
6
}
74}
71*
59}
1
1
16
1
1
1
2
69}
54*
52
98
25*
135}
114}
2}
0
39}
141*
31}
148}
95
2*
2
127}
12
1}
19}
36}
139
27}
105
136}
37*
1
4
143}
34*
1}
2
142*
38}
13}
142
10
1
Aug. 10.
142}
105}
17}
32*
91
2}
1
128*
105}
16*
36
89}
18}
128
12
0*
124
30
26
85
17
2
28
54
131}
25}
40
127
32}
26}
9
3
2
2
11
2*
31}
1
2
11
4
11
2
133
1
0
12
2
Nov. 9.
5*
48
8
*
Hi
90
80
17}
113*
98
1}
2
2
2
Dec.
Range of
prices.
6
}
27 to 4
130 to 33
1
0
36 to 7
165
94 to 8
103
82}
16}
119*
98}
40
27
186 to 88
125 to 55
52 to 10
348 to 107
174 to 89
42 to 10
2
0
11
1*
2}
0
2
2
116}
166 to
54 to
141 to
195 to
24}
9
47
274
1*
0
70
55 to 8
36 to 6
233 to 32
18}
6,295,615 5,802,476 6,176,753 3,786,059 3,169,313 2,301,758 4,436,982 2,588,258 2,481,097 1,817,591 4,613,552
25
13
15
44
.................
BANKING AND CUBEENCY,
Volume of sales for the
week, in number of
shares...........................
Mar. 4.
0
0
1. Allis-Chalmers Co.......
2. Amalgamated Copper
Co...........................
3. American Beet Sugar
Co...........................
4. American Ice Securities Co.....................
5. American Telephone &
Telegraph Co...........
6 Baltimore & Ohio......
.
7. Erie............................
8 Great Northern..........
.
9. New York Central...
1 . Southern Railway......
0
11. Tennessee Copper......
1 . TennesseeGoaf& Iron.
2
13. Texas Pacific.............
14. Third Avenue............
15. Union Pacific.............
16. United States Steel
Corporation.............
17. W abash......................
18. Westinghouse E. & M.
Feb. 4.
BANKING AND CURRENCY.
1809
Senator N elson . Professor, I think you are safer before this com
mittee to assume that both crowds are guilty.
Senator R eed. The statement made by Senator Owen is, of course,
very interesting as a matter of history, showing those fluctuations.
But, of course, that does not show that somebody deliberately con
spired to bring on the panic. Much less does it show that Mr. Mor
gan was posing as the good angel of the people and trying to prevent
it, and that Rockefeller was the Mephistopheles who overcame it. I
was interested in knowing how you proved this case, and still I am
in the dark.
Senator N elson . Y ou forget, Senator Reed, how Mr. Morgan
saved the country and stopped the panic by absorbing the Tennessee
Coal & Iron Co. [Laughter.]
Senator R eed. I have not overlooked the fact that he also got some
Government money.
Senator P omerene . They have proved that by Col. Theodore
Roosevelt.
Mr. S h ib le y . I was just going to remark that you should read the
President’s message of February, 1908, in regard to that panic.
Senator W eeks . I should like to return to a statement made by the
witness about the Morgan interests coming down here and dictating
what he called the Aldrich-Vreeland legislation.
Mr. S h ib le y . It was stated in the daily papers that the head of the
Morgan group came here when that was taking place and smiled
approvingly-----Senator W eeks (interposing). I think it is true, though I did not
see it, that Mr. Morgan was in the gallery while that bill was under
discussion. But what do you mean by “ dictating ” that legislation ?
Mr. S h ib le y . Oh, it is generally understood that the men who
hold the purse rule the party-----Senator W eeks (interposing). Just let me say to you that I helped
draw that bill and I was on the conference committee. I never saw
Mr. Morgan and never saw but one of his partners, which was at
another time, and neither Mr. Morgan nor any other interest had
any more to do with drawing that bill than you; and, moreover,
the limitation for six years and the limitation for the commission
were put in at the conference at the suggestion of Senator Burton
and myself.
Mr. S h ib le y . I am outlining things that took place when we did
not have a unified control in this country. Now, we are putting in
a unified control, and it will be absolutely impossible for other in
terests to do the things they have been doing heretofore.
Senator B ristow . Y ou say the volume of money was put up and
down in 1907?
Mr. S h ib le y . I mean before that; I am speaking of the period
from 1867 to the present time.
Senator H itchcock . Y ou think this unified control might never
fall into the hands of the great interests ?
Mr. S h ib le y . I f it does they will have to act somewhat fairly,
because a responsibility will be placed there-----Senator H itchcock (interposing). You remember how that same
great Morgan interest you have just referred to came down here and
persuaded the President of the United States to permit it to absorb
the Tennessee Coal & Iron Co., in violation of law, for the public
1810
BANKING AND CURRENCY.
good? That was-a case in which they had access to the President
of the United States and the Government. Might not such a con
dition happen again?
Mr. S h ir ley . I desire to say that under the unified control the
country will be much better off than leaving each separate interest to
work as it may choose.
Connected with the plan for the emergency currency was a sub
ordinate plan of bolstering up the stocks and bonds of the Steel
Trust and other trusts. This was exposed by Senators La Follette
and Gore, who conducted the noted filibuster against the passage of
the bill. But the bill became law and the Aldrich program went
forward.
However, the existence of an aroused public sentiment against the
trusts, combined with the existence of a considerable amount of im
provements in the mechanism for nominating and electing public offi
cials, prevented the rapid completion of the plan for a central bank of
issue to be controlled by the organized bankers. And in 1910, the
year after the trustocracy had revised the tariff upward, the people
secured control of the National House of Representatives. This
effectually blocked the plan for the central bank to be controlled by
the bankers. Then in 1912 the people captured the White House
and the Senate.
But the bankers, while they realize the changed situation, did not
give up in despair, as subsequent events plainly show. The follow
ing facts are of record.
The country is indebted to Charles A. Lindbergh, a progressive
Republican Representative from Minnesota, for the collection and
publication of data outlining much of what has taken place in con
nection with the bankers’ attempt in recent years to secure a continu
ance of special privileges in connection with the monetary system.
Last May Congressman Lindbergh published a book entitled “ Bank
ing and Currency and the Money Trust.” Mr. Lindbergh is one
of the authors of the Money Trust investigation.
Mr. Lindbergh’s book starts out by publishing the famous Hazard
circular of Civil War times, in which plans were laid for the
continuation of the bankers’ control of affairs in the United States
through the establishment of banks of issue to be known as national
banks. Also Mr. Lindbergh published three other famous circular
letters of the earlier days to demonstrate the established habits of
the bankers to cooperate with each other for the securing of special
privileges to themselves at the people’s expense. He then describes
an organization of recent years, the Citizens’ League, organized by
agents of Wall Street, with a branch in each of 44 States, and whicli
has doubtless expended $500,000. The plan has been to get men and
women to join throughout the country, the annual dues being $1 a
year, this to entitle them to the league’s literature; and these mem
bers have been relied upon to write to Senators and Congressmen
urging the program set forth by this miscalled Citizens’ League.
The appeals for funds in connection with this so-called Citizens’
League came from the Wall Street banks, and the letters are pub
lished in full by Congressman Lindbergh.
One feature of the Citizens’ League’s work was to aggressively
fight such of the Senators and Congressmen as were so manly as to
represent the people by fighting the bankers’ plan for the central
BANKING AND CURRENCY.
1811
bank and bankers’ control. Three public meetings were held in
Mr. Lindbergh’s district, the publie speaker being an ex-Member of
Congress, who was still drawing $7,500 per year of the people’s
money as a member of the National Monetary Commission.
It is said that the origin of the Citizens’ League was in Chicago
soon after the National Monetary Commission was created. A fur
ther fact is that in June, 1911, Prof. J. Laurence Laughlin, of the
Chicago University, secured a year’s leave of absence and was placed
in charge of certain work of the Citizens’ League. These facts are
stated in the bulletin of the league entitled “ Banking Reform,” for
April, 1913. The further statement is made that for nearly two
years Prof. Laughlin was employed by the Citizens’ League, and,
says the league’s publication:
It is largely due to his efforts and his persistence that the campaign enters
the final stage with flattering prospects of a successful outcome.
This was said last April. It is in order now to present to you gentle
men of this Senate Committee on Banking and Currency just what
Prof. Laughlin did that resulted in the bankers’ campaign entering
the final stage with flattering prospects of a successful outcome.
Under Prof. Laughlin’s leadership during the first six months of
1912 the league, according to its own figures, printed and distributed
a nearly 1,000,000 pamphlets,” together with hundreds of newspaper
articles and a regularly issued bulletin. The league’s textbook en
titled “ Banking Reform ” was distributed free to 1,500 newspapers
for review; 12,000 copies of the book were distributed; and the cir
culation of the league’s bulletin mounted up to 30,000 regularly.
These figures are from the official report of the league, and are
published at page 125 of Congressman Lindbergh’s book.
On January 8, this year, Prof. Laughlin appeared before the sub
committee of the Democratic House Committee on Banking and
Currency, and describes himself as—
at the present time chairman of the Citizens’ League for the Promotion of a
Sound Banking System.
(Page 107 of Hearings.)
He outlined a proposal for a currency and banking system that is
almost exactly what became the administration bill. O f course. Prof.
Laughlin knew that the progressive democracy would insist on
Government control of the national board, at least, and so he ad
mitted in his statement that the national board for the system he
had in mind might be a Treasury board, as he expressed it. (Page
129-133 of Hearings.)
But the regional reserve banks, as he termed them, were to be
controlled by the bankers. In answer to a question, he said that he
was—
trying to- find a practical way out as against the Government issuing paper
without any connection whatever with business. (Page 137.)
The one who afterwards became the chairman of the Democratic
Banking and Currency Committee argued with Prof. Laughlin urg
ing the guaranty of bank deposits and placed in the record a state
ment by ex-Secretary Lyman J. Gage in its behalf (p. 147), but
Prof. Laughlin opposed the idea and the professor’s ideas prevailed
in the bill which the chairman afterwards brought out.
1812
BANKING AND CURRENCY.
The fact that the bankers’ plan as outlined by their chief expert
has actually passed the Democratic House is an astounding piece of
information.
The explanation is that the “ sound money ” trick was of such a
character that its fundamental fallacy has not been exposed as yet
except in the statements by me published by the chairman of this
Senate Committee on Banking and Currency, and published, also,
in Senate Document No. 135, this session.
The underlying fallacy in the House bill for Federal reserve banks
is that a capital stock is called for. This fallacy can be seen by an
analysis of the work to be done by the reserve banks:
The proposed reserve banks are to be banks of issue; that is, they
are to issue paper money to be used in combination with the gold
standard; also, a gold reserve is to be built up, and, third, a clearing
house system for the entire Nation is to be conducted, the member
banks to have on deposit enough money or credit, at least, to settle
the daily balances.
In connection with this general system a central control of the
rate of interest for money is provided for through a national board
which shall exercise a veto power over the rate of interest suggested
by the boards of directors of the 12 banks o f issue.
These 12 banks of issue are to deal only with the banks of the
country and in no wise receive deposits from individuals or make
loans to them. Thus these 12 banks of issue are to be bureaus of
issue and redemption for the paper money of the country, and also
they are to accumulate an immense gold reserve through the ex
change of paper money for gold, the same as is done in England,
France, Germany, and the other up-to-date countries. A third great
function of the 12 banks of issue will be to control the interest rate
and thereby control the price level and the volume of gold in this
country.
These functions for the 12 banks of issue are all-important. And
it is extremely wise that they are not to loan to private individuals.
In this country we are free to establish an ideal system, and as we
are relying upon regulated competition in every part of the national
life except where natural monopolies exist and in the post office and
public schools, we should treat fairly the citizens who are supplying
capital and banking accommodations through the 25,000 banks.
Senator H itchcock . Mr. Shibley, it is a very serious question
whether or not the bill does not permit these 12 regional banks to do
business with individuals directly. I think it is section 15 which
gives them the right to go out and buy paper for the so-called pur
pose of establishing the rate of interest.
Mr. S h ib le y . But they are not to receive loans from individuals.
Senator H itchcock . No ; but they are allowed to buy paper in
competition with other banks.
Mr. S h ib l e y . That is considered a necessary measure in order to
control the rate of interest.
Now, I was saying that citizens who have invested their money
in the 25,000 banks should be treated fairly. This means that the
Government ought not to establish a banking system that is publicly
owned or that is provided with special privileges which the 25,000
banks do not possess. For that reason the 12 banks of issue, to in-
BANKING AND CURRENCY.
1813
elude hundreds of branches throughout the Nation, ought not to enter
into competition with the existing banks, but should be an aid to
those 25 #00 banks. At the same time the laws should be such that
competition in the loaning of funds shall be restored.
Senator N elson. What about the stock for these regional banks?
Mr. S h ib le y . I am coming to that. The existing banking and
money monopoly must be dissolved. The way to dissolve the exist
ing banking and money monopoly is to establish the 12 banks of
issue and provide that they shall be controlled by boards of directors
representing the people rather than the bankers.
Senator N ee d . What do you mean by “ the existing banking and
money monopoly” ? For instance, I live in Kansas City, a small
western city, and there there are a number of national banks, a large
number of State banks, and several trust companies. I f I do not like
to do business with one of them, I can go to another. Everybody else
has the same privilege. Some of them pay one rate of interest for
deposits; some pay another; some pay none. Some of them loan on
one class of securities, and some on another.
I have never known a time in my life when, if a man went
to one of those banks and had a reasonably good security, he could
not get almost any amount of money, except during the short periods
of trouble in 1907, and prior to that—1893—there was a stringency.
That is the situation there. I guess it is the same in other towns-----Mr. S h ib le y . In reply I should like to be authorized to place in
the record an excerpt from the report of the Pujo committee as to the
existence of the present Banking and Money Trust, which states just
how it operates.
Senator C rawford. But that involves the whole Pujo investigation,
which was for the very purpose of uncovering the Money Trust.
Mr. S h ib le y . I should simply like to place a page of the report in
the record, if I may.
The C h a ir m a n . I f there is no objection, that may be done.
Mr. S h ib le y . This excerpt states the facts which prove there is a
banking and money trust:
Of this present-day concentration of control of credit and money, Mr. George
F. Baker, of New York City, second only to Mr. Morgan in the banking world,
admitted on the witness stand before the Pujo investigating committee that—
“ I think it has gone about far enough.” (Rept. No. 1593, p. 106, 1913.)
Mr. George M. Reynolds, of the Continental and Commercial Bank of Chicago,
said to the Pujo committee:
“ I am inclined to think that concentration, having gone to the extent that it
has, does constitute a menace.” (Same citation, p. 105.)
Concentration of control of money and credit has gone so far that
the large banking houses have divided up the field for the flotation of
credit operations, so that—
A banking house that has organized a great industrial or railway combination
or that has offered its securities to the public is represented on the board of
directors and acts as its fiscal agent, t h e r e b y a s s u m i n g a c e r t a i n g u a r d i a n s h i p
o v e r th a t c o r p o r a tio n .
In the ratio in which that corporation succeeds or fails
the prestige of the banking house and its capacity for absorbing and distribut
ing future issues of securities is affected. If competition is threatened it is
manifestly the duty of the bankers from their point of view of the protection of
the stockholders, as distinguished from the standpoint of the public, t o p r e v e n t
it i f p o ssib le.
If they control the sources of credit they c a n furnish such pro
tection. It is this element in the situation that unless checked is likely to do
more to prevent the restoration of competition than all other conditions com
1814
BANKING AND CURRENCY.
bined. This power standing between the trusts and the economic forces of
competition is the factor most to be dreaded and guarded against by the ad
vocates of revived competition.
This is the carefully considered summarization of the facts by the
Pujo committee, page 160 of its report, and the committee continues:
Mr. Morgan was unable to name an instance in the past 10 years in which
there had been any railroad building in competition with any of the existing
systems. He attributed it to the restrictions of the Interstate Commerce Com
mission. The fact is, however, as we all know, that railroad construction is
constantly being prosecuted—necessarily so with our rapidly growing popula
tion—but that instead of being done independently as formerly i t i s n o w d o n e
b y th e g r e a t s y s t e m s .
It is impossible that there should be competition with all the facilities foxraising money or selling large issues of bonds in the hands of these few bankers
and their partners and allies, who together dominate the financial policies of
most of the existing systems. There never will be, until this combination or
community of interest can be dissolved by either closing to them the vaults of
the banks, life insurance companies, and other trustees of other people’s money
or by opening them to meritorious competing enterprises.
Mr. Baker, when upon the witness stand, was unable to name a single issue
of as much as $10,000,000 of any security, either in the railroad or industrial
world, that had been made within 10 years without the participation or co
operation of one of the members of this small group. He subsequently wrote
naming only the case of a single issue of $13,500,000. It was proved as to this
instance by the notice issued to stockholders that Morgan & Co. were in fact
largely intei-ested and received a part of the pi-ofits from the issue. Yet it
appears that within s i x years the j o i n t account transactions of that group in
p u b l i c i s s u e s a l o n e (not including any issues made by them alone or provately),
amounted to over t h r e e b i l li o n d o l l a r s , of which a $10,000,000 issue would have
been less than one-third of 1 per cent.
Issues of securities of local or small enterprises requiring moderate sums of
money are frequently financed without the cooperation of these gentlemen; but
from what we have learned of existing conditions in finance and of the vast
ramifications of this group throughout the country and in foreign countries we
are satisfied that their influence is sufficiently potent to prevent the financing
of any enterprise in any part of the country requiring $10,000,000 or over, of
which for reasons satisfactory to themselves they do not approve. Therein lies
the peril of this money power to our progress, far greater than the combined
danger of all existing combinations. The latter may at last fall of their own
weight, especially if deprived of the protection and support against competition
referred to, or they may be disintegrated as unlawful.
The men who established our great industries have added to the prosperity of
the country during the period of the upbuilding of these industries; but they
none the less violated the law when they reversed the processes under which
the country had grown and prospered by combining to throttle the competition
upon which they had thrived. Whilst they were struggling against one another
for supremacy they were a valuable asset to the country; since they have pur
sued the opposite policy they have become a menace.
The gentlemen constituting this inner circle have, however, violated no law
in what they have done, so far as we are able to gather; but that is rather be
cause of the loose, intangible character of this recently developed community of
interest and because the law has not yet properly safeguarded the community
against this form of control.
T h e a c ts o f th is in n e r g r o u p , a s h e r e d e s c r ib e d , h a v e n e v e r t h e l e s s b e e n m o r e
d e s t r u c t iv e o f c o m p e titio n th a n a n y th in g a c c o m p lis h e d b y th e t r u s ts , f o r t h e y
s t r i k e a t t h e v e r y v i t a l s o f p o t e n t i a l c o m p e t i t i o n in e v e r y i n d u s t r y t h a t is u n d e r
t h e i r p r o t e c t i o n , a c o n d i t i o n w h i c h , i f p e r m i t t e d t o c o n t i n u e , w i ll r e n d e r i m p o s
s i b l e a ll a t t e m p t s to r e s t o r e n o r m a l c o m p e t i t i v e c o n d i t i o n s in t h e i n d u s t r i a l
w o rld .
It accordingly behooves us to see to it that the bankers who require and are
bidding for the money held by our banks, trust companies, and life insurance
companies to use in their ventures are not permitted to control and utilize these
funds as though they were their own.
If the arteries of credit, now clogged well nigh to choking by the obstruc
tions created thi-ough the control of these groups, are opened so that they may
be permitted freely to play their important part in the financial system, compe-
BANKING AND CURRENCY.
1815
tition in large enterprises will become possible and business can be conducted
on its merits instead of being subject to the tribute and the good will of this
handful of self-constituted trustees of the national prosperity. (Original not
italicized.)
Senator R eed. I thought perhaps you had a reason. You have
evidently given this matter great thought, and I am curious to
know— as you use that as a basis of your argument—whether you
think that there is a banking trust that reaches the ordinary indi
vidual in transacting business.
Mr. S h ib le y . This Pujo Money Trust investigation shows evi
dence, which is uncontradicted, that a money trust does exist in New
York City in connection with the great banks, and it tells just how
it operates to finance different industrial interests and stands
guardian over them.
Senator R eed. That may be, but you do not claim that it extends
out to the ordinary bank, do you ?
Mr. S h ib le y . I do not know how far it extends. I know that
various clearing houses have, in violation of the law, I believe, be
come trusts. They provide that members must all charge 10 cents
for the collection of out-of-town checks. It probably takes place in
New York City as well as in other cities. It is a money trust to that
extent.
Senator R eed. Well, that would not be a very serious trust, if that
is as far as it goes.
Senator C rawford. I am curious to hear how these regional banks
are going to do business without a capital stock.
Senator H itchcock . Prof. Shibley, before I forget it, I want to
correct a misstatement I think you made when you said that the
chancellor of the German Empire controlled the rate of interest.
This publication of the National Monetary Commission, consisting of
interviews with European bankers, shows very clearly how the rate
of interest is controlled. I will read this statement into the record
from page 337:
The management is so constituted that the Government has actual and final
control through the Curatorium. The business of the bank is transacted by
the second body, the Direktorium. In the fixing of the bank rate it is their
custom to call a special meeting, if need be, of the central Ausschuss, who
always confer in regard to the advisability of a change in the bank rate. The
final power, however, lies with the directors, who usually follow the advice of
the central Ausschuss, but who have at times disregarded it.
Now, the Direktorium, on page 336, is described as appointed by
the Emperor for life. It consists of nine members, seven of whom
are directors and two of whom are the president and vice president,
respectively. The other members of the Direktorium are recom
mended by the Bundesrath to the Emperor, who makes the appoint
ment. In the case of the directors the advice of the central Auss
chuss is heard.
So it is the Direktorium, advised by the central Ausschuss, that
fixes the rate of interest.
Mr. S h ib l e y . N ow , I would like to inquire if there is any veto
power that could be exercised by the chancellor?
The C h a ir m a n . The language read by Senator Hitchcock states
that the actual and final control is in the Curatorium, of ivhich the
chancellor is at the head.
1816
BANKING AND CURKENCY.
Senator H itchcock . That is the final power; but there is no evi
dence that the Curatorium has interfered with the interest rate. I
have never heard of the Curatorium interfering with the interest
rate.
The C h a ir m a n . Heading from the same record, on page 336, at
the top of the page, this occurs:
In the chancellor lies supreme power, although he has never exercised it but
once in the history of the bank. On that occasion he demanded that they
should not receive Russian securities as collateral for loans. His order has
since been revoked.
Senator H itchcock . He never interfered with the interest rate.
Mr. S h ib le y . He has that power.
Senator H itchcock . I doubt it.
Mr. S h ib ley . It says he has the final, the supreme power, and that
is the German system.
Senator N elson . I am anxious to see how this bank is going to
continue without capital stock.
Mr. S h ib l e y . Let me continue.
The issue is clear cut: Shall the boards of directors of the 12
banks of issue represent the people or represent the bankers ?
The administration bill provides that the bankers shall elect six
of the nine directors for each of the 12 banks of issue.
The administration was morally bound to consent to this because
it was induced to accept the provisions that the bankers should con
tribute some $650,000,000 to be used by the 12 banks of issue.
Now, the fallacy which Prof. Laughlin and the other “ sound
money ” men perpetrated on the administration was to secure an
assent to the proposal to pile up a large volume of actual banking
capital in the banks of issue.
The fact is that no such banking system exists anywhere in the
world. In Germany a step in that direction was proposed in 1908
by the bankers’ experts, but the Government refused to accept the
plan. O f course this rejection by the German Government of the
plan proposed by the chairman of the House committee was not
known to the administration in this country when it accepted this
rejected German plan. I will ask this committee if it has been told
that the German Government had rejected the plan for the deposit
of actual bank reserves with the bank of issue ?
Does this record show that the German Government rejected this
plan that is being proposed ?
The C h a ir m a n . I think not.
Mr. S h ib le y . That is the point I am relying on right along. The
Citizens’ League, which was created as a mouthpiece of the bankers,
has been carrying this plan forward, and on January 8 they out
lined their plan publicly and afterwards got it into the administra
tion bill.
Senator R eed. I want to interrupt you just a moment. Do I un
derstand you to say now that the Money Trust got up the Citizens’
League ?
Mr. S h ib ley . The bankers.
Senator R eed. Would you call them the Money Trust?
Mr. S h ib ley . The big bankers.
Senator R eed. What bankers?
BANKING AND CURRENCY.
1817
Mr. S h ib le y . Mr. Lindberg states in his book that the president
of the Chase National Bank wrote to other bankers and asked for
contributions.
Senator R e e d . Does the Chase National Bank belong to the Mor
gan group or the Rockefeller group ?
Mr. S h ib ley . I can not say. Its plan is the “ sound money ”
plan; that is to place the bankers in control of the people’s monetary
system.
Senator R eed. Y ou think the bankers got up what I will call a
conspiracy to control and get a bill through that suited them ?
Mr. S h ib le y . Certainly.
Senator R eed. And they got up the Citizens’ League as a means
of propagating their ideas without apparently doing it themselves
in the open?
Mr. S h ib le y . Exactly.
Senator R eed. And ther^ got Prof. Laughlin to be the mouthpiece
of that league?
Mr. S h ib le y . Their bulletin states that such is the fact.
Senator R eed. And Prof. Laughlin, then, practically originated
this bill?
Mr. S h ib le y . Yes. I call your attention to the record as to what
he proposed on January 8, portions of which I have quoted.
Senator R eed. That is your judgment of it?
Mr. S h ib le y . Yes; I have collected the points he asserted and
claimed at that time, and I have placed them in this record verbatim.
Senator R eed. That is a startling bit of information.
Mr. S h ib le y . I call your attention to the fact that the men who
accepted this bill did not know that the German Government had
rejected a similar plan. They did not know that the German Gov
ernment had put in legal-tender currency when they accepted this
bill for a crippled legal tender, and the main point is that they were
induced to accept a plan to have a large amount of bank capital and
reserves in the 12 banks of issue. Now I will go on with my argu
ment.
Senator H itchcock . Will you state whether the notes of the
notes of the Reichsbank can be used as reserve in other banks?
Mr. S h ib l e y . Certainly.
Senator H itchcock . O f course they are not reserves in the Reichs
bank?
Mr. S h ib le y . Oh, no. Now, I will continue with my argument.
Furthermore, there doubtless was kept from the administration,
the same as there had been kept from this Senate committee, the fact
that the German Government temporarily lost the gold standard in
1907 because the paper currency was not legal tender. This fact has
been kept from this Senate committee, just as it was kept from the
administration, owing to the power and influence of the “ conspiracy
of silence ” which the bankers and their allies have been able to en
force.
It was perfectly natural, therefore, that the plan accepted by the
administration and the House of Representatives should include the
basic fallacy that the 12 banks or issue should receive from the
banks $100,000,000 to be contributed as capital stock, and some
$500,000,000 of deposits by the banks, whereas the depositing by the
1818
BANKING AND CURRENCY.
banks of anything more than enough to settle the daily balances
would be worse than useless, because—
First, apart from the operation of the clearing house system, the
proper working of the 12 banks of issue will not require the deposit
of a single dollar by the private banks of the country. In France,
for example, and in each o f the other countries where there is an
elastic volume of paper money, the bank of issue puts it out and
retires it, thereby meeting the enlarged demand for money from
various sources. The private banks are not asked to place part of
their deposits with the bank of issue, as such a thing would be en
tirely out of place.
Now why did the Aldrich bill propose that the central bank of
issue which it suggested should receive from the banks some 600 or
more million of actual banking capital ?
The answer is that the Aldrich bill planned that the bankers should
control the central bank of issue, whereas in Europe the bankers are
not permitted to control a bank of issue.
Senator R eed. I s there not another answer? They thought it was
necessary to have some money to have a bank. I am not defending
the Aldrich b ill; I have always denounced it.
Senator Crawford. In other words, can you have a bank for redis
counting features without having capital.
Mr. S hibley . I am coming to all of those points.
The answer is that the Aldrich bill planned that the bankers
should control the central bank of issue, whereas in Europe the bank
ers are not permitted to control a bank of issue, nor would the people
of the United States permit it unless they first were deceived and
thereby induced to grant the authority. Therefore, the framers of
the Aldrich bill set out to deceive the people, and the tactics adopted
were as follows:
Trick No. 1. It was proposed to gather together several hundred
million dollars of actual banking capital contributed by themselves—
their own property—believing that the people could not properly
object to the bankers’ control of their own capital. The name pro
posed for the institution was the National Reserve Association.
Incidentally, the plan included snug special privileges, namely, the
sole power, to control the purchasing power of money through the
control of the rediscount rate and the sole power to issue the paper
money of the country. These were tucked away toward the end of
the bill, very obscure, except to the most unflagging attention.
(Secs. 30, 41, 48, 50-56.)
The special privileges did not appear until those last sections were
reached.
Trick No. 2. While no such collection of actual banking capital
in the form of a central reserve association existed anywhere in the
world, because nowhere else had the bankers worked such a trick
upon the people, the trustocracy in these United States falsely
claimed that the European systems of banking were similar. This
was necessary to the carrying out of their plan. This was trick No. 2.
Senator Crawford. Professor, seriously, I want to place in the
record-----Mr. S hibley (interposing). Please let me finish; I am right in
the middle o f a paragraph. Neither in France, England, or any
other country are actual bank deposits placed in the bank of issue
BANKING AND CURRENCY.
1819
for the purpose of supplying the needed money when an emergency
arises. Therefore the backers of the Aldrich bill falsely claimed
that the European systems of banking were similar to their proposed
National Reserve Association.
The Aldrich plan was defeated in the Democratic House that was
elected in 1910 as the result of the people’s uprising against trustocracy. That Democratic House refused to accept the Aldrich bill.
Then came the people’s success in 1912. But in the House the new
chairman of the Committee on Banking and Currency proposed a
bill that contained the fundamental fallacy that was in the Aldrich
bill, namely, that the bank or banks of issue that were in nowise to
loan money to individual citizens, and so would not run any risk
of losing money, should possess a capital stock to be contributed
by the banks, and also that the banks should deposit with the banks
of issue a large volume of bank reserves. That fundamental fallacy
was contained in the Glass bill, also a proposal that the bankers
should control the national board as well as the regional boards.
That was the proposal presented to the chairman of the Senate
Committee on Banking and Currency, who had just been appointed,
and therefore had not had time to study the European systems .of
banking and currency. He at once rejected the idea of a bankers’
control of the national board and succeeded in winning his point,
just as Prof. Laughlin doubtless expected, for the professor, in his
statement at the hearing of the House committee on January 8, 1913,
conceded that there should be a “ Treasury board,” as he termed it.
Furthermore, the so-called experts who were volunteering advice
were mostly of the “ sound-money ” type, and so did not expose the
basic fallacy in the plan, as it was the basis for placing the bankers
in control of the boards of directors of the 12 banks of issue.
And I have just shown in my statement before this committee, up
to to-day this committee has not had placed before it the all-impor
tant facts I have given to you about the European system.
That is the real explanation of the success of the “ sound money ”
advocates. There was no public hearing, that being left for the
House committee.
Senator N elson. Y ou mean the Senate committee?
Mr. S hibley . There was no public hearing, that being left for the
House and Senate committees; but later the House committee re
fused to conduct a public hearing. I. for one, wrote and asked that I
be permitted to present facts favorable to important features in the
bill and in opposition to other features, but neither I nor any other
citizen was permitted to place any of our statements before the House
Banking and Currency Committee. I desire to place in the record
my letter to the chairman of the House committee.
(The letter referred to is as follows:)
I have just finished the preparation of a statement outlining the history of the
ways whereby the purchasing power of money has been measured, and is to-day
being measured by the Governments of the United States, England, and Canada,
and the mechanism whereby the price level in a country is controlled, and show
that in this and several other respects the Glass-Owen bill is ideal. And I point
out some of the advantages to society that will flow from a stable price level.
The title of my paper is “ Stable money and the new freedom provided for in
the Democratic bill.” At the close, in support of the doctrine of the “ new
freedom,” I ask three questions and answer them.
1820
BANKING AND CUKRENCY.
I should like to present this to the House Banking and Currency Committee
for immediate publication, and will gladly answer questions before the com
mittee at any time.
I will add that it was I who prepared in May the memorial to Congress on
“The currency and the money questions ” that was published by the Senate
Banking and Currency Committee. My present statement follows as a logical
sequence, explaining important details in the present bill and querying other
portions.
Senator C rawford. But, Professor, what I want to say is, are you
aware of the astounding character of the charge you are making?
That is to the effect that Secretary McAdoo, Secretary Bryan, and
President Wilson have been tricked, so completely as I understand
your language to import?
Mr. S hibley . I have made my statement, and I think it is very
clear.
Through the refusal of the House committee to hold public hear
ings after the bill for banking and currency reform had been drafted
there was no public record of the facts which I am now presenting
to this Senate committee. Had this Senate committee chosen to
refuse to conduct public hearings there would have been but little
opportunity to place before the public the facts which I am here
with presenting. This fairness on the part of the Senate committee
is cause for rejoicing; also the fact that the chairman of this com
mittee has freely published in the name of the committee the state
ments both for and against the various features in the bill.
He has been doing so from the start.
This explains why it is that not until October has there appeared
in an official record in connection with the banking and currency bill
the facts of history which demonstrate that a legal-tender paper
currency is absolutely essential in connection with gold standard;
and that capital stock and large reserves for the 12 banks of issue
would be worse than useless. The proof I present is indisputable,
and I also assert that if the present plan for capital stock contributed
by the bankers and bankers’ control for the 12 banks o f issue is put
through, and thereby become law, that it will largely tend to defeat
the progressive Democracy in next year’s election.
Senator N elson. How can a bank get along without capital?
Mr. S hibley . I am coming to that. I now present proof o f the two
points named.
First, as to my proof that the 12 banks of issue do not require
capital stock.
The things which the 12 banks of issue are to do can be fully per
formed and effectually performed without any capital stock. An
analysis of the work to be accomplished demonstrates that this is so :
First. A mammoth gold reserve can quickly be built up through
the issuing of legal-tender paper currency in exchange for gold bars
and gold coin, the same process that is used in England, France, Ger
many, and the other countries.
Senator H itchcock. H ow is that? Please repeat that.
Mr. S hibley . First, a mammoth gold reserve can quickly be built
up through the issuing of legal-tender paper currency in exchange
for gold bars and gold coin, the same process that is used in England,
France, Germany, and the other countries.
Senator N elson. Just these banks are to issue legal-tender notes to
get gold ?
BANKING AND CURRENCY.
Senator H itchcock. N o ; that is not the process.
to get the gold and then issue the notes.
1821
They are going
Senator N elson. N o ; here they issue the notes and then get the
gold on the notes.
Mr. S hibley . Exactly; the same as is done in France, England,
Germany, and other countries.
Senator R eed. Let me understand that. What was Senator Nel
son’s suggestion?
Senator N elson. I said his theory is that these regional banks, all
they have to do is to issue these legal-tender notes and upon
them they get the gold reserve. That is, they just hand out these
notes and the gold comes in for the reserve. Is that correct?
Mr. S hibley . That is correct.
Senator H itchcock. Where do you get it from ?
Mr. S hibley . Get it from the banks and the people in general.
There is stacked up in the United States Treasury, against gold cer
tificates, more than $1,100,000,000. The only thing required is that
these 12 banks of issue shall get those certificates and issue legal
tender in place of them and then they will have the gold.
Senator R eed. That is to say, now, I am president o f one of these
regional banks. I want $10,000,000 of gold. I get $10,000,000 paper
money from the Federal reserve board. Now, where do I take that,
and what am I going to do with it to get that gold ?
Mr. S hibley . A s the gold certificates come in to the bank it will
sort them out and issue the legal-tender paper currency in its place.
Senator R eed. Where is the gold coming from? O f course, if it
gets in there I am going to grab it.
Mr. S hibley . It will be paid in in the regular course of trade.
Senator N elson. Who will pay it in and for what purpose?
Mr. S hibley . The national banks and individuals will pay in gold
certificates. I f I could draft the law I would provide that the na
tional banks should pay into the reserve banks their gold certificates.
That is in connection with the provision reducing the volume of
reserves to be held by the national banks. I would provide that the
reserves shall be the legal-tender paper currency, rather than the
present gold certificates. The change would be to use another form
o f paper currency. Both forms of paper currency are legal tender,
and both are redeemable in gold on presentation and the reason for
the change is to build up a central gold reserve in charge of the Fed
eral reserve board in place o f having the gold in the 7,000 national
banks and various other places.
Senator W eeks. Mr. Chairman, may I suggest the hour of 5 o’clock
has arrived, the hour at which we have agreed to close our hearings?
Senator N elson. Oh, I think he can finish by 6, can’t you ?
Senator B ristow. Suppose we continue until half-past 5, anyway,
which was the hour we agreed to adjourn.
Senator N elson. I want you to come prepared in the morning to
give us a clear idea of how this bank is going to be run without any
capital—these regional banks.
Mr. S hibley . I am right in the midst of that.
The C h airm an . Proceed.
Senator H itchcock. We have the wireless telegraph and the horse
less carriages, and now we are going to have the capitalless bank.
1822
BANKING AND CURBENCY.
Senator R eed. I do not want to take the time of the committee or
interrupt you, but we are right on this point, and, of course, if you
are correct, then many things might follow. Your proposition is
that we will establish a regional reserve bank without any money
being paid in in the way of capital stock?
Mr. S hibley . Yes; 1 am just in the midst of giving my reasons.
I said, first, that a mammoth gold reserve would be built up.
Senator R eed. That is what I want to know—how it will be
built up.
Mr. S h ib l e y . I say, in the same way that the central gold reserves
in Europe are built up. The gold will be impounded in the 12 banks
o f issue, and in exchange would be issued legal-tender paper money
instead of gold certificates.
The C hairm an . They have to put the reserves in these banks. The
banks keep the reserves in the reserve banks, according to your sug
gestion.
Mr. S hibley . Oh, yes.
The C h airm an . H ow are you going to build up gold reserve in
the reserve banks from the member banks? That is what Senator
Reed wanted to know.
Senator R eed. Yes; and I do not understand it yet. The professor
states he would issue paper money and in that way would get the gold.
Now, manifestly, merely issuing it will not get it, and I want to know
how he gets it. That is a very different thing—issuing paper money
and getting gold for it—from the banks putting in their reserves,
and when they do pay in their reserves, you require them to put
the gold in for reserves. I grant you, freely, if the bank was re
quired to put $1,000,000 o f reserve in. and then we said it must put
gold in, and it was able to do it, that would get the gold in. But
the proposition you asserted was that by issuing the paper money
you would get the gold for it. How ?
Mr. S hibley . In the same wav that the Government of the United
States accumulated its $1,100,000,000 of gold. It issued gold cer
tificates in the place of it.
Senator R eed. I do not think it got it that way. I think the Gov
ernment of the United States got that $1,100,000,000 principally from
two sources. First, men brought gold there to be coined—gold bul
lion—and the Government coined it and kept the coin and issued a
piece of paper which can be termed a warehouse receipt, which passes
current because it really represents the gold and many people prefer
it to the gold. That is one great source. The other, as I under
stand (and I speak with hesitation, because I do not possess that
cocksureness about these matters that I probably ought to posses),
the other great source has been that the customs when paid had to
be paid in gold coin, gold certificates, or greenbacks, and therefore
that a large amount of gold flowed into the Federal Treasury. Hav
ing been once placed in the Federal Treasury it could be laid
aside and gold certificates issued against it. Now, that is the source
by which the Government gets it. It does not get it by issuing
money and then getting the gold, but it gets the gold and then issues
the paper money, to wit, the gold certificates, against it. Am I
correct ?
Mr. S hibley . Certainly. But why is the gold left in the Central
Treasury and the people use the gold certificates ?
BANKING AND CURRENCY.
1823
Senator R eed. Oh, it is more convenient.
Mr. S hibley . And the same would be true of the legal-tender
notes, the paper currency. I f it is legal-tender paper and it does not
have the weight of gold, the same thing will occur.
Senator R eed. Y ou still have not gotten the gold in. That is the
crux of this matter. After you get it in, I grant that you may con
tinue piling up the gold as long as you get a flow of money. But
when we issue gold certificates, there is a gold dollar back of it, and
we certify that a gold dollar will be issued for the piece of paper
when the people want it. There is no question but what you can do
that, but I do not see how that plan meets this, because there, in that
plan, we get the gold and then issue the certificates. Here you pro
pose to issue the certificates and thereby get the gold. There seems
to me to be somewhat a radical difference. There is a difference be
tween a man having a horse and owning it and issuing a bill of sale
and a man issuing a bill of sale and thereby getting the horse.
Senator N elson. He may be able to explain this to your satisfac
tion.
Mr. S h ib l e y . I call attention to the fact that I stated a moment
ago, that I would provide in the law that the reserves to be held by
the national banks should be legal-tender paper currency, and that
would cause them to release their gold certificates, which would go
into the banks of issue—the gold certificates would be driven into the
reserve banks. The Government, of course, would help the reserve
banks to get the gold that now is in the Federal Treasury. So, in
addition to the $1,100,000,000 of gold certificates, there is $150,000,000
that is back of the greenbacks, making one and a quarter billions,
which is one and a half times more than the Bank of Franee has, and
the Bank of France has the largest gold reserve in the world. And
this billion and a quarter would be six times the gold reserve of the
Bank of England.
But in the bills before this committee there are provisions for a
crippled paper currency, and if this character of paper currency is
provided for in the law, then the national banks will hold on to their
gold certificates and gold coin, and no central gold reserve o f any
considerable size could be built up; just as in Germany, while the
paper currency was not a legal tender, there were great difficulties in
connection with the central gold reserve. It could not be built up to
anything like the size of the French central gold reserve, as I have
shown. In 1907 Germany temporarily lost the gold standard of
prices, and great injury resulted, as I have shown by quotations from
the Germans themselves. In other words, under the bills before this
committee we would not be able to build up a gold reserve in the
reserve banks. Failure would have to be admitted, the same as was
admitted in Germany. Bonds might be issued for gold, which the
bankers would draw out, and thus there would again be in operation
the same old “ endless chain.”
Senator H itchcock. Y ou think, then, that as the bill stands now
the 12 banks would not be able to build up an adequate gold reserve?
Mr. S h ib l e y . I point to the history of Germany in that respect.
Senator H itchcock. I understood you to argue with the Senator
that that was the way you were going to do it.
Senator S hafroth . He would get it if you issue legal-tender paper
currency and make it the legal reserve in the banks.
9328°— S. Doc. 232, 63-1— vol 2----- 55
1824
BANKING AND CUKRENCY.
Senator H itchcock. I understand that, but the present bill does
not make that possible.
Senator S hafroth . Suppose you change the bill and put in legal
tender ?
Senator C rawford. Does not that all amount, then, to the issue of
a redeemable paper for gold?
Mr. S hirley . We should have a gold standard and make it abso
lutely sure that our citizens would be able to get gold at any time.
Senator N elson. N ow , suppose you have the regional banks. They
get started issuing legal-tender notes, through which you get the gold
reserve. How are the member banks to get the currency ?
Mr. S hibley . T o get the gold?
Senator N elson. N o ; to get the money out of these regional banks,
if the member banks want some of that money ? How do they get it ?
Mr. S hibley . That is my second point. My first point is that a
mammoth gold reserve can quickly be built up through the issuing of
legal-tender paper currency in exchange for gold bars and gold coin,
without capital stock.
Second, as money is needed to move the crops and for other un
usual demands within the country, the needs can be met by the issu
ance of legal-tender paper currency in exchange for commercial
paper, the same as in France, Germany, and the other countries that
supply an elastic volume of paper currency. Those European coun
tries do not provide that the banks that loan to the people shall part
with some of their funds and place them in the banks of issue so
that the banks of issue can meet the unusual demands for money
within the country. The mere statement of the principle involved
exposes the fallacy in the plan. Our banks of issue are not to loan
money to the people and therefore will not run any risk of losing
more than the profits; therefore capital stock will not be required.
The banks of issue will issue the money when needed, and these
banks of issue ought not to ask the banks of deposit to put in some of
their money or credits in excess of enough to settle the daily clearing
house balances, and there is no country in the world where such a
thing is required. Now, that exposes the basic fallacy in this bill.
The C h airm an . State that again.
Mr. S hibley . The European countries do not provide that the
banks that loan to the people shall part with some of their funds and
place them in the banks of issue so that the banks of issue can meet
the unusual demands for money within the country. That is the
principle at stake. We should recognize that principle. Therefore
our national banks and other banks of deposit should not be required
to place in the 12 banks of issue a large volume of actual capital for
the purpose of meeting unusual demands for money. The elastic
volume of paper currency and the mammoth gold reserve should be
used to meet the unusual demands.
Senator N elson. What would the paper currency be issued upon?
Mr. S hibley . A mammoth gold reserve would exist.
Senator N elson. I know, but they must issue the paper currency on
something.
Mr. S hibley . The 12 banks of issue would take commercial paper,
as is provided in this bill.
BANKING AND CURRENCY.
1825
Senator C rawford. For every dollar of that gold reserve they have
already got out a dollar of this paper money that they used in get
ting the gold in.
Mr. S hibley . That is the same as they do in France and Germany.
Senator C rawford. N ow , when you go to increase it, they have
issued, say, more than a billion dollars for gold, which is the full
face value of the gold.
Mr. S hibley . The result in France is that they have a 60 per cent
gold reserve; in Germany, 70; England has a 60 to 70 per cent gold
reserve under that very system.
Senator C rawford. In other words, the whole system is based on
the credit of the Government.
Mr. S hibley . N o ; the gold is stacked right up in the banks.
Senator C rawford. They got that on the credit of the Government.
Mr. S hibley . They issued legal-tender money.
Senator C rawford. That is simply using the credit of the Govern
ment.
Mr. S hibley . It is money which the Government issues. The
people must have a medium of exchange.
Senator C rawford. It is a promise to pay.
Senator S hafroth . The impelling force in his argument is that
when paper securities are presented a full legal-tender dollar shall
be issued. Then a provision in the law requiring that the banks of
deposit shall keep as their reserves legal-tender money, which would
force out the gold from these banks and thereby put it in the Federal
reserve bank and putting the legal-tender money in the member
banks.
Senator N elson. I s that your theory ?
Mr. S hibley . That is the theory exactly, and the further fact that
the people do not want to carry around gold, but they take something
which represents gold and pay their debts the same as in Germany
and France and the other countries.
Senator C rawford. What is the use of having this gold if it is a
mere trinket? You are using that money directly issued by the Gov
ernment, you are making that legal tender, legal reserves, and so
forth. What is the use of having all that around there? Why not
eliminate that and use this paper money?
Mr. S hibley . Ask the Bank of France why it is so strong with its
$800,000,000 of gold. It is because it has the gold, and we likewise
need a large central gold reserve.
Senator C rawford. Y ou are going in debt for it?
Senator H itchcock. The accumulation by the Bank of France has
been brought about in this way: The Bank of France receives de
posits from the Credit Lyonnaise and the other great banks of
France. They are partly in gold and partly in notes and partly in
silver. When it pays out, instead of paying out gold it pays out in
notes and holds on to its gold. It receives more deposits constantly
and always holds on to the gold and pays out as many notes as pos
sible, so that gradually, through this process, the Bank of France
accumulates a gold reserve.
Mr. S hibley . That is it exactly. The law should further provide
the same as the English law—that the gold that comes from the
miners should be deposited with our reserve banks, so that they can
1826
BANKING AND CURRENCY.
issue the paper money against it. We would soon have a gold reserve
of a billion and a quarter, six times as much as the Bank of Eng
land, and when we shall need money to move the crops our 12 banks
of issue will issue paper currency.
Senator N elson . Would not your plans lead to 1 central bank
instead of 12 ?
Mr. S hibley . Oh, my, no. Twelve banks are away ahead of any 1
central bank.
Senator N elson . I mean that your plan of running without any
capital and issuing legal-tender notes for gold, would your banks
be banks of issue?
Mr. S hibley . Yes.
Senator N elson. Twelve banks of issue?
Mr. S hibley . Yes; and this bill provides that they shall be banks
o f issue.
The C h a ir m a n . Did you not mean to say with regard to capital,
that the Bank of England, while it has a nominal capital, has every
dollar of the capital in Government securities, so it is not active, and
the same thing is true of the Bank of France, that the capital actu
ally is invested in Government securities, and is not therefore a part
of the process?
Mr. S h ib l e y . That is it exactly, The banks of issue have no capi
tal stock.
The C h a ir m a n . N o active capital stock?
Mr. S hibley . N o active capital stock. The Bank of France has
100,000 depositors and not a dollar of active capital stock. The capi
tal stock was paid in years ago and invested in Government securi
ties. They are going on it without active capital stock. We in this
country are not planning that the Federal reserve banks shall loan
money to the people. These reserve banks are simply to be banks
of issue plus the holding of a central gold reserve and the holding of
enough of the actual bank reserves to settle the daily balances in the
clearing-house system. We would not think of asking the bankers to
subscribe a capital stock to a subtreasury system, because you would
say, “ When we want currency we issue it. No capital stock or bank
reserves would be placed in the subtreasury. But we want a clearing
house system for the entire Nation.” And therefore I favor the Fed
eral reserve system, and that the member banks should place with the
reserve banks enough funds to settle the daily balances. Under this
plan practically all of the 25,000 banks come into the system, provided
we leave the fixing of the rates fo the national board. Then we would
have the greatest system in the world, but we can not have it with
out having a legal-tender paper currency.
Senator N elson. The country banks, especially in the South and
Southwest, are directly opposed to this clearing-house system in this
bill.
Mr. S hibley . Because the bill says they must exchange at par.
The bill is wrong, in my judgment, in planning to fix the rates. That
ought to be left to the national board. Therefore, I say, strike out
the fixing of the rates in this bill. x\nd do not ask the banks for a
dollar of capital stock for the banks of issue and only for enough of
their reserves to settle the daily balances. Also leave it purely op
tional with the banks to come into the clearing-house system.
BANKING AND CURRENCY.
1827
Senator N elson. What is the occasion for having them contribute
capital? What is the occasion for asking them to come in? What
need is there for them to come in?
Mr. S hirley . There is no need, unless they want to exercise the
clearing-house privilege. I f they do, well and" good.
Senator N elson. Would it not be simpler to say that all banks of
the country—national and State banks and trust companies—can all
make these regional banks their clearing houses?
Mr. S hibley . Yes: most assuredly.
Senator N elson. Then, if the banks would not be compelled to
contribute anything, I imagine there would not be any need of their
coming into the system.
Mr. S hibley . Leave it purely optional.
Senator N elson. There would be nothing for them to come in for
if they were not to contribute their stocks or reserves.
Mr. S hibley . They would have to contribute just enough reserves
to settle the daily balances. That they would be willing to do.
Senator N elson. That is the same thing they do at the banks now?
Mr. S hibley . Yes. Another point is that each trust company and
State bank ought to be able to get money from the regional banks
whenever they are in trouble, as all banks of deposit do in other
countries. The president of the Bank of France states that when
ever a bank in France needs money it makes application to the Bank
of France, and it does what is right. The Bank of France is a bank
of banks. It is just as simple as a, b, c.
Senator C rawford. This is really a revolutionary proposition.
Heretofore when the Government has wanted gold it has sold
bonds-----Mr. S hibley (interposing). Who was in power?
Senator C rawford. Here, all at once, we are going to get a billion
dollars in gold, and the way we are going to get it is to issue notes.
Senator N elson. Make them legal tender.
Mr. S h ib l e y . That is the French system, the English system, the
German system, and the system of the other European countries,
except Scotland. Do you understand that? I am saying that that
is a fact. It is the system that Germany accepted after losing her
gold standard.
Senator N elson. I do not know why we should be issuing these
gold bonds.
Mr. S hibley . Who was in power? Were the people’s representa
tives in power? The seat of political power is the main thing to
look for. Now that the political power in this country is where it
ought to be, everything will come out right.
(Thereupon, at 5.20 o’clock p. m., upon motion of Senator Weeks,
the committee went into executive session and afterwards adjourned
to meet at 10 o’clock a. m. to-morrow, Tuesday, October 7, 1913.)
1828
BANKING AND CURRENCY.
T U E S D A Y , OCTOBER 7,
Committee
on
1913.
B anking and C urrency,
U nited S tates S enate,
Washington, D. C.
The committee assembled at 10.10 o’clock a. m.
Present: Senators Owen (chairman), Hitchcock, Pomerene, Shafroth, Hollis, Nelson, Bristow, McLean, and Weeks.
The C hairm an . We will hear you now, Mr. Shibley.
STATEMENT OF GEORGE H. SHIBLEY— Continued.
X V I.
Mr. S hibley . Mr. Chairman and gentlemen, last evening when I
closed I was giving the reasons why, in my judgment, no capital
stock is required for a bank o f issue, or for the 12 banks of issue in
this country. As I pointed out, a very large gold reserve can be
built up through the issuance of paper currency the same as is done
in Europe; and, secondly, that the elastic volume of currency will
meet the unusual demands, the same as in Europe.
Another way to expose the fallacy in the proposal for the capital
stock in the proposed banks of issue is to consider what would
actually take place should a capital stock be subscribed and paid in.
Suppose that capital stock should be subscribed to the 12 banks of
issue and be paid in, what would the banks of issue do with it?
The answer is that the commercial paper and cash received in pay
ment would be treated as follows:
The cash received would be loaned out from day to day, for there
would be no object of holding it in the banks, because the gold re
serve would be built up by exchanging paper currency for it, and,
should there be at any time an unusual demand for money it would
be met by issuing paper currency. So the result would be that the
cash received in payment of the capital stock would be loaned over
and over again. This would be worse than useless. The capital that
would be paid into the banks of issue had much better remain where
it now is as the result of industrial development, or where it would
go under an improved system. Leave with the bankers the control
and investment o f their capital and not place it in the 12 banks of
issue, subject to the management o f boards of directors that should
represent the public in connection with the control of the purchasing
power of money. The two functions o f regulating the private banks
in the interest of the public and the loaning of huge sums o f capital
to the banks merely for the purpose o f loaning it is manifestly a
wrong policy. The boards of directors o f the banks o f issue deter
mine the purchasing powr of money within their respective regions,
er
just as the Interstate Commerce Commission determines the height
of the railroad rates. Now to provide that the directors of the banks
of issue shall also take over some $600,000,000 o f actual banking
capital and turn it over each 60 or 90 days, and with no other pur
pose than that the bankers shall name six of the nine directors of
each o f the banks o f issue would be folly, and would be exposed to
the people in next year’s campaign by the opposition leaders. The
weekly statements by the banks o f issue would be used to demonstrate
BANKING AND CURRENCY.
1829
the system. I f the management should attempt to hold large quanti
ties of cash derived from actual banking capital and thereby endeavor
to prove that there was some reason for providing the capital stock,
then the opposition leaders would show that business conditions were
being injured thereby— that had this bank capital been left with the
banks it would be in use. So in no possible way could the boards of
directors of the 12 banks of issue conceal the unwise plan of provid
ing capital stock by the bankers for what should be public institu
tions.
Furthermore, the inefficiency and more or less of graft that would
develop from the management of hundreds of millions of actual bank
capital by political appointees would give rise to popular discontent
with the leaders who established the system. The history of the twT
o
banks of the United States ought to be a sufficient warning against
te unnecessary mixing of politics and the banking business. Presi
dent Andrew Jackson’s description of the evils in connection with
the Second United States Bank may be found in Senate Document
135, this session (1913), pages 64-70.
Our 12 banks of issue ought not to touch the banking business,
confining their duties to the building up of the gold reserve and the
supplying of an elastic volume of paper currency, combined with a
clearing house for the entire Nation and the carrying of just enough
of the bank reserves to settle the daily balances. That would leave
with the bankers the management of the capital which the bankers’
expert advisers have planned for the 12 banks of issue—planned for
these banks of issue in order that the bankers shall have a reason
for insisting on their control.
The providing of capital stock by the bankers would tend to de
feat the progressive democracy. So there is every reason why the
provision in the bill for capital stock should be dropped out. It
would result in a far better system, and result, also, in laurels for
the progressive democracy, instead o f tending toward its defeat.
Briefly let me present the argument that would apply should the
Democratic organization in charge of the Federal Government go
ahead and place upon the statute books the provision for capital
stock and the corollary, that of placing the bankers in control of the
12 banks of issue:
First. It would be pointed out that the capital stock is a special
privilege to the bankers, the people not being permitted to subscribe.
Second. That this capital stock, by a private interest in what
should be a public institution, is worse than useless.
Third. That this special privilege is used as a basis for placing
under the bankers’ control the people’s interest in the monetary
system and the purchasing power of money. The bankers are to
elect six o f the nine directors in each board, which would be con
clusive proof that the bankers were in control. That would be com
plete proof that the so-called progressive democracy had been false
to the people in the banking and currency law. “ False to the peo
ple,” I say, because from this hour forward there is public notice and
proof that Prof. Laughlin and his “ sound-money ” colleagues have
tricked the House o f Representatives, which relied upon its Com
mittee on Banking and Currency. Nine o f the progressive Demo
crats in the House voted against the bill in the final vote in the
caucus.
1830
BANKING AND CURRENCY.
And there are minor parts of the bill as it now stands that are
especially obnoxious to a self-respecting and self-governing people.
This is especially true of the provision in section 4 that the bankers
shall elect three members of each board of directors, who “ shall be
fairly representative of the commercial, agricultural, or industrial
interests of their respective districts.” You will find this in
lines 9 and 10, page 8 of the bill. Here it is openly stated that in
the control of the purchasing power of money the organized bankers
shall be the guardians of the organized farmers, organized wage
earners, and organized business men, as well as the guardians of the
unorganized men and women in these industries.
That is not fair to the organized farmers, the organized wage
earners, and the organized business men. The very least that would
satisfy these portions of the sovereign power of the Nation would
be to direct that they nominate candidates and that selections be
made from among these by the national board subject to confirma
tion by the Senate. The Senate should confirm in order that the
public shall have an opportunity to protest against selections by the
national board. The President’s appointees are confirmed by the
Senate, and the national board’s appointees ought not to be exempt.
But the fact is that the proposal that the bankers shall elect six
of the nine directors is because the intention is, manifestly, that the
will of the bankers shall prevail, because they are putting in hun
dreds of millions of dollars of capital for which they are responsible.
That argument is sound, but as that capital would be handled by
boards that are in politics, as compared with being handled by the
banks themselves, so it would be worse than useless, there is every
T
reason for dropping out the provision for capital stock. There is a
practical way for doing this, but before taking that up I desire to
point out that the banker’s own best interests, as well as the interests
of the general public, require the proposed change.
In both the administration bill and the House committee’s bill the
paper money to be issued under the new law is to be the obligation
of the United States, whereas the obligation should be that of the
Federal reserve system, the system that is to hold the gold reserve
and the commercial paper for which money shall have been issued.
Whether or not the obligation shall be stated the one way or the other
may at first sight be considered as of no great moment; but view with
me for a few moments, please, the reasons why the money issued un
der the new system should be the obligation of the Federal reserve
system.
' The regional banks of issue, 12 in number, will be a vast improve
ment over a central bank of issue or the issuance of paper currency
by the Treasury Department and subtreasuries, in which a central
power would operate, because in the regional banks of issue there
will be 12 boards, each representing the people of the community.
In that way each section of the Gountry will possess its own board
of directors, whose duty it will be, first, to help determine the height
of the interest rate for money and therefore determine the average of
prices for commodities at wholesale; second, to operate the rediscount
system for commercial paper, which will include the prevention of
“'runs ” upon the banks and the guaranty of the safety of bank de
posits; and, third, to operate the transfer system for money and
BANKING AND CURRENCY.
1831
credits. Other functions for the Federal reserve banks will arise
from time to time.
This Federal system, as distinguished from a centralized system,
will result in the largest possible amount of home rule. The national
hoard will only deal with national problems, leaving to the boards of
directors of the Federal reserve banks the entire management of de
tails. Thus, the operating of the rediscount system will be under the
control of men who live in the community and are leading citizens
thereof.
And the paper currency issued through this Federal system ought
to be the obligation of the banks of issue plus the obligation of the
Federal reserve board, and the result would be that in time of war,
if ever again w e shall suffer that catastrophe, the control of the price
T
level and volume of paper money will be separate and distinct from
the Treasury Department and Congress. That would be important.
In France, for example, during the terrific Franco-German War,
the control of the price level was entirely separate from the legisla
tive power and the executive power and the results were the very
best. The price level for doing business was properly maintained
throughout the w ar; and, then when the German troops occupied Paris,
the Bank of France with its gold reserve was not touched; whereas had
the French Government been in direct control the German general in
his occupancy of Paris would have confiscated the gold reserve, and
the price level would have been tremendously irregular. Later,
when the French Government was in the hands of the Commune it
did not interfere with the control of the price level and volume of
money, except that funds were demanded of the Bank of France and
paid to the Government. But there was no interference with the
most important function in government and which had been lodged
with the Bank of France, namely, that of controlling the volume of
paper currency in combination with the metallic money, thereby
controlling the price level whereby business is conducted.
Let us profit by this successful experience of the French people
through the Bank of France. In other words, let us completely
separate the Treasury Department from the Federal system o f
monetary control, placing 12 boards of directors in control in the
several regions of the country, thereby controlling the lifeblood of
commerce, namely, the volume of money and of bank credits.
To thus separate the Treasury Department and Congress from the
banks of issue it will be necessary to provide that the paper money
to be issued shall be the obligation of the Federal reserve system, and
the only way that this can be done is to first drop from the bill the
provision for capital stock by the bankers, and provide that the
boards of directors of the 12 Federal reserve banks shall represent the
people and not the bankers. That is self-evident. The Federal
reserve banks should be publicly owned and operated, the same as is
the Treasury Department of the Federal Government. When the
Federal reserve banks are publicly owned and operated they properly
can issue the paper currency, for then it will be Government cur
rency, as distinguished from the banker’s currency. By thus pro
viding for bank notes to be issued by the Federal reserve system the
country can secure the full advantages of the truly Federal system.
It wili truly be a Federal system as distinguished from a central
1832
BANKING AND CUKRENCY.
bank, because each region in our great country will possess its own
bank of issue, separate from the United States Treasury, yet all of the
banks of issue will be linked together through the national board, which
should control the entire gold reserve; yet each region will possess
the organization that is to decide just how the paper currency shall
be issued and to whom. This important function for the citizens of
each region will be home rule, which would be denied under a central
bank.
To secure all of this the primary step is to drop from the bill the
proposal for capital stock contributed by the bankers.
Another point, and it is of great moment to all who possess capital
in the privately owned banks. Bv not providing a capital stock for
the Federal reserve system it will lessen the tendency to change it
and provide that the 12 regional institutions and their numerous
branches shall include in their work the accepting of deposits from
individuals and the loaning of capital to them. The present bill
very properly does not include these functions, relying upon the pri
vately owned banks to compete among themselves, under proper reg
ulations. But if capital stock is provided in these Federal reserve
banks and their multitude of branches, then a demand will soon arise
from some of the progressive leaders that the people be authorized
to supply capital stock in these institutions and become deposi
tors and receive loans, the same as the banks, and this system actually
prevails to-day in France and all of the other countries in Europe,
including England. The fact is that the proposed Federal reserve
system is an improvement over the European plan because it will
supply a means whereby all of the privately owned banks can be
unified into a single organization for supplying a clearing-house
system for the entire country— a cheap system of transferring money
and credit, while preserving competition in the loaning of funds and
in supplying banking accommodations. The bankers, however, in
some of the large banks in this country, in their efforts to secure
special privileges for themselves, at the expense of not only the people
but the country hanks, are hastening the day when our Government
will actually be placed in the banking business, as in Europe, instead
of merely issuing the currency and controlling the price level.
You see that there are reasons from the bankers’ standpoint why
the proposed capital stock by bankers should not be placed in what
should be purely Government institutions; and public interest coin
cides in this case with the bankers’ interests. The two are in
harmony.
I wish not to amplify somewhat a few points which I have merely
mentioned in passing.
I will speak from the standpoint of the party in power and as a
member of that party.
The people of this country have only just come back into power,
after being out of power in Federal affairs since the debasement of
the national convention system in 1844, except that the people after
wards secured control o f the Federal Government for a few months
after 1860.
The debasement of the national convention system in 1844 is de
scribed by John C. Calhoun in an address to the Democrats of the
country in that year withdrawing from the race for the presidential
nomination. Benton, the great Missourian, in his Thirty Years in
BANKING AND CURRENCY.
1833
the United States Senate, written in 1853, also describes the debased
national convention whereby the people of this country lost selfgovernment in national affairs. Machine rule is the usual term for
the debased convention system.
But the people are now back in power, having established direct
nominations and other improved governmental machinery, and the
people’s representatives who are in office should give as little offense
as possible in reconstructing the currency system. It is the belief
of many that poor judgment has been exhibited in proposing to
actually force the bankers to contribute some $600,000,000 of capital
and yet deny them the control of it in the national board, proposing
to place the control in political appointees. The way out is to drop
the requirement for capital stock and large reserves. That will
remove the reason for criticism.
Then the progressive democracy can go into the forthcoming cam
paign in excellent shape. We certainly should not be obliged to face
the following argument:
We are told—
Saj^s a prominent banker—that $650,000,000 to the success of the Federal reserve bank system, and, by im
plication at least, we are told we are not worthy to be represented on the Fed
eral reserve board.
If the Government can rightfully compel the banks to contribute this vast
sum for this purpose, would it not follow that it could compel corporations do
ing an interstate business to invest their funds for some other purpose; and if
so, how long do you think there would be any capital invested in enterprises
over which this drastic prerogative could be exercised by the officials of the
Government?
It is one of the traditions of the Angle-Saxon race and in accordance with the
spirit of true Americanism that capital must be managed by those who supply
it, and, furthermore, that the investor must be free to decide whether or not
he shall make investments; yet we are confronted with a plan which proposes
to compel the banks of the country to turn over to a political committee vir
tual control of about 10 billions of dollars of banking power, the result of 50
years of conscientious labor on the part of the officers of 7,000 national banks in
the United States.
The banker further said:
I contend that this drastic and wholesale shifting of reserves from the
natural centers where the requirements of business have caused them to flow
automatically will disturb business and greatly impair the ability of the public
to secure credit accommodations.
On this same point he said:
You can regulate and supervise but when you try to bring about an entire
change from those natural conditions created by the development, growth, and
natural trend of our business and commerce, you are undertaking a task
fraught with a great danger. (Mr. George M. Reynolds before the Minnesota
State Bankers’ Association.)
This argument is unanswerable, in my judgment, and the Avay to
meet it is to strike out the provision for private capital stock in what
should be public corporations. Furthermore, the proposed transfer
of hundreds of millions of dollars of the banking capital from the
places where it has been built up by competent hands and brains
and place it in the control of political appointees, whose necessary
duties are along an entirely different line, would be suicidal for the
party because harmful to the country. Experience shows us every
1834
BANKING AND CURRENCY.
day that while political control is needful in regulating the affairs
of the people, yet to the extent that public ownership and operation
is engaged in at the present stage of our development it is much less
effective than private ownership and operation. This difference
would be several times worse by attempting to combine the control
of the monetary system with the banking business as proposed.
The investing of some $650,000,000 each two or three months by po
litical appointees and bankers’ representatives would lead to all
sorts of “ grafts ” and attempted “ grafts,” which would give the
opposition party leaders the opportunity for which they naturally
are longing. Charges of malfeasance and of misfeasance would
quickly be made, and the charges would be pressed until investiga
tion would have to be gone into.
This sure trouble, should the present plans for capital stock be
carried out, can all be side-stepped by simply dropping the provision
for the bankers’ capital stock and huge bank reserves in the banks of
issue.
Furthermore, consider the embarrassment should the $650,000,000
be levied upon by the party in power as proposed and then the bank
statements should show each week that it was simply being reinvested
and was not where it could be of any assistance in case of panic be
cause not needed! Explanation would have to be made— the truth
would come out. Or, suppose that the 12 banks of issue should
withdraw from commerce hundreds of millions of dollars of actual
banking capital and it should lie stacked up and utterly useless, then
that would be exposed.
Avoid such a condition, is my advice. You now are facing the two
alternatives of squarely recogizing that a mistake has been made in
suggesting private capital stock in what should be a public institu
tion, or of going ahead with the incongruous affair. Progressive
Democracy can not afford to be placed permanently in this awkward
position.
The present position has come about through a nation-wide “ con
spiracy of silence.” There are plenty of people in this country who
have known right along the true facts concerning France, Germany,
and England, and should have helped the patriotic and progressive
leaders to have gotten this bill into proper shape at the start, but as
this was not done, the thing to do is to do it now. Section 3 can be
recast and be made to set forth the powers and duties of the Federal
reserve banks. It is thorougly practicable.
One more point in this connection: The farmers and the wage
earners will have to be permitted to nominate their representatives
on the boards of the banks of issue or there will be far-reaching
trouble in next year’s campaign. They will not quietly submit to
having their interests in the monetary system placed under the
guardianship of the bankers. And in order to provide that the farm
ers and the wage earners shall nominate their own representatives
there should first be dropped the requirement for capital stock by the
bankers.
So it all simmers down to that one point. Make the necessary
change as to capital stock and the rest will follow. And a good anti
sufficient reason for dropping the proposed capital stock is that a
legal-tender paper currency will be so effective an ally to the gold
standard that the capital stock will not be needed. That is all that
BANKING AND CUERENCY.
1835
need be said, after having explained the history of paper currency
in Europe.
Senator B ristow. Have you explained just how this bank is going
to operate without capital stock?
Mr. S hibley . I presented most of that last evening.
Senator B ristow. I was here last evening, but did not get it clear.
I suppose I was not sufficiently familiar with it.
Senator S iiafroth. Suppose we allow him finish his statement,
and then we can ask him questions.
The C h a ir m a n . I think that would be better.
Mr. S hibley . The remedy is simple and thoroughly practicable.
It is to leave sections 1 and 2 of the bill as they are, with minor
changes, so that the 12 Federal reserve banks shall be organized.
The next section, section 3, which now provides for the capital stock,
should be recast by enumerating the powers and duties of the Fed
eral reserve banks. What I suggest in this respect is as follows:
S ec. 3. The powers and duties of each Federal reserve bank shall be:
(a) To establish and maintain throughout the Nation an improved system
for the transfer of money and credit, to be known as the Federal reserve sys
tem, to consist of 12 or more Federal reserve banks, also a supervisory board,
and as many of the privately owned banks as care to join, each of said pri
vately owned banks to deposit with the Federal reserve bank in its district
sufficient reserves to settle the daily balances.
In explanation I will add that this function of the forthcoming in
stitution, plus the maintaining of a mammoth gold reserve, would
determine the name, the Federal reserve system, consisting of 12
regional banks and 12 boards of directors thereof, along with a na
tional supervisory board and as many of the privately owned banks
as care to join the Federal clearing-house system.
Each of the 25,000 banks of the country should come into this
Federal clearing house, and they doubtless will do so in order to
hold their depositors, provided the conditions for admission are not
unreasonably severe. All that actually is needed is the deposit of
sufficient reserves to meet the daily balances. No capital stock is re
quired in a clearing house. That is self-evident.
Paragraph b, of the powers and duties: Here is the keynote of the
system, as I see it. The existing bill makes it very difficult to under
stand just what the Federal reserve system is to be. Here is what I
propose in paragraph b of section 3:
(b) Through the mechanism hereinafter provided each Federal reserve bank
shall control the interest rate for money within the district where the said bank
is located, the rate of discount to be subject to the supervisory power of the
Federal reserve board provided for in this act. and the aim shall be to promote
stability in the purchasing power of the standard of value, thus to aid in the
development of the industrial system and of prosperity and deal justly as be
tween the industrial groups.
Senator N elson . That is the keynote of the system?
Mr. S hibley . Yes; that is the keynote.
I will further add, parenthetically, that raising the interest rate
for money, that is, raising the rediscount rate for commercial paper,
which each Federal reserve bank is authorized to do, will actually
increase the purchasing power of the money thus put out, and this
will tend to make all money in use in the district more valuable, that
is, that it will purchase more commodities, which means that the
prices for commodities will tend downward. That is everywhere
1836
BANKING AND CURRENCY.
recognized. Conversely, the lowering of the interest rate for money
will at once decrease the purchasing power of the money so put out
and also all money in use within the district will tend to buy less.
These are the principles whereby the Bank of England and the other
banks of issue operate. They, if necessary, retire money from circu
lation in order to actually control the bank rate.
Next is paragraph (c) of powers and duties:
(c)
In connection with the official rate the Federal reserve bank shall at
all times (1) offer to supply money to the national and such other banks as
comply with the requirements of this act, the cash to be distributed by redis
counting short-time business paper as hereinafter provided, and (2) be in
a position to reduce the volume of money in circulation (a) by retaining the
cash received from the payment of the short-time business paper, (b) by re
selling business paper should offers for it be made, and (c) should occasion
require to retire from time to time some of the existing currency or its sub
stitutes. [Two additional sources of change in the volume of money in circula
tion will be the inflow and the outflow of gold from our shores.]
In explanation I will state that if the controlling power is to bring
about the needed stability it must be supplied with the means for
increasing the volume o f paper currency when occassion requires,
and with a suitable means for reducing the volume of money in
circulation whenever occasion requires. That is self-evident, and yet
the bills before this committee are deficient in not providing for a
sufficient retirement of the money in circulation. No provision has
been made for the permanent retirement of any of the existing paper
money, yet the percentage of reserves in cash to be held by the
national banks is to be cut in two, thereby permitting these banks to
practically double their credits unless the volume of money in circu
lation is reduced.
Senator W eeks. Y ou do not mean literally cut in two?
Mr. S hibley . According to the statement in the report on the
banking and currency bill in the House. I will refer you to pages
65 and 66 of that report, and I have quoted the figures in an earlier
part of my statement.
Paragraph ( d) of powers and duties:
(<2) The national board of the Federal reserve system shall be placed in con
trol of the gold in the United States Treasury, subject to the existing obligation
with the holders of gold certificates, and there shall be maintained a gold
reserve for the entire Nation, so that demands for gold from abroad will not
affect the volume of money in circulation in the United States, and that the
gold standard of prices will assuredly be maintained, resulting in a fixed par
of exchange with the other countries using the same standard.
(e)
In connection with the future issuance of paper currency, which shall be
legal tender, there shall be back of every dollar issued an equal amount of gold
or an equal amount of commercial paper, as hereinafter provided for, or bonds
of the United States or of a State or of a municipality of this Union, and every
dollar of paper currency in circulation from whatever source shall be re
deemable in gold at the main offices of the Federal reserve board upon demand,
at par.
Senator N elson. D o you not mean Federal reserve banks instead
of Federal reserve board?
Mr. S hibley . N o ; I think the national board should have control
of the country’s gold reserve. This plan I am proposing gives a
central control to the gold reserve, so that only a single reserve will
be had for the entire country instead of 12 separate reserves. The
national board will secure control of the gold when it issues the
paper currency for it. This plan gives a central control for the gold
BANKING AND CURRENCY.
1837
reserve while giving Federal participation in the fixing of the inter
est rate and price level; also the passing upon the commercial paper
will be by boards representing the 12 regions.
There can be inserted in the bill a requirement that a certain per
centage of gold shall be kept against the paper currency issued, say
33£ per cent, but the percentage under a legal tender paper currency
will soon be 50 to 60 per cent. However, if for any reason the gold
reserve should tend downward, there should be no legal limit at 33J
per cent because there should exist the other form of limitation,
namely, that of maintaining stability in the purchasing power of
money. While that instruction was being carried out the gold
reserve might with safety fall to 30 per cent and even lower, pro
vided the law did not require that figure or a higher sum. In France
after the Franco-German War there was practically no gold reserve
for a, time, and yet the premium on gold was less than in New York
City during the panic of 1907.
I now pass to an enumeration of the other powers and duties of
the Federal reserve banks which section 3 should specify:
(f) Branches within the district shall be established wherever the board of
directors shall deem best, subject to a right in the Federal reserve board to
finally decide.
( g ) With the consent of the Federal reserve board, to open and maintain
banking accounts in foreign countries and establish agencies in such coun
tries wheresoever it may deem best for the purpose of purchasing, selling, and
collecting foreign bills of exchange, and to buy and sell with or without its
indorsement, through such correspondents or agencies, prime foreign bills of
exchange arising out of business transactions which bear the names of two or
more responsible parties or are secured on the property sold. (Compare p. 27
of House caucus bill.)
( h ) To accept payments for the Federal Government without charge, and,
without charge, to make payments for the said Government to the extent of
its credit balance, and as far as may be requested by the said Government to
take over for safe-keeping or management, free of charge, securities and valu
ables belonging to it or placed under its management. (From Swiss law.)
(i) The said bank shall become a body corporate, and, in the name desig
nated in the organization certificates, shall have power to perform all the acts
necessary and proper to carry out the purposes of this act, and shall have suc
cession for a period of 20 years from its organization unless sooner dissolved
by act of Congress.
( j ) The Federal reserve board and the boards of directors of the Federal
reserve bank shall not invest funds in real estate except with the consent of
Congress.
These 10 paragraphs bring together in one place an outline of
the powers to be conferred, a plan that is followed in the laws in
Europe establishing banks of issue. In Switzerland, for example,
the law openly declares as follows:
A rt. 2. The chief function of the national bank is to regulate the monetary
circulation of the country and to facilitate the operations of payment. Fur
thermore, the bank must take over the exchequer business of the Confedera
tion free of charge, so far as it may be called upon to do so.
That is a plain statement of the object of the law, and I suggest
that the bill to be reported by the committee shall be equally frank.
I have shown a practicable method for reconstructing the House
bill. Retain section 1, slightly amend section 2, and in secton 3
enumerate the powers and duties of the 12 Federal reserve banks.
That is practicable.
In enumerating the powers and duties there can be established an
effective system without any capital stock, because none is needed in
1838
BANKING AND CURRENCY.
connection with the clearing house for the Nation, and no capital
stock is required in connection with our proposed banks of issue,
because they are not to accept any considerable risk. They are not
to make loans to business men. It is the risk of losses by the banks
in the making of loans that calls for capital stock in the privately
owned banks, whereas in a bank of issue, a bank which issues paper
currency and receives the vast profits thereform, there is no need
for capital stock, even in the case of the Bank of France, which has
100,000 depositors among the people of France. In 1909 the Bank
of France had branches in 467 places throughout the nation and had
become “ the bank of all the French public," as its president stated
in his interview with the Aldrich Monetary Commission. This is
on page 208. And yet this great bank had not a cent of capital
stock in use in the banking business. The capital stock that had been
subscribed and paid in many years before had been retired from use
as bank capital by being invested in Government securities. And
the same is true of the Bank of England. These facts are shown
in each weekly statement. Samples of these weekly statements
are at pages 534-537 of these hearings.
So it is perfectly clear that a bank of issue that does as much
private business even as the Bank of France and the Bank of Eng
land have no need for capital stock. Much less do the 12 banks of
issue in our proposed Federal system require capital stock, for they
are only to issue paper currency as needed and build up a gold re
serve, taking no risks whatever. Every dollar of commercial paper
taken by the 12 banks of issue will be indorsed by a bank, in addition
to the responsibility upon which the bank itself relies.
And in France, with its manifestly successful system, every bank
is at liberty to go to the bank of issue or the 467 branches and get
cash whenever they need it. This is found in Interviews, pages 206
and 207. There is no legal requirement that a bank shall keep any
part of its reserves with that bank of issue. This is in Interviews,
page 202. Why should there be? No aid is required by the bank of
issue, for it issues the paper currency and holds the gold reserve.
There should be no trouble in understanding this perfectly simple
system in France, and the system that we require, were it not that
since 1907 the bankers have set out to get control of a unified mone
tary system for this country. They have practiced almost every
kind of deception, the worst part of it being an assertion that the
people of this country are possessed of instincts of confiscation, and,
therefore, should not be permitted to control the volume of the paper
currency, as they would inevitably overissue it and thus rob creditors.
This assertion against the people by the bankers is the fundamental
reason assigned against control by the people’s Government of the
volume of paper currency and against Government control of the
price level for commodities— the purchasing power of money.
What the bankers are doing is to selfishly try to step in and get
for themselves a special privilege, while the people are actually
insisting against inflation in order to put an end to the rising price
level for commodities. Only the business men, who do not consti
tute one-tenth of the people, would be benefited by inflation, and now
that the people possess the direct primary they are the sovereign
power in this country and will not permit either an undue inflation,
BANKING AND CURRENCY.
1839
nor an undue contraction, for it would make unstable the purchasing
power of money, the standard of value, and this would injure the
people.
As to what are the principles that are required to constitute a
successful banking and currency system in this country, I desire
to again emphasize the fact that nowhere in Europe are the private
banks forced to contribute a cent of their capital to a bank of issue;
and so none of our banks should be forced to place a dollar of their
capital with a bank of issue, leaving it entirely optional with the
banks to come in and stay out. Those that come in should be obliged
to deposit enough funds to pay their daily balances. That should
be all.
In Germany, in 1909, the Government expressly refused to require
the banks to keep on deposit with the bank of issue 1 or 2 per cent
of the amount o f their deposits. Yet with this history of an express
refusal to adopt the policy which the Aldrich bill proposed, and
which the Glass bill proposed, the Administration was induced
through the keeping secret of the German action, to endorse the
plan which had first been incorporated in the Aldrich bill that the
banks be required to deposit with the banks o f issue 5 per cent of
their deposits.
The proposal in Germany for actual bank reserves to be deposited in
the bank of issue was discussed by the German commission some siv
months after the Government had rejected the idea. This discussion
is in volume 2 of the German Bank Inquiry of 1908, indexed under
“ Deposits (etc.), deposition of a portion of, in the Reichsbank,” pub
lished as Senate Document 407, part 2, 1911.
I have stated that nowhere in Europe are the private banks re
quired to assist the bank of issue. No deposits by the private banks
in the bank of issue are required. And yet each private bank receives
aid from the bank of issue wherever it is practicable to give it,
whereas in the Aldrich bill and in the bill which the administration
has been induced to accept and which the House has passed, the aid
from the 12 banks of issue to private banks is to be limited to only
one-third or one-half or one-fourth of the private banks. This is
not for the best interests of the country, I believe. The fundamental
fallacy is in the assertion that the capital stock and bank reserves
should be subscribed by the banks that are to receive aid in time of
trouble.
To further show that particular fallacy permit me to lay before
you two instances of how the French bank of issue has met monetary
crises, and it ought to be clear that each one o f our State banks and
trust companies should by law be entitled to receive all the aid that
the officials of our banks of issue shall be able to give, leaving it to
their discretionary power, as in France.
The two instances in France are as follows:
In the year 1889 in the city of Paris there was an attempt to cornei
the price of copper, which failed, and one of the Paris banks became
largely involved. The president of the bank committed suicide, and
there ensued a “ run ” on the bank. But the bank of issue, the Bank
of France, came forward and loaned it 140,000,000 francs on its
commercial paper and other securities, and the depositors were paid
off without closing the bank.
9328°— S. Doc. 232, 63-1— vol 2 ----- 56
1840
BANKING AND CURRENCY.
The way it came about that so much money, actual cash, was put
out and yet no scarcity of money in the other banks was created,
was that the bank of issue issued paper money and used as much of
the gold reserve as it cared to. Then, as rapidly as the commercial
paper fell due, it was paid to the bank of issue, which thereby re
ceived back as much money as it had paid out, and this was held out
of circulation. This plan worked perfectly, for the paper currency
was legal tender and so filled every need. Doubtless no gold from
the reserve was paid out.
One of the places where this handling o f a great monetary crises
is described is in a volume entitled “ Evolution of Credit and Banks
in France,” by Andre LieSse, and it is republished in the series issued
by the National Monetary Commission, Senate Document 522, during
the year 1909. See pages 184 to 186.
Two years after the panic in Paris, caused by the collapse of the
corner in copper, another great bank failure occurred.
In four days the depositors withdrew 19,000,000 francs. Then a
syndicate of bankers was formed to go security to the amount of
15,000,000 francs, and the Bank of France advanced 60,000,000 francs
in actual money, receiving as security the bills and notes which the
bank held and its other assets.
The money issued was largely bank notes, a full legal tender, and
later the volume of money in circulation was quickly reduced through
the payment of the commercial paper as it fell due. This is found
on page 190 of Evolution of Credit and Banks in France.
These illustrations of the way the Bank of France handled the mon
etary crises demonstrate the great benefits derived from an elastic cur
rency and one that is full legal tender. I want you to get firmly fixed
in your minds the fact that the Bank of France, the bank of issue of
the French people, has handled monetary crises within the country
by issuing full legal tender paper currency. That was all there was
to it, and it was enough. The paper currency was quickly retired
from circulation. Complete proofs are the weekly statements of
the Bank of France.
When commercial crises have occurred outside of France, the cen
tral gold reserve in the Bank of France has been used as thought
best.
Now, observe what would happen here in the United States should
you, this Senate committee, recommend to the Senate that the forth
coming banking and currency law should be patterned after the suc
cessful French system and the Senate should adopt your suggestion
and secure the approval of the House and the President.
We can start with a gold reserve of $1,250,000,000, the largest pile
of gold in any country, six times as large as the gold reserve in
England. We should simply provide in the law for the transfer to
the Federal reserve board the control of the gold now in the National
Treasury, amounting to $1,250,000,000. There is $1,100,000,000 of
gold against which gold certificates are issued and $150,000,000 of gold
that is back of the $346,000,000 of greenbacks. Provide that as rap
idly as greenbacks are received by the Federal reserve banks and
their branches and received by the United States Treasury and sub
treasuries they shall be retired by the Federal reserve board, it to
issue in their place an equal amount of Federal reserve notes. And
as rapidly as gold certificates are paid in to the Federal reserve
BANKING AND CURRENCY.
1841
banks and their branches and paid in to the United States Treasury
and subtreasuries they shall be retired and in their place shall be
issued the legal tender Federal-reserve notes. The central gold re
serves in Europe have been built up by issuing legal-tender paper
currency in exchange for gold. Further provide that gold from the
refineries and from abroad may be deposited with the Federal re
serve system at each of the main offices and that this gold shall be
purchased and paid for forthwith at the mint price. This would re
sult in making it more profitable to sell to the Federal reserve bank
than to deposit the gold in the mints and wait for the minting of
the coins. Still another way whereby our gold reserve will be in
creased will be by saving up the gold coins that flow into the Federal
reserve banks and their branches and gathering up the gold coins
that flow into the United States Treasury and the subtreasuries.
Thus we would possess the largest gold reserve of any nation in
the world. 'We would start out with six times the amount that is
held by England to-day.
Next let us consider how an elastic volume of legal-tender bank
notes issued by the reserve banks would operate to prevent monetary
crises within the United States.
We have seen that in France the way a run on the bank is stopped
is for the bank of issue to issue legal-tender bank notes in exchange
for the assets of the bank and the trouble is soon over. Then the bank
that is in trouble pays its depositors without closing its doors. Most
of the money thus issued soons flows back to the bank of issue in
payment of the commercial paper as it falls due. There is no closing
of bank doors in the face of frightened depositors unless the bank has
lost considerable of its capital and the personal liability of the stock
holders is insufficient to meet the deficit.
But in France there is no Government inspection of the banks, so
that the conditions in France are less favorable for preventing bank
runs than with us. Our national banks are inspected by the Federal
Government, while the State banks and trust companies are inspected
by the State governments. The 12 banks o f issue should be at liberty
to aid the State banks and trust companies to the utmost that these
banks of issue are able, the same as the bank of issue in France aids
the banks that are in trouble. Furthermore, our law should provide
that the Federal reserve board and the several boards of directors
may provide conditions upon which aid to the State banks and trust
companies shall be given. But the proposed law that is before you,
gentlemen, actually prohibits the 12 banks of issue from aiding the
banks that do not part with a considerable portion of their working
capital. In other words, part of the banks are to be given special
privileges with relation to aid from the banks of issue, whereas that
aid ought to be given wherever possible.
That has reference to the State banks and the trust companies. As
to the national banks, they are inspected by the same Government
that supervises the banks o f issue, and this Federal inspection of the
national banks can be made as rigid as shall be found beneficial, so
that at no time would a national bank be likely to become unable to
pay off the depositors should time be given in which to sell its
properties. Therefore, in connection with the Federal inspection,
there should be a provision that the national banks shall be thor
1842
BANKING AND CUREENCY.
oughly safeguarded against the “ runs ” by depositors by supplying
them with sufficient cash to pay off the depositors—pay them off as
rapidly as they may ask for their money. Then there would be no
“ run ” on any national bank, for the people would know that their
money would be ready for them whenever needed.
This protection to the bankers should be provided, because many
of the bursted banks come from “ runs ” by the depositors. Under
the existing system every banker is living over a volcano which may
go off any day. The remedy, now that a new currency law is being
framed, is to more rigidly examine the banks and then direct that
the 12 banks of issue shall stand ready to supply cash to the carefully
inspected banks and supply cash in such volume that no national
bank shall be obliged to close its doors except by order of the inspec
tion department of the Government.
That means the guaranty of the safety of bank deposits, the pro
tection of the people, as well as the protection of the barikers.
Nothing short of this will do, because the plan is feasible. The
small amount of losses that would come should be paid from the
profits that are to arise from issuing the p>aper currency. These
profits will belong to the people through their Government, and no
better use can be made of a portion of these profits than paying the
losses which the inspection department of the Government shall be
unable to prevent. These losses ought not to fall on a few of the
people, themselves entirely innocent of any negligence or wrong; but
the losses should be borne by all, and would not be felt. Besides, a
vast amount of losses would be prevented by stopping the “ runs ”
on the national banks. Both the national banks and the business
men should be safeguarded against “ runs ” on the national banks
and the locking up of depositors’ funds in closed banks.
From every standpoint, therefore, there are sound reasons for the
absolute guaranty of the safety of national bank deposits. When
losses are met with beyond the bank’s capital and the personal lia
bility of the stockholders, let it be paid from the profits which the
Federal reserve system shall have made from the issuance of the
paper currency. Not 10 per cent of these profits would ever be used
in the payment of these losses. Therefore, in the law state that the
limit of the Government’s liability shall be its share of the net profits
from the Federal reserve system. That will effectually meet the ob
jection which heretofore has been made against compelling the banks
themselves to pay for the-net losses from failed banks. Then the
bankers will all be benefited by the system, likewise the people in
general, and it would conform with the pledge whereby the pro
gressive Democratic leaders were elected to office. The party plat
form declares that—
All legislation on banking and currency should have for its purpose the se
curing of these [banking] accommodations on terms of absolute security to the
public and of complete protection from misuse of the power that wealth gives
to those who possess it.
That pledge should be kept. It is entirely feasible, as I have
shown; but to carry it out will require an addition to the OwenGlass bill, and a material addition to the House bill.
This places the guaranty of bank deposits in a new light, for the
onlv proper place to prevent “ runs” upon the banks will be the
Feaeral reserve system with its elastic volume of legal-tender notes
BANKING AND CURRENCY.
1843
and a mammoth gold reserve, together with millions of dollars of
profits annually received from the interest from paper currency.
Next, as to the moving of crops and other usual demands for
money.
To move the crops the Federal reserve banks will issue paper
currency in exchange for commercial paper, and the cash which the
banks get will be used as reserves on which to issue from four to
eight times that amount of bank credit. Then as the demand
slackens the paper currency thus issued will quickly be retired by
being paid in to the reserve banks to meet the commercial paper as
it falls due. Thus the elastic currency will be the means whereby
the reserve banks will help to move the crops.
And this same general system will be the means whereby other
unusual demands for money will be met. The first of each month
there will be a temporary increase in the volume of paper currency,
quickly followed by its retirement. Each three months when the
interest payments are made and the stock dividends are paid there
will be a considerable increase in the volume of paper currency and
of bank credits for a time, followed by gradual and prompt retire
ment.
Reviewing the points that I have just made it is evident that the
proposed administration bill if amended so as to drop out the pro
vision for capital stock, and amended so as to provide a legal-tender
paper currency would at once result in the largest gold reserve in
the world; whereas to use the crippled legal-tender paper currency
would result in the retention of gold certificates in the national
banks and in various other places which would refuse to give up the
gold certificates. In other words, should the crippled legal-tender
paper currency be issued as proposed by the bankers and their socalled experts the result might be that our gold reserve could not be
built up, and our new system would at once become a failure. In
Germany, through the use of a crippled paper currency, the gold
standard was temporarly lost in 1907.
Also, I have demonstrated that if the law shall provide for the
legal-tender paper currency and reject the idea of a capital stock,
then monetary crises can be effectually controlled, the same as in
France.
And I have demonstrated that the proposed system would effectu
ally meet the other unusual demands for money, such as moving
the crops and providing for disbursements the first of each month
and each quarter.
In short, that if we shall adopt the European system of a full
legal-tender paper currency for this country the result will be the
starting out with a huge gold reserve, and this, in combination with
an elastic volume of paper currency would successfully meet monetary
crises and provide for other unusual demands for money. There
would be no possible use for capital stock in the Federal reserve
banks nor any use for any more bank reserves than enough to settle
the daily balances in the Federal clearing house.
Logic shows that this is so, and so does the experience of Europe,
and there is a third method of proof that I have already presented,
namely, that in 1909 the German Government rejected" a proposal
that 1 or 2 per cent of the deposits of each of the private banks of
the country be placed in the bank of issue. That proposal which the
1844
BANKING AND CURRENCY.
German Government rejected is now being proposed in the bill before
this committee.
Thus, there are three methods of proof which demonstrate that
capital stock for the 12 banks of issue in this country would be worse
than useless.
Gentlemen, this concludes my statement except to point out that
I have presented proof for each point, citing where the proof is to
be found. The issues discussed have been so clear that I believe you
will have no difficulty in arriving at a verdict. While it has been
my good fortune to be able to present an abundance of proof for
the people’s side of the case, I regret and deeply regret, that the
bankers’ shrewd tactics in their behalf at the expense of truth and
manly treatment of this committee should have happened. The
bankers, however, are meeting their Waterloo, and are certain to lose
every special privilege. The people are back in power and will see
to it that every special privilege shall be abolished so that equal op
portunities before the law shall prevail. That condition, combined
with a stable price level for the coming years, will result in a pros
perity for the entire Nation, and one that will be far in excess of
anything which we have heretofore experiences.
To our opponents I desire to say that my duty as the people’s
counsel in this case and “ a friend of the court ” has compelled me to
speak plainly, but I desire to expressly state that I realize that the
motives of a misguided “ sound money ” advocate may be of the
highest character. I have not been dealing with motives but with
acts— acts of the “ sound money ” believers, acts that have been
injurious to the people.
I also wish to point out that I have freely admitted the high-grade
work of certain of the “ sound money ” advocates; for example, the
all-important work for stability that is being done by the professor
in Yale University.
Some of the professors in our universities have taken their profes
sional lives in hand by championing the people’s cause and have lost
their positions, while others have barely remained-----Senator W eeks (interposing). May I ask the witness to give the
names of those who have lost their positions?
Mr. S hibley . I will do that gladly; for years I have been making
a special investigation of that subject. Prof. Edward W. Bemis, of
Chicago University, was discharged because, as the evidence plainly
shows, he was telling the facts about the Chicago Gas Trust. They
told Bemis, “ You have got to stop that or you will lose your posi
tion,” but he kept on and he lost his position.
Senator W eeks. Who told him that?
Mr. S hibley . One of the men in the Chicago Gas Trust.
Prof. John R. Commons, of Syracuse University, was discharged
because he voted for Bryan in 1896. He exercised the right of being
a man. You know how the president of Brown University was called
immoral and discharged because he worked for the restoration of
bimetallism.
James Allen Smith, of Marietta College, Ohio, exposed the iniqui
ties that were being committed against the people through contrac
tion of the volume of money, and he was discharged. He now oc
cupies a high position in Washington State University.
BANKING AND CURRENCY.
1845
Prof. Commons is in Wisconsin University, and Prof. Bemis is
going about the country as the people’s representative on municipal
matters. Other cases might be given. For example, the discharge
of President Thomas E. Will, Prof. Frank Parsons, and Prof.
Edward W. Bemis, in the Kansas Agricultural College, and Prof.
E. A. Ross, from Leland Stanford University.
George Washington, while President of the United States and
living in Philadelphia, saw the State University of Pennsylvania
taken from the people so that they would not be able to control the
teachings therein.
And President Washington worked for a national university; he
worked hard for it. The establishment of a national university was
perhaps his most ardent wish in the later years of his life, but
he could not get a bill reported, so strong was plutocracy at that
time under the Federalist regime. And right along up through the
next century the universities have been a storm center; and one after
another of them have been taken from the people’s control. Yale
and Harvard were taken from the people less than 50 years ago.
Senator N elson. Prof. Fisher then is your ideal of the people’s
friend, from the scientific standpoint?
Mr. S hibley . I have stated that Prof. Fisher is doing invaluable
work for the stable price level. You can not estimate the importance
to the Nation and to the world of his great work.
The C h airm an . Every member of the committee, I suppose, has
read his book, The Purchasing Power of Money.
Senator N elson. And we heard him here, too, I think.
Mr. S hibley . A s I was saying, several of the progressive profes
sors lost their positions. One of those that remained in office was
the patriot who last year was elected the people’s leader in this
Nation. While holding his professorship he actively championed
the “ short ballot ” system as a needed reform for terminating
“ machine rule.” For years he has been president of the National
Short Ballot Organization; and in his speeches in the State and the
national campaigns he has explained with a clearness and forceful
ness, unmatched by anyone else, the intricate and disgraceful system
of “ machine rule” party government; and now he is leading in the
development of a people’s rule system of party government and the
restoration o f competition—the “ new freedom.”
Another fact which I feel it my duty to state is that the Secretary
to the President, to my personal knowledge, while he was a member
of the assembly ifi New Jersey, introduced a bill for the advisory
initiative, the aim being that the people of his State should possess
the needed machinery for directly expressing their will on public
questions. The introduction of that bill and working for it demon
strated its author to be a true-blue patriot.
Gentlemen, I thank you for your courteous attention.
X V II.
Senator N elson. Professor, I want to ask you one question. Have
you called the attention of the President to your plan of having
these regional banks operate without capital?
Mr. S hibley . I have been----- -
1846
BANKING AND CURRENCY.
Senator N elson (interposing). I understand he favors this bill.
Mr. S h ib l e y . Why, the bill comes here as his bill, with the sta
bility clause in it.
Senator N elson . And you think that in that respect it is not right?
Mr. S h ib l e y . I favor the stability clause.
Senator N elson . N o ; I mean this thing of requiring the banks to
contribute capital to the regional bank.
Mr. S h ib l e y . Oh, that is simply an incident in a great bill.
Senator N elson . Y ou regard that simply as an incident, then?
Mr. S h ib l e y . Yes. The main thing is that there shall be a unified
control of the purchasing power of money in this country, so that
the bankers and foreign countries can never control our price level.
Senator N elson . N ow , I wish, Mr. Shibley, you would take this
bill and prepare a substitute for it, on the lines of your argument,
to carry out your suggestions. Prepare a bill for the use of this com
mittee as you think it ought to be.
Mr. S h ib l e y . Thank you. I have received permission to place in
my statement the matter that I have gotten together.
Senator N elson . Y ou take this bill, and you rewrite it as you
think it ought to be.
Mr. S h ib l e y . I shall be very glad to do that.
Senator N elson . I shall be very glad to have you do it. Put vour
ideas in concrete, legislative form, so as to express it in legal lan
guage, so that if the bill passed in the form you prepare it would be
an effective law.
Mr. S h ib l e y . I will gladly take the matter up.
Senator N elson . W ill you do that for the use of the committee?
Mr. S h ib l e y . With pleasure.
Senator N elson . There is only one point in your argument that
bothers me, and that is how these regional reserve banks would get
a supply of gold by the simple issuing of legal-tender notes. You
say the notes should be the notes of the reserve banks and not the
notes of the Government; that they should be legal tender; and upon
the mere issue and delivery of those notes your opinion is that an
ample supply of gold could be secured?
Mr. S h ib l e y . Exactly; the same way as in Europe; the same proceess.
Now, the only thing that is required is to transfer the $1,100,000,000
of gold in the Treasury, against which certificates are issued, into
the reserve banks in exchange for another form of gold certificate.
The gold is in the banks because people do not want to carry it
around; they won’t have it, and therefore there will be no difficulty
under a properly framed law o f getting the transfer of that gold
over into another vault.
Senator B ristow . Y ou would not issue any more of this legal tender
than you had gold?
Mr. S h ib l e y . Not for the gold ; exchange it dollar for dollar.
Senator B ristow . Y ou would exchange it dollar for dollar; but
instead of having it a gold certificate you would have it simply a
United States note that was a legal tender for everything and the
Government would pay gold for it if it was ever requested ?
Mr. S h ib l e y . Yes; a Federal reserve note that is practically a gold
certificate.
Senator B ristow . Practically a gold certificate?
Mr. S h ib l e y . Yes.
BANKING AND CUBRENCY.
1847
Senator B ristow . I can see, Professor, that that might work just as
a gold certificate does. It is a gold certificate except that it has a
different name and is put out in a different form.
Mr. S h ib l e y . Precisely.
Senator N elson . But here is a regional bank that comes up with
$100,000 of commercial paper, and they say, “ Here, we want cur
rency on this; we want your paper currency.” Now, the bank would
issue to them $100,000 in these legal tender notes and all the bank
would get would be that commercial paper. There would be no gold
back of that issue.
Mr. S h ib l e y . Let us see just a moment. The bank would at once
transfer that commercial paper to the national board in order to get
its money, would it not?
Senator N elson . I do not see how that-----Mr. S h ib le y (interposing). That is part of the arrangement in the
bill, as I understand it. The commercial paper will be held by the
Federal agent at the reserve bank, so that it all goes right over-----Senator B ristow (interposing). But when the gold supply is ex
hausted you can not get any more money.
Mr. S h ib l e y . Well, when you have six times the volume of gold
that England has it is not likely to be exhausted.
Senator N elson . N ow , follow that up. In the first case you sup
posed that you got the gold for the notes. You exchanged the notes
for the gold. But this is a case where you exchange the notes for the
commercial paper?
Mr. S h ib l e y . Yes.
Senator N elson . N o w , where do you get the gold in that case to
back up those notes?
Mr. S h ib l e y . The national board will hold that commercial paper
a few moments after the transaction has been finished in the regional
reserve bank. The commercial paper will be handed over to the
Federal agent in charge and he will issue the paper currency, so he
will be in charge of the commercial paper plus the gold reserve.
Senator N elson . But there is no gold reserve back of that paper.
Mr. S h ib l e y . Oh, yes, there is. There will be a large gold reserve
in the keeping of the national board.
Senator N elson . Can there be any more gold in the bank without
capital, on your theory, than the legal-tender notes you issue?
Mr. S h ib l e y . Oh, no.
Senator N elson . N ow , you issue, to begin with, legal-tender notes?
Mr. S h ib l e y . Yes.
Senator N elson . And on those legal-tender notes that you issue,
offhand, in the first instance, you assume you get an equai quantity
of gold, dollar for dollar. Now, stop right there. The next step is,
a member bank comes up with $100,000 of commercial paper and
says, “ We want $100,000 of your currency; here is our paper.” The
regional bank gives them the legal-tender currency. And the re
gional bank or the agent—you can put it that way, if you like—the
agent of the national board holds that commercial paper. Where
does the gold come from that backs up that legal-tender currency
as issued for that commercial paper?
Mr. S h ib l e y . The Federal reserve board has it. This will be
shown each week in its statement.
1848
BANKING AND CURRENCY.
Senator P omerene (interposing). You are speaking of the re
serve banks when you say “ banks ” -----Mr. S h ib l e y . I am saying that when the Federal reserve board
T
issues its statement each Saturday morning there will appear the
volume of gold on hand and the volume of commercial paper, also
the amount of paper currency outstanding, and it doubtless will show
that the gold reserve will be 60 or T per cent of the outstanding
O
paper currency.
Senator N elson . H ow do you assume that?
Mr. S h ib l e y . Under the European system that I am proposing
the Federal reserve board will at once receive the gold that now is
in the Federal Treasury, amounting to $1,250,000,000. This gold
would amount to 60 or 70 per cent of the paper currency and gold
certificates outstanding-----Senator S hafroth (interposing). That is something like the
Allings system. Have you read his book?
Mr. S h ib l e y . N o ; but I would like simply to refer to the weekly
reports in the London Economist, showing how each of these foreign
banks issues a statement. A sample set of these statements is in our
hearings, and I wfill refer to them—pages 534-537.
Senator S hafro th . But the Allings system proposes the transfer
of this $1,100,000,000 of gold back of the gold certificates over into
the redemption fund bodily, and the cancellation of the gold certifi
cates, and then the issue of full legal tender on that until they needed
some more full legal tender, and then the issues in the future would
decrease relatively the quantity of reserve until it would get down, as
he said, to 70 per cent, and maybe lower than that. Is that your view
also?
Mr. S h ib l e y . I do not think the Government has the right to
change its contract wdth the people when it issued the gold certificates,
and arbitrarily issue a legal-tender bank paper currency in its place.
Senator S hafroth . He contemplated that as these gold certificates
went into the Treasury gold would be placed from the warehouse
room over to the redemption fund, and that, therefore, when it was
all done—of course it would not be done quickly—there would be
outstanding the same quantity of full legal-tender money to take the
place of the gold certificates. Then as they issue money this gold
reserve would relatively diminish as each issue occurred; but it would
still be ample.
Mr. S h ib l e y . Precisely; that is my idea, and that is the system
in Europe.
Senator N elson . Y ou do not believe, then, you have a right to
compel these holders of gold certificates to surrender them?
Mr. S h ib l e y . N o, sir.
Senator N elson . For Federal reserve notes, without their consent?
Mr. S h ib l e y . Oh, n o ; not at all.
Senator N elson . Then these holders o f gold certificates absolutely
control over a billion dollars?
Mr. S h ib l e y . Yes.
Senator N elson . N o w , would the residue of the gold outside of
that in the country be sufficient for our currency?
Mr. S h ib l e y . It would not.
Senator N elson . Would you not need the gold that the gold certifi
cates stand for?
BANKING AND CURRENCY.
I84y
Mr. S h ib l e y . Yes.
Senator N elson . H ow would you get that gold?
Mr. S h ib l e y . Why the self-interest of the people who hold the
gold certificates would be to take this other form of paper currency.
We should provide in the law that the national banks shall keep as
reserves the legal tender paper currency, the same as in Europe.
Senator S ha fro th . That very requirement that the national banks
shall keep the full legal-tender money would make them shun gold
and hold legal-tender notes-----Mr. S h ib le y (interposing). Exactly. Then, by providing in the
law that the gold as it comes into the country shall go into the Fed
eral reserve system, as in the Bank o f England, will make it still
more easy.
Senator S h afro th . Mr. Shibley, I wish to ask you some things
that have been bothering me. I have been in communication with
you for something like 18 years and have talked with you about the
price level any number of times, and I have got some propositions
here presented by Mr. Berry in his book that somewhat puzzle me,
and I want you to explain them.
Mr. S h ib l e y . I will do the best I can.
Senator S hafro th . Here is the first one: He says that gold has
not appreciated in purchasing power. He says that while the means
of extracting gold have been cheapening and that gold has been in
creasing in the quantity produced, yet the amount that is added to
the gold stock each year is a very small per cent. And he says that
the cost of manufacture o f articles out of copper, iron, zinc, lead,
and other things has diminished more than the cost of producing
gold and that the increase of those articles has been greater in pro
portion than the increase in the output of gold, and that, therefore,
while there has been a rise in prices he attributes it to other things.
Now, have you looked into the question as to whether the cheapen
ing of the process of extracting gold has been greater than the cheap
ening of the process of getting out iron ore, copper, lead, and zinc
and coal, and a great many other things?
Mr. S h ib l e y . Yes.
Senator S hafro th . N ow , what is your view?
Mr. S h ib l e y . What he states about the lessening cost of produc
tion in certain lines is a fact, but he has failed to notice that in agri
cultural products there has been an increasing cost.
Senator S h afro th . Here is his answer to that: He says that the
increase in the population of cities from 1900 to 1910 has been 22
per cent, according to the United States census taken in 1910, and
that the increase in the population in the country has been only 2
per cent—practically stationary. He says the city population are
the consumers and the country population the producers, and that
as the producers have stood still and the consumers have increased
that makes a greater demand upon practically the same quantity
of products, and therefore there would be a rise-----Mr. S h ib le y (interposing). Naturally.
Senator S hafro th . And therefore, he says, it is not attributable
to gold but is attributable to this condition of affairs-----Mr. S h ib le y (interposing). That is true as to those particular
prices, but we have been trying to distinguish right along between
the price level and the price of a particular article, and that is all
1850
B A N K IN G
AND
CURRENCY.
allowed for in the index number of average prices. In our Govern
ment’s publication, issued by the Department of Labor, there is, on
page 15, a chart showing the increasing cost of agricultural products
and other raw materials as compared with manufactures. Now, it
shows—and this chart has been included in our record—that from
1897 the prices of raw materials have risen more than manufactured
commodities by something like 30 points, showing how, in the prog
ress of civilization, manufactured articles fall in price as compared
with farm products and other raw materials.
Senator S hafro th . I can see, of course, that there is a difference
between these lines, but he accounts for both the manufactured prod
ucts and farm products by saying that the cheapening of the proc
esses of manufacture has been going on more than the cheapening
of processes of extracting gold, and that for that reason the higher
prices are not on account of the quantity of gold, but it is on account
of the fact that this cheapening process is going on with respect to
general manufactured goods. Now, when he comes to agricultural
products, he says that is on account of the increase of city popu
lation or consumers with a stationary number of people in the coun
try who are producers, and that a greater demand upon the same
quantity of products will produce, of course, a higher price.
Mr. S h ib l e y . I grant that; that is unquestionably true; but he
is referring to the price of farm products-----Senator S hafroth (interposing). He used very nearly everything,
and make the explanation as to manufactured products just as I
have said.
Mr. S h ib l e y . But if he will put them all together and give each
its due proportion he will find that the Government’s index number
is along right lines, agreed to by every economic association.
Senator S h afro th . But he says that the rise in prices is due to
other things than the increased production of gold.
Mr. S h ib l e y . The circulation per capita in this country has in
creased 62 per cent in 17 years. That is a tremendous increase.
Senator S hafro th . Yes; but here; here is an editorial that came
to me—and I referred to it yesterday—by Alfred F. White, which
appears in the Banking Law Journal of September, 1913. I want to
read this into the record and get your opinion of it:
EUROPE NEEDS GOLD.
Europe needs gold and buys it at a premium. Imports of gold to Europe are
necessary to recoup the waste of capital from the Balkan wars and the devasta
tion of the agricultural countries which furnish so much food to continental
countries. Egyptian reserves have been depleted by demands for capital in
the Far East and must have more gold. India, favored by great balances of
trade, has within two years purchased over $250,000,000 of gold besides silver,
and as much more within the next two years will have to go into the “ sink
hole ” of precious metals. The banks of France. England. Austria, and Russia
have, by reducing accommodations to the borrowing countries, recouped to some
extent gold reserves; that of Germany labors under demands for great military
expenditures to be undertaken. The president of the Iteichsbank, who warned
his shareholders last winter that gold reserves must be increased approximately
$175,000,000 has not yet obtained his desires. All of “ the nations are tugging
at the blanket of gold,” and there appears little prospect of easy money for
borrowing countries until late in 1914. To the urgent needs of Europe for at
least $500,000,000 gold the soft-money men in Congress appear to be willing
to reopen the endless chain of redemption in gold of more than half a billion
treasury notes, and furnish without premium the gold to Europe which this
country in emergency has always paid a high rate to obtain.
BANKING AND CURBENCY.
1851
Now, relative to that question as to the demand of the world for
gold, are those, in your judgment, facts?
Mr. S h ib l e y . Not as he has stated them. He has confounded the
need for actual capital with the use of gold as a measure of value.
Now, the Balkan War has consumed an immense amount of actual
capital, and other capital is needed to replace it. A mere medium
of exchange like money will not answer.
Senator S ha fro th . D o you think this demand of India for $250,000,000 of gold has existed for two years?
Mr. S h ib l e y . I presume that those figures are correct.
Senator S hafroth . And that they are likely to be making that
demand for the next two years ?
Mr. S h ib l e y . We should all be thankful that India has taken that
much gold, so that it has not remained in Europe and in our own
country to raise the price level still higher.
Senator S ha fro th . That is on the theory that gold has raised the
price level?
Mr. S h ib l e y . Oh, that is unquestionably true. Every economist
now accepts that as a fact.
Senator S ha fro th . Mr. Berry, to my mind, has produced some
very strong facts to the contrary. He says that the trusts are charge
able with the increased price of commodities and articles.
Mr. S h ib l e y . I reply by pointing to the fact that in England,
where there are practically no trusts, the price level has gone up
about 30 per cent, whereas here it has gone up about 42 per cent.
Possibly this difference may all be due to difference in the way the
index numbers are constructed.
Senator S hafroth . Well, his answer to that is that there are com
binations and there are efforts to get increased prices in Europe as
well as in America.
Mr. Siiibley. It is recognized that England has practically no
trust prices.
Senator S ha fro th . I do not know. Of course, the trusts, being
exporters to a large extent, would to a considerable degree affect even
the prices of manufactured goods in Europe and of the European
countries. But you do not think there is much in that ?
Mr. S h ib l e y . Absolutely nothing.
Senator S ha fro th . Then he also says that the tariff has been a
factor in elevating prices in this country, and he associates that with
the trusts, by reason of which they have been able to take advantage
of what might come from Europe and thereby raise the prices of a
great many things. What do you think of that ?
Mr. Siiibley. In proportion as the trusts have raised prices during
the era of a rising-price level, it simply means that some other prices,
as compared with those, have not risen as much or not at all, so that the
great sea level of prices has not been affected bv trust prices. That
is, particular prices do not affect the great average or price level.
Should a great mountain of gold be discovered and be mined and
minted then the whole price level of the gold-standard world would
go up and trust prices would go up a little higher than the average.
Senator S ha fro th . Here is another proposition that he states
that I do not know whether you can answer or not, but it is very
strong to my mind. He says that outside of movable things there
has been no increase of prices. He says, you take real estate, stocks.
1852
BANKING AND CURRENCY.
investments, things which the increase of that which measures every
thing—gold—would probably affect and ought to affect, and they
ought to show its purchasing power better than the rise and fall of
commodities. He says that permanent investments are less to-day
than they were 10 years ago, or less to-day than they were in 1907, by
considerable.
Mr. S h ib l e y . N o w , just notice the premises in his statement. H e
says that the price of real estate has gone down; that it has not gone
up sufficiently high; that the price of stocks has not gone up suffi
ciently high. Now, the index number of prices is as to commodi
ties—
Senator S hafroth (interposing). I know; and he says that com
modities are not a fair test on account of these various conditions he
describes. And he says the real test as to whether gold is increasing
in purchasing power or decreasing in purchasing power is really
based on what the investor has to deal with, and when there is no
rise in those things it indicates that there is not too much gold.
Mr. S h ib l e y . N o w , you see we have gotten where we can see the
point of view he has in mind. He says, from the point of view of
the investor. It is recognized that in constructing index numbers
there are various viewpoints, and the Government viewpoint in con
structing its index number has been to construct a standard for
deferred payments; that is, provide a just standard as between
debtors and creditors, and for all people who come into contact with
prices fixed by law and by custom, such as 5-cent fares on street
railways. In other words, we should keep our average of prices
somewhat stable, so that men and women can do business.
Senator S hafro th . Yes; but he says railroads are one of the very
things that have not increased in price. He says the stocks of the
very best railroads in the entire United States show a decline for the
last 6 or 7 or maybe 10 years.
Mr. S h ib l e y . That is an excellent illustration to show that there
is a fallacy in his reasoning-----Senator^Shafroth (interposing). I do not know. His article that
I refer to more particularly is one that is in favor of the gold stand
ard and against the substitution of a standard that is a measured
price level. There are a number of people in the United States, you
know, that advocate that neither gold nor silver ought to be coined;
that there is no such thing as intrinsic value, and that there should
be no such thing as coining anything. They say it should be regu
lated by the price level and the dollar should be issued on that, and the
quantity issued should be contracted to make that price level stable.
He says, in answer to that, that it is absurd that a thing of that kind
could not exist because mechanical devices have made a number of
things ridiculously low in price. Another party suggests that the
kilowatt hour is the thing that ought to control. Now, his theory
is that gold, being universally accepted by every nation in the world,
is as near a perfect standard as you can get. He says that to aban
don gold as a universal standard would be to put nations in a chaotic
condition where transfers could not be made.
Mr. S h ib l e y . Absolutely; but in his argument the matter o f indi
vidual prices has been thrown right in with the treatment of the
price level.
BANKING AND CUKRENCY.
1853
Senator N elson . Your figures there—those tables—are utterly of
no value at all. Take the matter of agricultural products. It is as
the Senator has just stated, and we know it who live in the great
-agricultural States of the West. The increase in prices has arisen
from the fact that the increase in the number of consumers has been
faster than the increase in the number of producers. The army of
consumers has been increasing and agriculture, you might say, has
stood almost still. And we have no better evidence of that—take
cattle, for instance. Cattle were never so high in this country, in
my recollection, as they are to-day; and what are the causes? The
causes are that the range cattle, as we call them out West, have ceased
to be a great factor because most of the range country has been occu
pied by homestead settlers and there is a scarcity of cattle. They
are importing to-day beef in England and even in this country from
Argentina. Now, if you base your figures on this kind of statistics
you will have something to stand upon; but here you group a lot of
figures—it is simply like taking eggs as worth so much for a number
of years and potatoes as worth so much, and you group the two
things and say the level of prices between eggs and. potatoes has been
so much and it has been effected by the gold standard.
Mr. S h ib l e y . Now, right in that connection, let me say that un
questionably the difference between the price of cattle and of manu
factures is as you have stated. That is one of the factors.
Senator N elson . That is the principal factor. This other factor
is only a sideshow.
Mr. S h ib l e y . Y ou admit there is a factor, however, in the volume
of money.
Senator N elson . The same currency I bought the bushel of pota
toes with in my home last year—we had the same currency then—
and I bought for 20 cents a bushel at my home town last fall what
I now have to pay 45 cents a bushel for with the very same currency.
What have you to say to that ?
Mr. S h ib l e y . A short crop in those important articles. But that
does not affect the point I am speaking about—the great sea level
of prices. Suppose we should discover a mountain of gold, and get
10 times as much gold in circulation, would you still have the same
price for cattle?
Senator N elson . The relative price would be high.
Mr. S h ib l e y . That is the very point I am making.
Senator N elson . Your figures are of no earthly value. You
might as well take one of the calendars they had 2,000 years ago
and tender those dates.
Mr. S h ib l e y . I am afraid you have not looked at them carefully.
Senator N elson . I do not intend to look at them, because they
go against my own sense and good judgment, no more than I intend
to read Prof. Fisher’s book. [Laughter.]
Mr. S h ib l e y . I just wish-----Senator N elson . Don’t you try to fool us with such things.
Mr. S h ib l e y . I iust wish to state in the record the prices of farm
products go into the general index number and are given a proper
proportion.
Senator N elson . Oh, index numbers! Old Mother Hubbard!
[Laughter.]
1854
BANKING AND CURRENCY.
Senator B ristow . I was interested in this national clearing house
you referred to. You regard these Federal reserve banks, prac
tically, as clearing houses for all the banking houses in their region ?
Mr. S h ib l e y . Yes; that is what they should be.
Senator B ristow . Would it not be better to have a clearing house,
one national clearing house, to be located here in Washington under
the supervision of this board, and let it have branches in every sec
tion of the country where they are needed ?
Mr. S h ib l e y . That is practically what is provided for in this bill—
12 central institutions, 12 regional institutions with a supervisory
board.
Senator B ristow . Why not have one institution, a national insti
tution, with a supervisory board here in Washington, and let them
have branches in every section of the country, and you would have
a more simple organization?
Mr. S h ib l e y . H ow would that be more simple?
Senator B ristow . Y ou have 12 clearing houses in the bill.
Mr. S h ib l e y . I see your point. I prefer the 12 clearing houses
formed into a national organization because it is a Federal system
with home rule, rather than a central system which says to a com
munity, “ You go and do as we say.”
Senator B ristow. Why is not that the same as we have now ?
Mr. S h ib l e y . Because these 12 boards of the regional institutions
are to be run by the citizens of the several communities, and they
are going to have important things to work out for their communi
ties.
Senator B ristow . They simply advise upon the commercial paper
that is to be accepted.
Mr. S h ib l e y . That is one thing.
Senator B ristow . There is nothing else they do.
Mr. S h ib l e y . They have to determine each week what shall be
the bank rate.
Senator B ristow . That is administered by the Federal board here
in Washington.
Mr. S h ib l e y . This Federal board simply has a veto power. The
initiative comes from the community.
Senator B ristow . Y ou think the banking rate ought to be different
in different communities?
Mr. S h ib l e y . That should be worked out by providing each com
munity with its own board of directors, and not leave it to a central
board.
Senator B ristow . Y ou would establish in each community—take
the communities like we have out in the Northwest. You would
locate one of these clearing houses at St. Paul, which would be an
entity by itself. The area it will have to cover, to get a sufficient
amount of patronage, according to this bill, will be 600 miles wide
and 1,700 miles long. It is utterly impracticable for any one concern
to be advised upon the conditions in a community of that size.
Mr. S h ib l e y . How much worse would it be then to have a central
institution to pass on the entire United States?
Senator B ristow . I say to have a central institution with branches
where they were needed.
Mr. S h id le y . The central institution would control the commu
nities.
BANKING AND CURRENCY.
1855
Senator B ristow . N o more than they are going to do now.
Mr. S h ib l e y . This system is going to have 12 boards.
Senator B ristow . But under the dominating influence of the board
here in Washington.
Mr. S h ib l e y . It will only possess a veto power as to some things.
It will not possess a veto power as to some of the important things,
such as the determining as to what paper shall be accepted.
Senator B ristow . Oh, this board here in Washington is absolutely
to be at the head of these regional boards. I do not know anything
the regional boards can do except by permission of the national
board.
Mr. S h ib l e y . But pass upon the commercial paper.
Senator B ristow . Except as to discounts.
Mr. S h ib l e y . That is important; that is all-important.
Senator B ristow . A branch of this Federal clearing house might
be located at Wichita, Kans. That is a reserve city. It could pass
on them just as well as the regional bank which might be located at
St. Louis could, and a great deal better, because they are better ac
quainted with the community there.
Mr. S h ib l e y . Who would pass on it?
Senator B ristow . Who would pass on it?
Mr. S h ib l e y . The Wichita branch of the central board would pass
on it and not a board representing the people of the community.
That is the difference between a Federal system and a central system.
We should have boards in control representing the people of each
community, nominated by them, and that is really a home-rule sys
tem. This country is too large to have one central authority for our
banking world.
Senator M cL e a n . Suppose the central reserve board orders the
regional reserve bank in New England to transfer $10,000,000 of
money to the regional bank in California ?
Mr. S h ib l e y . Yes.
Senator M cL e a n . D o you think that that would tend to harmony
and conservation in local reserves ?
Mr. S h ib l e y . There is a national power that should be in the Na
tional Government, and that is one of them.
Senator M cL e a n . Y ou say you think these 12 reserve associations
would tend to promote harmony and the conservation of the local re
serves. Suppose they have conserved their reserves in the New Eng
land region, say, and along comes the reserve board and tells them
to transport $10,000,000 of that credit out to a San Francisco bank;
do you think that would tend to promote harmony in these associa
tions ?
Mr. S h ib l e y . But we started in by asking what it is that will
benefit the community, and now you are asking whether a certain
course will promote harmony.
Senator M cL e a n . Y ou idea is that this will promote harmony?
Mr. S h ib l e y . 1 say that for the promotion of public welfare we
o u g h t to have home rule as far as is practicable.
Senator M cL e a n . D o you consider it home rule to have this board
over here in Washington go to New England and order $10,000,000
of credit transferred to the Pacific coast against its wishes?
Mr. S h ib l e y . In the federal system there has to be a national au
thority over some things.
9328°— S. Doc. 232, 63-1— vol 2----- 57
1856
BANKING AND CURBENCY.
Senator M cL e a n . That is not an answer to the question. You
stated that to have a local institution would promote harmony in this
arrangement.
Mr. S h ib l e y . I say that while it may permit home rule in some
things, there has to be a national authority over other things.
Senator M cL e a n . Y ou said it would promote local harmony in
the institution.
Mr. S h ib l e y . N o ; I am speaking about the division of authority
between the Nation and the community—home rule.
Senator B ristow . That would not be home rule.
Mr. S h ib l e y . No ; because that bridges over to where the national
authority should act.
Senator B ristow . Then the question of home rule breaks down
under this Federal reserve bank.
Mr. S h ib l e y . No; in the Federal reserve system there is a place for
home rule and a place for nationanl authority, and the line must be
drawn somewhere.
Senator B ristow . Why could it not be adjusted just as well with
one central clearing house, with branches for each community ? They
would be in more intimate relation than the 12 regions would.
Mr. S h ib l e y . Because you would provide that the entire control
shall be in the national authority and you abolish home rule entirely.
Senator B ristow . Suppose the law should require the Federal re
serve agencies to discount all the paper of any bank if that bank is
a reputable concern, to the extent that its assets are good?
Mr. S h ib l e y . Just what is the point?
Senator B ristow . I say. suppose this law that creates the national
T
clearing-house association directs the various branches, when estab
lished, to perform the same functions that are required of these re
gional banks.
Mr. S h ib l e y . Then home rule on certain questions would be lost.
Senator B ristow . On what questions?
Mr. S h ib l e y . The question of passing on the paper, for example.
Senator B ristow . I do not lose it; I leave it right there; I put it
right there by law. That is a question for them to determine.
Mr. S h ib l e y . Then you put in the Federal system, just as it is in
the bill.
Senator N elson . Would it not be better to submit those matters to
a referendum?
Mr. S h ib l e y . Perhaps, under your political ideals.
Senator H itchcock . I would like to inquire what puts the Senator
from Minnesota in such a jocular frame of mind this morning.
[Laughter.]
Senator N elson . I did not hear your reply to the question of Sena
tor McLean, as to how you thought home rule and local interests
would be promoted by requirihg New England, on an order from
Washington, to transfer the $10,000,000 of their local funds to a fardistant point of the country.
Mr. S h ib l e y . I stated that in every Federal system there is a line
between national authority and home rule. This matter of trans
ferring funds comes under the national head in order to make the
system strong.
BANKING AND CUBKENCY.
1857
Senator N elson . D o you know of any country in the world where
one part of the country is required to transfer to another part of the
country its own resources and its own savings?
Mr. S h ib l e y . Yes.
Senator N elson . Where?
Mr. S h ib l e y . Europe has central banks and branch banks, and
there the power to transfer funds from one part of the country to
the other in times of monetary crises is in the central authority, and
here in the United States some people are advocating a central au
thority.
Senator B ristow . Then you advocate a branch-bank proposition?
Mr. S h ib l e y . Quite the contrary.
Senator B ristow . I understood you to defend and advocate the
proposition that the Federal board should have the right to order
one reserve bank to transfer $10,000,000 of the savings of the people
in one locality to another part of the country for their use.
Mr. S h ib l e y . The regional reserve banks will not have the savings
of the people in their possession if the system is installed that I am
proposing, for it is not to have a capital stock and no more of the
bank resurves than enough to settle the daily balances.
Senator B ristow . And the reserves of the banks will constitute
the savings they have in that locality.
Mr. S h ib l e y . There is no system in the world but the one of the
people in this country, where they attempt to get control of these
banks of issue.
Senator B ristow . Let me see if these reserves do not constitute
the savings of the people in that locality.
Air. S h ib l e y . Certainly they constitute the savings of the people,
but they are not to be put in the banks of issue.
Senator B ristow . I am eliminating now capital stock and referring
only to funds of the reserve banks. Now, taking a case, for instance,
m which the reserve bank at Chicago is ordered to transfer to the
reserve bank out in San Francisco $10,000,000 of funds: What do
those funds consist of if they do not consist of the deposits of the
banks in that Chicago district left with the reserve bank located in
Chicago?
Mr. S h ib l e y . They would not consist o f that.
Senator B ristow . WT
hat would they consist of?
Mr. S h ib l e y . They would consist of paper currency, because these
are banks of issue, and they are going to issue currency for the
unusual demands.
Senator B ristow . If the Chicago bank is ordered to transfer funds
to San Francisco, your point is that it does not transfer its actual
resources, but only procures from the Government United States
notes, which it will then send to San Francisco?
Mr. S h ib l e y . That is right; and then this Chicago reserve bank
will take the commercial paper and deposit that with the Federal
reserve board.
Senator B ristow . That is to say, the Chicago reserve bank would
borrow $10,000,000 in paper currency from the United States and
loan it to San Francisco?
1858
BANKING AND CURRENCY.
Mr. S h ib l e y . Exactly, and make money by the transaction, and
who would have any fault to find with it ?
Senator B ristow . Your idea is that the law should provide that
that Chicago reserve bank, we will say, may be required to borrow
$10,000,000 of the United States and lend it to San Francisco.
Mr. S h ib l e y . Yes; should the Federal reserve board decide to
handle a monetary crisis that way.
Senator B ristow . That is worse than the other.
Mr. S h ib l e y . The large amount of loans from San Francisco
would thereby be divided between several banks of issue. The only
question is as to whether all of the loans from San Francisco should
be made with the local bank of issue or be divided up between several
banks of issue.
Senator N e l s o n . Senator, you overlook the fact that this currency
is legal-tender currency, not issued by the Government but issued by
the regional banks, and you overlooked the fact how easy it would be
for those regional banks to issue $10,000,000 in legal-tender money
and ship it to San Francisco. It would not be difficult at all.
Mr. S h ib le y . Just so.
Senator R eed. D o they put anything up in the bank for it?
Mr. S h ib l e y . Oh, yes; commercial paper, dollar for dollar, and
the member bank will indorse it; also the reserve bank.
Senator R eed. If the regional bank in Chicago took $10,000,000 of
the notes it had in its possession, those notes would have been re
ceived from member banks, would they not?
Mr. S h ib l e y . No ; my proposal is that the member banks shall not
deposit any reserves except enough to settle their daily balances.
Banks in trouble and wishing to borrow money would offer to re
discount their commercial paper and would be given paper currency.
Senator R eed. I understand. The currency issued is backed by
promissory notes and bills of exchange, etc.
Mr. S h ib l e y . Yes; together with the gold reserve and the indorse
ment of member banks and the indorsement of the banks of issue.
Senator R eed. Where do they get the bills of exchange?
Mr. S h ib l e y . From the merchants.
Senator R eed. Those bills of exchange are obligations of the local
merchants, we will say, of the city of Chicago, in this illustration.
Mr. S h ib l e y . Yes.
Senator R eed. They are the credit of those merchants, and you
propose to take the credit of the merchants in the city of Chicago
and employ it to get money to be used by the merchants in the city
of San Francisco. That is where you get it, isn’t it?
Mr. S h ib l e y . N o ; I did not get your meaning a moment ago. My
proposal is that the merchants of San Francisco shall put up their
promissory notes.
Senator R eed. They put up their notes and you exchange the
security ?
Mr. S h ib l e y . The merchants of Chicago are not going to put up
securities.
Senator R eed. Y ou mean the merchants o f San Francisco put up
iheir notes and send them to the regional bank in Chicago, and then
the regional bank in Chicago issues paper and sends it to them?
Mr. S h ib l e y . Yes; if it should be deemed by the national board
that that would be desirable.
BANKING AND CURRENCY.
1859
Senator R eed. Why could not they do it through their own re
gional bank, as long as they have unlimited power of the printing
press and the capacity of men to work 8 hours in shifts, to run 24
hours—why could they not do it right through that bank if they
have the security?
Mr. S iiib l e y . They probably would, just the same as the Bank of
France issued something like 160,000,000 francs to one bank, and
that bank never closed its doors, and in a short time that money was
all retired.
Senator R eed. Would not that be the right way to do it? If the
merchants of San Francisco needed this money and had the securi
ties, to issue the money right there from that bank, under your plan,
instead of sending those securities on to New York or Chicago or
some other place and having them issue the credit? Because, after
all, all that is back of this money are the credits deposited and the
faith and credit of the Government of the United States.
Mr. S iiib l e y . Plus the indorsement of the bank of issue; also the
indorsements of the banks that get the paper currency; and there is
the gold reserve.
Senator R eed. Of course the gold reserve would exist in either case.
Senator M cL e a n . But he has shown that it is going to be elimi
nated in San Francisco before they get the notes.
Mr. S iiib l e y . Not so; because the gold reserve of the entire country
is to be a central reserve under my plan.
Senator R eed. Mr. Chairman [Senator Hitchcock], I want to ask
the indulgence of the committee for a few moments, because I will
have to leave to attend to some work which will not wait, and I
would like to ask the witness a few questions out of order in regard
to some points that were not developed.
Senator H itchcock . The Senate meets at 12 o’clock, and I think
we had better take a recess until half past 2 and then hear Mr. Fow
ler. He has come here with the expectation of going on this after
noon. Mr. Shibley, you will be in town and could come next week?
Mr. S iiib l e y . Yes.
Senator N elson . Before you come before us, you get up that bill
of yours—you get up your substitute bill.
Mr. S h ib l e y . I shall be glad to.
Senator R eed. Before you leave, I wish to say that what I wish to
inquire about here is with reference to the genesis of this bill to which
you referred yesterday. I want you, if you will, to come prepared to
tell us all about how this bill originated and give us the facts, as far
as you can, to substantiate your conclusions.
Air. S h ib l e y . I wish to say that my authorities and quotations are
all in the record with the pages given to the hearings and to the
different sources of my authorities.
Senator H itchcock . I wish you would be prepared just to lay that
subject before us when you come back, because I am very much inter
ested in that phase of the matter.
Senator S h a feo th . Mr. Shibley, in regard to your paper, I think
it is a very able one; but I should like, it vou have the time, for you
to read a few chapters in the book called Our Economic Troubles,
by William H. Berry, and try to answer some of those objections
which I have read, because I regard that book of Mr. Berry’s as one
of the best works ever written.
BANKING AND CURRENCY,
1860
Mr. S h ib l e y . I shall do so.
(The chairman presented the following document, with the request
that it be placed in the record at this point.)
P l a n k s of D em o cratic a n d R e p u b lic an P latfo r m s on B a n k in g a n d C urrency
S in c e 1896.
R e p u b lic a n .
D e m o c r a tic .
1896.
i n t e r e s t -b e a r i n g
bon ds.
f in a n c e
We are opposed to the issuing of
interest-bearing bonds of the United
States in time of peace, and condemn
the trafficking with banking syndi
cates, which, in exchange for bonds
and at an enormous profit to them
selves, supply the Federal Treasury
with gold to maintain the policy of
gold monometallism.
a g a in s t
n a t io n a l
b an k s
.
Congress alone has the power to coin
and issue money, and President Jackson declared that this power could not
be delegated to corporations or indi
viduals. We therefore denounce the is
suance of notes intended to circu
late as money by national banks as
in derogation of the Constitution, and
we demand that all paper which is
made a legal tender for public and pri
vate debts, or which is receivable for
dues to the United States, shall be is
sued by the Government of the United
States, and shall be redeemable in coin.
.
The Republican Party is unre
servedly for sound money. It caused
the enactment of the law providing for
the resumption of specie payments in
1879; since then every dollar has been
as good as gold.
We are unalterably opposed to every
measure calculated to debase our cur
rency or impair the credit of our coun
try. We are therefore opposed to the
free coinage of silver except by inter
national agreement with the leading
commercial nations of the world, which
we pledge ourselves to promote, and
until such agreement can be obtained
the existing gold standard must be pre
served. All our silver and paper cur
rency must be maintained at parity
with gold, and we favor all measures
designed to maintain inviolably the ob
ligations of the United States of all
our money, whether coin or paper, at
the present standard, the standard of
the most enlightened nations of the
earth.
1900.
T H E CU RREN CY B IL L DENOUNCED.
FREE COINAGE OF SILVER OPPOSED.
We denounce the currency bill en
acted at the last session of Congress as
a step forward in the Republican policy
which aims to discredit the sovereign
right of the National Government to
issue all money, whether coin or paper,
and to bestow upon national banks the
power to issue and control the volume
of paper money for their own benefit.
A permanent national-bank currency,
secured by Government bonds, must
have a permanent debt to rest upon,
and if the bank currency is to increase
the debt must also increase. The Re
publican currency scheme is therefore
a scheme for fastening upon the tax
payers a perpetual and growing debt.
We are opposed to this private cor
poration paper circulated as money
but without legal-tender qualities, and
demand the retirement of the nationalbank notes as fast as Government
paper or silver certificates can be sub
stituted for them.
We declare our steadfast opposition
to the free and unlimited coinage of
silver. No measure to that end could
be considered which was without the
support of the leading commercial
countries of the world.
However
firmly Republican legislation may seem
to have secured the country against
the peril of base and discredited cur
rency, the election of a Democratic
President could not fail to impair the
country’s credit and to bring once more
into question the intention of the
American people to maintain upon the
gold standard the parity of their
money circulation. The Democratic
Party must be convinced that the
American people will never tolerate
the Chicago platform.
1861
BANKING AND CURRENCY,
1904
TH E
GOLD
STANDARD
M UST
BE U PH E LD .
We believe it to be the duty of the
Republican Party to uphold the gold
standard and the integrity and value
of our national currency. The main
tenance of the gold standard, estab
lished by the Republican Party, can
not safely be committed to the Demo
cratic Party, which resisted its adop
tion, and has never given any proof
since that time of belief in it or fidelity
to it.
1908.
We approve the emergency measure
adopted by the Government during the
The panic of 1907, coming without recent financial disturbance, and es
any legitimate excuse, when the Re pecially commend the passage by Con
publican Party had for a decade been gress of the law designed to protect
in complete control of the Federal Gov the country from a repetition of such a
ernment, furnishes additional proof stringency. The Republican Party is
that it is either unwilling or incompe committed to the development of a per
tent to protect the interests of the manent currency system responding to
general public. It has so linked the our greater needs and the appointment
country to Wall Street that the sins of of a national monetary commission by
the speculators are visited upon the the present Congress which will im
whole people. While refusing to res partially investigate all the proposed
cue the wealth producers from spolia methods and insure the early realiza
tion at the hands of the stock gamblers tion of this purpose.
and speculators in farm products, it
The present currency laws have fully
has deposited Treasury funds, without justified their adoption, but an ex
interest and without competition, in panding commerce, a marvelous growth
favorite banks. It has used an emer in wealth and population, multiplying
gency for which it is largely respon the centers of distribution, increasing
sible to force through Congress a bill the demand for the movement of crops
changing the basis of bank currency in the West and South, and entailing
and inviting market manipulation, and periodic changes in the monetary con
has failed to give to the 15,000,000 de dition, disclose the need of a more
positors of the country protection in elastic and adaptable system. Such
their savings.
a system must meet the requirements
We believe that in so far as the of agriculturists, manufacturers, mer
needs of commerce require an emer chants, and business men in general;
gency currency, such currency should must be automatic in operation, mini
be issued and controlled by the Fed mizing the fluctuations in the interest
eral Government and loaned on ade rates; and all must be in harmony
quate security to national and State with the Republican doctrine, which
banks. We pledge ourselves to legis insists that every dollar shall be based
lation under which the national banks upon and as good as gold.
shall be required to establish a guar
PO STAL SA V IN G S.
anty fund for the prompt payment of
the depositors of any insolvent na
tional bank, under an equitable sys
We favor the establishment of a
tem which should be available to all postal savings bank system for the
State banking institutions wishing to convenience of the people and the en
couragement of thrift.
use it.
We favor a postal savings bank if
the guaranteed bank can not be se
cured, and believe that it should be
so constituted as to keep the deposited
money in the communities where the
depositors live. But we condemn the
policy of the Republican Party in pro
posing postal savings banks under a
plan of conduct by which they will
B A N K IN G .
1862
BANKING AND CURRENCY,
aggregate the deposits of the rural
communities and deposit the same
while under Government charge in the
banks of Wall Street, thus depleting
the circulating medium of the produc
ing regions and unjustly favoring the
speculative markets.
1912.
B A N K IN G LE G ISL A T IO N .
B A N K IN G AN D OUBBENCY.
We oppose the so-called Aldrich bill
or the establishment of a central bank,
and we believe the people of the coun
try will be largely freed from panics
and consequent unemployment and
business depression by such a system
atic revision of our banking laws as
will render temporary relief in local!
ties where such relief is needed, with
protection from control or dominion by
what is known as the Money Trust.
Banks exist for the accommodation
of the public and not for the control
of business. All legislation on the sub
ject of banking and currency should
have for its purpose the securing of
rhese accommodations on terms of ab
solute security to the public and of com
plete protection from the misuse of the
power that wealth gives to those who
possess it
We condemn the present methods of
depositing Government funds in a few
favored banks, largely situated in or
controlled by Wall Street, in return for
political favors, and we pledge our
party to provide by law for their de
posit by competitive bidding in the
banking institutions of the country, na
tional and State, without discrimina
tion as to locality, upon approved se
curities and subject to call by the Gov
ernment.
The Republican Party has always
stood for a sound currency and safe
banking methods. It is responsible for
the resumption of specie payment and
for the establishment of the gold
standard. It is committed to the pro
gressive development of our banking
and currency system. Our banking
arrangements to-day need further re
vision to meet the requirements of
current conditions. We need meas
ures which will prevent the recurrence
of money panics and financial disturb
ances and which will promote the pros
perity of business and the welfare of
labor by producing constant employ
ment. We need better currency facili
ties for the movement of crops in the
West and South. We need banking
arrangements under American auspices
for the encouragement and better con
duct of our foreign trade. In attain
ing these ends the independence of in
dividual banks, whether organized
under national or State charters, must
be carefully protected, and our bank
ing and currency system must be safe
guarded from any possibility of domi
nation by sectional, financial, or po
litical interests.
It is of great importance to the
social and economic welfare of this
country that its farmers have facilities
for borrowing easily and cheaply the
money they need to increase the pro
ductivity of their land. It is as im
portant that financial machinery be
provided to supply the demand of
farmers for credit as it is that the
banking and currency systems be re
formed in the interest of general busi
ness. Therefore we recommend and
urge an authoritative investigation of
agricultural credit societies and cor
porations in other countries and the
passage of State and Federal laws for
the establishment and capable super
vision of organizations having for
another purpose the loaning of funds
to farmers.
BU B AL CBFDITS.
Of equal importance with the ques
tion of currency reform is the ques
tion of rural credits or agricultural
finance. Therefore we recommend that
an investigation of agricultural credit
societies in foreign countries be made,
so that it may be ascertained whether
a system of rural credits may be de
vised suitable to conditions in the
United States; and we also favor legis
lation permitting national banks to
loan a reasonable proportion of their
funds on real estate security.
We recognize the value of vocational
education and urge Federal appropria
tions for such training and extension
teaching in agriculture in cooperation
with the several States.
(Thereupon, at 11.55 o’clock a. m., a recess was taken until 2.30
o’clock p. m.)
BANKING AND CURRENCY.
AFTER
1863
RECESS.
The C h a ir m a n . We are ready to hear you now, Mr. Fowler.
STATEMENT OF HON. CHARLES N. FOWLER, OF ELIZABETH, N. J.
Mr. F owler . Mr. Chairman, in order to clearly define and impress
upon this committee my impressions of the bill now pending, I am
led to state the principles which I think should prevail and buttress
them with historical facts.
The credit system of the United States is a most complicated
and delicate organism and legislation should, if possible, be evolu
tionary and in harmony with its natural development, and not in
direct violation of all our experience and established practices, but
more especially our legislation should not be in direct violation of
economic law.
Recently I received a letter from a Democratic Member of the
House of Representatives which contained this language:
The dense ignorance of the Members of this House upon this question is
simply appalling.
This sentence perfectly describes the mental condition of the coun
try upon this question to-day. The people, bankers as well as busi
ness men, know just as little about the fundamental priciples, the
A B C of the question, as the country knew about the standard
of value in 1896. It took a campaign of education to learn that
iesson then, and unless there is a corresponding period of educational
discussion now we shall suffer the direct penalties for our “ dense
ignorance ” expressed by banking legislation.
All truth is simple when you arrive at it by stripping away the
cobwebs of tradition and habit, and by supplanting ignorance with
intelligence and by eliminating our greed so far as possible. What
we want is to establish in the minds of the people those few funda
mental principles of banking economics that must be recognized and
obeyed. We must knoiv what money is; what true reserves are and
how they should be held; what a true bank currency is and how it
differs from money; how our conditions differ from thosq of any
other country before we can apply these economic principles.
The adoption and establishment of a banking system for the
United States is incomparably the most important economic question
that has ever confronted the world. Our territory is 3,200,000 square
miles, while that of all Europe, including Russia, is only 3,500,000.
Mark this, that when the Bank of France was established in 1803 the
banking resources of France were inconsiderable, and were, so far
as I know, without official record.
In 1844, when the bank act under which the Bank of England was
established, the banking resources of that country were probably in
the neighborhood of 500 million. The total note issue of England,
Scotland, and Ireland was less than 200 million; the public and pri
vate deposits in the Bank of England were less than 75 million;
and the gold in the Bank of England was less than 100 millions of
dollars.
In 1873, when the Imperial Bank of Germany took its present
form, industrial Germany was slumbering and the bank resources
probably did not exceed 1 billion.
1864
BANKING AND CUBBENCY.
The capital of the incorporated banks was about 425 million, the
notes about 325 million, and the reserves held about 30 million.
In 1890, Mulhall, the English statistician, stated that the banking
resources of the whole world were only 16,000 million, or 16 billion.
To-day the banking resources of the United States alone are upward
of 25,000 million or 25 billion, or more than 50 per cent greater than
the total banking resources of the entire world only 23 years ago; and
we now have nearly one-half of all the banking resources of the
whole commercial world.
The significance and seriousness of your work is written in these
stupendous figures, and in the fact that your action will indeed affect
every day’s toil of every American citizen and every dollar of capital
for a century to come—yes, possibly for 1,000 years to come— and will
also determine in a very large part with what success this Nation
shall measure commercial swords with every other nation in the
never-ending struggle for the markets of the world.
But some one may inquire:
Is it as serious as all that? Could we not correct any mistake now made,
however small or however great, next year or the year after, or whenever the
errors now committed and the blunders now made are discovered?
I say no; and to reenforce this statement have only to inform you
that there has been no substantial change in the bank act of France in
over 100 years. There has been no change in the bank act of Eng
land since it was passed in 1844, more than 60 years ago. Nor has
there been any change in the bank act of Germany worth mentioning
since 1873, the year of its passage, though now the unsoundness of
the scheme demands attention, for it is threatening not only the com
mercial interests of Germany, but is a menace to all Europe and to
ourselves as well.
Gentlemen mark this: There has not been a single serious or sub
stantial change made in the national-bank act since it was passed,
now more than 50 years ago. Have efforts been made to change it?
Certainly. Ever since 1897 I have been describing and predicting
the exact situation that confronts us to-day, and as chairman of the
Banking and Currency Committee of the House of Representatives
for eight years I did everything in my power to effect changes in the
law, some comprehensive, some slight, some of a permanent character,
and some of a temporary character, such as to meet the panic of 1907,
but all to no avail.
The reason for the permanence of all bank laws, the absolute fixed
ness of them, is perfectly obvious after a moment’s reflection. Bank
ing laws involve every possible business relation, and therefore so
long as business, which abhors a disturbance, will endure the con
ditions in which it finds itself, there can not be a change of conse
quence.
Every line of business fearing any change because of its inherent
conservatism will always protest, and so nothing is done in calmness
and as a result of cold reasoning and deliberate judgment. Changes
will only come when the situation becomes so intolerable that it can
not be endured any longer. This is only a statement of a universal
historical truth.
Therefore, since we must do something now, let it be the right thing,
the wise thing, not the chance thing of haste.
r
7
BANKING AND CURRENCY.
1865
Chairman Glass is reported in the press as having said, “ We must
act or plead our incompetence.” But does not Mr. Glass know that
it would be far better for this country and the Democratic Party as
well to plead its incompetence rather than to practice its incompe
tence on this great country at the expense of the American people?
This is no time for an exhibition of party vanity or party power,
but of caution and of intelligent and patriotic service, rather. Ab
ject ignorance of the banking question, a wicked prejudice born of
that ignorance against it, and political ambition and political neces
sities have cursed this country all too long already. Away with it.
Let there be light. Let the American people have the same oppor
tunity to learn about this vital question that we gave them in 1896
to learn about the standard of value. The people settled that ques
tion in three months. Congress had played politics with it for a
quarter of a century. Again, I say, let there be light before we
take this blind, this fatal plunge into the bottomless abyss which
seems to be hidden from the men in power.
From the adoption of the Constitution to the breaking out of the
Civil War, beginning with the history of the First United States
Bank, whose success and usefulness was supplemented by the mar
velous record of the second, there was developed here on this conti
nent in many of our States banking systems that were as good as anjT
the world has yet produced and as perfect in their adaptation to the
needs of the people at that time as anything we can now hope, in the
highest display of wisdom, to call into being.
The principles of a perfect banking system of a single State or
nation considered separate and apart from its relation to any other
State or nation are simple indeed.
Hear them, note them, mark them well. With these once firmly
fixed in your mind so that you fully realize that you are standing
upon these fundamental, these eternal, these irrevocable laws that are
just as certain in their operation as the law of gravitation, no sophis
try can divert you, no human device can deceive.
First. Whatever your standard of value may be, all bank credit
must be convertible into it. Our standard value is gold. All re
serves must be gold. The only money we have is gold and the only
pieces of money we have are the $2.50, $5, $10, and $20 gold pieces.
Every other thing which we popularly call money is, correctly speak
ing, only a demand for money, a demand for gold, an agreement to
pay gold, for gold alone is its own redeemer. Every piece of it,
whether a dull, misshapen slug or a shining coin bearing the impress
of this great Nation, is worth identically the same. Will you say this
of your silver in the pig or the pulp from which your bank notes or
your United States notes are made? However, it took a great na
tional campaign to demonstrate and establish this fact in the minds
of the American people, and now we are in need of another great
campaign to establish another great, fundamental economic truth.
Second. The customer of a bank has a right to ask for that par
ticular form of credit that will best serve his particular need and
receive it at the lowest possible necessary cost. All the different
forms of bank credit are essential to best meet the ever varying con
dition of trade throughout the length and breadth of this land.
I
1866
BANKING AND CURRENCY.
Third. It is the duty of the bank to furnish its customers that
particular form of credit that will best serve their particular need
jf they are entitled to credit at all, and it is the duty of the bank
also to keep its credit in the various forms as good as the standard
of value, as good as gold.
Fourth. It is the office and duty of the Government to provide a
banking system that will enable the banks of the country to furnish
these various forms of credit at the lowest possible cost and compel
the banks to keep it as good as gold. The science of banking, then,
is to effect the exchange of all commodities, the myriad products of
the American people, at the lowest possible cost to "them.
More concretely and simply expressed, these principles mean (1)
ample coin reserve; (2) interchangeability of deposits subject to
check and bank notes; (3) quick current com redemption of both.
Any banking system founded upon these principles establishes
three facts at once:
First. That it must necessarily be sound in principle.
Second. That the customers who are entitled to credit can always
get it in precisely the form that will best serve their purposes,
whether a current credit in the form of a note or a deposit credit
subject to check.
Third. That the two credits, the current credit in the form of a
note, or a deposit credit subject to check are identical, differing only
in form—one, the note passing without any indorsement; the other,
the check passing with an indorsement. Also that the cost of each is
identically the same, viz, only the interest on the reserve held for
the protection of both of them; that is, if a bank holds a reserve of
20 per cent against its deposit subject to check and 20 per cent
against its note issue bank notes will cost the custom ers precisely
the same and no more than a deposit subject to check.
The profit to the bank upon a given amount of bank notes issued
will not be as great as upon a corresponding amount in a deposit
subject to check because of the additional cost of the plates and the
cost of the notes printed upon them.
Issuance o f bank notes is n ot a p riv ileg e to a bank but a d u ty o f a
bank to its custom ers , as a m atter o f convenience and econom y.
Bank notes are not money. They are only another form of bank
deposit that will better suit the customer than a deposit. A bank
deposit is a debt. A bank note is a bank debt. They are identical.
They are both agreements to pay money. They are both deposits—
one a current deposit, the other an order deposit. That is the only
difference, which is no difference at all so far as the bank is con
cerned, and is no difference at all so far as the customer is concerned,
except that he has his bank credit in precisely that form that will
exactly serve his convenience.
When there is a perfect interchangeability of the two the habits
of the people will determine which will be the larger in amount. 1
want you gentlemen to mark those words— when there is perfect in
terchangeability of the two, the habits of the people will determine
which will be the larger part, whether the bank notes or the deposits.
Senator N elson. Or the check?
Mr. F owler . In 1841 a great merchant of Boston, Nathan Appleton. who had undoubtedly been a student of the Suffolk system and
BANKING AND CUERENCY.
1867
had observed its marvelous adaptation to the trade conditions of
New England, used this language in a pamphlet:
Bank notes are promises to pay on demand a given quantity of coin; they
are promises to pay money, but they are not money in themselves. This is an
important distinction, and the not making of it is the source of most of the
popular errors on the subject of currency.
Bank credits, commonly called deposits, are of precisely the same character
as bank notes. * * * Bank notes and bank credits are convertible into each
other at the pleasure of the possessor. They are essentially the same.
Right on this point, gentlemen, I want to call your attention to the
fact that about 15 years ago tvhen I first advocated this great
economic truth it was much ridiculed and given a great many sug
gestive names, such as the india-rubber currency and asset currency,
and there is no one that I recall now who then recognized it except
myself. And I remember very distinctly in 1902 when I was at the
New Orleans American Bankers’ Association Convention that I was
hooted because I advocated this very principle.
Now, I want to call your attention to a most interesting statement
made by Paul Warburg, in the North American Review, on this very
question, because it is, to me, most refreshing:
Notes that have been issued to-day may again be turned into book credits
to-morrow. They are interchangeable, and, from the Federal reserve bank’s
point of view, they ought to be treated alike— both as deposit liabilities. To
cut these functions in two, to attempt to let book credit and the note—twin
brothers—be born of two different mothers, is a most anomalous proceeding.
I approve of that heartily.
The C hairm an . That is Mr. Paul Warburg, of Kuhn, Loeb & Co.,
representatives of the Rothschilds, is it not?
Mr. F owler. I do not think they are representatives of the Roths
childs. I think they are representatives of Kuhn, Loeb & Co.
Senator S hafroth . He is the same man who wrote that article in
the Monetary Commission’s reports concerning discounts, which was
a very able article.
Mr. F owler. I would like to pay my respects right here to Mr.
Paul Warburg, as. in my estimation, having contributed more sub
stantially to the advancement of this question of discounts than any
other one man in this country.
Beginning with the Bank of Scotland in 1695, about 220 years ago,
the evolution of bank credit currency has been unbroken. The
next link in the chain was the bank notes of the First United States
Bank, whose charter was drawn by Alexander Hamilton, one of the
most subtle, astute, and profound banking economists the world
has ever produced.
In 1804 the grand old Commonw’ealth of Virginia, following the
Scotch example, established the Bank of Virginia, with a capital of
$1,500,000, with the right to issue notes to three times the amount of
its capital, provided that the bank always kept a reserve of 20 per
cent in coin. Five other banks were established in Virginia, all of
them having the right to establish branches. There is no record of
any one of these banks ever failing. No one, it is stated on high
authority, ever lost a dollar by holding a note of a Virginia bank up
to the time of the Civil War, and the notes of the Bank of Virginia
were at a discount of only one-quarter of 1 per cent in New York.
1868
BANKING AND CURRENCY.
Detailed information might be given of a marvelous banking
system that developed in Louisiana under a general banking law,
providing for individual banks without branches, which required a
33 per cent coin reserve, without any limit whatever being placed
upon the notes issued or deposits taken. The effect of this law was
such that at the time of the outbreak of the war Louisiana had more
gold than any other State in the Union except New York. The day
Gen. Butler marched down the streets of New Orleans the banks
Avere redeeming their notes in gold coin.
I remember a very interesting episode which you called my atten
tion to, Senator Nelson, of Avhich I was not aware until you repeated
it to me, that those notes were cut in haKes and quarters.
Senator N elson. They cut them in halves; a dollar bill was cut in
two and each half passed as a half dollar. Five-dollar bills and
three-dollar bills Avere treated the same Avay in the State Bank of
Louisiana. That Avas in 1862 and 1863.
Mr. F owler. Striking confirmation of the virtue of these simple
but sound principles can be found in the banks of Kentucky, Ohio,
Indiana, Iowa, and Missouri, and in the six New England States
under the Suffolk system. In no case did any one of these separate
individual systems fail to demonstrate the soundness of the principles
upon Avhich they were founded. Nor is there a single instance A ere
vh
they haA e ever failed.
I t is o ften said by the u nthinking— unthinking because u tterly
ignorant both o f the principles in volved and in the invariable results
established by h istory— that there m ust be a human con trol som e
w here o f n ote issues; I assert that all exp erien ce shores that the on ly
sound, wise, and scientific con trol o f n ote issues, as w ell as deposits,
lies in am ple coin reserve and p ro p er facilities fo r quick coin red em p
tion.
Recardo states this omnipotent and unvarying law so Avell that you
should all hear it and ne\r forget i t :
er
The issuers of paper currency should regulate their issues of currency solely
by the price of bullion, and never by the quantity of their paper in circulation;
the quantity can never be too great or too small while it preserves the quality
of the standard of values.
The soundness of Recardo’s law for the absolute control of bank
credit A a illustrated with such emphasis, certainty, and undeviating
vs
accuracy in the operation of the Suffolk system that the main facts
should not be passed over unnoticed at this time. There were 504
independent indiAT
idual banks in the 6 New England States haA’ing
capital ranging from $25,000 each up to $500,000 each.
Now, gentlemen, mark the history of what was the most perfect
banking system that has ever existed in this world anywhere, which
cleA
’eloped without any law whatever except the practices of the
New England people.
The total right of note issue aggregated more than $131,000,000,
but the maximum amount of bank notes outstanding at any one time
neArer exceeded $57,000,000.
Senator H itchcock . What was the right of note issue based on ?
Mr. F oavler. The law gave to some three times the amount of
capital and to some two.
Senator H ollis. What date was that?
BANKING AND CURRENCY.
1869
Mr. F owler. Y ou mean when did it exist?
Senator H ollis. Yes.
Mr. F owler. From 1819 to 1865, when the 10 per cent tax went on.
Senator W eeks. I think, Mr. Fowler, you ought to state that it
varied some.
Mr. F owler. Yes; I will state that.
This maximum issue occurred during the panic of 1857. The
average amount of notes outstanding for the 25 years preceding the
war being only $43,000,000, or only 33 per cent of the permissive
or possible issue of $131,000,000. The bank credit of the Suffolk
system in the form of bank notes exceeded the bank credit in the
form of bank deposits by 33 per cent, as the deposits averaged only
$31,000,000 during the 25 years before the war, as against $43,000,000
of notes.
The interchangeability o f bank-book credits and bank-note credits
was p erfect, the one passing into the oth er w ith unobstructed facility.
This m arvelous adaptation o f bank credit to the ever-ch an gin g con
ditions o f trade was illustrated during the panic o f 1857. In 1856
the n ote issue was $50,000,000 and the deposits am ounted to
$32,000,000. D u rin g the panic the n ote issue rose to $55,000,000 and
the deposits fe ll to $25fi00,000, there being a conversion o f $5,000,000
deposits into bank notes. In 1858, one yea r a fter the panic, the note
issue had fa llen to $36,000,000 and the deposits had risen to
$37lOOO,000, or there had been a conversion o f m ore than $20,000,000
o f bank-note, debts into bank-deposit debts. The ex ig en cy fo r cash
had disappeared.
Senator H itchcock. Was there any panic among the note holders?
Mr. F owler. They recognized no difference between deposits and
notes. They are identically the same thing. There were 497 banks
at the beginning of that panic and there were 502 banks the next
year. I give you that to show you that they went through the panic
without any destruction to the banking system. I will come to the
point of the safety of those notes, which touches the points you are
referring to, a little later on.
Canada copied the Massachusetts bank law before the war, and
there to-day this same principle is in operation, furnishing Canada
the most facile and the most economical and the most perfect cur
rency system in the world.
This, then, was the one invaluable contribution o f American
banking experience to banking economics before the war. Ample
coin reserve, interchangeability of bank-book credits and bank-note
credits, quick coin redemption.
The Civil War made a most important contribution to our cur
rency which we had never enjoyed up to that time, and that was a
uniform appearance, character, and value all over the United States.
The Government was seeking new ways o f raising funds for carry
ing on the war, and hit upon the device o f compelling the banks
to buy United States bonds as a basis of bank-note circulation. To
make the scheme successful it was necessary to give the national
banks a monopoly o f the note issue. The one and the only beneficial
result was to produce a uniform currency for this country. But
coincidentally in establishing the latter we destroyed all that we
had gained in all the preceding 75 years of our national history
by putting a tax of 10 per cent upon all bank-note issues. To-day
1870
BANKING AND CURBENCY.
we can combine all that we had gained before the war with the
characteristic quality of our national-bank-note currency by simply
returning the United States bonds now deposited to secure our
national-bank notes to the respective banks who own them, thus
contributing $750,000,000 to the commercial fund of the country,
for in a comparatively short time this vast investment capital of
$750,000,000 could be converted into cash or commercial capital.
I am of the opinion that if the $750,000,000 o f 2 per cent bonds are
converted into 3 per cent bonds and turned over to the banks, being
free of tax, the savings banks, insurance companies, trust companies,
and trustees of estates would absorb them at about par within a
year and this vast sum be available for the commerce or productive
industries o f this country.
Senator N elson. Y ou mean the national-bank notes issued on 2
per cent bonds?
Mr. F owler. I mean all the bonds would be converted into savingsbank investments, insurance company investments, and the large
estates in Chicago and New York and Boston, and all the big cities—
they are free of tax, you know, and what they are looking for is
safety, and not excessive income. I have no doubt about it, and I
think if you gentlemen will study it, you will be convinced of the
same thing.
Senator S hafroth . I f the circulation privilege is taken away from
them-----Mr. F owler (interposing). They then become an investment for
the insurance companies and others.
Senator N elson. Y ou mean by that, if I understand you, that
they take the 2 per cent bonds on which the bank-note circulation is
issued and gives them 3 per cent bonds in lieu of them for circula
tion; if you do that you would release this national-bank currency;
is that what you mean ?
Mr. F owler. I f you will strike off from the top o f the bank notes
this barbaric superscription, “ Secured by Government bonds and
other securities,” and leave the bank notes where they are, in the
hands of the banks, and return them their bonds, after making them
3 per cents, which I would do by putting a tax of 1 per cent on the
bank notes, and transfer that tax to the interest account of the
Treasury Department, so that it falls on the banks.
Senator N elson. What it amounts to. Mr. Fowler, is this: You
would eliminate the present bond-secured currency ?
Mr. F owler. Absolutely.
Senator N elson. And have an asset-secured currency?
Mr. F owler. A bank-credit currency.
Senator N elson. What is called asset-secured currency?
Mr. F owler. Let us forget that name; let us call it bank-credit
currency.
Senator H itchcock. There would be no security except the general
credit of the bank. Suppose the bank failed?
Mr. F owler. Eight on that point I desire to say if you eliminate
the savings deposits you will have in the United States $20,000,000,000
o f bank assets. I f these banks could issue credit currency as their cus
tomers wanted it, just as you give them credit on deposits subject to
check, carrying the same reserves against the notes as against deposits,
and make them a first lien against the $20,000,000,000 of assets and
BANKING AND CURRENCY.
1871
put up an insurance fund of 5 per cent, they would be £afe beyond
all peradventure; because for the 50 years the national banking sys
tem has been in operation a tax of one-fifth of 1 per cent on all bank
notes would have paid all the notes of banks that have failed.
Therefore, an insurance fund of 5 per cent will guarantee the notes
absolutely for 25 years.
Senator N elson. That is, have the bank pay 5 per cent and make
that a common fund, available for all?
Mr. F owler. Absolutely.
Senator N elson. S o that that fund can be dipped out of in any
case?
Mr. F owler. Absolutely; a general fund.
Senator N elson. Y ou are very interesting, and I want to see if I
understand you. Your theory is that the bill holder in such a case
has as much security as the man who has a credit account on the
books of the bank, against which he can check?
Mr. F owler. All of that and more, first, because the bill holder
has a first lien upon the assets of the bank.
And, second, there is a 5 per cent insurance fund up for all the
notes.
Senator N elson. I see. I simply wanted to clear my mind on that
subject.
Senator P omerene. Y ou would secure these notes by proper re
serves ?
Mr. F owler. Identically the same reserves that are carried against
deposits, because they are a deposit and nothing but a deposit.
Senator P omerene. Y ou require them to be kept in gold?
Mr. F owler. I would, as quick as I could.
Senator P omerene. H ow much of a reserve would you require?
Mr. F owler. The same as they carry now, with the exception of
some slight differentials.
Senator M cL e a n . I was just going to inquire if, under the Suffolk
system, they had this insurance feature?
Mr. F owler. N o , sir; I am coming to that point.
Senator H itchcock. Would you not require a larger reserve
against notes than against deposits?
Mr. F owler. Notes are nothing but deposits.
Senator H itchcock, The European practice is to require a larger
reserve against notes.
Mr. F owler. That is only where they have central banks, where
they are supposed to be carrying the reserves of the whole country.
But this should only be done with the two accompanying incidents.
First, the bonds should be made to bear 3 per cent interest in order
to protect the credit of the United States Government and to keep
faith with the national banks who now hold them as a basis of their
circulation.
Second, we should avail ourselves of the development of American
banking since the war as expressed in the most highly organized
clearing house which has established these four functions.
Let me note right here that all of these functions are without law,
and one of them in absolute defiance of law—they have simply
grown up as a matter of convenience in business: First, a clearing
house committee; second, clearing-house examinations; third, clear
ing-house reserves; fourth, clearing-house credit currency.
9328°— S. Doe. 232, 63-1— vol 2-----58
1872
BANKING AND CURRENCY.
Clearing-house credit currency is precisely the same currency that
served the people of the United States before the war, in 12 States,
perfectly—perfectly, I say.
D id you hear that w ord p e r fe c tly f I used it ad visedly , and w ith
m alice a foreth ou g h t , because no oth er w ord can m ore fittin gly and
adequately describe the soundness , the econ om y , the fa c ility , and
the invariable and instantaneous adaptation o f it to every possible
con tin gen cy in 12 differen t States o f this U nion b efore the war.
I t was used by the tw o U nited States banks through their various
branches. I t was used by the five banks o f V irgin ia through their va
rious branches; it was used in Louisiana under a general banking law
by individual banks w ith ou t branches; it was used in K en tu ck y by
the banks o f K en tu ck y and their branches; it was used by the Ohio
State B ank through its 39 branches. The S tate B ank o f Indiana and
its successor , the B an k o f the S tate o f Indiana , both cred it-cu rren cy
banks , w ent through the panics o f 1837 and 1857 w ithout the loss o f
a cent to eith er a n ote holder or a depositor. The B ank o f the S ta te
o f Ioica, w ith its branches , was a cred it-cu rren cy bank. The grea t
B ank o f M issouri , w hose notes circulated throughout the sparsely
settled 1Vest clear to the P acific coast , was a cred it-cu rren cy bank.
In New England 504 individual and independent banks, scattered
throughout six different States, and with capital varying from
$25,000 to $500,000, to all intents and purposes had the right of
unlimited note issue, when you consider the actual amount o f notes
issued compared with the permissive issue, and were all bound to
gether in a single system by the Suffolk Bank, at Boston.
Senator W eeks. Mr. Fowler, do you not think you should state
just there that that note issue was dependent, however, on the re
demption fund in the hands of the Suffolk Bank?
Mr. F owler. I will explain. I said that it grew up without any
law. Some gentlemen got together in Boston with the idea of com
pelling country banks to redeem their notes in Boston.
Then, gentlemen, you must remember that the larger part of the
bank credits were in notes and not in deposits subject to check,
because the people used bank credit in that form. Every bank in
New England coordinated itself with that system and no bank could
start in New England without redeeming its notes at the Suffolk
Bank, because if the notes were thrown out of the Suffolk Bank the
bank could not do business. These notes were so good that they were
taken all over the United States— in Buffalo, in Cincinnati, in Chi
cago, and Milwaukee, and St. Louis at a premium of from 1 to 3 per
cent, because they were currently redeemed in Boston in coin, and
they never asked the question whether a bank had $25,000 of capital
or what the capital was; but if they were redeemed at Boston at the
Suffolk Bank in coin that was the touchstone. Does that answer the
point?
Senator W eeks. Yes.
Senator P omerene. They were the notes issued by these different
banks?
Mr. F owler. Yes.
Senator P omerene. Bankers’ banks?
Mr. F owler. N o ; individual banks.
Senator P omerene. And all organized under the laws of Massa
chusetts ?
BANKING AND CURRENCY.
1873
Mr. F owler. N o ; all the six New England States had different
laws.
Senator P omerene. Yon are speaking of the entire New England
States ?
Mr. F owler. Six States; the whole system.
Senator P omerene. Y ou are speaking of the entire New England
States?
Mr. F owler. Yes, sir.
It will be observed then that under every conceivable condition,
under all kinds of circumstances, and in all parts of the United States,
in the newer as well as the older parts, bank-credit currency was
tested, proved, and established wherever it had been tried, and that
to-day it is furnishing Canada, all things considered, the most
economical, the most efficient, the most perfectly adapted currency
for the needs of business in the whole world, and as good as gold in
which it is redeemed daily at the clearing houses and over the counters
of the Canadian banks.
The Canadian bank notes are made a first lien upon all the assets
o f the respective banks issuing them, and in addition they are insured
by a guaranty fund of 5 per cent of the amount issued. No one has
ever lost a cent by holding a Canadian bank note since the system
was established more than 60 years ago.
Our present bank notes are a first lien upon all the assets of the
banks issuing them, in addition to the fact that they are also secured
by the deposit of an equal amount of Government bonds.
The record of the comptroller’s office here in Washington shows that
during the whole 50 years since the national banking system was
established that a tax of one-fifth o f 1 per cent on the total amount
of notes outstanding would have paid the notes of all the failed banks.
Therefore an insurance fund of 5 per cent would pay all the notes
of failed banks for a period of 25 years.
Some one here may remark as they have often done in times past,
“ Oh, well, if the bonds had not been deposited to secure the notes,
the conditions might have been different.”
Mark this: M a y it n ever be fo rg o tten by any one o f y ou that it
ivould have taken a tax o f only one-eighth o f 1 -per cent to pa y all the
notes o f the banks that fa iled under the S uffolk system . That is , the
tax necessary to p a y the notes o f the fa iled banks under the S u ffolk
system was on ly a little m ore than half as much as the tax necessary
to pay the losses on notes under the national system i f th ey had not
been secured by bonds.
Senator S hafroth . That was a tax per annum?
Mr. F owler. A tax per annum.
And the reason for that was in the fact that they were daily re
deemed in gold coin.
Senator P omerene. May I ask you there, under that Suffolk sys
tem, how much of a gold reserve was carried-----Mr. F owler (interposing). The banks themselves carried a re
serve, and they made them carry an additional reserve at Boston that
varied according to the size of the bank and the amount of its issue.
Senator P omerene. The reserve at Boston varied?
Mr. F owler. Yes.
1874
BANKING AND CURRENCY.
Senator P omerene. H ow much of a reserve did the banks carry in
their own vaults?
Mr. F owt . It varied in the different States.
ler
Senator P omerene. Well, approximately.
Mr. F owler. Oh, approximately from 5 to 10 per cent, and some
of them 15 per cent, but that is a long story.
Senator N elson. Did not these outside banks who had their notes
made redeemable at the Suffolk Bank keep gold on deposit there?
Mr. F owler. The Suffolk Bank required a bank to keep an amount
of coin with them that was commensurate with the amount of their
liabilities.
Senator W eeks. Originally they required $2,000 of free coin and
enough to cover the notes presented for redemption-----Mr. F owler (interposing). Current—yes.
Senator W eeks. On the $2,000 free coin no interest was paid.
Mr. F owler. They required an original deposit of $2,000, but then
they made an arrangement with every bank that coordinated itself
with the necessities of that bank.
Every man within the hearing of my voice must admit that the
historical proof in favor of the bank-credit currency is literally over
whelming and absolutely precludes even the basis of an argument
against it.
Now, gentlemen, come to the very crux of this great question. Let
us establish a test out in the city of Chicago. The Chicago Clearing
blouse is the natural outgrowth of business conditions. There is no
lawT bv which it exists. The clearing-house association was created
without any statutory provision, and the clearing-house committee
is a board of trustees to execute its will without any legal authority
whatever.
In the first place.it was found by long experience that it was a
great convenience to meet and swap credits or cross accounts and pay
the balance.
In the second place it was learned that it was a matter of great
advantage to carry a part o f the reserves at the clearing house.
In the third place it was discovered that they could not depend
upon the political bank examiner, whether he received his in
structions from Washington or Springfield, and therefore, without
any authority of law, it instituted a system of bank supervision en
tirely its own and placed in charge of it a clearing-house bank exam
iner. Ilis moral authority— for he has no legal authority—does not
stop at the threshold of the banks that are actually members of the
clearing house, but it extends to every bank that clears through
any member of the clearing house. From their experience they have
learned that no bank will long continue to act in violation of their
advice and instructions. All know that the banking situation there
is very much sounder, if, indeed, it is not incomparably so. than if
would be but for the clearing-house supervision. Twenty cities have
now* adopted the plan. . Not a bank failure has occurred in a city
where adopted.
In the fourth place they did, by an evasion of the law at least, if,
indeed, not in direct violation of the intent and purpose of the law,
create and issue a pure credit currency in 1907 amounting to $7,500,000, in denominations of $1, $2, $5, and $10.
BANKING AND CURRENCY.
1875
Will any banker from Chicago say that if the banks that issued
that $7,500,000 of credit currency had issued a corresponding amount
of true bank notes, just such as they issue in Canada, without
depositing United States bonds or any other kind of collateral to
secure the payment of them, but if instead the bank notes so issued
had been made a first lien on all the assets of the bank issuing them,
and if there had been deposited in addition an insurance or guaranty
fund of 5 per cent of the total amount of such notes in gold, will any
banker in Chicago, would any of you declare that the notes so issued
would not, under any and all circumstances that could possibly arise
in the ordinary course of human events, be as good as gold ? That
is what I want to know. Would they not be absolutely good ? Would
they not serve their purpose perfectly?
Now, gentlemen, suppose that you should extend the bank organi
zation that I have developed there in Chicago to the natural commer
cial zone that is directly tributary to that great commercial center.
Then assume, if you will, that the bank capital included in this com
mercial zone should amount to $100,000,000 and the deposits should
amount to $750,000,000, calling for an average reserve of $150,000,000,
of which from $50,000,000 to $75,000,000 was carried at the center in
Chicago for mutual convenience and protection.
I want to say to you, gentlemen, that at the clearing houses
throughout the United States now there is being carried by the banks
$200,000,000 of reserves.
Senator W eeks. Y ou mean that is carried at the clearing-house
centers instead of in their own vaults?
Mr. F owler. Yes.
Senator P omerene. I s there any official report of that fact?
Mr. F owler . No, sir; I have investigated it and know it to be a fact.
At present the national-bank notes of this zone outstanding aggre
gate about $60,000,000, or 60 per cent of the capital. Let us assume,
for the purpose of illustration, that every bank in that commercial
zone has the right to issue an amount of bank notes equal to its cap
ital, precisely as the Canadian banks have to-day, and that the
operations of the banks were confined to that commercial zone, and
that it did not cost a bank within the zone anything to send the notes
that it might receive to Chicago, where they must be paid in gold as
well as over the counter o f the bank of issue.
Do you believe that there would remain outstanding a single bank
note for a single hour longer than it was needed to facilitate the trade
and commerce of this supposed commercial zone? Don’t you know
that you would always have precisely the amount of notes in circu
lation that trade demanded; no more, no less? Don’t you know that
such notes would be sent home with the same celerity that checks
are, and that both the notes and the checks would go by the same mail
or the same express in the same package and that the notes and
checks would be cleared together, because the banks could get gold
for the notes and could also pav out their own notes if their customers
should want currency? Don't you know that a credit-note issue
would be a deposit at your bank for the exact amount of notes out
standing at any time? Don’t you know that if all the banks in this
supposed commercial zone banded themselves together to supervise
each other you would never have a bank failure in this zone? Don’t
1876
BANKING AND CURRENCY.
you know that their reserve against such a note issue would be iden
tical with their reserves against their deposits, and therefore that the
cost of such currency to a customer would be the interest on the re
serves, or only one-fifth of the average of what currency will cost
when they have to buy it, to say nothing of all the attendant trouble
and extra expense of sorting, selecting, and shipping commercial
paper backward and forward across the country?
Now, let us calculate what this commercial zone would have to do
to maintain $100,000,000 of currency, for which you would have to
discount commercial paper. In the outset it would take $100,000,000
of commercial paper to get the currency out.
Senator N elson. H ow do you make out those figures?
Mr. F owler. That is taken from this bill. I am assuming you
have to provide a currency under this bill instead of a pure credit
currency. I have formed a zone simply by extending the process of
the clearing house to all the banks naturally tributary to Chicago.
Senator N elson. Y ou are applying this bill to that zone?
Mr. F owler. Yes; and telling you what it will cost to do it.
Senator N elson. Making Chicago the regional bank?
Mr. F owler. I hope it never will be.
Senator N elson. Well, go on.
Mr. F owler. It is the center of a commercial zone; that is, it is a
natural center to which credit flows.
A prominent banker stated to me that if the time limit for the
paper to run was made 60 days, the average life of the paper sold
would not exceed 30 days. It is evident, therefore, that to maintain
$100,000,000 of currency throughout the year you would have to re
discount $100,000,000 of commercial paper every 30 days, or $1,200,000.000 every year. Now, remember your total deposits for your
entire commercial zone are only $750,000,000. Will it pay? W ill
you get as useful a currency as you could get without discounting a
single dollar’s worth of paper? W ill it be as well adapted to your
needs? W ill it be as good in any one way?
I assert that the plan now being considered will not produce a
currency at all adapted to the needs of this country; that it will not
be immediately responsible to the requirements of trade everywhere
and all the time, as a bank credit currency is; that it will not respond
immediately and directly to the demands of current transactions; that
it will be not only five times as expensive, but when once out there
will be no natural impulse to send it home, as in the case of a bank
credit currency. Twenty thousand State banks and trust companies
will hold it as reserve, and just to that extent drive gold out of the
banks and out of the country, leaving us ultimately upon the quick
sand of a mad inflation.
In 10 years we should have, under proper financial and banking
arrangements, at least $3,000,000,000 of gold in the United States,
possibly as much as $3,500,000,000, but if under the spur of party
pride, party ambition, and under the power of the party lash, Con
gress should pass this measure, we will in the same period have some
where in the neighborhood of $1,500,000,000 of gold; possibly consid
erably less. Add to this situation the astounding proposal of con
fusing the price of commercial credit with the price of gold, two
absolutely different factors, and you have started upon a gallop for
BANKING AND CURRENCY.
1877
commercial bedlam and financial ruin. There can be no question
whatever about the appalling disaster that awaits us, for just as soon
as the slightest apprehension arises about the stability of the situation
in this country, which is sure to follow very soon, the true balance of
trade against us every year, now variously estimated from $400,000,000
to $600,000,000, due to foreign freights paid, interest on American
securities held abroad, cash spent by Americans in foreign countries,
and money sent out of the country by nonresidents, will materialize;
possibly almost in a night, for panics, like wars, are born of an inci
dent.
The causes that may influence the movement of gold to or from us
may be summed up as follows: First, the balance of trade; second,
the state of foreign exchange throughout the world; third, the state
o f our currency— that is, the use of substitutes for real reserves, such
as United States notes, silver, and bank notes, in place o f gold. The
present plight of Germany is due to her use of bank notes as reserves.
It is a vivid illustration. History has furnished hundreds of illus
trations, but the most forcible in our recent history was the issue of
the United States notes in the sixties and the effect of the silver-pur
chase act of 1890. Gresham’s law, put into operation, will overcome
all opposing forces. So that to bring your own proposed measure
to trial the use of these notes would do just what I have said they
would do.
Senator H itchcock. The use of these notes would drive gold out
of the country?
Mr. F owler. Absolutely.
Senator H itchcock. Under the Gresham law?
Mr. F owler. Absolutely.
Senator H itchcock. That is a matter about which I have been
trying to inquire of witnesses.
Mr. F owler. Fourth, foreign financing. Fifth, political disturb
ances. Sixth, the state of the money market in foreign financial
centers.
Seventh, demands for capital in periods of speculative
development in foreign countries. Eighth, changes in our tariff
laws.
It is easy to imagine how complicated and powerful these forces
might become and how essential it is that we should be ready to
combat them when the tide turns against us. We must be in a
position to buy and sell gold bullion, and to buy and sell domestic
and foreign exchange, and to loan a large sum of money, gold
I mean, quickly through a board of control to stop a panic in some
financial center, and last and above all we must hold the chief key
to the situation. That key lies mainly in the power to fix ani
enforce a price for the use of gold in what is popularly called a
discount rate for gold and make it universal throughout the United
States.
Now, gentlemen, if Gresham’s law is in operation, driving the gold
out of the country, fixing the bank rate will not bring gold into the
country. That is happening right now in Germany, and the great
German banks, in the last two or three years, as some bankers here
must know, I presume— at least the New York bankers do— that the
German banks with a capital of $500,000,000 have borrowed money
in this country at as high as from 15 to 20 per cent.
1878
BANKING AND CURRENCY.
I w ant to em phasize this econom ic truth— that w h en ever G resham ’s
law is in operation and the suspicion o f the w hole w orld is turned to
a financial cen ter you can not bring gold back by raising a rate upon it.
Senator H itchcock. I want to ask you to restate what your criti
cism was of the German system now. What does it consist of ?
Mr. F owt . I will come to something a little later on that I
ler
think will explain that.
Senator H itchcock. Y ou did state that it is-----Mr. F owler (interposing). I think I will cover what you want
in what I am going to say hereafter.
The bidding and stru ggle f o r gold now goin g on demand that we
have a single central g old reserv e , en tirely disassociated fro m our
currency system , in ord er that w e m ay deal ivith the price o f gold
precisely as E n glan d does as distinguished fro m the conglom erate
situation at B erlin , w here th ey regard it n ex t to a crim e to take gold.
Germany, owing to this fundamental error in her financial system,
has been the peril of all Europe for the last 10 or 15 years and has
been gradually but certainly moving toward a cataclysm of gigantic
proportions.
Senator H itchcock. What does that fundamental error consist of?
Mr. F owler. The confusion of commercial credit and gold; that
is, of a currency system with a gold reserve.
Senator R e e d . Mr. Fowler, 1 hope it wdll not interrupt you if I
stop to ask you if it is not a fact that in the last 20 years Germany
has advanced more rapidly in population, in wealth, in industrial
activity, in exportation, and in all that makes a nation strong than
any other nation in Europe ?
Mr. F owler. She has done that, notwithstanding her banking sys
tem, precisely as the United States have outstripped her in those same
things notwithstanding our banking system.
Senator R eed. But the fact remains that under this bad banking
system she has made those advances.
Mr. F owler. She is temporarily bridging her difficulty by draining
the gold from every nook and corner o f the Empire— from every bank,,
from every store till, and from every pocket—by exchanging bank
notes of small denomination for the gold wherever she can find it, only
to accentuate in the end the inherent weakness o f her situation.
Can we do no better than to follow in the footsteps o f the one
country that above all others is in constant trouble and a peril not
only to itself but to all the rest of the commercial world from per
fectly obvious reasons?
In my last speech in the House of Representatives, delivered March
29, 1910, I used this language with regard to the German banking
system:
Its gold reserve is of the halfway sort, and its bank-note issue is also of the
halfway sort. The result is that the financial and banking situation of Germany
must necessarily prove weak upon the first great test when the bank notes of
the Imperial Bank of Germany must be made a legal tender.
Indeed, upon the declaration of war by Germany or against Germany the
first step taken in a financial way would be for her to declare her bank notes
a legal tender. It is hardly problematical what would soon happen, with the
wide divergence between her gold fund and the amount of her note issue.
Imagine for a moment a central bank in the United States, like the Imperial
Bank of Germany, issuing all our bank-note currency and these notes going into
the reserves of our myriad of banks as the basis of loans which, under our
system, in turn become our deposits.
BANKING AND CURRENCY.
1879
The natural, first, and immediate effect would be an expansion of credit, an
inflation to just the extent to which the notes were used for reserves.
As soon as the situation became obviously dangerous a halt would be called
and a contraction in loans would follow. But a contraction of loans calls for
liquidation, and liquidation produces an exigent demand for currency. We
all learned that lesson only so short a time ago as 1907.
But in the very face of the increased demand for more currency the currency
would be contracting, because the loans would be reduced by calling in bank
notes which were being used for reserves; or, in other words, the loans called
would be paid in bank notes.
For every $100,000 of notes so called in the loans might be reduced to an
average of $500,000 and yet this very process of liquidation would be con
currently destroying the only instrument of credit that would adequately meet
the demand created by itself— the demand for cash. It would clearly lead to
self-destruction, to commercial suicide.
The best thought of England recognizes this subtle but obviously destructive
contradiction in the use of credit and therefore opposes the issue of credit notes
by the Bank of England.
Within 15 months from the time that I made this prediction, Ger
many did make her bank notes a legal tender, the occasion being a
possible war with France. I assert that the German financial situa
tion has been gradually but certainly getting more difficult and se
rious every year since.
On January 20, 1912, at the Republican Club, in New York, I used
this language:
During the 10 years from 1900 to 1910 the gold accumulated by Russia
amounted to upward of $200,000,000; that accumulated by France, upward of
$300,000,000; that accumulated by England, where nothing but gold is treated
as reserves, and where there was comparatively little growth in business,
$32,000,000. The United States accumulated $1,100,000,000 while Germany, with
all her development of trade during the last 10 years, accumulated only
$40,000,000, when all things considered it should have been 10 times as much, or
$400,000,000. If she had done this she would not have been compelled to send
her great financial institutions all over the globe in search of gold and would
not have been compelled to pay 15 per cent, and some 20 per cent, for it.
Gentlemen, within C days after these words were uttered this
O
conversation was reported to have taken place. The German Em
peror asked Ilerr Havenstein, the president of the Imperial Bank
of Germany, whether Germany was prepared, financially, to carry on
a war with a first-class power. Herr Havenstein said “ No.” To
this the German Emperor replied, “ I do not want that answer to that
question when I ask it again.” Herr Havenstein immediately called
the managers of the 30 great banks together and told them that they
must collect at least a 15 per cent reserve. To this they protested,
saying that it meant the accumulation of at least $250,000,000 in
gold; but Havenstein persisted and insisted upon his demand. Now,
gentlemen, if you add the $10,000,000 they had accumulated to what
Havenstein insisted they should accumulate, or $250,000,000, you have
nearly $300,000,000 as a minimum. It is altogether probable that
$400,000,000 was nearer what they should have accumulated.
So far as I know, his demand upon the banks has utterly failed.
The Imperial Bank resorted to the issuance of smaller notes in order
to gather in gold from throughout Germany.
Gentlemen, I assert that unless Germany changes her financial sys
tem fundamentally there can be but one ending. She is now travel
ing over identically the same road economically, though under far
more favorable circumstances, that England traveled before the
passage of the English bank act in 1844, and history is only repeating
1880
BANKING AND CURRENCY.
itself again in Germany. Are we now so totally ignorant of the
fundamental principles of banking economies and all history as to
fall a ready and easy victim to this certain and fatal folly?
Senator H itchcock. Before you pass on to that, I still have not
got it straight in my mind the particular defect you desire to criti
cize in the German banking law. As I understand it, the Reichsbank
in Germany can issue notes to the extent of three times its gold re
serve. Is that right?
Mr. F owler. Yes, sir; that is correct.
Senator H itchcock. D o you think that is not a sound basis?
Mr. F owler. T h ey should n ot issue any notes at all , because those
notes in turn are p u t in to the reserves o f the banks , and then instead o f
having a reserve o f 100 p er cent th ey have a reserve o f on ly 33 per
cen t , and to the e x ten t that ev ery one o f those notes is used in any
bank it drives out ju st that m uch gold.
Senator H itchcock. Were not those made available for the re
serves of the other banks and made legal tender also for the purpose
of driving that gold out and into the Reichsbank?
Mr. F owler. N o ; I do not think so.
Senator H itchcock. We were told here by a witness that one of the
reasons why the notes of the Reichsbank were made legal tender and
good for the reserves of other banks was for the purpose of allowing
the Reichsbank to get rid of the notes, and that the effect had been to
increase the reserve in the Reichsbank.
Mr. F owler. That was the reason for the notes in 1873.
Senator H itchcock. They were not legal tender.
Mr. F ow'ler. But that does' not make any difference. All the
banks were looking to the Reichsbank for protection.
Senator H itchcock. They made them legal tender within three
or four years.
Mr. F owler. At the time of the trouble with France.
Senator R eed. What do you say they ought to do with the German
system to make it safe?
Mr. F owler. I think they have got to divorce their note-issuing
function from their central reserve.
Senator R eed. O f course, that is a general statement and might
mean many things. Concretely, what should they do?
Mr. F owler. When you ask me to revise their whole banking
system, that is a big question.
Senator R eed. But what would you suggest, fundamentally?
Mr. F owler. That is fundamental; that is absolutely concrete and
iundamental, that they should not confuse the issuance of their cur
rency with their gold reserve.
Senator R eed. D o you mean, then, that the gold reserve should be
a thing entirely independent-----Mr. F owt
ler (interposing). Just as it is in London.
Senator R eed. And the currency not redeemable in gold ?
Mr. F owler. I would make every dollar of currency redeemable
in gold but issued by the individual banks.
Senator H itchcock. Y ou just said a little while ago you thought
the national banks of the United States ought to be permitted to
issue their present national-bank notes without any bond security.
Mr. F owler. Yes.
BANKING AND CURRENCY.
1881
Senator H itchcock. But you would require them to keep a reserve
against those notes equal to the reserve they were to keep against
deposits?
Mr. F owler. That is correct.
Senator H itchcock. That is exactly what they are doing in Ger
many.
Mr. F owler. N o ; they are keeping—the banks of Germany are
holding their notes as a reserve, and in the United States our banks
are issuing notes; it is just the reverse.
Senator H itchcock. It is true that the 30 big banks do not issue
notes, except one or two, but the Reichsbank, when it does issue notes,
is in exactly the same position as the national banks in this country.
It issues the notes and keeps a gold reserve to the same extent that
it keeps a gold reserve against deposits. Is not the Reichsbank in
Germany doing just what you propose to have the national banks
in this country do?
Mr. F owler. N o. I would have a single central independent gold
reserve in the United States, which would amount to somewhere
between $1,200,000,000 and $1,500,000,000.
Senator H itchcock. Where would you have that reserve ?
Mr. F owler. Here in Washington as far as the control goes, but
it would be distributed throughout the United States at each commer
cial zone center.
Senator H itchcock. Y ou are not talking about the national-bank
system ?
Mr. F owler. Oh, no.
Senator H itchcock. Y ou are talking about a bill now. I am
speaking about your statement that you believe that the nationalbank notes should be free from bond security, and that the national
banks should be permitted to issue $700,000,000 of national-bank
notes and keep a gold reserve against those notes in the same pro
portion that they keep a gold reserve against their deposits. Now,
the Bank of Germany is keeping a gold reserve against its notes
to the same extent that it keeps a gold reserve against its deposits.
Why do you not criticize that system over there ?
Mr. F owler. There is this difference, and I will explain it as I
go on. In this country I would have a central gold reserve handled
precisely as the Bank of England is handled, and I would adopt
the Canadian bank-note currency system, giving the privilege to all
the banks o f this country to issue their currency, which is nothing but
another form o f deposit. The point of difference is that these bank
notes issued by the Imperial Bank of Germany become the reserves
o f all the banks in Germany, and that is exactly what these notes
that you propose to issue here would become.
Senator H itchcock. Then your idea is that the notes of the Reichs
bank in Germany should not be used as reserves by the other banks ?
Mr. F owler. Certainly not.
Senator S hafroth . The gentleman who preceded you said that un
der the German policy of not having them legal tender the gold
standard had absolutely fallen down, and it was not until they were
made legal tender by the act of 1911 that German banks got in good
standing. That was the statement he made this morning.
Senator W eeks. H ow could you adopt the note-issuing methods of
Canada without adopting at the same time the branch-bank system ?
1882
BANKING AND CURRENCY.
Mr. F owler. The branch-bank system has nothing whatever to do
with the currency system.
Senator W eeks. But it has to do with redemption and distribution.
Mr. F owler. Nothing whatever. You can take a zone, like that
one of Chicago, and those notes would be handled precisely in that
zone as the bank notes are handled in Canada and precisely as checks
and drafts are handled. And to prove that I will recall the Suffolk
system, with 500 banks in New England, where there was not a
single branch bank, so far as I know’.
Senator W eeks. There was not a branch bank?
Mr. F owler. No ; but you had a complete currency system, with
daily redemption in coin at Boston.
Senator W eeks. But the territory covered by New England is com
paratively limited. It is a question of territory and distribution and
frequent points of redemption that have to be taken into consider
ation.
Mr. F owler. That is true, but the six New England States with
their 65,000 square miles without any railroads, telegraph lines, or
telephones was as difficult to cover as half the United States would
be to-day with our present facilities. Again, 65,000 Square miles is
one-fiftieth of our total area, and therefore if we had, say, 40 com
mercial zones our daily redemption of notes and checks would be
almost instantaneous, both checks and notes going to redemption
daily, as every bank in the United States would be within 12 hours
of some commercial center. Neither a check nor a bank-credit
note would live longer than its actual usefulness in the channels
o f trade would require.
Senator W eeks. And I think there ought to be about 400. But I
did not mean to disturb you.
Senator N elson . But would you not have the banks provide the
gold-redemption fund if they are granted? You would not throw
that burden onto the Government?
Mr. F owler. Oh, no. Now, I will go on and finish, if you will
allow me.
Recalling 1907, in our present apprehension we are apparently
ready to adopt almost any nostrum that is brought forward, because
we seem ready to believe that any plan that may be adopted can not
bring greater evils than those from which the country is now suffer
ing. Our present troubles, great as they are, are nothing to be com
pared with what they would be if the proposed measure should be
passed. To-day the remedies are compartively simple and can be
easily applied. Pass the proposed bill and the difficulties will be
multiplied a hundredfold.
Certainly it must have been the result of appalling fright, pro
found ignorance, or amazing, yes, astounding cupidity, that led a
number of bankers who had gone to Washington to get a slice of
that $50,000,000 recently distributed to say that if Congress would
reduce the reserve from 25 to 20 per cent in the reserve cities and
from 15 to 12 per cent for the country bank they would not fight the
pending bill, not waiving, however, their objection to its political
control. How strange, how appalling, this act of approval was.
Gentlemen, the greatest danger to American banking to-day is that
our average reserves, which are only 11 per cent, are all too low now.
BANKING AND CURRENCY.
1883
Again, if you include the savings-bank accounts they are reduced to
a reserve of only 7 per cent.
Our average reserve for the whole country under no circumstances
should fall below 20 per cent, but our credit facilities should have
much greater play and ampler freedom. This, however, should not
be done by capitalizing our bank capital, already burdened with all
the insurance it should carry, and creating holding companies, the
chief curse of our time, especially in the banking business, under
the authority o f the National Government itself.
The Bank of England is not a dumping ground for the commercial
credit centering in London, although it is always in close touch
with it.
I want to call your attention to what Mr. Warburgh said right on
that point. Mr. Warburgh said:
The business normally done by central banks must be only a fraction of the
aggregate discounting done by the general banks, banking firms, corporations,
large and small, and in particular by foreign banks and governments.
It is doubtful if one-tenth of 1 per cent of the commercial credit
sold in London goes to the Bank of England. This discount business
is carried on by the great discount houses of London, whose special
work it is to carry on this particular kind of business. As soon as
acceptances become a part of our banking life there will spring up
here as they have in London, in various sections of this country, simi
lar institutions, with their own independent capital, carrying on iden
tically the same business now being conducted bv the great discount
houses of London. But acceptances in this country can only become
a feature of our banking business upon the condition that reserve
be carried against them precisely as reserves are now carried against
deposits or note issues, if we adopt the Canadian system of note issue.
We must always keep in mind that we have our own peculiar prob
lems to solve, and one of them is the fact that we have to-day here in
the United States between 25,000 and 30,000 individual independent
banks, whose action must necessarily be circumscribed by reserve limi
tations if they are to write acceptances.
Senator H itchcock . D o I understand you to say that if banks are
allowed to give acceptances they must maintain reserves against the
acceptances ?
Mr. F owler . Every one of them. It is a liability of the bank
just as much as your note issues and deposits.
Senator H itchcock . It is a contingent liability?
Mr. F owler . O f course.
Senator N elson . On an accepted bill of exchange the party pri
marily liable is the acceptor. Until the drawee accepts the draft,
he is not liable, but the moment he accepts it he is to be primarily
liable. On a foreign bill of exchange the drawer of the bill is not
liable until the bill has been protested and he has been notified.
That does not apply to inland bills of exchange.
Senator H itchcock . Y ou think the gold reserve against acceptances
should be of the same per cent as the gold reserve against deposits?
Mr. F owler . Absolutely.
Senator H itchcock . D o you understand that the Federal reserve
notes provided for in this bill are acceptable as reserves for national
banks ?
1884
BANKING AND CURRENCY.
Mr. F owler. The bill does not provide they shall be, but there
are 17,000 or 18,000 banks outside of the national system that will
take them.
Senator H itchcock. D o you think they should be accepted as
reserves for national banks?
Mr. F owler. N o ; under no circumstances.
Senator H itchock . Have you read the bill in that particular, to
ascertain whether it does authorize that or not?
Mr. F owler. I read it one time when it said they should not be for
the national banks. I do not know whether this particular bill has
it or not.
Senator S hafroth . I do not think the act as it passed the House
contains any such provision.
Senator H itchcock. It has been the general impression, but I
am not able to find it in the bill. The general impression is that
just as the notes of the Reichsbank of Germany are acceptable for
reserves by other banks, so the notes of this bank are to be made
acceptable.
Mr. F owler. Yes.
Senator N elson. Unless by implication, it is not directly provided
for in the bill.
Senator S hafroth . One of the very reasons why they urged the
notes should be made legal tender was so they could be made re
serves. But I am pretty confident it is not provided for in the
bill.
Senator P omerene. The statement was made that there should be
reserves carried against those acceptances. What amount would you
sav should be carried as reserves?
Mr. F owler. The same as against deposits and note issues. Your
bill provides that acceptances may be half of the capital, and there
it stops. But w
rhat possible use would that be to a bank down in
the cotton-growing district. A bank with a capital of $100,000 could
accept only $50,000. Can you give me any good reason why it should
not accept for $100,000 if it carried the same reserve against that
liability that it carried against its other liabilities?
The amount of acceptances should bear no particular relation to
the amount of capital as a limitation. That is absurd.
Again has it occurred to you that if you did not sacrifice all your
liquid paper in a perfectly useless, senseless, and most expensive
way as proposed by the administration bill, and had a system of true
bank credit currency by which every bank was supplying its cus
tomers, immediately and directly, currency as a part of their daily
transactions, just as you give them a check book to use immediately
and directly as transactions arise, you would have no trouble what
ever. even under present conditions, in supplying all the credit facili
ties for rediscounting that the commerce of the country now demands?
Mark this: On June 14, 1912— and by the wav, I would like to
remark here that this country has gone mad on some plan for dis
counting, as these facts prove—on June 14, 1912, the total amount
o f paper discounted or money borrowed by all of our 25,195 banks
was less than $150,000,000. or less than three-fifths of 1 per cent of
the total assets of the banks, which exceeded $25,000,000,000. and
that on September 4, 1912, the total amounts discounted or bor
BANKING AND CURRENCY.
1885
rowed for crop-moving purposes amounted to only $200,000,000, or
only four-fifths of 1 per cent of the total assets.
Now, gentlemen, answer me this question. I f your reserve city
banks had not been asked by the country banks to ship them.cur
rency at all, simply because the country banks could create their own
currency by converting their deposits subject to check into bank notes
without increasing their reserves one single cent and without increas
ing their liabilities one single cent, what part of the $200,000,000
borrowed last year do you think would have had to be borrowed?
All they w
rould have had to do w to have converted a bank-book
^as
credit subject to check into bank-note credit and so supplied the
people locally with their currency, just as Canada does.
Senator H itchcock. Mr. Fowler, while it would do very well in
times of peace, do you think on occasions of panic, when the de
positors are demanding their money, that they will be satisfied to
take the note of the bank any more than they would be satisfied to
keep a deposit with the bank?
Mr. F owler. I f you had what I propose, a central gold reserve
of $1,250,000,000 or $1,500,000,000, they would never think anything
about it at all.
Senator N e l s o n . Your theory is this, Mr. Fowler, as I understand
y ou : I f I go and give a bank a deposit of $10,000, and I say to the
bank, “ Give me credit on your books for $5,000 and give me $5,000
in your bills,” I need that much?
Mr. F owler. That is right.
Senator N elson. Y ou put the two on exactly the same foundation?
Mr. F owler. Absolutely identical.
Senator N elson. O f course, I either deposit my money or give my
note to the bank—my commercial paper.
Mr. F owler. Anything that entitles you to credit.
Senator N elson. And you have that there for my actual deposit
of money, or you have my note, and you shift the credit on the books
o f the bank, and I can check against the other half or carry it away
in bills in my pocket.
Mr. F owler. Absolutely. That is a perfect illustration. Now, let
me answer Senator Hitchcock by an illustration. Canada has this
exact system. Whenever a bank fails in Canada everybody hunts
after these notes, because they draw G per cent interest, and they know
that inasmuch as they are a first lien upon the assets and that they
are insured by a 5 per cent fund they are the best thing they can get
in Canada for an investment.
Senator N elson. The notes of the failed bank?
Mr. F owler. The notes of the failed bank. They are sought after
and held.
Senator H itchcock. Then it is the insurance of the reserve fund
in the hands of the Government you depend upon to give assurance
to the people?
Mr. F owler. Together with the fact that they are a first lien
upon all the assets.
Senator R e e d . H ow is that insurance fund created in Canada ?
Mr. F owler. By the banks putting up 5 per cent of the notes
they have outstanding.
1886
BANKING AND CURRENCY.
Senator R eed. That stands as a guaranty forever for the bank
notes ?
Mr. F owler. Yes.
Senator N elson. My impression, Mr. Fowler, was—I may be right
or wrong—that 5 per cent was not pooled, the funds which the banks
put in.
Mr. F owler. They are pooled for the purpose of redemption. But
the notes, being a first lien, o f course, they are paid at once out of
the bank’s assets.
Senator B ristow. N ow , Mr. Fowler, to get back to this illustration
Senator Nelson suggested to you, the man that took away $5,000
worth o f notes and deposited $10,000, or borrowed $10,000 on his
note. Ordinarily, under our system, the bank can give you credit for
$10,000, subject to check.
Mr. F owler. Yes.
Senator B ristow. He might take a credit of $5,000 and he might
take $5,000 in the notes of the bank with him, and he would use those
notes. Now, when and how would those notes be redeemed by this
bank?
Mr. F owler. O f course you would have an organization that would
provide for the redemption of these notes at every one of the natural
commercial centers and over the bank’s own counter, concurrently
with checks and drafts, just as they do in Canada.
Senator B ristow. They are just handled as checks?
Mr. F owler. Absolutely the same thing. They are just the same,
anyway, because a personal check is a check against a bank by an
individual, while the note is a check against the bank by the cashier
of the bank. It is the same thing. One is simply current and passes
around and the other passes by indorsement. That is the only
difference.
Senator N elson. One is redeemable in gold and the other not
absolutely.
Mr. F owler. Ultimately it is; both are redeemed by paying bal
ances.
Senator H itchcock. N ow , then, what restraint would there be on
the bank to prevent an inflation of credit ?
Mr. F owler. Ah, if he is a banker the inflation of credit never
comes in on what he pays out, but it comes in if he grants a loan—
if he says, “ I will grant you a loan ” he has created the credit, and
that is just as much an inflation— I won’t use “ inflation ”—that is
just as much an expansion of credit, if it is subject to check, as if he
put it all in notes, because it is nothing but a debt of the bank in
either case. It does not mean inflation or expansion to give notes
instead of the credit of the bank subject to check. He probably
knows if he makes a loan when he should not make it. It does not
make any difference what form it takes, a deposit or in notes.
Senator S itafroth. What check would you have on that?
Mr. F owler. Your intelligence; the banker’s intelligence.
Senator S hafrotii. Y ou are going to rely on nothing except that
if he makes the loan?
Mr. F owler. I f you make a loan when a man comes to you, and
you should not make it, you have made a mistake; it is wholly imma
terial whether you put it on the credit side and check against it or
BANKING AND CUBEENCY.
1887
whether you give notes. You have got to meet both in precisely the
same way.
Senator M cL ean . That same danger would be there in either case.
Mr. F owler. The same danger.
Senator B ristow. Just the same as if he gave it in credit.
Mr. F owler. Let me go back to that. I think it is well illustrated
here. A bank note is a check against the bank, drawn by the cashier,
and a check drawn by a man against his account is a check against the
bank just the same.
Senator S hafroth . There ought to be a gold reserve in back of
each?
Mr. F owler. Absolutely.
Senator S hafroth . A certain percentage o f each one.
Mr. F owler. Against the deposits and the notes?
Senator S hafroth . Yes.
Mr. F owler. Absolutely. They are the same thing.
Senator S hafroth . N ow , Mr. Fowler, you stated a little while
ago that there was about $20,000,000,000 of credits.
Mr. F owler. N o ; I didn’t—$20,000,000,000 assets besides the sav
ings accounts.
Senator S hafroth . Well, there is, is there not, about $20,000,000,000 of credits, all told?
Mr. F owler. I f you will excuse me, 1 respect you very much; but
do not interpolate that into this subject, and let me go along.
Pursuing this phase of the question a step further, I want to call
your attention to the statement of the national banks June 4, 1913—
the latest statement—which discloses the fact that New England
would contribute over $10,000,000 for the privilege of borrowing a
little over $4,000,000 from the proposed Federal reserve bank; that
the eastern group of States would contribute $34,000,000 to borrow
back $16,000,000; the middle group of States would contribute over
$28,000,000 to borrow less than $8,000,000.
Senator N elson. H ow do you limit the borrowing? By what rule?
Mr. F owler. I am discussing now-----Senator N elson. Oh, excuse me.
Mr. F owler. I am discussing now the proposition that if the banks
of this country could supply locally all the demands for currency it
would reduce the rediscount to a minimum, and I have cleared that
up, and now I am going to show how small the rediscount is in some
parts of the United States.
Pursuing this phase of the question a step further. I want to call
your attention to the statement of the national banks June 4, 1913—
the latest statement— which discloses the fact that New England
would contribute over $10,000,000 for the privilege of borrowing a
little over $4,000,000^----Senator H itchcock (interposing). You contribute $10,000,000 to
what?
Mr. F owler. T o this banking scheme you have.
Senator N elson. The bank reserve?
Mr. F owler. T o the Federal reserve bank, in putting up the cap
ital.
Senator H itchcock. But are you not overlooking the fact that at
present rediscount is more or less disreputable and the banks avoid it,
9328°— S. Doc. 232, 63-1— vol 2-----59
1888
BANKING AND CURRENCY.
whereas under the new system they are expected to resort to it more
freely because it will be made reputable?
Mr. F o w l e r . I think any student o f the period of 1907 will say that
we had expanded all that we ought to.
Senator H i t c h c o c k . I agree with you there.
Mr. F o w l e r . And I do not think w e ought to facilitate expansion
T
in this country beyond our present facilities, but give liquidity to our
assets without weakening our reserves.
Senator H i t c h c o c k . I say amen to that.
Mr. F owtl e r . Pursuing this phase of the question a step further, I
want to call your attention to the statement of the national banks
June 4, 1913, the latest statement, which discloses the fact that New
England would contribute over $10,000,000 for the privilege of bor
rowing a little over $4,000,000 from the proposed Federal reserve
bank; that the eastern group of States would contribute $34,000,000
to borrow back $16,000,000; the middle group of States wmuld con
tribute over $28,000,000 to borrow less than $8,000,000; the Pacific
States would contribute $8,750,000 to borrow less than $3,500,000;
the Western States would contribute $5,800,000 to borrow $2,300,000;
while the cotton-growing States would contribute about $13,000,000
to borrow $25,000,000, or a total of only $73,000,000. I f the State
banks had been included probably this amount would have been about
double, which would have brought it up to the figure of last year.
Gentlemen, what do you think would become of this $73,000,000 of
rediscounts or borrowed money if the banks of the country could have
created their own currency precisely as the banks are doing to-day in
Canada? Would it not practically disappear from the bank state
ment? Could you not easily manage the balance, if any?
The rediscount of the present banking system shown by this state
ment. gentlemen, which I presume is the last one, because given me
by Senator Nelson, shows rediscounts and borrowed money o f $108.000,000. I will print with my remarks a statement here showing
exactly what the different States would have to contribute for the
amount they are now borrowing, through rediscounts or otherwise.
(The statement referred to is as follows:)
[From The Financier, New York, N. Y., July 26, 1913.]
T a b le s h o w in g , b y S ta te s , m o n e y
th e w h o le
n u m ber o f
ba n ks,
borrow ed
th e
by
num ber o f
n a tio n a l b a n k s on
banks
b o r r o w in g
S e p t. 6,
in
ea ch
1 0 0 ),
S ta te,
a n d p e r c e n t a g e o f t h e s e ; 1 0 p e r c e n t o f t h e c a p i t a l s t o c k in e a c h S t a t e , a n d
t h e e x c e s s o r d e f i c i t o f t h i s 10 p e r c e n t o v e r t h e a m o u n t o f m o n e y b o r r o w e d .
|
000’ s a re o m itte d .|
B a n k s b o r r o w in g .
A m oun t
borrow ed .
N um ber
o f ban ks.
C a p ita l
stock .
E x cess of
c a p it a l
over
borrow
in g .
N u m ber.
P e r cen t.
25
6 .8 0
7 .0 0
9 .0 0
12.50
18.20
*1,217
2 ,502
356
56
1,648
*378
14,352
9 ,513
1 ,796
227
1,649
*378
13,135
7,011
1,440
17'
1
8 .0
5 ,779
27,915
22,136
E a s t e r n S ta te s :
P e n n s y lv a n ia ....................................................
T o t a l ..................................................................
, 12
367
640
135
24
88
1 ,206
12
3
16
101
1889
BANKING AND CURRENCY
T a b le sh o w in g , b y
S ta te s , m o n e y b o r r o w e d b y n a tio n a l b a n k s o n S e p t. 6, 1 9 0 J ,
e t c . — Continued.
B a n k s b<w r o w in g
A m oun t
borrow ed
N um ber
o f ban ks.
N um ber.
C a p ita l
stock .
E x c e s s o*'
c a p it a l
o v er bor
r o w in g .
P er cen t.
N e w E n g la n d S ta te s :
V e r m o n t ...............................................................
R h o d e I s la n d ....................................................
C o n n e c t i c u t ........................................................
N e w H a m p s h i r e ..............................................
M a in e .....................................................................
M a s s a c h u s e tts ...................................................
49
28
80
56
84
220
1
1
6
5
9
31
2 .0 0
3 .6 0
7 .5 0
9 .0 0
10.70
14.00
$20
35
490
48
255
1,622
$623
917
1,994
538
1,014
6 ,410
$603
882
1,504
490
759
4,788
53
1 0 .3
2 ,4 7 0
11,496
9 ,026
2
1
4
10
3
5 .1 0
6 .0 0
11.40
13.30
2 5 .0 0
5 0 .00
109
15
49
232
27
70
107
5
274
185
370
1,796
65
28
107
5
165
170
321
1,564
38
142
502
2 ,8 3 0
2 ,328
T o t a l ..................................................................
517
P a c ific S ta tes:
I d a h o .....................................................................
A l a s k a ...................................................................
O r e g o n ...................................................................
U t a h .......................................................................
W a s h i n g t o n ........................................................
C a lifo r n ia .............................................................
A r i z o n a .................................................................
N e v a d a .................................................................
23
1
39
15
35
75
12
2
T o t a l ..................................................................
202
21
1 0 .4
M id d le S ta te s:
I llin o is ...................................................................
I n d i a n a .................................................................
M ic h ig a n ..............................................................
W is c o n s i n ............................................................
M is s o u r i................................................................
O h i o .......................................................................
M in n e s o t a ............................................................
I o w a .......................................................................
324
175
88
114
93
334
215
269
7
4
6
8
8
29
57
81
2 .1 6
2 .2 9
6 .8 2
7 .0 0
8 .6 0
8 .6 8
26.51
30.11
171
55
77
111
278
1,003
700
1 ,414
4,881
1,858
1,273
1 ,350
2 ,3 5 2
5 ,237
1 ,769
1,705
4 ,710
1,803
1 ,196
1,239
2 ,074
4 ,234
1 ,069
291
T o t a l ..................................................................
1 ,6 1 2
200
12 .4 0
3 ,8 0 9
20,425
16,616
27
147
161
19
60
64
21
83
2
12
16
2
8
9
6
42
7 .4 0
8 .1 6
10.00
1 0 .5 2
13.33
1 4 .06
2 8 .6 0
5 0 .60
36
158
232
22
78
66
90
809
280
1,081
1,073
108
589
250
129
305
244
923
841
86
511
184
39
'5 0 4
582
97
1 6 .66
1,491
3 ,8 1 5
2 ,324
80
76
62
115
13
14
13
25
16.25
1 8 .42
21.0 0
2 1 .7 4
464
370
1,050
840
778
629
745
1 ,429
314
259
>305
589
333
65
1 9 .52
2 ,7 2 4
3,581
857
95
26
23
414
107
52
44
35
24
23
54
20
7
8
203
54
30
26
23
16
19
45
21.05
2 6 .92
3 4 .7 8
49.03
5 0 .4 6
5 7 .7 0
5 9 .0 0
6 5 .70
66.6 6
8 2 .60
83.33
235
134
221
7,2 5 6
940
2 ,0 0 0
1 ,0 3 4
1,793
1,3 3 4
2 ,2 2 4
3 ,1 4 6
362
255
238
3 ,0 9 0
468
555
370
430
282
293
595
127
121
17
'4 ,1 6 6
'4 7 2
1,445
' 664
'1 ,3 6 3
'i ; 0 5 2
1R 931
' 2 ; 551
897
451
5 0 .3 0
20,317
6 ,9 3 8
13,379
2
1
1
5 0 .0 0
253
53
10
'2 0 0
10
W e s t e r n S ta tes:
M o n t a n a .................................................
N e b r a s k a ..........................
K a n s a s ......................................
W y o m i n g .................................................
C o l o r a d o .....................
S o u t h D a k o t a ..............
N e w M e x i c o ...........
N o r t h D a k o t a ................
T o t a l ..........................
S o u t h e r n b o r d e r S ta te s:
V ir g in ia ........................................
W e s t V ir g in ia ................................
T e n n e s s e e ....................................
K e n t u c k y ...............................................
T o t a l ............................................................
C o t t o n -g r o w in g S ta tes:
O k la h o m a .............
F lo r id a ..........................................
A r k a n s a s .........................
T e x a s ..................
I n d ia n T e r r i t o r y ..............
A l a b a m a .........................
N o r t h C a ro lin a ____
L o u is i a n a ..............................
M is s is s ip p i.....................
S o u t h C a r o lin a .......................
G e o r g ia .........................................
T o t a l .................................
H a w a ii.............................
P o r t o R i c o .......................
» D eficit
1
1890
BANKING AND CUEEENCY,
Table shouting, by S ta tes, m on ey borrow ed by national banks on Sept. 6, 190b,
etc. — Continued.
S U M M A R Y O F U N IT E D
S T A T E S , J U N E 4, 1913.
N um ber
of ban k s.
P er cen t
of bor
r o w in g to
c a p it a l.
A m ount
bor
row ed .
10 p e r
cent of
c a p it a l
stock .
E x cess of
c a p it a l
over bor
r o w in g .
4
2,063
515
955
453
1,653
'5 0 0
1,3 3 0
$7,690
3,433
2,359
4^240
16,066
4 ,0 0 2
3 5 ,112
$61
28,242
8 ,7 5 0
5 ,797
10,168
3 3 ,9 3 8
5 ,860
12,875
$61
20,552
5 ,317
3 ,4 3 8
5 ,928
17,872
1,858
1 22,237
7,473
T o t a l ..........................................................................................
2 .7 0
3 .9 5
4 .0 0
4 .1 0
4 .7 0
6 .8 3
27.27
6 .9 0
72,902
105,691
3 2 ,789
A m ount
bor
row ed.
C a p it a l
sto ck .
E x cess o f
ca p ita l
over bor
r o w in g .
1 D e fi c it .
S U M M A R Y O F U N IT E D
S T A T E S S E P T . 6 , 1904.
B a n k s b o rro w in g .
N um ber
of ban ks.
N u m ber.
P er cen t.
1,6 1 2
'2 0 2
1,2 6 6
517
582
333
897
2
T o t a l ..................................................................
200
21
101
53
97
65
451
1
1 .3 7
1 .7 7
2 .0 0
2 .1 5
3 .9 0
7 .6 0
2 9 .2 8
4 7 .7 0
$3,809
'5 0 2
5 ,7 7 9
2 ,4 7 0
1,491
2,7 2 4
20j317
253
$20,425
2 ,8 3 0
27,915
11,496
3; 815
3,581
6 ,9 3 8
53
$16,616
2,3 2 8
22,136
9 ,0 2 6
2 ,324
'8 5 7
‘ 13,379
‘ 200
5,411
989
4 .8 5
3 7 ,345
77,053
3 9 ,708
1 D e fi c it .
SU M M ARY OF TH R E E
P E R IO D S C O M P A R E D .
N um ber
o f ban ks.
S e p t . 6 ,1 9 0 4 ........................................................................................
S e p t . 4 ,1 9 1 2 ........................................................................................
5 ,4 1 2
7 ,397
7,473
Per cen t
o f bor
r o w in g to
c a p it a l.
4 .8 5
7 .8 7
6 .9 0
A m ount
bor
row ed.
$37,345
82,360
72,902
10 p e r
cen t of
c a p it a l
stock .
$77,063
104,601
105,691
E x cess o f
c a p it a l
over bor
r o w in g .
$39 ,718
22,241
3 2 ,7 8 9
Mr. F owler. In this connection I want to call your attention to the
fact that in the fall of 1906, in anticipation o f the panic and for the
purpose of meeting the extraordinary demand for currency which I
knew would arise, I introduced a bill providing for $250,000,000 of
pure credit currency to be issued by the national banks. When I
pressed its importance upon the attention of Mr. Cannon, he replied,
“ Oh, hell, everything is all right out around Danville.” The panic
came, precisely as I had predicted, and the amount of credit currency
actually issued by clearing houses in the form of clearing-house cer
tificates and by banks in the form of cashiers' checks amounted, ac
cording to the report o f the Comptroller of the Currency, to $248,279,700, or within $1,720,300 o f the amount provided for in the bill I
had introduced. It must be apparent to all of you that if we had had
BANKING AND CURRENCY.
1891
a credit currency in 1907 we never would or could have had that
panic. Bank-book credits would have been converted into bank-note
credits instantaneously—indeed, automatically— and the demand for
cash would have been met as it arose at every bank counter in the
United States.
Senator H itchcock. Mr. Fowler, Senator Bristow has just called
my attention to the fact that in Canada, at the present time, under
this currency system of which you approve, there is considerable com
plaint because the borrowing class find difficulty in securing bank
currency when desired.
Mr. F owler. The note issue is limited to the amount of capital, and
the capital of the banks up there has remained comparatively sta
tionary, because banking is confined to 27 large banks with branches.
Others might be organized, but they can not start with less than
$500,000, which has proved a serious obstacle to others entering the
business.
Senator N elson. I think that is one reason, and I think there is
another reason. There has been an excessive boom and expansion in
that country, an unusual expansion, and I think the banks there are
hedging for the purpose of preventing undue inflation. I do not
think it is a lack of funds on the part of the banks, but they want to
curtail their loans, for they are afraid of undue inflation. They have
been having what I would call a state of boom there for two or three
years.
Mr. F owler. The average amount of bank notes in the hands of
the people in Canada is approximately $15 per capita, and the average
amount of currency in the hands of the people of the United States,
outside of their subsidiary coin and the $1 and $2 bills is about $15
per capita. I f it is proposed to furnish the American people $15 per
capita in the near future, or approximately $1,500,000,000, it is in
teresting to inquire how much commercial paper must be rediscounted
each year to keep it afloat.
Now, I want to call your attention to a comment made by Mr. Warburgh on this point, because I made this statement when this bill was
first introduced, and I now find myself supported by his conclusion.
Mr. Warburgh says in his article in the North American Review:
It follows that, in addition to their own capital and part of their deposits, the
Federal reserve banks would have permanently invested about $800,000,000 in
commercial paper, and to this we would then have to add the extraordinary and
seasonable demand for which $500,000,000 were estimated to be issued, a total of
about $1,300,000,000 to $1,500,000,000.
Senator H itchcock. That is the flexibility from seven or eight hun
dred million up to twice that amount.
Mr. F owler. I was reading it for the purpose of showing that Mr.
Warburgh agreed with me it would require a rediscounting of paper
that would produce currency of $1,500,000,000—the currency under
this bill.
Senator H itchcock. It would only produce currency to take the
place of the national bank currency.
Mr. F owler. Yes; it would only produce it to take the place of the
national bank currency, as this regional reserve system contemplates.
We have already discovered and observed that it would take
$1,200,000,000 to keep $100,000,000 alive. Therefore it will require
1892
BANKING AND CURRENCY.
a rediscount of 15 times $1,200,000,000, or $18,000,000,000 every year,
$1,500,000,000 every month, to supply us with the necessary amount
of currency, provided of course that the average life o f the paper
turned in is 30 days, which is just half that o f the maximum life of
the paper to be accepted, which is 60-day paper.
They have since increased this to 90 days I see.
Gentlemen, is this not a most appalling -figure? Is it not enough
to put any sane man upon inquiry and cause him to hesitate, compel
him to halt, before he commits this country to an impossible, as well
as a most useless and most wasteful task—even, if possible, especially
since Canada is furnishing her people with $15 per capita of the best
currency in the world without selling a single dollar's worth of com
mercial paperf As you will remember, we have already pointed out
that a bank-credit currency is a bank deposit, therefore let me ask you
what effect in your judgment it would have upon the rates of interest
to deposit $1,500p00fiOO with the banks of the United States instead
of tying up $1,500p00p00 of your best and most liquid assets, and
constantly keeping that amount rediscounted and tied up for the
purpose of supplying the country with an adequate amount of cur
rencyf Think this over and don't stop thinking it over until you
know.
What w want in principle—I may now answer some question that
re
has been asked about the system—what we want in principle and
practice is to combine the Bank of England, the most perfect type
of a single central gold reserve in the world, and illustrated by the
reserves that are now held by our clearing houses to the extent of
$200,000,000 and the Canadian bank-note system, which is a pure
bank-credit currency, and is, as I have already pointed out, of Ameri
can origin.
But, gentlemen, to do what I have here suggested will only be
the adoption and adaptation of the very things that we have already
had in our own experience, demonstrated to be sound in principle
and most efficient in practice.
As I have already pointed out, a bank-credit currency was proved
and tested in 12 different States before the war. A uniform national
currency was developed as a result of the war. The most highly
organized American dealing house is the natural development o f our
business necessities, and furnishes us with everything that is essential
to an American banking system.
These elements having been all systematized and brought together,
and all our clearing houses at the natural commercial centers having
been coordinated and unified into one system, we shall have the most
economical, the most efficient, the soundest, and the most powerful
banking system in the whole world and distinctly American from
beginning to end, as it will have been drawn entirely from American
experience, and yet would be founded upon the eternal principles of
banking economics and buttressed by American experience o f more
than a hundred years. It will give us a single central gold reserve of
$1 #50,000,000.
Senator H itchcock. H ow did you figure that gold reserve? How
do you get that amount?
Mr. F owler. I would have all of the banks o f the United States
furnish their pro rata share-----Senator N elson (interposing). Their quota?
BANKING AND CURRENCY.
1893
Mr. F owler. Their quota—every bank furnish its part* for the
pool, precisely as the banks in Chicago have put their money at the
clearing house, and as to-day the banks are now carrying $200,000,000
at their clearing houses.
Senator H itchcock. What per cent of their deposits would they
have to deposit thus?
Mr. F owler. Y ou mean the $1,250,000,000?
Senator H itchcock. Yes.
Mr. F owler. It would amount to about 7 per cent.
Senator H itchcock. The reserve amount deposited in gold at some
central point?
Mr. F owler. Together in one common pool.
Senator H itchcock. For the purpose of redeeming notes?
Mr. F owler. No.
Senator H itchcock. For what purpose?
Mr. F owler. For the purpose of standing as a monitor in the
United States over all the bank credits, to control the movement of
gold to and from the United States, and to supply gold to each
commercial center according to its needs for additional reserves.
Senator H itchcock. Suppose a bank failed to meet its notes, would
it be paid out o f that gold reserve?
Mr. F owler. Why the note, in the first place, if a bank failed,
would be paid out of the 5 per cent guarantee fund of $75,000,000,
and then the amount of the notes would be recouped back into the
fund out o f the first assets that the bank turned into cash, just as it
is in Canada.
Senator N elson. You would have that 5 per cent redemption fund
in gold ?
Mr. F owler. Yes, sir.
Senator N e l s o n . And you would have the reserve in gold?
Mr. F owler. Yes, sir.
Senator H itchcock. H ow would the depositors be paid if a bank
failed ?
M r. F owler . Just as they are now, out o f the assets.
Senator H itchcock. Then. I do not see what practical use there is
for the $1,250,000,000 if you do not pay bank notes with it and you do
not pay depositors with it.
Mr. F owler. I will tell you just what it would be used for. You
would have a board of directors (I won't go into the details), you
would have a board of directors sitting here in Washington. One
man came from New Orleans. Along in May or June they would sit
upon the question of how much gold it would take to help move the
cotton crop, and if he said $25,000,000 or $50,000,000, it would come
out of this $1,250,000,000 for proper commercial credits. Suppose
they wanted $50,000,000 or $75,000,000 for Kansas City; that center
would get its allowance.
Senator H itchcock. H ow would that be taken out of the fund and
sent to New Orleans or Kansas City?
Mr. F owler. Virtually it would be carried all the time at these
commercial centers throughout the United States as a part of this
fund, and to be used by them under instructions.
Senator R e e d . How would they get it out, wherever it was in?
What would they put up for it?
1894
BANKING AND CURRENCY.
Mr. F owler. Commercial paper of the proper kind.
Senator R eed. For the gold?
Mr. F owler. Yes; and then the gold would go into their reserves.
Senator R eed. O f course, the certificates would be just as sound as
gold.
Mr. F owler . O f course.
Senator H itchcock. Would the Government be in the banking
business under those circumstances?
Mr. F owler. Not to the extent of one single cent.
Senator H itchcock. These officials would be Government officials?
Mr. F owler. No ; not in the management of it, but in the control
of it.
Senator N elson. Where would you actually keep the gold? Here
in Washington in the Treasury?
Mr. F owler. Not in the Treasury, but at the center here in Wash
ington, theoretically— all here and under the control of the central
body here.
Senator N elson. Y ou would try to keep it here?
Mr. F owler . Yes.
Senator N elson. And you would make these bills payable here,
then, out of your reserves?
Mr. F owler. No, sir. They would be payable at the counter of
banks and at these commercial centers all over the United States.
Nothing would be paid out o f this fund here.
Senator N elson. And would be payable in gold?
Mr. F owler. Yes; and paid at each commercial center, in every
commercial zone, and at the banks over the counter.
Senator N elson. Then that commercial center or commercial zone
would have to have a supply of gold to meet it?
Mr. F owler. They would have to carry a gold reserve for all their
practical needs.
Senator S hafroth . In addition to the $1,250,000,000?
Mr. F owler . Yes.
Senator H itchcock. Mr. Fowler, what effect on prices would this
increase in the volume of the currency have?
Mr. F owler. Excuse me, will you-----Senator H itchcock. I would like to have your opinion on that.
Mr. F owler. You are going too far afield. That is a very abstract
question.
Senator H itchcock. Oh, no; it is not an abstract question.
Mr. F owler . Oh, yes. That is a great, long question. I do not
think the currency as a question has any effect on it at all as distin
guished from any other bank credit. I think prices increase from in
flation of credit and great demand for goods, and if that is one part
of it, of course that may affect prices; that depends, but is only inci
dental.
Senator H itchcock. Does the increase in the supply of gold affect
prices?
Mr. F owler. I do not think so, because of this fact, and I have
tried to follow it with some care: The amount of gold, in propor
tion to the bank credit, in 1890 was greater than it is to-day, and
the bank resources have increased very much faster than the amount
of gold in the world has increased, which shows that if the gold is
diminished by its use as reserve, it does not affect prices.
BANKING AND CURRENCY.
1895
Senator H itchcock. N ow . I want to ask you whether, if there
should be established in the Treasury of the United States a division
of currency and, say, 40 or 50 subtreasuries should be located
throughout the United States, it would, in your opinion, be prac
ticable for the United States to discount or make advances to national
banks to the extent of, say, 75 per cent of their capital stock?
Senator N elson. In paper currency?
Senator H itchcock. N o ; United States notes secured by 40 per
cent gold reserve.
Mr. F owler. I do not.
Senator H itchcock. Why not?
Mr. F owler. Well, I am coming to a discussion of some of those
things.
Senator H itchcock. W on’t you come to it right now? You have
postponed those things so much, and this is a question we have put
to all witnesses. The United States can easily establish such a fund
by selling bonds, and we know that a 40 per cent gold reserve is
adequate for the United States. We know from the testimony we
have had here that the banks of the country would only at certain
seasons of the year have to borrow for 60 or 90 days or 4 months
an amount of money just as now and rediscount their notes, and we
would like to know why it would not be possible for the Treasury
of the United States to supply that currency direct to the banks,
having the interest which they derived from the banks applied to
pay the interest upon the bonds outstanding which were sold to
produce the gold reserve.
Mr. F owler. In the first place the Government has no resources
whatever. It has only the power to tax the people.
Senator H itchcock. N o ; I am providing a gold reserve by selling
bonds, and I have provided in this hypothetical case that the banks
must pay the Government interest to pay interest on the bonds.
Mr. F owler. The trouble is that whenever the Government be
comes involved in business transactions or its credit is doubted, as it
became in 1894, because we were adding $50,000,000 of silver to the
load we were already carrying, the people who have Government-de
mand obligations begin to ask for their redemption. The Govern
ment having nothing to pay with, except its credit, begins to sell its
credit to procure the one thing, the only thing, that will satisfy its
creditors, and that is gold. Nor will this demand stop until the
people are satisfied that the Government can and will maintain its
honor. For this reason the Government credit should not become
involved, with all our bank liabilities now aggregating more than
$25,000,000,000. This has been demonstrated so often, and this experi
ence in this connection has been so bitter, that it is pitiful to have to
discuss it before such a body as this.
Senator H itchcock. N ow , a few moments ago you said the redis
counts by the banks in the United States amount to only about
$250,000,000.
Mr. F owler. What is that?
Senator H itchcock. Y ou said the rediscounts only amounted to
about $250,000,000?
Mr. F owler. Oh, yes.
Senator H itchcock. Assuming that that is-----Mr. F owler (interposing). About $200,000,000 at the maximum.
1896
BANKING AND CURRENCY.
Senator H itchcock. I am going to make it a little larger. Assum
ing that is correct, and that the banks called upon the Treasury for,
we will say, $300,000,000, that they might call upon the Treasury for.
You think it wrnuld strain the credit of the United States to procure
a 40 per cent gold reserve from $300,000,000?
Mr. F owler. What wrnuld you do with these notes you issue— are
they to go into the reserves of the banks ?
Senator H itchcock. That is a detail I have not come to consider.
I am asking you as to the proposition.
Mr. F owler. I want to ask you that question.
Senator H itchcock. I do not want to answer that question; you
do not need to cross a bridge you have not come to. Here is the
Government of the United States, whose Treasury Department is
nowT periodically examining all these national banks. Its inspectors
go into those banks two or three times a year. It practically testifies
to their solvency. They could, through the subtreasuries, make these
advances to the banks and have all the knowledge in each subtreasury that the bank inspectors obtain on their visits during a year.
Why could not the Treasury under those circumstances make those
advances to the banks, and direct the supply of currency directly to
the part of the country that needed it?
Mr. F owler. They can not have any such intimate knowledge of
the situation, the circumstances and conditions, and it would be a
poor way of handling the business.
Senator H itchcock. Y ou have said the aggregate amount wdiich
the banks require does not exceed $250,000,000 a year, and the testi
mony before this committee is that the maximum the banks require
is somewhere in the neighborhood of one-fifth of their capital stock.
Suppose we said that no bank could borrow of the United States an
amount greater than 75 per cent of its capital stock, and that the
United States should hold a first lien on its assets for the amount
borrowed, and it should pay a rate of interest that should be higher
for four months than for three months, and higher for two months
than for one month, in order to produce the payment of the loan;
why would that not result in supplying directly from the Treasury
the currency the banks needed when they needed it ?
Mr. F owler. The amount of currency is about $15 per capita.
Senator H itchcock. I am taking a case where we are not disturb
ing the present supply at all.
Mr. F owler. That is not the currency that these people wanted,
that $250,000,000, not necessarily.
Senator H itchcock. What is that ?
Mr. F owler. Nobody could tell just what it was that they wanted.
One man goes in and asks for a credit on the books; and another
man goes in and asks for credit on the books and New York exchange,
and another fellow wants the currency. It is a thing that is as deli
cate as every individual transaction.
Senator H itchcock. Can you not imagine a man going into a
bank, whether he asks for credit or for currency, being dissatisfied
with the credit, and wanting the currency? Would not the currency
perform every function of credit ?
Mr. F owler. N o ; it does not. because a man might want a deposit
in order to check against it. What is the use of starting out and
adding to the difficulties we already have? Instead of having, in
BANKING AND CURRENCY.
1897
my judgment, another dollar of the United States, I would pay otf
all we have, and put the United States Government in the same po
sition in the world as New York City is, as Chicago is, and as Illinois
is, so that in case of war we could sell its credit at the lowest rate
of interest, and not have its credit involved in the commerce of the
country.
Senator H itchcock. Your objection would not be that it would
not supply the needs of the banks, but that it might embarrass the
United States Government?
Mr. F oavler. Both. It could not supply the needs of the banks and
would embarrass the Government.
Senator H itchcock. I want to confine it to the needs of the banks.
Explain why a country bank would not be satisfied with being able
to get currency direct from the United States Government, just as
it now gets either a credit or currency from a central bank.
Mr. F owler. Y ou have 7,000 national banks, and you have 18,000
or 20,000 State banks and you have many, many thousand of de
positors, and these demands come up in a million forms. When you
are dealing with 7,000 banks you do not get anywhere. It is not
adapted to the needs of the commerce of the United States at all.
Senator H itchcock . The Treasury is already dealing with those
7,000 banks.
Mr. F owler. In what way?
Senator H itchcock. It is receiving their bonds, it has issued cur
rency to them, it sends an inspector to them at least twice a year, and
requires a report from them four times a year.
Senator S hafroth . And requires 5 per cent reserves.
Senator H itchcock. The Treasury has more dealings with them
than any other agency.
Mr. F owler. But those banks are only one-third of all your banks.
Senator H itchcock. I am talking about the national banks. Sup
pose we provided additional agencies for the national banks; if the
State banks found it advantageous to do so, they could nationalize.
Mr. F owler. I think it is an economic blunder. I think it is a
practical mistake.
Senator H itchcock. Would it not meet the needs of the banks?
Mr. F oavler. I do not think so.
Senator H itchcock. Will you explain to me why the banks—say at
Omaha, the tov7 I live in— would not be satisfied to secure that
n
currency from the subtreasury at Omaha when they found a need for
additional funds.
Mr. F owler. I suppose they Avould rather get it from the United
States than not have it at all.
Senator H itchcock. Why would they rather have it from New
York than from the United States?
Mr. F owler. I do not know that those particular banks would have
any particular choice. We are dealing with a very much greater
question than the matter of wdiether a bank likes it or not. It is not
a question of any importance to ask Avhether a bank Avould just as
leave get it from the United States as from New York.
Senator H itchcock . We are trying to satisfy the bank, so that
the bank may satisfy its customers. If you are unable to point out
wherein the bank Avould be dissatisfied, you must be able to point
out Avhy this method Avould not answer the demand.
1898
BANKING AND CURRENCY.
Mr. F owler. Not at all. There are a great many men who to-day
think that these notes ought to be made legal tender.
Senator H itchcock. I am asking you as a practical man, not only
as a statesman but as a banker, and you ought to be able to show if
there is a real objection, why this would not reach the needs of the
bank which needed rediscount at a certain season of the year.
Mr. F owler. I do not say that the bank, if it wanted to borrow
$10,000, would not have its needs met if it got $10,000 of notes. I
do not mean to say that in that particular case that bank would not
get what it needed.
Senator H itchcock. I f all the banks got what they needed, why
would not the problem of additional currency be solved ?
Mr. F owler. That brings up the whole question of putting the
Government into the banking business. That particular bank might
be satisfied, but it would not be supplied at the time and in the way,
in the definite way, it ought to be supplied.
Senator H itchcock. The subtreasury would be located right there
and they could be located as near the place as they were needed, and
that could be arranged as well as with any central organization.
W hy would it not be as definite?
Mr. F owler. I f you can locate it wherever it is necessary—which
you could not— so far as getting the money is concerned, you probably
could supply them, but back of all that is the great fundamental error
of the United States Government issuing a single note of any kind.
Senator H itchcock. Under this bill the United States Govern
ment is going to issue notes. I am thinking of a substitute for this
bill.
Mr. F owler. D o you assume that it is right because they are going
to do it?
Senator H itchcock. I assume it is decreed the Democratic Party
is against bank notes, and I expect the Democratic Party, being in
power, will provide for Treasury notes.
Mr. F owler. So much the worse for the Democratic Party.
Senator H itchcock . I am asking you why those United States
notes should not be issued from the "Treasury direct to the bank in
stead of being issued through an intermediary.
Mr. F owler. God forbid that I should attempt to analyze your
proposition.
Senator H itchcock. I do not want it to be designated as my
proposition. I am only suggesting it tentatively, to see what they
will do about it.
Mr. F owler . It will give ns a single central gold reserve of
$1 £50,000,000, not a central reserve o f chips and whetstones, a reserve
o f wind and water, not a reserve o f debts but o f gold, gold / say by
the control of which we can hold or bring to this country at will all
the gold we shall need through a price placed upon gold, not a price
upon commercial credit, which should always be adjusting itself to all
the ever-varying conditions of trade everywhere throughout the
United States as the true and natural check, balance, and regulator
of business. This would not mean a central bank but precisely the
same kind of a reserve for the whole United States that many o f our
clearing houses are now carrying with its use correspondingly broad
ened and enlarged to meet the needs of the times in the development
o f trade and commerce.
BANKING AND CURRENCY.
1899
Gentlemen, to me your duty is plain, because the one single essen
tial to such a sound public opinion as will justify wise and conclusive
action can only come after a campaign of education upon the pri
mary principles upon the very A B C’s of this great question. This
nation-wide education is not only essential to wise and conclusive
action, but is also essential to guarantee permanent conditions and
that degree of acquiescence which can come alone through a prepon
derating judgment of the people, and a tradition of sound learning
upon this question.
It is your duty to demand delay! delay! delay! It is your duty
to force discussion, discussion, discussion, until all these fatal fal
lacies are eliminated, because if this is not done now they will remain
to plague us at a most inconvenient time in the future.
Let us begin at the very bottom and press the discussion every
where.
The people must talk about this question until they know: What
money is. What true reserves are; what amount of reserve should
be held; how reserves should be held. What a true bank currency is ;
how it is created; what its functions are. What a bank is; what a
bank should do; what its functions are.
Now, I am going to come to a discussion of the bill. In connec
tion with that I have here a letter which illustrates, I think, the
attitude of any bank in the country corresponding to the bank from
which this letter comes. This letter was handed to me yesterday, and
I am going to read it, and then pass to some other points [reading]:
I don’t see how any banker with good sense could think the proposed currency
bill fine. I don’t know what it will do to you central bankers, but it will put
the country national bank out of business. Take us as an illustration, and we
are larger than a majority of the country national banks, with our $150,000
capital and $1,000,000 of deposits. To carry on our business we have to have in
our vaults about $75,000—at Jacksonville about $25,000 and $50,000 in Phila
delphia or New York. The regional bank will not enable us to cut down these
amounts one penny. We have to have about 20 per cent in cash and balances
in order to collect our out-of-town checks and be able to pay the checks on this
bank as presented and care for our customers.
In our territory we are the only national bank, and yet there are 21 State
banks, trust companies, and two savings banks. If the national bank act offers
so little now, what will it offer under the new law?
First. We will have to buy $30,000 (20 per cent of our $150,000 capital stock)
in regional bank stock limited to 5 per cent dividends. We can loan this money
here or almost anywhere in the South at 7 and 8 per cent. In loaning it locally
you know we can get good accounts by reason of the accommodations extended
customers.
Second. We will have to carry a deposit of $50,000 ( 5 per cent of our
$1,000,000 deposits) with this regional bank, and that without receiving any
interest for it. The central banks to-day pay 2 per cent, and most of the
southern centers pay 3 per cent.
Third. We can not reduce one penny the amount of cash balance we have to
carry at certain points to pay checks drawn on us and collect checks deposited
by our customers.
' In other words, this $SO O which we have to tie up in the regional bank is
.O O
really that much out of our capital stock. Instead of having $150,000 capital
we will only have $70,000.
As this $80,000 is worth 8 per cent to us. or $6,400, we will have to pass up
that amount if we stay in the national banking system.
Fourth. We are to remit for all clearing checks at par. This means another
loss of $0,000 to $7,000. It actually costs us—clerk hire, stationery, shipments
of currency, etc.—about $500. Then, instead of being out $6,400. we will be
out between $12,000 and $13,000. or 6 per cent, on our capital stock just to
be able to hang a sign out “ National ” bank.
1900
BANKING AND CURRENCY.
What is all of this for? Just to be able to borrow a little money. I have
been in banking 15 years and have always been able to borrow such money as
we needed from New York—good times and bad. In 1907. in the height of the
panic, we experienced no trouble borrowing $50,000 from the National City
Bank of New York, who charges us interest at the rate of 6 per cent per
annum.
Now, let us see about borrowing money from this regional bank. They will
take certain commercial paper and high-grade bonds, I believe. Let me tell
you something. The average country banks’ loans are to farmers and small
traders— perfectly good, but not of high ratings that would be required—the
country bank has little or none in commercial paper and the same of highgrade bonds, so what can they expect from the national bank?
Since we have been a national bank we have actually lost nearly $8,000 in
premiums on Government bonds purchased and deposited to secure circulation.
This is a lot of money for a country bank to lose and is three times the amount
of money we have lost since organization in 1902 in loans and investments.
Recently we were designated a regular depositary and allotted $10,000, but
the Secretary required $7,000 in bonds of Hawaii, the Philippines, and Porto
Rico, and Panamas, but we felt sure these bonds were selling on an artificial
market, much like Government twos; we declined to buy $7,000 of the bonds
named and thus secure the $10,000 deposits. We offered to deposit municipal
bonds that were acceptable to the postal savings trustees, but they would not
accept them. Evidently the Secretary of the Treasury’s idea was to stimulate
the market for a certain class of bonds, and that at the expense of the bonds.
We have written our Senators about the proposed currency measure. The
politicians know how to run the country, or think they do, and what bankers
say don’t go.
There is some consolation in the fact that our State legislature has just
adjourned and will not meet for 10 years—the hysteria of Bryan guaranty
of bank deposit has exploded—a State bank charter only costs $30, and if this
proposed currency measure goes through we will write out the “ First National
Bank ” and write “ The First State Bank ” and continue at the same old
stand. We will have lots of company in changing charter— no doubt of that in
my mind.
I wrote Uncle Tip to-day to point out to me some of the good features of the
proposed bank bill. If he will think it over he will be convinced that a
country bank can’t be run along safe lines and make a dividend for the stock
holders under the proposed currency measure. I do not know how the city
banks will fare; maybe they can figure out some way to run if they think the
measure too oppressive. I know how we can get out whole— by changing over
to the State bank system, which is as good, if not better, than the present
national banking system anyhow.
Senator S iiafroth. D o you not recognize in that that he puts ail
the objections and does not give a single benefit which may come
from going into the system? He says that in the first place 20 per
cent is required of him. That is not the fact. Ten per cent in cash
is all that is required. He figures on a 20 per cent basis, in the first
instance. You will find that is his criticism. Now, as to the reserves,
he figures that there shall be reserves to the extent of 20 per cent,
he counts that 20 per cent all the time, no matter whether this bill
goes into effect-----Mr. F owler (interposing). He says 5 per cent.
Senator S hafroth . Twenty per cent is what he says, I think.
Mr. F owler . He says 5 per cent of a million must be put up.
Senator S hafroth . That is, on the circulation?
Mr. F owler . That is of his deposits. He says he has a million of
deposits and says he will have to put up 5 per cent with the regional
reserve bank.
Senator S hafroth . He puts up more than that—yes; 5 per cent,
that is right. Five per cent is put up.
Mr. F owler . That is $50,000.
BANKING AND CURRENCY.
1901
Senator S hafroth . He has to keep in his vaults $60,000 in cash,
and he has got to put in other banks, he has got to put up 9 per cent,
and 9 per cent would be $90,000. That is what he puts up now.
There is an entirely different phase to it when we consider that. He
puts up now $140,000, whereas, under the other system, he gets
$30,000 less, because his reserves are reduced from 15 per cent to 12
per cent. I f this capital is worth 8 per cent, calculate his 8 per cent
on $30,000 and you will see he has a pretty big profit in that by going
into the scheme.
Mr. F owler . I simply put that letter in as an interesting document
and as stating the position of the country bank.
Now, I want to call your attention, if i may, to South Dakota, and
certain facts about South Dakota as illustrating the desirability for
all our country that lies in the agricultural regions having a creditcurrency system. The capital stock of the national banks of South
Dakota is $4,235,000. The surplus is $1,331,000, and the circulation
there is $3,300,000. I f you will take Boston as illustrating the differ
ence between the needs of currency in the country and in cities, you
will find that Boston has $28,000,000 of capital and $20,000,000 in
surplus, in round figures.
Senator P omerene . In the national banks?
Mr. F owler . In the national banks, making $48,000,000, with a
circulation o f only $10,000,000, or less than 25 per cent of capital
and surplus.
Senator N elson . South Dakota has a large circulation in propor
tion to capital?
Mr. F owler . Fifty per cent. The point I want to bring to your
attention is this, that if the banks of South Dakota had the right to
issue credit currency they would be all right to supply their people
with $4,000,000 of currency at a cost to the banks of South Dakota
of 15 per cent reserve. Four million dollars is the amount of their
capital. That would be just one-sixth of what it would cost the peo
ple of South Dakota to buy their currency at par and turn over com
mercial paper, provided they had any commercial paper at all, which
they have not
Now, in Boston or any other city their credit in the form of de
posits costs them the cost of reserves. Why should not all the agri
cultural regions of the United States get their currency just as
cheap as the centers get their credit, which is in the form of deposits ?
Now, I object to certain features in this proposed measure. I ob
ject to the Federal reserve board, which is created on page 17 of the
bill. I do not think the officers of this Government, the Secretary
of the Treasury, the Secretary of Agriculture, or the Comptroller
of the Currency should have anything to do with the management
of a banking system. In the first place, they are preoccupied with
their own business. I think that the Secretary of the Treasury and
the Comptroller of the Currency should be in close touch with any
central organization.
In the second place, I think that if you follow out this organization
you will find that it is practically under the control of the Secretary
of the Treasury. On page 18 you find these words:
The manager of the Federal reserve board, subject to the supervision of the
Secretary of the Treasury and Federal reserve board, shall be the active
executive officer of the Federal reserve board.
1902
BANKING AND CURRENCY.
Now, the Secretary of the Treasury is the servant of the President.
He is his official representative.
Now, again, on page 19, it says:
The Secretary of the Treasury shall be ex officio chairman of the Federal
reserve board.
And on page 20 it says:
The chief officer of which bureau shall be called the Comptroller of the Cur
rency and shall perform his duties under the general direction of the Secretary
of the Treasury, acting as the chairman of the Federal reserve board.
Now, the chairman of a Federal reserve bank board can be re
moved, and therefore practically the influence of the Secretary of the
Treasury runs through it all. He is the dominating force of the
whole situation. And that goes so far as to remove class B entirely.
When you get back to it, the Secretary of the Treasury is the man;
he is the single controlling force through it all. Everybody will
recall that when Mr. Chase was Secretary of the Treasury he was a
pretty live candidate for the Presidency, and he was gotten out of
that business by Uncle Abraham. I have known some Presidents,
and I have never known a President yet, and I never expect to know
one, who is not playing the game of politics from the time he is
inaugurated until the time he finds out he can not be renominated or
elected again. His secretaries are his executive officers, and therefore
he has his hand on his secretaries, and this Secretary is the dominat
ing character all through this organization.
Senator P omerexe . Some are candidates after they are out.
Senator N elson . Your opinion is that it is not limited to the pres
ent administration?
Mr. F owler . I apply it to all administrations which might come
into power. I do not want to limit it to this administration.
I am simply finding out how defective it is.
Senator N elson . It would apply to any administration.
Mr. F owler . T o any administration, because any President I have
ever known began to play the game as soon as he got his seat.
Senator N elson . I think you are right about that.
Mr. F owler . I have known every President to play the game, and
I have known two or three Secretaries of the Treasury who thought
they were going to be President.
On page 2 there is reference to 12 centers or regional reserve banks.
The organism of the human body is scarcely more complicated and
delicate than the organism o f the credit system of the United States,
and the credit system requires a single heart or center as much as the
human body requires a single heart. Any one may a.~k. “ Can we
not have more? ” Yes; we have had the Siamese twins as a human
monstrosity, and you can have a banking monstrosity with 12 heads
and 12 hearts if you like. Your trouble will begin with their origin.
On page 21 is the provision compelling them to rediscount. This
will only add to your trouble, certainly with a politically managed
institution as this would be. We have our East, we have our West,
we have our North, we have our South, we have our Wall Street,
and we have our prairies, and every one of them is clouded with sus
picions and suspicions and self-seeking.
BANKING AND CURRENCY.
1903
I have always been in favor of a central reserve o f gold; of gold,
I say— a single, central reserve of gold—so that this reserve of gold
could respond to the most sensitive requirements for reserves any
where and everywhere naturally and almost automatically. I am in
favor o f a governmentally controlled central gold reserve, a governmentally controlled banking system, but not a politically managed
one.
The Aldrich scheme was, in my judgment, structurally designed to
turn the control of all bank credit over to certain banking interests.
This scheme has gone to the other extreme and turned our bank man
agement over to politicians. We must avoid both of these deplorable
evils, and adopt the middle course of a governmentally controlled
banking system in order that the business of the country will not be
shaken to its center every time we have an election. It is bad enough
as it is; God help the country when your elections mean a different
policy in bank administration.
Senator P omerene . What change would you suggest in that re
spect ?
Mr. F owler . I can not attempt to suggest any changes to this
measure.
Senator P omerene . But you have just suggested that it should be
a governmentally controlled bank. Now, how would you make it a
governmentally controlled bank?
Mr. F owler . Y ou must excuse me— with all deference.
Senator P omerene . But this is very pertinent. You have hinted
at a course without suggesting what should be done.
Mr. F owler . Yes; but it requires a substitution, and not a sug
gestion in regard to this scheme at all.
Senator M cL e a n . Y ou have prepared several bills in times past?
Mr. F owler . I have one now. You will find it in that book.
Senator P omerene . D o you regard it as governmental control ?
Mr. F owler . Absolutely as governmental control.
Senator M cL e a n . The bill in your book comprises that feature?
Mr. F owler . Exactly.
Senator P omerene . I suggest you incorporate it in your remarks.
Senator B ristow . I think that would be a good plan.
Mr. F owler . I will if you wish.
Senator H itchcock . Y ou might send each member of the com
mittee a copy of your book.
Mr. F owler . I have sent them a good many circulars and I found
out they did not appreciate a good thing when they saw it. [Laugh
ter.]
Senator B ristow . Every statement you have sent me I have read.
On page 22 the board is given control of the notes, so as to super
vise and regulate the issue and retirement of Federal reserve notes
and to prescribe the form and tenor of such notes.
Senator H itchcock . W ill you put a copy of your bill in the
record ?
Mr. F owler . I f you desire.
Senator H itchcock . This is not a bill you have introduced, but one
you have prepared ?
Mr. F owler . Yes.
1904
BACKING AND CUERENCY.
Senator S hafro th . I s that bill you are going to put in the one
founded upon the Canadian system?
Mr. F owler . N o ; it is not. I do not found anything upon the Ca
nadian system. I only referred to one principle they have up there—
bank-credit currency.
How can this board form any opinion whatever what the needs of
currency are any more than they can form any opinion whatever
whether some man is entitled to a loan 100 miles from a railroad sta
tion?
I want to tell you a little story about the First National Bank of
Seattle during the panic. The gentleman who told me this story
had a deposit of $10,000 in the First National and he could not get
a dollar. “ Why,” he said, “ won’t you let me check? ” “ No,” they
said, “ You can not check against it. We can not pay you any
money.” “ Well,” he said, “ what am I going to do ? I have got to
go up in the country. I am a hay merchant here, and this is my hay
time. I do not see what I can d o ; I want currency to go up there and
buy the hay. These people do not know me, and I go around through
that country and ship down the stuff I want.”
Well, they could not supply him with notes, but they said they
would give him cashier’s checks, and he could go up there and pay
them out. “ Well,” he said, “ they would not take those.” You can
readily see that this fellow could not get his own $10,000, but if they
had given him credit notes he could have gone up there and met the
requirements of the situation.
Tell me howTthis board could meet the requirements of a fellow out
in Idaho somewdiere that wanted to go up in the country and buy hay
or eggs or anything else, when the occasions come up instantaneously
at the counter of 25,000 banks every hour o f every day in the year ?
Senator H itchcock . The bank could get it.
Mr. F owler . H ow could the bank get it? And if it did, it would
have to pay 100 cents on the dollar for it. The bank might try to
anticipate it but could not. He probably would say, “ Maybe you
w
rill have to wait until to-morrow or next week. We will have to
send down some paper, and vet I do not know whether they will take
it, and after we have sent it dowm it will cost us 100 cents on the
dollar, and you will possibly get it next week. It costs six times
as much as it would if we could give it to you over the counter by
converting your promissory note for 60 days into bank-credit cur
rency, which would be identically the same thing to us as giving you
a deposit to check against.”
Senator H itchcock . Why could not the bank pay out cash to this
man?
Mr. F owler . Suppose all the cash it has on hand is reserve money.
Senator H itchcock . The bank can always cut into its reserve to
pay a depositor.
Mr. F owler . I f it could pay out all-----Senator P omerene (interposing). Under this system would you
have the bank give the notes to this man?
Mr. F owler . Certainly.
Senator P omerene . I f it did not know anything about him?
Mr. F ow^ . Y ou do not think a bank would give money to a fel
ler
low they did not know anything about ? He is their customer.
BANKING AND CURRENCY.
1905
Senator P omerene. Most assuredly. But you were pointing out
the disadvantage of the proposed system as compared with the system
that you have in mind. In the particular named they would both
be met by the same difficulty.
Mr. F owler. Not at all. Suppose Senator Shafroth here were the
banker, and a man comes in and says: “ I want to borrow $10,000.”
For the purpose of eliminating the question o f credit, suppose he
gives him security.
Senator S hafroth . In the Seattle case you said that man had it on
deposit.
Mr. F owler. O f course; he had it tied up. I am bringing this case
home, Senator. The Senator would not lend him a dollar unless he
had standing at the bank.
Senator P omerene. I assume that is true in all these cases, and
therefore I can not see the difference in that respect.
Mr. F owler. I will try to point it out. Suppose he came in to the
Senator and said: “ I want to borrow $10,000; I am going out to buy
horses or chickens.” “ All right,” the Senator says, “ I will lend you
$10,000.” He puts it to his credit so he can check it out. The bor
rower comes back in the afternoon and says, “ I want all of it in
currency.” Suppose the bank is down to its reserve. They say, “ I
can not let you have the currency; you can check it out, but I can
not give it to you. I will have to send in $10,000 worth of paper
and sell it ”— and the paper is drawing 6 per cent—and the currency
is issued to him, if he bought it under this bill. But, on the other
hand, if he could do what they do in Canada, and what they were
doing all over the United States in many States before the war, he
would take his note for $10,000 and give him the bank’s notes for
$10,000 in the denominations he wanted.
Do you know they did that for 140 years in Scotland without hav
ing a single dollar on deposit, the banks simply trading their notes to
the people for their notes? They did not have such a thing as de
posits subject to check. Now is not the great difference obvious to
you ?
Senator S hafroth . Nor reserve, either?
Mr. F owler. Oh, o f course, the banks had to take care of their
banking just as they do now.
Now, let me 'point out the difference with still greater particularity.
When the hanker sold his paper to the Federal reserve hank, and ob
tained notes in exchange for it, he paid $10,000 for the notes he
bought, and the commercial paper he sold was prohahly earning him
6 per cent interest.
On the other hand, if he could issue his own notes and carry a re
serve of 15 per cent against them, the exact amount he is carrying
against deposits, the notes so issued would cost less than one-sixth
as much as in the former case because it would he only 6 per cent
upon $1,500, the amount of the reserve, or $90 per year as against
$600 in the former case, or 6 per cent on $10,000, the amount of notes
he purchased from the proposed Federal reserve hank with $10,000 of
commercial paper. Now, don't you see the differencef In the one
case the cost is $600; in the other the cost is only $90. or there is a
saving of $510 in favor of the credit-currency system, to say nothing
about all the trouble and expense of selecting and shipping paper
1906
BANKING AND CURRENCY.
backward and forward across the country, even if they bad com
mercial paper, which no country bank has.
Senator P omerene. Y ou are assuming, of course, that when the
bank issues those notes they have the proper amount of gold reserve
back of them ?
Mr. F owler. He would not issue the notes unless he had it. Now,
let us follow that right up. When he takes the man’s note and places
it to his credit he has got $1,500 reserve there or he would not let him
check against it. It would be contrary to law to let him do it, would
it not ?
Senator P omerene. Ordinarily.
Mr. F owler. N ow , if the bank has the reserve against the man’s
deposit of $10,000, then he has all that is necessary to get the $10,000
of currency. The bank did not change its reserve, as you know, so
it has not increased its debt 1 cent. It did not change the situation
to the extent of 1 cent in any respect. It simply changed the nature
of its debt from a check book that the depositor carries to notes in
the man’s pocket.
Senator N elson. Then the man comes into the bank and gives his
notes and gets in exchange the notes of the bank ?
Mr. F owler. Certainly.
Senator N elson. It is a swapping of notes?
Mr. F owler. Right, sir.
Senator N elson. And the man who gets the notes of the bank—
his guaranty is the reserve?
Mr. F owler. His guaranty is the reserve.
Senator N elson. And the general assets o f the bank ?
Mr. F owler. That is right; and the insurance fund.
Senator S hafroth . What reserve do you think there ought to be
kept in a case of that kind?
Mr. F owler. The same against your deposits as against your notes.
Senator S hafroth . Fifteen or twenty per cent?
Mr. F owler. Fifteen in the country.
Senator P omerene. T o what extent would you allow the bank to
issue those notes?
Mr. F owler. I would make a provision as a matter o f administra
tion that they could issue an amount equal to the capital and another
provision that they could issue another amount equal to that, with
permission.
Senator N elson. Would you allow them to issue the amount of
their capital and surplus?
Mr. F owler. I would not have the currency relate to the surplus
any more than I would have their deposits relate to their surplus,
because bank-credit notes, as we have already seen, are only another
form of deposits. There is no more need of limiting bank-credit
issues than of limiting deposits, because no bank is going to part
with its notes without taking something in return any more than it
is going to let some one check against it without having something
to protect it. Since the notes go into innocent hands, they should
be a first lien upon the assets and be further protected or guaranteed
by a 5 per cent insurance fund; but the people of our agricultural
States have as much right to a cheap or economical bank credit as
the people who live in our financial centers where bank credit in the
BANKING AND CURRENCY.
1907
form of deposits are used instead of bank notes. There are sec
tions in the United States where at certain times of the year banks
might want to have their note issues twice the amount of their capital,
while in New York they would not want more than 25 per cent of
their capital out in notes, simply because their customers did not
want notes. Cotton-picking time in Texas illustrates a condition
when a bank might want to convert its book credits into note credits.
There is no more danger in a bank having out $500,000 of notes
than there is in having out $500,000 of deposits; not a bit. It only
owes $500,000 in either case. Why, under the Suffolk system before
the war for 25 years the average note issue was $43,000,000 and the
average deposits only $31,000,000. Take the people of France to-day.
They do not use the deposit system at all in France. The Bank of
France issues over a billion and a quarter dollars in notes. It has
only $120,000,000 on deposit subject to check; but you cross over the
Channel and the Bank of England does not issue a single note except
in the form of a gold certificate.
Senator P omerene. Would you have the banks carry their entire
reserve in their vaults or have a reserve bank?
Mr. F owler. Precisely as they do it to-day except-----Senator P omerene (interposing). You would have reserve banks
and central reserve banks just as they have to-day?
Mr. F owler. I would let them carry on their business with their
correspondents just as they do now, and carry their reserves just as
they do now, and have a central reserve in the United States amount
ing to a billion and a quarter at least, and that amount always
increasing as the banking interests of the United States increase.
Senator N elson. The integrity of your whole plan rests upon the
care of the bank in extending credits?
Mr. F owler. All your banking to-day depends upon that.
Senator N elson. That is, the banker must discriminate whose notes
he takes?
Mr. F owler. Just as he does now.
Senator N elson. And if he is careless and takes more notes or
gives more credit than he ought to that will of itself break down
the system?
Mr. F owler. It would not break this system down any more than
it would break any system down.
Senator N elson, ft would break it to that extent?
Mr. F owler. It would break that bank but not the rest.
Senator N elson. But as long as the banks exercised discrimi
nation—
Mr. F owler (interposing). As well as they have exercised it for
the last 50 years------Senator N elson (interposing). As long as the banks exercised
discrimination in the notes they took the volume of notes would
follow the business wants of the country?
Mr. F owler. Absolutely; to a cent.
Senator P omerene. Would not the directors of the regional reserve
bank be a check upon the system which you have described here if it
were superimposed upon that?
Mr. F owler. Why, the regional reserve system is an utterly for
eign proposal, brought over from Germany and utterly out of har-
1908
BANKING AND CURKENCY.
mony with American conditions. I f you take the American clearing
houses at every zone center in the United States and coordinate
them by bringing their reserves together, you do not want any cen
tral bank; you simply want to fit the conditions that exist to-day.
You could do this and no bank in the United States would ever
know it was being done, and you would have a great central reserve of
a billion and a quarter, and it would simply be what you have
developed without any law whatever. The whole history of AngloSaxon civilization is nothing more than the enactment o f the habits
and practices of the Anglo-Saxon countries.
Senator S hafroth. H ow would you get that gold reserve of a
billion and a quarter?
Mr. F owler. By the contribution of all the banks in the United
States.
Senator S hafroth . Would you have the banks retain in their own
vaults gold to meet the demand also?
Mr. F owler. Yes; I would, as quickly as I could, pay off the United
States notes and get them out of the way. And I would pay those
off out of a tax on the notes the banks circulated.
Senator S hafroth . N ow , each bank would keep gold to redeem its
notes and also to pay checks.
Mr. F owler. Those things are never paid at their face; you pay
the balances on clearings.
Senator S hafroth . But you would not have any other money.
Mr. F owler. I would have what we have. I would not disturb
our present situation, but in the course of 15 years I would have paid
off the United States notes and have nothing but gold. And the
silver—all our silver to-day is nothing but pin money. We should
keep our silver certificates down to ones and twos and so distributed
that they could not in any way become a demand.
Senator S hafroth . At the end of the time, if bank credits keep on
the way they have gone— they are now over $20.000.000.000------Mr. F owler. Oh, no; there are less than $12,000,000,000 demand
deposits; that is, commercial deposits.
Senator S hafroth . Yes, sir; bank credits are over $20,000,000,000
at the present time. I f you take that and have a 15 per cent reserve,
that would take $3,000,000,000 right there, and if you were to wait
until the end of 15 years the chances are vou would require
$ 6 ,000,000,000.
Mr. F owler. I am not waiting at all. I would do this in a year.
Senator S hafroth . Then you would retire national-bank notes in
a year, too?
Mr. F owler. I would convert them into credit notes immediately.
/ would take this country precisely where it is to-day, and I would
let the State hanks that hive 7 per cent reserves increase their re
serves up to 17 per cent in this way. I would let them put out
$500P00f)00 of their notes in exchange for $500p00p00 of gold cer
tificates, which they could catch as they come in over the counter.
And what effect would that have on the hanking situation in this
country? It would increase your present hank liabilities about 2 per
cent and it would increase your reserves about 33 per cent. That is
pretty good banking, isn’t it? And that is all that they would have
to do to become a national bank. It would not cost them a cent,
BANKING AND CURRENCY.
1909
because they would be putting out their debt. And you would
increase the State banks’ reserves from 7 to 17 per cent, and you
would also increase the debts of the banks of the United States 2 per
cent, and you would increase the reserves of the banks of the United
States 33 per cent.
Senator H itchcock. The hour for adjournment has about arrived.
Mr. F owler. I have just about finished. I want to make a com
ment or two more.
Senator H itchcock. Y ou are leaving to-night, are you, Mr.
F owler ?
Mr. F owler. Yes. I want to call your attention, gentlemen, to the
fact that if you have the right kind of banking system there is abso
lutely no difference in the perfect adaptation of your note system to
the demands of trade and your deposit system. They work harmoni
ously and instantaneously. And the use of currency, as I remarked
some time ago, should be just as cheap as the use of bank credits in
the form of deposits and not as dear as gold. What earthly use,
gentlemen, is it to be walking around the streets with gold certifi
cates in your pocket? They would far better be in the banks as re
serves and the bank credit in your pockets. To have gold certificates
out in the corn fields and wheat fields and cotton fields is literally
and absolutely useless, because a bank credit could do the same work.
Any one of you might just as well take six automobiles to come down
here to your office in the morning as to do the current business of this
country with gold certificates instead of bank credit.
Senator H itchcock. Because bank credits are six times the amount ?
Mr. F owler. Because the gold costs six times as much.
Senator H itchcock . That is, on an equal amount of gold you could
have six times that amount of bank credit?
Senator S hafroth . Mr. Forgan said eight.
Mr. F owler. The fact is, the whole scheme of the note issue is based
upon a false theory, and that is that they are some kind of money,
which they are not. There is no money in the United States except
these four pieces o f gold money. All the rest of these things are
nothing but debts, because the gold is the only thing that is its own
redeemer.
Senator R eed. Would you have nothing but gold for reserves?
Mr. F owler. I should like to have; but you have to treat the situa
tion as it is until, by taxing the bank notes, you convert the United
States notes into gold certificates by putting gold in there until the
$340,000,000 is all covered.
Senator R eed. Ultimately your proposition is that we should have
nothing but gold or gold certificates in the banks?
Mr. F owler. Absolutely nothing but gold.
Senator H itchcock. Y ou have just said the notes provided for in
this bill are to be used as reserves.
Mr. F owler. In this bill here—the Federal reserve banks?
Senator H itchcock. Yes. I asked you, and you said they were to
be used.
Mr. F owler. It don’t say—it does not limit them, and I know the
State banks would use them, and therefore I treat them that way.
Senator H itchcock. When you made your statement just now—
that they were to be used by the national banks------
1910
BANKING AND CURRENCY.
Mr. F owler. I did not say “ national.” I said “ banks.”
Senator H itchcock. Y ou did not include national banks?
Mr. F owler. The bill does not say you shall not. I call your atten
tion to the fact that these obligations of the United States, from
Senator Owen’s point of view—I want to read to you (I do not know
whether you gentlemen have seen this or not) the following from
page 564 of the North American Review. Your chairman, Mr. Owen,
uses this language. This was very refreshing to me, because it
sounded a good deal like some ancient history I read a long time ago
when I began to study this question. His words are these— Senator,
I want you to hear this, because I think you have this fever a little
yourself.
Senator H itchcock. What is this?
Mr. F owler. This is Senator Owen’s article in the North American
Review. He uses this language:
It is my personal opinion that these notes should be legal-tender notes, in order
to give them the fullest possible credit to enable them to be used as reserves by
member banks, but not by the Federal reserve banks.
The notes of the Bank of England, of the Bank of France, and of the Bank of
Germany are legal-tender notes, although they are private institutions. It is of
more importance that the Federal reserve notes should be legal tender, for the
reason that they should serve every purpose of actual lawful money. It is ob
vious that such notes, being limited in volume to actual commercial needs and
issued against commercial bills based on actual commercial transactions and
having fixed limited maturity, there is no danger whatever of undue or unwise
expansion. They will automatically contract with the payment of such notes
on their maturity and immediately that the commercial exigency passes.
Now, do you know in 1717 when John Law made the proposal he
did, he had 33 per cent against those notes, and what he said sounded
amazingly like this?
Senator N elson. In gold?
Mr. F owler. In mixed coin, and it just lasted about a year. O f
course we have a little better control now than we had then, but
the result would be the same. The same thing happened in 186*2
when we first issued the Government notes. We were trying to make
something out of nothing, and the demand was then to make them
legal tender, and of course they made them legal tender. Now, here
is the chairman of this committee advocating that they should be now
legal tender, and the result of that would be an apprehension all over
the world with regard to the financial situation of the United States.
Senator S hafroth . Does it not do it as to the greenbacks they have
now?
Mr. F owler. It did in 1890 until we pretty near went over the dam.
Senator S hafroth. N o ; it was caused by a deficit in the Treasury.
That was what caused that great uproar.
Mr. F owler. What did you have in 1863 when you made the green
backs legal tender?
Senator S hafroth . The fact we were in war.
Mr. F owler. Well, gentlemen, I am for a banking system that will
not break down when there happens to be a deficit in the Treasury.
I am in favor of a banking system that will not break down in time
of war. Are we to have no more Treasury deficits? Are we to have
no more wars ? God be praised. The very day that we made the United
States notes legal tender these halls were ringing with the declara
tion that they would not depreciate if we only made them legal
BANKING AND CURRENCY.
1911
tender; the next day they were 97; the next year they were 35 cents
on the dollar.
Senator S hafro th . Those that were made full legal tender for the
payment o f import dues and interest on the public debt, the $60,000,000 never went to a discount, did they ?
Mr. F owler. I do not know.
Senator S hafro th . N o ; they never did.
Senator N elson. There was a small issue.
Senator S h afro th . Yes; $60,000,000, and they were payable on de
mand in gold.
Mr. F owler. Well, then, they were not legal tender fiat, and they
were afterwards paid, I think, by Chase.
Senator N elson. I remember this act. I was stationed up here by
the Relay House as a soldier, and it was my first pay day, and in that
first pay I got one of those $10 notes, and I sent it home.
Senator R eed. I was going to ask you, Senator, if you ever got any
r
more?
Senator N elson. Not of that kind. Afterwards I got this other
kind. But I do not like to hear you talk about those old greenbacks.
Mr. F owler. I know you do not, Senator.
Senator N elson. Those greenbacks were the means of carrying us
through the war.
Mr. F owler. I agree with you.
Senator N elson. And every soldier in the Army was a creditor of
the United States. We were not only willing to carry muskets, but
we were willing to loan credit to the United States to the extent of
taking those greenbacks, and we may get into another war wRere we
need it, and we want to get into a position where we will not have to
use them.
Senator W eeks. Would you not reserve the right in here to put
out Treasury notes, or greenbacks, or whatever you call them, in a
time of great emergency rather than in normal times?
Mr. F owler. I f you will permit me, I heard myself repeated here
in terms so much better than I ever wrote myself that I want to read
you right on that point what Paul Warburgh wrote in the North
American Review. I think I had reached the question of the sys
tem used in France by Napoleon, who was as great a financier as he
was a soldier. He expressed it so well here in his recent article.
He says:
History has shown that the Banque de France survived when the Govern
ment of France went to pieces. It remained unchanged whether France be
came an empire, commune, or republic. History has shown that by keeping
the central banks and the Governments separate entities they become mutual
supports. The Government is the customer of a central bank; at times its
largest depositor, at times its heaviest borrower. The Government’s credit
strengthens the central bank, the central bank strengthens the credit and the
power of the Government. Where Government credit and bank credit have been
mixed up the consequence has been to weaken both. Are the United States
under the Presidency of a man of science going to throw this universal expe
rience to the winds?
Senator N elson . D o you not know. Mr. Fowler, that the Bank of
England, as a result of the conduct of the Napoleonic war, through
the stress of that war, and the great liabilities and debt they in
curred, was allowed to suspend specie payment ?
1912
BANKING AND CUKRENCY.
Mr. F owler. They had to. The Bank of England did not ex
act it.
Senator N elson. Oh, yes; they did.
Mr. F owler. That is right.
Senator H itchcock. The motion is made that we are now 10 min
utes past our hour of adjournment, and we want to know if you
can stay over.
Mr. F owler. I have got to be in New York to-morrow.
Senator R e e d . I very seldom get any real information out of the
glittering generalities of a paper, and I like to ask some questions,
and if you can stay to-morrow I shall feel obliged to you, for I think
the committee ought to hear you through.
Mr. F owler. I have just got about 15 or 20 words here to finish
this.
Senator R eed. Without any discourtesy to you, I am obliged to
withdraw, because I made an engagement for this hour in my office,
and I will have to go. So I will read what you have to say to-mor
row.
Mr. F owler. That is all right, Senator.
I regard the political management of this bill most pernicious,
detrimental, dangerous, and destructive. I regard the 12-headed
project impractical and destined to failure.
Senator W eeks. Do you know any reason that would apply to
12 that would not apply to 1, 2, or 4?
Mr. F owler. I would like to continue this, and then I will come
back to that.
I am absolutely confident that to make these notes Government obli
gations will be fatal. To confuse our bank-note issue with our
central gold reserve must result in driving gold out of the country
and lead ultimately to complete disaster. While driving, in a blind
way, at some desirable ends the bill as passed by the House is
economically and fundamentally the worst proposal that has received
serious consideration within my recollection in this country [laugh
ter], and if allowed to be dispassionately considered by the country
will be utterly repudiated within a year and men will wonder how
they could ever have thought well of it.
Senator H itciiock . I want to commend you for your moderation
of statement.
Mr. F owler. I think I did say that the Aldrich scheme was the
worst, at that time. [Laughter.] But I think this worse than that.
[Laughter.]
Senator N elson. Y ou did not approve of the Aldrich scheme?
Mr. F owler. No, sir. We have made some progress and are mak
ing more progress now than at any time in 20 years, but we are far
from the point of intelligence where action is justified. Now, Sena
tor, I will answer your question.
Senator W eeks. What I want to ask you, Mr. Fowler, is this:
Do you know of any reason for advocating 12 reserve banks which
will not apply with equal force to 6, 4, 2, or 1, or any other number?
Mr. F owler. Ask me that question again, please.
Senator W eeks. D o you know of any reason for the establishing
of 12 reserve banks which will not apply with equal force to any
other number less than 12, down to 1 ?
BANKING AND CURRENCY.
1913
Mr. F owler. Well, I do not think that any general system should
have but one organ, any more than you should have but one heart in
your body.
Senator W eeks. Do you know of any good argument that will
apply to any number greater than one that does not apply with equal
force or greater force to one?
Senator H itchcock. I think he wants to ask whether you do not
think the central bank has all the virtues and none of the vices of
the 12 reserve banks.
Mr. F owler . You are asking it in the negative form?
Senator W eeks. Yes.
Mr. F owler. I do not see any reason for it whatever, but many
objections to it; on the other hand, there are many strong reasons for
a single central gold reserve. I think it is absolutely essential to this
country to protect its gold and to protect the commerce of this coun
try. I do not believe that 12 of these individual reserve institutions
have any of the virtues of a single central gold reserve, but that they
would be fatal to any kind of a plan because fundamentally wrong.
Since our standard of value is gold, nothing but gold should be
recognized as fit for reserves any longer than it will take us to get
rid of our $346,000,000 of United States notes, and thereafter noth
ing but gold should be held as reserves. To pursue the plan pro
posed must certainly disturb and gradually weaken our commercial
status and in the end break down our Government credit.
What we want, above all else, at this time, is to establish in this
country precisely the condition or situation that exists in London
to-day; that is, a gold market to which any one can resort by holding
bills of exchange drawn on London and obtain the metal without
any hindrance or obstruction whatever, such as is thrown constantly
in the way of everybody at Berlin and Paris, where it is made very
difficult if not quite impossible to obtain gold at all.
The Bank of England is not a dumping ground for commercial
credit, but stands above the commercial credit market as a monitor
not only of London and the British Empire, but of the entire com
mercial world. The gold market established and controlled by the
Bank of England and the commercial market are two absolutely d if
ferent and distinct things and should not be confused and combined
as they are in Germany and as they are in this bill. More especially
is this true considering the varied conditions which exist throughout
the United States. This mistake would be fatal. The price for
the use of gold in the United States should be uniform everywhere,
but the commercial credit or bank credit must be permitted to vary
acording to the different conditions prevailing in ten thousand, yes,
in a hundred thousand different localities.
A bank with $50,000 capital in a new country where there is no
accumulated wealth to take the form of deposits in excess of actual
commercial needs can not if it has only $50,000 or $100,000 of de
posits loan money as cheaply as some other bank in another locality
which has $50,000 capital and $500,000 or possibly a $1,000,000 of de
posits. There are thousands of places in the United States where
the deposits do not much exceed the amount of capital, therefore to
make a hard and fast rule for all banks everywhere would break
many of the small banks and would completely destroy the individual
1914
BANKING AND CURRENCY.
independent banking system of this country and supplant it with
a branch banking system such as they have in Canada, but without
their bank-note facilities.
The yroposed plan is based upon an utterly false assumption, which
is that bank credit, Government credit, or any credit is some kind
of money. This false assumption leads those who make it into in
numerable and ofttimes fatal errors. Among these errors is this,
that they must control arbitrarily the amount of this form of credit
instead of subjecting it to the same touchstone as deposit (credit—
current gold redemption. This profound, this fundamental error
arose from the fact that during the first part of the nineteenth cen
tury throughout Europe banks o f lesser importance used the bank
notes of banks of greater importance instead of coin as a basis of
credit. The natural and necessary result of this was the expulsion of
gold/ hence the assumed necessity of arbitrarily controlling the
amount of bank notes outstanding. The extreme expression of this
view was the bank act of England, which was based solely upon the
erroneous assumption that if bank notes were ordy issued on exchange
for a corresponding amount of gold, no one could get gold except by
surrendering a corresponding amount of bank notes.
Within a year after the passage of this act they were convinced
that an ordinary check was just as efficient in getting gold, out of
the Bank of England as a Bank of England note was. The bank
act had utterly failed to accomplish its one and only avowed purpose.
There is no more reason for arbitrarily controlling the amount of
bank notes than there is for controlling the amount of deposits; for
they are identically the same thingy and both should be controlled
in Identically the same way, by subjecting them to daily redemption
in gold coin. Then both of these forms of bank credit will circulate
in directly that proportion that the people need them to meet the
current demands of their business, in strict accord with their con
venience and habits.
This great fundamental principle was established during the first
75 years of our history in 12 different States as well as in Scotland,
as 1 have already pointed out, by allowing every bank to give to its
customers just that particular form of bank credit they desired, cur
rent credit or bank credit notes and order credit or deposits subject
to check, provided that they redeemed both of their credits in gold
coin.
In no case did this principle ever fail to meet any demand of trade,
however varied. / challenge any man to cite a single case in
American history where it ever broke down. Furthermore, interest
rates were lower in those States under the influence o f this great
principle than they have ever been since, simply because deposits
were greatly increased, thereby increasing the loanable funds.
The identification of our Government credit with our banking or
commercial credit is fundamentally and eternally wrong and must
prove fatal under all circumstances and end in disaster.
The confusion of our central reserve system with our currency
system is fundamentally wrong and must necessarily lead to the ex
pulsion of gold and the ultimate repudiation of gold redemption.
The proposed plan for supplying our currency can not meet the
current demands of trade as they arise at the counters of 25,000
BANKING AND CURRENCY.
1915
banks and will cost the commerce of the country five or six times as
much as a true bank currency would.
Every true bank-credit note in circulation, such as they have in
Scotland and in Canada and as they had in 12 States before the war,
is only another form of a bank deposit. Therefore, if our people
are to have $15 per capita, or approximately $1,500,000,000 of bank
credit in the form of circulating notes, the difference between buying
that $1,500,000,000 by exchanging commercial paper for it and allow
ing the individual banks to create it out of their own credit by
simply converting, upon demand, book credits into note credits, can
only be appreciated by estimating what the difference would be
between actually withdrawing from the banks and locking up
$1,500,000,000 of our most liquid assets and actually depositing with
the banks $1,500,000,000. The only differential to be provided for
is the reserve to be held against the $1,500,000,000 of bank-credit
notes, or approximately 20 per cent of $1 pOO,000,000, or $300,000,000
in reserves the same as against deposits.
But in this very connection it is to be observed that even if the
notes are purchased, there is to be a reserve held against them of
at least 33 per cent, or $500,000,000. Then remember, also, the end
less trouble and expense of shipping and reshipping $1,500,000,000 of
commercial paper backward and forward across the country every
30 days. Do not forget, either, that there is not one bank in one
hundred that has any commercial paper whatever in the sense
contemplated by this bill.
In this connection it is most pertinent to illustrate precisely how
true bank credit currency w ill work to the great advantage of all
7
our great agricultural regions.
Please note this: That if a bank with, say, a capital of $100,000
could exchange its current credit or bank notes for the credit
of the farmers to the extent of $100,000; that is, for their promissory
notes, the effect of the transaction is to give the farmers of the United
States the privilege of depositing their credit to the extent of
hundreds of millions of dollars ,and getting precisely the form of
bank credit they want to use at the lowest possible cost; that is,
6 per cent upon the amount of reserves carried against the bank notes
issued.
Six per cent upon $15,000 of reserves against $100,000 of deposits
or notes is $900. I f the bank had to buy $100,000 notes the cost
would be 6 per cent on $100,000, or $6,000 instead of $900, or at a
loss of $5,100, which must necessarily come out of the borrowers—in
the end, out of the farmers of the country.
The loss to the whole country on the total amount of currency
used would exceed $100,000,000 per annum, when all the direct and
indirect expenses are considered. The larger part o f this will have
to be paid by the country districts where current credit or bank
notes are used instead of deposits
In point of earnest wishes, desire to serve political ambition, and
determined purpose the proposed plan is one hundred to the good.
In point of execution it is one hundred to the bad.
There is not one proposed purpose of the bill as presented that
can be successfully defended, not one. This fact proves the utter
ignorance of the country generally upon the A B C’s of the question.
1916
BANKING AND CURRENCY.
the fundamental principles involved, and discloses the absolute ne
cessity of a thorough discussion of the whole matter before legislative
action can be wisely taken.
I pronounce the scheme of organization a stupendous blunder,
when analyzed, because the Secretary of the Treasury, always the
political tool of the President, is or can make himself the dominat
ing, absolutely the controlling, force. I am in favor of a governmentally controlled banking system, but I am utterly and unalter
ably opposed to a politically managed one, as this proposal would
be. A twelve-headed financial institution, as contemplated, would
be as much of an economic monstrosity as a human being with twelve
heads would be a human monstrosity.
When our problem of financial and banking reform is truly solved
the plan should simplify and not complicate the present complicated
situation.
The plan proposed does not dispose of the United States notes, but
increases them.
The plan does not diassociate our Government credit from our
commercial credit, but if put into operation, inextricably binds it
to it.
The plan does not dispose of the United States bonds now used as
a basis of bank circulation, but still further complicates the Govern
ment debt situation.
The plan does not reduce the number of our variegated forms of
currency, but adds still another. We now have seven; we would then
have eight.
In principle we should have only three— gold for our reserves,
bank-credit currency redeemable in gold, and silver for our sub
sidiary coin, including our one and two dollar bills.
The whole structure is so alien and foreign to our institutions and
conditions that if put into operation it will seriously disturb, if it
does not actually break, every credit relation in the United States,
and it will dislocate so many economic forces as to bring on a panic
of appalling proportions.
The passage of this act will be an economic tragedy in the com
mercial life of this nation.
QUESTIONS.
Two great questions must be answered by your committee:
First. Shall this country adopt the principle and factors by which
London has become the financial center of the world, or those of
Berlin, the menace of the world?
Second. Shall this country adopt the most economic and efficient
currency system in the world, or the most expensive and dangerous ?
WHAT SHOULD BE DONE?
Legislation should be in harmony with the evolution of American
banking, and not antagonistic to it.
First. Every economic center with its naturally tributary terri
tory constitutes a commercial zone which should oe organized pre
cisely as our most highly organized clearing houses are to-day; but
under governmental supervision and control.
Second. There are about 40 of these commercial zones in the
United States, and they should all be coordinated and unified into
BANKING AND CURRENCY.
1917
one comprehensive and complete cooperative association precisely
as the States of the Union are bound together in the Federal Union.
Third. There should be no central bank created in the United
States, but there should be established here a great central gold re
serve, aggregating approximately $1,250,000,000, contributed by the
banks for the purpose of protecting the commerce of the United
States through the zone centers, and for the purpose of controlling
and directing the movement of gold to and from the United States,
thus performing precisely the same function for the United States
that the Bank of England performs for Great Britain.
Fourth. Our present bond-secured bank-note circulation should be
converted into a bank-credit currency and that currency sent to the
zone centers- daily with the checks and drafts and be redeemed in
gold coin.
Fifth. All of the 2 per cent bonds should be converted into 3 per
cent bonds, the difference in the rate of interest to be made up out
of a tax upon the bank-credit currency.
Sixth. All the $346,000,000 United States notes should be gradually
converted into gold certificates by paying into that fund gold until
the amount so paid in should be equal to the total amount of the
notes. The gold used for that purpose should be derived from a tax
on the bank-credit currency. This accomplished we should have in
circulation only gold or its substitute bank-credit currency redeem
able in gold and silver or its substitute.
Seventh. National banks should be allowed to do a savings and
trust business.
Eighth. National banks should be allowed to write acceptances, pro
vided that they carry the same reserves against such liabilities as
against deposits and bank-credit currency liabilities.
Ninth. National banks desiring to build up their reserves or ob
tain assistance during crop-moving periods or for any other proper
purpose could do so by buying gold at their zone centers, provision
having been made out of the general cooperative fund of $1,250,000 ,000.
These propositions do not introduce a single new factor into our
banking business, but only organize what we have in accordance with
economic principles.
CONCLUSION.
A banking system founded upon these principles would lie so
simple, sound, strong, and advantageous that no State bank or trust
company could stay out of it, and we should have a truly national
banking system of which every bank in the United States would be
a unit.
(The following paper was submitted by the witness:)
PREFACE TO BILL.
T h e reforms to be effected are t h e s e :
First. Holding companies in the banking business would be completely
wiped out.
Second. Every national bank should be authorized to do—
(1) A commercial banking business;
(2) A savings bank business;
(3) A trust company business;
(4) A note issue business, precisely as the Canadian banks do.
1918
BANKING AND CURRENCY.
Third. All the various accounts— commercial, savings, trust, and note
issues— should be segregated.
Fourth. Every bank in the United States under similar conditions should be
compelled to carry the same amount of bank reserves.
Fifth. All bank reserves should consist of gold or gold certificates, as soon
as the United States notes can be converted into gold certificates.
Sixth. Every bank in the United States should be brought under national
control, because banking is essentially interstate commerce.
Seventh. Every natural financial center in the United States should become
the clearing center for all the checks, drafts, and bank notes that are payable
in the territory that is economically and naturally tributary to that financial
center; such territory should constitute a commercial zone.
Eighth. There should be organized at each of these financial centers a clear
ing house at which all the checks, drafts, and bank notes payable within the
commercial zone shall be at par.
Ninth. The banks of each commercial zone should elect a board of control
to examine, supervise, and control all the banks within such commercial zone,
precisely as the clearing house bank examiners are examining and supervising
all banks clearing through them to-day.
Tenth. The banks of each commercial zone should also elect a court of
appeals, or a banker’s council, composed of an equal number of business men
and bankers, to settle all banking and business questions that would properly
come before them.
Eleventh. The board of control in each commercial zone should be presided
over by a deputy United States comptroller, for the purpose of securing im
mediate and efficient action.
Twelfth. The banks of the United States should all contribute a percentage
of their deposits to a central reserve, which should be composed of gold, and
gold alone. The percentage of deposit should be 7 per cent at the outset, and
be gradually increased to 10 per cent, which would amount, at the present
time, to a central gold reserve of upward of $1,250,000,000. This reserve
would correspond to the reserve held to-day by the clearing houses for their
banks.
Thirteenth. This central gold reserve should be held in trust by a body of
men appointed by the President, for the benefit of all the commercial zones.
Fourteenth. Each board of control should have access to this central gold
reserve and should have power to sell gold to any bank within its zone and
under its supervision, in case it desired it for the purpose of moving crops or
for any other legitimate reason. The practical result would be that the gold
would be held, to a large extent, at the financial centers, and under the com
mand of the board of control, precisely as the clearing house committees to-day
hold the reserves of the banks constituting their respective clearing houses.
Fifteenth. The use, distribution, and control of the central gold reserve
should be under the management of the representatives of all the commercial
zones, who should be composed equally of business men and bankers.
Sixteenth. For the purpose of establishing responsibility and securing effi
ciency, the representatives of the zones should act through corporate powers
granted by the National Government.
Seventeenth. The purpose of a national centralization of gold to so large an
extent is twofold:
(1) It brings all the banking power of the United States to the defense of
the commercial interests in every part of the United States instantaneously.
(2) It will give to the representatives of the Government the power to con
trol and direct the movement of gold to and from the United States, by fixing
and enforcing a price for the use of gold, or a discount rate for gold trans
actions throughout the United States.
These reforms are based upon three distinct propositions:
First. They incorporate the principles of a central gold reserve, as illustrated
by the Bank of England, where all the transactions are in gold, and gold alone,
without the use or intervention of bank credit in the form of bank credit notes,
which could be used for reserves by the banks throughout Great Britain.
Second. They incorporate the principle of bank credit currency, as illustrated
by the bank note system of Canada, which involves daily redemption in gold
coin through the clearing houses.
Third. They extend to every economic or natural commercial zone the estab
lished and approved practices of the American clearing houses, that is—
(1) Bank supervision and control over all members.
BANKING AND CURKENCY.
1919
(2) A reserve created by all the members of the clearing house and held by
the clearing house committee for the benefit of all the members.
(3) Such a free check system over every commercial zone, precisely as New
England has had since 1899, and as has just been established over a large terri
tory around New York by the New York Clearing House.
The result of these reforms would be:
(1) To make each individual bank absolutely independent, because it has
an unlimited resource in the cooperative gold reserve.
( 2 ) To make every commercial zone as free and independent of every other
commercial zone as England is of France or France is of Germany.
(3) To completely decentralize all bank credit in the United States, while
it centralizes the gold to a degree that would enable us by raising the discount
rate to close the door of our markets against the demands for gold from abroad.
(4) To liquefy and therefore develop a general market for commercial paper.
(5) To save the business interests of this country more than $200,000,000
every year, to say nothing of the incalculable losses growing out of our everrecurring panics.
A BILL TO ESTABLISH A COM
PLETE FINANCIAL AND BANKING SYSTEM FO
R
THE UNITED STATES OF AMERICA.
S
e c t io n
1.
B e it en a cted
by
th e S en a te and H o u s e o f R e p r e s e n ta tiv e s o f th e
That a complete financial and
banking system for the United States of America shall be, and is hereby, cre
ated, organized, and established as follows:
First. The commercial zone.
Second. The bankers’ council.
Third. The board of control.
Fourth. The Federal Reserve Bank.
C o m m e n t .— This organization is precisely the same as that we have to-day in
20 American cities, where the clearing house is most highly developed. The
commercial zone corresponds to the clearing-house banks; the bankers’ council
corresponds to the clearing-house committee; the board of control corresponds
to the clearing-house examiner; the Federal reserve bank corresponds to the
reserves now held at the clearing houses, now amounting to $200,000,000.
S e c . 2. That upon the passage of this act the President of the United States
shall appoint three persons, who, with the Secretary of the Treasury and the
Comptroller of the Currency, shall proceed immediately to designate such cities
in the United States, not less than twenty-eight in number and not to exceed
forty-two in number, for the location of the financial centers of the commercial
zones, numbering them consecutively as shall best accommodate and serve the
business and banking interests of the United States.
S ec . 3. That within ninety days after the designation of the cities for the
location of the financial centers of the commercial zones every national bank,
with the approval of the five persons designated in section two of this act. shall
select one of the centers so designated as the place for its clearing house, and
thereupon the Comptroller of the Currency shall notify all the national banks
to meet at their respective financial centers on a given day and at a designated
place for the purpose of organizing the several commercial zones, of which
there shall not be less than twenty-eight nor more than forty-two in number.
C o m m e n t . —Referring to sections 2 and 3, I would urge upon your attention
these points:
U n ite d S t a t e s o f A m e r ic a in C o n g r e s s a s s e m b le d ,
G E O G R A P H IC A L
C O N S ID E R A T IO N S .
Great Britain has only 120,000 square miles of territory, France has 204,000,
and Germany 208,000 square miles. All Europe, outside of Russia, is only
about half the size of the United States. It has 1,600,000 square miles, while
we have 3,026,000 square miles. Including Russia, all Europe has only 3,600,000
square miles.
Extended as our territory is, our products are far more varied and more
universally important to the human race than those of any other nation. They
exceed in value $35,000,000,000 a year.
LO C A L IN T E R E S T S .
New England is essentially a manufacturing center of dry goods, wearing
apparel, and metal wares. Pennsylvania is known the world over for its coai,
iron, and oil industries. New Orleans is the market for cotton, sugar, and rice.
9328°—S. Doc. 232, 63-1—vol 2------61
1920
BANKING AND CUKRENCY.
Kansas City is the emporium for live stock and grain. Chicago, the greatest
food market on earth, is fast coming to be one of the greatest manufacturing
points in almost every line of industry. St. Paul and Minneapolis supply us
with wheat and flour. The cities of the Rocky Mountains are growing in
importance year by year, each one entitled to distinction for some particular
industry. The development of the Pacific coast from San Diego to Seattle is
challenging universal attention.
It is the opinion of your committee that it is highly important, indeed, abso
lutely essential, for the best interests of the people, industrially, commercially,
socially, and politically, that each geographical zone of common business inter
ests should have independent self-government in matters of banking, precisely
as the several States have control of their local affairs.
At the same time these commercial zones should be so harmonized and
federated as to give to each the financial strength and power of all combined,
precisely as every State is as strong and powerful politically as the Federal
Government itself.
All the governments of Europe are traditionally monarchical and imperial
istic. Their banking institutions not only all bear the insignia of their political
origin, but also characteristically mark the times and conditions that gave
them birth.
In England alone self-government found true expression in the selection of
the board of directors of the Bank of England. The British Government has
no relation to the management, either directly or indirectly. It neither appoints
a single representative on the board nor has any voice whatever in his selection.
The French Empire of 1803 and the German Empire of 1873 are each reflected
in the organization of the Bank of France and the Imperial Bank of Germany.
This Government was organized as a protest against royal rule and imperial
power. It has been fighting the evils of centralization for more than a hundred
years; and of nothing has it shown such persistent jealously as the possible
centralization of financial interests and the control of commercial credits.
Will it be said by some one who thinks only in the terms of the special
interests that, notwithstanding this watchfulness and constant anxiety, great
aggregations of capital in the business woild have come practically to control
the business situation; that our commerce is practically centralized now, and
that our banking should be so to make it the counterpart of the existing state
of things?
Let us not assume that the problems of coordinated power and wealth have
all been solved. Let us believe that the study of this modern mystery has just
begun. Let us hope that if it is possible for us so to solve the financial and
banking problem as to recognize the best traditions of the Republic and the
highest aspirations of the American people, keeping steadily in view every
economic law involved, we shall then save our beloved country from the tragic
consequence of political controversies directly affecting our commercial credit
and indirectly affecting every day’s labor and every dollar of capital until the
question is settled right.
We must not forget that every conceivable phase of the so-called “ money
question ” has been the football of American politics from the organization of
the First and the Second United States banks, down through the greenback
madness, the silver craze, and the gold-standard fight. Not a single subject has
aroused such intense bitterness as this one. excepting slavery alone.
Whoever, then, tries to solve this problem must recognize at every turn the
origin of our political institutions, the genius of our people, and the peculiar
characteristics of the American citizen, or he will fail utterly in his under
taking.
S ec. 4. That each bank shall be entitled to one vote, which shall be cast by
an officer of the bank who has been duly authorized by a vote of the board of
directors thereof, such authorization to be evidenced in writing and under the
seal of the bank. Each bank shall be identified in its zone by a number.
C o m m e n t .— It is my judgment that every bank should have equal power in
organizing and consequently in controlling the respective zones, because we
believe the business interests of the country will be better conserved thereby.
Sec. 5. That the association of all national banks clearing checks and redeem
ing their notes at each of the cities so designated shall be known as “ The
--------- Commercial Zone.”
S ec . 6. That all the national banks of each of the commercial zones so con
stituted and established shall organize themselves into “ The--------- Commercial
BANKING AND CURRENCY.
1921
Zone ” by electing a chairman, a secretary, and a treasurer, who shall all hold
office until the first Monday of the following May, and by proceeding in the fol
lowing manner:
Sec. 7. That they shall take some point in the financial center of their re
spective commercial zones, from which they shall draw four radial lines, so cut
ting the territory as to divide the whole number of banks, as nearly as possible,
into four district groups, each district containing approximately the same num
ber of banks, and may from time to time thereafter shift said radial lines for the
purpose of maintaining such equal subdivision of the banks.
C o m m e n t . — It is a matter of great importance that these districts shall be
automatically and arbitrarily constituted to eliminate politics, if possible; and
this plan will accomplish it. By this method every part of every commercial
zone will be represented by business men as well as bankers. Neither particular
sections nor particular banks can have any direct advantage.
S ec . 8. T h at each subdivision of the commercial zone so created shall be
known as a district, and they shall bear numbers respectively from one to four,
inclusive.
S ec . 9. That the board of the bankers’ council shall be constituted as follows:
First. The bankers of each district of the respective zones, voting as pre
scribed in section four of this act, shall elect a banker and a business man as
members of said board.
Second. The term of office shall be four years, but the terms of the members of
the first board shall be for one. two, three, and four years, respectively; that is,
the board shall arrange itself into four groups, each group being composed of
one banker and one business man, and thereupon the four groups shall deter
mine by lot how long each group shall serve.
Third. The eight members of the board of the bankers’ council of the respec
tive zones shall then elect their president, who shall not be one of the eight so
selected, but shall be a resident of one of the districts in their own zone. The
term of service of the president of said board shall be one year.
S ec. 10. That the services to be rendered by the bankers’ council shall be ad
visory to the board of control whenever the board of control may call them in
consultation, or an appeal is made to them from the action of the board of con
trol by some citizen or citizens of their particular zone.
S ec . 11. That the members of the bankers’ council shall receive no salary, but
all expenses incurred by them severally incidental to such consultation and
services shall be paid by the zone.
C o m m e n t .—The relation of the bankers' council is the same to the zone as the
clearing-house committee is to the clearing house. It will be the supreme court
of the zone.
S ec. 12. That the board of control shall be constituted as follows:
First. The bankers of each district, voting as prescribed in section 4 of this
act, shall elect a banker who resides in their district as a member of the board
of control.
Second. The term of office shall be four years, but the terms of the members
of the first board shall be for one, two, three, and four years, respectively, and
the four members so elected shall determine by lot how long each shall serve.
S ec . 13. That before any member of a board of control enters upon the per
formance of his duties he shall sever all connection as officer or stockholder with
every bank in his commercial zone, and he shall be ineligible to any position in
any bank in his zone during the time for which he shall have been elected to
serve.
C o m m e n t .—The board of control will be composed of a body of men who are
younger than the bankers’ council, but of the same high order. They will be
men who have the undoubted confidence of the banking fraternity; men who are
to win the prizes in the banking world. This position will be a sure stepping
stone to the best positions, but it must not be used for that purpose, at least
until each man has served out his time.
S ec . 14. That the compensation of the members of the board of control shall
be fixed by the bankers’ council and shall be paid out of a tax imposed upon the
capital or capital and surplus of the banks of the respective zones.
S ec. 15. The Comptroller of the Currency shall appoint a resident of each
commercial zone a deputy United States comptroller, who shall be chairman of
the board of control. Such appointment shall be subject to approval by a twothirds vote of the board of directors of the Federal Reserve Bank.
1922
BANKING AND CURRENCY.
C o m m e n t . —The power of the United States Government should always be
present to enforce orders and insure equal opportunities to all the members of
the zone.
S ec . 16. T h at the services to be rendered by the board o f control shall be as
fo llo w s :
First. Each board of control shall have supervision of all the national banks
located in its zone.
C o m m e n t . —The expense and annoyance of bank examinations as they are
carried on to-day would be reduced one-half, and they would be worth ten times
as much as they are to-day, with the exception of those made by clearing-house
examiners.
Second. The boards of control shall have power to employ all the examiners
and such other assistants as may be necessary to properly and efficiently super
vise the banks under them, and such examiners, as far as possible, shall be paid
stated salaries.
Third. Each board of control shall have power to purchase commercial paper
or bills of exchange whenever they desire to build up their reserves by obtaining
additional gold or for the purpose of crop moving or any special or extraordinary
demand of trade: P r o v i d e d , h o w e v e r . That all the paper so purchased by them
shall bear the unqualified indorsement of some national bank.
C o m m e n t . — It makes every zone an absolutely independent banking democ
racy. No outside influence is permitted to interfere with the zone. It is cer
tainly local self-government from top to bottom. The fact that anyone in the
zone may appeal to the bankers’ council for redress and that every district has
two representatives upon that board will insure fair consideration at the hands
of the board of control.
S ec . 17. That in case of a bank failure in any commercial zone one of the
members of the board of control in that zone shall be appointed the receiver
thereof and shall not receive any additional compensation for the services
rendered as such receiver.
S ec . IS. That the President of the United States shall, subject to the ap
proval of the United States Senate, appoint seven business men and seven
bankers as a board of directors of the Federal Reserve Bank. Such appoint
ments shall be representative of the commercial zones and various sections as
nearly as possible. Not more than seven of such appointees shall belong to
any one political party. The salary of each member shall be ten thousand
dollars per annum, payable monthly. The term of service shall be seven years;
but the terms of service of the first board appointed shall be for one. two. three,
four, five, six, and seven years, respectively; that is, the board shall arrange
itself into seven groups, each composed of one banker and one business man,
and thereupon the seven groups shall determine by lot how long each group
shall serve.
S ec . 19. The Secretary of the Treasury shall be ex officio a member of the
board of directors of the Federal Reserve Rank.
S ec . 20. The board of directors of the Federal Reserve Bank so constituted
shall elect as their president and vice president men who are not members of
the board so constituted. The terms of office shall be three years. The salary
of the president shall be twenty-five thousand dollars per annum. The salary
of the vice president shall be fifteen thousand dollars per annum.
S ec . 21. That the place of business of the Federal Reserve Bank shall be
Washington, District of Columbia.
S ec. 22. That the members of the board of the Federal Reserve Bank shall
reside in Washington, District of Columbia, and shall give their time and per
sonal attention to the business of the bank.
S ec . 23. That it shall be the duty of the board of the Federal Reserve Bank
and it shall have the power to fix the rate of interest or discount at which all
the commercial paper or bills of exchange shall be purchased or discounted by
all the boards of control.
S ec . 24. That it shall be the duty of the board of directors of the Federal
Reserve Bank to issue a bulletin the latter part of each week giving a state
ment showing a balance sheet of the Federal Reserve Bank and making such
suggestions and comment and giving such advice as their wisdom may deter
mine, and it shall make such arrangements as to insure the presence* of this
bulletin at practically every national bank in the United States every Monday
morning.
BANKING AND CURRENCY.
1923
S ec. 25. That vacancies in any one of the three boards as organized in this
act may occur by death, resignation, or expulsion, and shall occur whenever a
member of any of the boards shall be a director or officer of a suspended, in
solvent, or failed bank. All such vacancies shall be filled by the respective
boards in which they occur until the first Monday in the month of May fol
lowing, except those appointed by the President of the United States.
S ec. 26. That the term of office of each member of the three boards herein
described shall begin at the time elected or appointed, but shall continue from
the first Monday in the following May as if that day were the beginning of the
time for which they were severally elected.
S e c . 27. That on the first Monday in May each year after one full year of
service has expired the bankers of each commercial zone shall meet at the city
in which the financial center is located to fill any vacancies that may have
occurred in the two boards described in this act, and also to elect any members
to said boards where terms of members have expired.
S ec . 28. That each commercial zone shall have all the attributes and powers
of a body corporate and may sue and be sued in the United States courts having
jurisdiction of the action brought; it may receive deposits from banks and act
in every capacity of a bank for other banks, but shall not allow or pay any
interest on such deposits; it shall have power to receive, collect, and forward
bank notes; it shall have power to buy and sell commercial paper and bills of
exchange; it shall have power to act as the agent or attorney in fact of the
banks which are members of any of the commercial zones, so far as it may be
necessary to do so to carry into effect the purposes of this organization; it
shall have the power to do and perform any and all acts that may be necessary
for the proper performance of its duties in the supervision of all banks under it,
and in the conduct and operation of the commercial zone.
S e c . 29. That each commercial zone shall maintain and keep in operation at
its financial center a clearing house where all the bank notes, checks, drafts,
bills of exchange, and other instruments of credit, drawn upon any bank located
in the zone, may be cleared, and for any other purpose that may come within
the purview of this act; and all such instruments of credit shall be accepted and
settled for at par at such clearing house, under and in accordance with such
rules and regulations as may be established from time to time by the board of
directors of the Federal Reserve Bank.
C o m m e n t .— I have now completed the functions of the zone, and everything
that I have proposed is based upon the approved practices of the American
Clearing House.
The free-check zone, provided for in this last section, is identical with that
at Boston, where, ever since 1899, every New England bank check has been at
part at the center. Sixty thousand square miles around London is a free-check
zone.
Atlanta, Nashville, Kansas City, and several other cities are working out the
same plan. This plan is also identical with the plan that New England worked
out before the war, with resi>ect to the redemption of bank notes, when bank
notes were the chief form of bank credit then used.
From 1818 to 1865, you will remember, the Suffolk Bank acted as a clearing
house for all New England bank notes which were par at Boston, precisely as
checks are to-day.
Here we are getting back to the simple fundamental principle of current
redemption of bank credit without charge to commerce in whatever form the
people may choose to use it.
It is bank-credit notes and checks in France, Scotland. Ireland, and all over
Canada. Why should it not be bank-credit notes and checks all over the United
States just as well, in order that the people may have bank credit in the most
convenient and cheapest form possible?
Then, I have extended to every commercial zone the same organization for
supervision and administration that the most advanced clearing houses have:
the board of control to examine them and the bankers’ council as a court of
appeal to settle all difficulties that may arise.
It is not practical to have the zones conform to State lines. Such a thing
should not be thought of. Economic laws do not follow State lines. There
is not a single State in the Union that is a natural economic zone. Some
States should have several financial centers; some none. To atempt to
make a commercial zone conform to State lines would be absurd. Bank credit
1924
BANKING AND CURRENCY.
flows to centers as water rushes to the ocean, and we should not violate a great
economic law to the irreparable injury of commerce. Sense and not sentiment
should control in such a matter.
St. Louis and Kansas City are natural financial centers, hut Jefferson City is
not. St. Louis draws its bank credits from eastern Missouri, southeastern Iowa,
northeastern Arkansas, and southern Illinois.
Kansas City draws its bank credits from western Missouri, southwestern
Iowa, southeastern Nebraska, all of Kansas, and some of Oklahoma. These
cities illustrate the principle that must not be violated, or we may do more
harm than good.
Vermont has no economic center, and it would do violence to trade and com
merce to make one arbitrarily.
Tennessee has three such centers. Indiana and several other States have
but one.
S ec. 30. That the Federal Reserve Bank shall have all the attributes and
powers of a body corporate and may sue and be sued in any United States court
having jurisdiction of the action brought. It shall have power to buy and sell
gold bullion and gold coin; to buy and sell United States Government securities;
to loan money to the United States Government, and to act as banker, fiscal
agent, representative, and attorney in fact for the United States Government;
to buy and sell hills of exchange, domestic and foreign; to act as fiscal agent,
attorney in fact, for all members of the respective commercial zones, and shall
have full power to carry into effect the object for which this organization is
created; it may receive deposits from banks and act in every capacity of a bank
for other banks, but shall not allow nor pay interest upon any deposits that may
be made with it.
Sec. 31. That the board of directors of the Federal Reserve Bank shall define
from time to time the nature and character of the promissory notes, checks,
drafts, and bills of exchange that may be purchased by the resiiective zones and
the length of time they may have to run: P r o v i d e d , h o w e v e r , That every piece
of paper purchased by any commercial zone shall bear the unqualified indorse
ment of some national bank.
Co m m e n t .— It would be unwise to fix now arbitrarily by statute just what
kind of paper the banks of every zone should buy. This ought to be left to the
board of the Federal Reserve Bank. They will meet it wisely as it arises.
S ec . 32. That the United States Government is hereby authorized and em
powered to prepare, upon the passage of this act. bank notes for the respective
banks applying for them without the following superscription upon them: “ This
note is secured by bonds of the United States or other securities,” hut in all
other respects like the bond-secured bank notes now in use: P r o v i d e d . h o w e v e r ,
That the notes delivered to any bank for issue and circulation shall have in
bold type, first, and to the left of the center, the number of its zone, and,
second, to the right of the center, the number of the bank by which it is
identified in its zone.
C o m m e n t .— This section provides a true bank-credit note by erasing that
barbaric superscription that makes our present bank notes a bond speculation;
and by bold numbers identifies every bank note with a zone and with the
bank issuing it, thereby greatly facilitating the quick redemption of the notes.
Now note how much more economical this currency would be than a cur
rency furnished by the Government or purchased from some central bank or
other central institution, to say nothing of the trouble.
It would cost just one-fifth as much, or the difference between par that would
have t6 be paid for the currency purchased and the average reserve carried,
or about 20 per cent. The average per cent of gain to the banks would be
about 5 per cent upon the amount of notes outstanding (approximately
$1,500,000.(X)0) or $75,000,000. Of course, this gain would come to the ])eople;
in the end the expense of the bank is borne by commerce. The present enor
mous cost of shipping currency to and fro across the country would he saved
also, and this amounts to several million dollars a year, to say nothing of the
added trouble of shipping commercial paper with which to pay for it.
S ec . 33. That upon the completion of the organization of the several commfiEcial zones as hereinbefore provided any national bank may retire all or any
part of its present bond-secured note circulation by depositing with the United
States Treasurer an amount of the present bond-secured notes or lawful money,
or both, which shall be equal to the amount of its circulation so retired, and
may thereupon, with the approval of the Comptroller of the Currency, take out
BANKING AND CURRENCY.
1925
for issue and circulation an amount of bank notes, which shall be known as
“ national-bank notes,” that does not exceed in amount its paid-up and unim
paired capital without depositing United States bonds or any other securities
to secure the payment thereof as now provided by law: P r o v i d e d , h o w e v e r ,
That before any national bank shall have the right to retire its present bondsecured circulation and take out national-bank notes for circulation, as in this
section prescribed, it shall first, unless located in its financial center, make
arrangements with a national bank which is located in its financial center for
the redemption of its bank notes in gold coin: A n d p r o v i d e d f u r t h e r , That it
shall first deposit in gold coin or gold-coin certificates with the Federal Reserve
Bank an amount of money equal to 7 per centum of its average deposits during
the preceding calendar six months, and in addition thereto an amount equal to
7 per centum of the national-bank notes it proposes to take out for issue and
circulation.
C o m m e n t .— The amount of notes is limited to the amount of capital as a,
matter of convenience only. Some banks will not be able to keep out 25 per
cent of their circulation, because their customers use checks; other banks will
need, at certain times of the year in some sections of the United States, an
amount of circulation largely in excess of the amount of their capital. The
habits of the people will always determine what the amount of currency in use
is, if permitted to choose between checks and notes; but crop-moving times will
greatly increase the normal demand, as we have seen in the case of Canada and
know by experience in shipping currency West and South.
The amount of bank-credit currency that any bank may issue is equivalent
to making a deposit at the bank of the same amount. That is, if a bank has
a capital of $100,000, and can issue $100,000 of bank-credit currency, it is
precisely as if you made a deposit at the bank of $100,000. Therefore, a bank
could take a part of this deposit and put it into the Federal Reserve Bank as a
reserve. The national banks should have all the United States bonds now de
posited to secure their circulation made 3 per cent bonds and returned to
them to be disposed of by them in any way they see fit. This would give the
national banks an additional amount of cash aggregating $730,000,000. Cer
tainly it would not be difficult for them to supply their 7 per cent. A State bank
or trust company could become a national bank by simply exchanging its bankcredit notes for gold or gold certificates as they come in over its counter, to the
extent of the 7 per cent required. All of the additional bank notes it issued
would add just that amount to its deposits.
S e c . 34. That thereafter every national bank shall have upon deposit upon
the 10th days of January and July of each year with the Federal Reserve Bank
an amount of gold coin equal to 7 per centum of its average deposits during
the preceding calendar six months and 7 per centum of its national-bank notes
taken out for issue and circulation: P r o v i d e d , h o w e v e r , That this reserve shall
be increased at the rate of 1 per centum each year for a period of three years
thereafter; and that thereupon and thereafter every national bank shall have
upon deposit upon the 10th days of January and July of each year with the
Federal Reserve Bank an amount of gold coin equal to 10 per centum of its
average deposits during the preceding calendar six months and 10 per centum of
its national-bank notes taken out for issue and circulation.
S e c . 35. That every national bank shall carry a cash reserve of 6 per centum
of all of its bank notes outstanding and individual deposits subject to check
up to six million dollars and one-half of 1 per centum additional for each five
hundred thousand dollars up to ten million dollars, and upon this and all addi
tional individual deposits a reserve of 10 per centum in cash.
S e c . 36. That every national bank shall carry a cash reserve of 15 per
centum of its deposits from banks, or upon its bank balances.
C o m m e n t . — There is no doubt whatever that banks should carry larger cash
reserves against bank balances than against those of individuals. The banks
of Europe which carry such balances carry all the way from 33 per cent up
to 50 per cent.
S e c . 37. That any national bank may at any time fall 75 per centum below
its required cash reserve: P r o v i d e d , h o w e v e r , That its average cash reserve
from January first to December thirty-first shall be equal to its required cash
reserve.
S ec. 38. That the amount that any national bank located outside o f a financial
center shall be required to carry with a national bank located in a financial
center for the purpose of redeeming its notes may be counted as a part of its
required cash reserve.
1926
BANKING AND CURRENCY.
S ec . 39. That any national bank desiring to build up its reserve may redis
count or sell any of the commercial paper or bills of exchange owned by it by
applying to the board of control of the commercial zone in which it is located.
S ec. 40. That if any national bank shall not maintain its required average
cash reserve, as prescribed by this act, it shall pay at the end of the year as a
penalty therefor 10 per centum up<«o all deposits against which it did not carry
the required average reserve.
S ec. 41. That any national bank desiring to take out for issue and circulation
an amount of national-bank notes in excess of its paid-up and. unimpaired cap
ital, without depositing United States bonds or any other securities to secure
the payment thereof, may do so to an amount not to exceed 100 per centum of
its paid-up and unimpaired capital stock, provided the board of control of the
commercial zone to which such bank belongs first gives its approval thereto.
S ec. 42. That the United States Government shall print and place in the
hands of the respective boards of control an amount of national-bank notes
for such national bank, upon the request of any national bank, equal to the
paid-up capital thereof in addition to the bank notes taken out in accordance
with section 33.
C o m m e n t . —You will observe, gentlemen, that by section 37 a bank is allowed
to fall 75 per cent below its average cash reserve; that by section 39 it can buy
gold from the board of control with its commercial paper and bui'd up the
reserve; also that by section 41 it can take out an additional amount of cur
rency to meet any emergency that may arise. Now, when you appreciate the
fact that the board of control is going to make every bank qualify in the out
set as sound, and then is virtually responsible for its condition, with the power
to aid it in case of necessity, it is difficult to even imagine a case where a bank
would fail.
Every bank ought to be kept in liquid shape by the board of control; then its
means of defense, as I have just pointed out, are unlimited. Of course, it would
still have all its present resources by way of rediscounting paper with its city
correspondent, and on top of that the provisions of your bill.
S ec . 43. That national bank notes shall be a first lien upon all the assets
of the bank issuing them, including the double liability of the stockholders,
and any person or bank holding any of the national bank notes of a failed
bank shall be entitled to recoup the amount thereof out of the first moneys
collected on account of the failed bank.
C o m m e n t . — These credit notes should be a first lien precisely as our present
bank notes are; as the Scotch notes are, and as the Canadian notes are. Bank
notes should be made a first lien, because they are a public convenience and
because the holder is morally and practically compelled to take them in the
ordinary course of business.
He could refuse if he chose and demand legal tender, but public policy should
put the goodness of bank notes beyond question under all circumstances.
S ec . 44. T h at the expense o f transm itting national bank notes by a bank to
its financial center, except its own bank notes, shall be paid by the board of
control o f the com m ercial zone in which such financial center is located.
S ec . 45. That the expense of transmitting national bank notes from a finan
cial center outside of the zone to which they belong to the financial center to
which they belong shall be paid by the bank issuing the national bank notes so
returned.
C o m m e n t . — It will not cost bankers anything to forward notes for redemption,
as the expense of transportation will be paid by the commercial zone. This
fact will insure the immediate return of all notes for redemption, as it will
cost a bank less to ship notes than to ship checks and drafts.
S ec . 46. That the national bank notes issued in accordance with the pro
visions of this act shall be received at par in all parts of the United States
in payment of taxes, excises, public lands, and all other dues to the United
States, including duties on imports, and also for all salaries and other debts
and demands owing by the United States to individuals, cori>oratious, and
associations within the United States, except interest on the public debt and
in redemption of the national currency. Said notes shall be received ii]>on
deposit and for all purposes of debt aud liability by every national banking
association at par and without charge of whatsoever kind.
S ec . 47. That from and after the passage of this act no bank shall receive
or have on hand deposits exceeding in amount ten times the amount of its
paid-up and unimpaired capital.
BANKING AND CURRENCY.
1927
C o m m e n t . — Capital is a sort o f insurance fund precisely as reserves are, and
there should alw ays lae a reasonable relation sustained between capital and
deposits.
S e c . 48. That any national bank may, with the approval of the board of
control, establish a branch bank in any town, village, or locality within its
own zone and within a radius of thirty miles, where there is no national bank;
but such branch bank shall be discontinued as soon as an incorporated bank
is established at that point with a capital of at least ten thousand dollars.
S ec . 49. T h at w henever any body o f men desire to establish a national bank,
or to nationalize a private bank, State bank, or trust company, they must first
secure the approval o f the board o f control o f the commercial zone in which
the proposed bank is to be loca ted ; and if such application shall not be ap
proved by the board o f control for any reason, the applicant or applicants m ay
then appeal to the board o f the bankers’ council for approval.
S e c . 50. That the decision of the board of the bankers’ council upon all
appeals by applicants for the privilege of starting a national bank shall be
final, and their decision shall also be final in all other matters in which appeals
may be made from the board of control.
S e c . 51. That all the rules and regulations under which branches are carried
on shall be fixed and established by the board of directors of the Federal
Reserve Bank.
S ec. 52. That any national bank which has taken out national bank notes
for issue and circulation in accordance with this act shall pay the Federal
Reserve Bank on the tenth days of January and July of each year 1 per
centum upon the average amount of notes in actual circulation during the
preceding six months.
C o m m e n t . The tax is placed at 2 per cent per annum because that is the
usual rate of interest now allowed on good balances all over the United States,
and the notes are only another form of deposits made by the public who carry
or use the notes; and if banks can afford to pay 2 per cent on one form of
deposits, they can on the other.
S ec . 53. T h at the ta x so paid by the banks upon the national-bank notes,
as provided in this act, shall be appropriated for the follow ing uses and
p u rp oses:
First. To pay all the expenses, of whatsoever kind, growing out of the
administration of the four organizations established by this act, except as
otherwise provided.
Second. To pay 1 per centum per annum upon all the Un;ted States 2 per
centum bonds or consols until their maturity in nineteen hundred and thirty.
Third. To establish and maintain in the Federal Reserve Bank a bank
note guarantee fund equal to 5 per centum of the average amount of the notes
outstanding each six months preceding the first days of January and July of
each year for the purpose of redeeming the notes of failed banks.
Fourth. The balance remaining, if any, shall, on the tenth day of January in
each year, be paid into the division of the trust fund of the United States
Treasury, in gold coin, for the purpose of converting the United States notes
into gold certificates. An equal amount of United States shall thereupon be
canceled and a corresponding amount of gold certificates shall be issued in lieu
thereof.
S e c . 54. That, to any national bank which has complied with this act, the
United States Government shall return the 5 per centum fund deposited with
it for the purpose of redeeming its bond-secured bank notes.
S ec. 55. That any national bank desiring to wind up its affairs and go out
of business shall be entitled to receive back all its advances made upon its
deposits and note issue to the Federal Reserve Bank: P r o v i d e d , h o w e v e r ,
That all the liabilities of such bank have been paid in full and satisfied, or any
amount of lawful money equal thereto has been paid into the Federal Reserve
Bank for that purpose, and the Comptroller of the Currency approves the repay
ment of said sum.
S e?c . 56. That, from and after the first day of January, nineteen hundred and
fourteen, no national bank shall pay out over its counter any bond-secured
bank note, but shall send the same to its financial center, and the financial
center shall forward it to the United States Treasurer for redemption, can
celation. and destruction.
S e c . 57. That any national bank that shall count any national bank note
or notes as a part of its reserve shall pay into the Federal Reserve Bank a
1928
BANKING AND CURRENCY.
penalty of 10 per centum per diem on the amount so counted, and any national
bank that shall, a£fer January first, nineteen hundred ami fourteen, count any
bond-secured bank note as a part of its reserve shall pay into the Federal
Reserve Bank a penalty of 10 per centum per diem upon the amount so
counted.
C o m m e n t . If there is one evil that should be crushed out in this country
more than any other, it is the practice of carrying debts as reserves. No bank
should be allowed to carry any other bank’s notes, any more than any other
check or draft which it thinks is good. It has been this abuse of bank credit
that has led to more trouble than almost any other single thing. It was the
requirement of coin reserves and current coin redemption that made the banks
of Virginia. Louisiana, Kentucky, Ohio, Indiana, Iowa, Missouri, and the Suf
folk system such perfect successes.
Here is the crux: The very soul of sound banking is current coin redemption.
So let us not fool ourselves by putting wind and water into our reserves.
S e c . 58. That any national bank may and is hereby authorized to accept
any note, check, draft, or bill of exchange, with not more than four months
to run, for any one of its regular customers: P r o v i d e d , h o i c e v e r , That the instru
ment of credit so accepted shall be for goods or merchandise sold and actually
delivered or in transit to the buyer: A n d p r o v i d e d a l s o . That the instrument
of credit states this fact upon its face: A n d p r o v i d e d f u r t h e r , That the bank so
accepting any such instrument of credit shall keep and maintain against such
acceptance identically the same reserve as it is required to keep and maintain
against a deposit subject to check, and it shall be subject to the same penalty
as provided in section forty-six of this act.
C o m m e n t . — Let us not fool ourselves by supposing that by creating liabilities
we are actually creating new capital. By acceptances a class of paper will
undoubtedly be created that will in turn create a market for itself precisely as
it has in London. The object, therefore, of acceptances should be to facilitate
the handling of commodities in transit.
S e c . 59. That any national bank having a paid-up capital and surplus of at
least one million dollars may establish a branch in any foreign country with the
consent and approval of the board of directors of the Federal Reserve Bank.
C o m m e n t . — If we hope for our share of profit upon our foreign trade, and if
we hope to secure for the American merchant an equal opportunity in securing
that foreign trade, we must prepare here two aids: One is banking facilities
and the other is shipping facilities. Is it not perfectly clear that a foreign
banker would do anything in his power to divert all the traffic he could over
the shipping lines of his country? We shall find in the end then that our foreign
trade will be aided not by our foregn bank alone, but by American shipping as
well.
S e c . 60. That any national bank that has a paid-up capital of at least fifty
thousand dollars, and the surplus required by law , may act as a guardian, ad
T
ministrator, executor, or trustee, and in such capacity in any State, by whatever
name known, in accordance with the laws of the State or Territory where situ
ated or located, and the reserves required against trust funds shall be as fol
lows :
First. Seven per centum thereof shall be deposited wuth the American Reserve
Bank.
Second. Six per centum cash shall be carried against all trust funds up to six
million dollars and one-half of 1 per centum for each additional five hundred
thousand dollars up to ten million dollars, and upon this amount and all addi
tional amounts 10 per centum in cash shall be carried, but any national bank
accepting trust accounts shall keep the same separate and apart from all other
accounts in said bank, and shall establish a trust-account department; and all
such deposits shall be invested in such securities as are prescribed by the laws
of the State where such bank is located.
Sec. 61. That if the laws of the State wdiere any national bank accepting trust
accounts is located do not prescribe how trust funds shall be invested, then the
board of the Federal Reserve Bank shall fix rules and regulations for the in
vestment of such funds.
S e c . 62. That any national bank may accept savings accounts, as distinguished
from commercial accounts, but any national bank accepting savings accounts shall
keep the same separate and apart from all other accounts in said bank, and shall
establish a savings-account department; and all such savings deposits shall be
invested in such securities as are prescribed by the laws of the State where such
BANKING AND CUERENCY.
1929
bank is located or such securities as the board of d?rectors of the Federal Reserve
Bank may prescribe.
S ec . 63. That if the laws of the State where any national bank accr
£ sav
ings accounts is located do not prescribe how savings funds shall be
then the board of the Federal Reserve Bank shall fix laws and i.gulat: -s tor
the investment of such funds.
S ec. 64. T h at all investm ents made for the benefit o f the savings dtp- si tors
o f any national bank shall be held prim arily and exclusively fov the beneLi of
the depositors in the savings d ep artm en t; and in case o f a ban.: failure, if the
investm ents made for the benefit of the depositors in the savings department do
not satisfy their claim s in fu ll, then the depositors o f the savings bank shall
be entitled to such a part o f the capital, surplus, and capital liability as the sav
ings deposits bear to all other deposits up to and until the savings accounts are
paid in full.
S ec . 65. That any national bank accepting savings accounts shall, on the tenth
days of January and July of each year, have with the Federal Reserve Bank an
amount in gold coin equal to 5 per centum of the average deposit in sreii depart
ment during the preceding six months, and such national bank shall be required
to carry casli reserves amounting to 5 per centum against such savings accounts.
S ec. 66. That the said 5 per centum so paid by the national banks to the
Federal Reserve Bank as reserves against their savings deposits shall be in
vested in United States Government bonds or securities for the exclusive benefit
of the savings depositors in the national banks as a savings-bank fund, and the
full interest earned upon said bonds shall be credited to the savings-bank fund
in the Federal Reserve Bank, and no part thereof shall be deducted for any
other purpose whatsoever than the protection of savings-bank depositors.
C o m m e n t . —This trust fund would absorb a large amount of the United
States bonds now held for circulation.
S ec . 67. That any national bank accepting a savings bank account may at
any time demand the right to have thirty day’s notice of an intention to with
draw the same, and may also reserve the right to pay all savings accounts in
two installments—50 per centum thereof in three months, 50 per centum in six
months.
S ec . 68. That from and after the first day of January, nineteen hundred and
fourteen, every State bank and trust company in the United States receiving
deposits subject to check, or saving accounts in the usual way, or trust funds
shall keep and maintain identically the same reserves against these respective
funds as is provided for by the provisions of this act; and every State bank and
trust company, except mutual savings banks, that fails to comply with the
provisions of this act shall pay a tax of 10 per centum to the United States
Government on the tenth day of January in each year upon all the deposits or
trust funds against which the foregoing prescribed reserves have not been kept
and maintained.
S ec . 69. That every State bank or trust company that shall, after January
first, nineteen hundred and fourteen, hold as a part of its required reserves,
any national-bank note, check, draft, or other instrument of credit, shall pay a
tax thereon to the United States of 10 per centum per diem on the amount so
held; and every State bank or trust company accepting deposits or trust funds
shall, upon the first day of January in each year, make a sworn statement to
the United States Government showing exactly the amount and the character
of reserves held during the preceding year against all of its deposits, and upon
failure to do so shall pay a fine of one thousand dollars per day until such
report is made.
C o m m e n t . —These sections, 68 and 69, provide that every State bank or trust
company in the United States shall not only carry its proper share of reserves,
but the right kind of reserves as well. Quantity and quality must both be
made obligatory if we are to have a banking system that amounts to anything.
Will anybody deny that banking is interstate commerce and therefore a proper
subject for Government control under the constitution? I respectfully refer
you to the chapter on reserves in my work Seventeen Talks on the bauking
question.
S ec . 70. That all the profits growing out of the operations of the several
commercial zones and the Federal Reserve Bank combined may be distributed
between the United States Government and all the national banks pro rata,
according to the amount they have respectively deposited with the Federal
Reserve Bank, whenever in the judgment of the board of the Federal Reserve
1930
BANKING AND CURRENCY.
Bank it is advisable to do so, having made such provision for a reserve as is
deemed necessary: P r o v i d e d , h o w e v e r , That the distribution of profits shall not
exceed 2 per centum per annum until practically all of the United States notes
have been converted into gold certificates; and for that purpose all the profits
in excess of 2 per centum shall be paid into the trust fund of the United States
Treasury in gold coin, and an equal amount of United States notes shall there
upon be canceled and a corresponding amount of gold certificates issued in
lieu thereof.
S e c . 71. That subject to the disposition made and provided for in this act
of all the various sums of money to be paid to the Federal Reserve Bank all
such sums of money shall be combined and held in one common fund and be
known as the Federal Reserve Bank fund, and this fund shall guarantee the
repayment of all Government deposits made with the Federal Reserve Bank
and the redemption of the national-bank notes of any failed bank.
C o m m e n t . — In paragraph three, under section 53, provision was made for a
5 per cent guarantee fund to redeem the bank notes of any bank which has
failed. This fund is held by the Federal Reserve Bank, which under section 71
will be used to redeem the notes of all failed banks immediately and the amount
of the notes so redeemed shall be recouped from the assets of the bank that
issued the notes; if, by chance, one should fail after it has become a part of the
proposed system, which I, for one, do not believe is possible.
S e c . 72. That the Federal Reserve Bank shall, on the first days of January
and July of each year during the life of the 2 per centum United States consols
up to nineteen hundred and thirty, pay into the Treasury of the United States
an amount of cash in equal payments which shall be equal to 1 per centum per
annum upon all the United States 2 per centum bonds or consols, now aggre
gating about seven hundred and thirty million dollars.
S e c . 73. That when the Federal Reserve Bank shall have paid into the
United States Treasury the first half of 1 per centum in accordance with the
preceding section, the United States Government shall thereupon refund all of
the 2 per centum bonds or consols into 3 per centum bonds or agree to pay 3
per centum thereon; and thereafter the Government shall pay 3 per centum
interest upon all of said 2 per centum consols.
C o m m e n t . — By this section all the 2 per cent bonds will be converted into
3 per cent bonds and they will then be returned to the banks to which they
belong. They can then be sold by them, bringing into the commercial fund
of the country $730,000,000. Savings banks, insurance companies, private estates
and foreigners ought to take them up at once.
This change ought to enable the banks to loan money more cheaply to the
people; we must remember that the more expensive we make banking in this
country the higher the rates of interest will be; for, in the end, the people
bear every added burden.
S e c . 74. That when the United States Government shall have made provision
for refunding the 2 per centum bonds or consols into 3 per centum bonds and
the Federal Reserve Bank fund shall amount to the sum of $500,000,000,
the Federal Reserve Bank shall become the fiscal agent of the United States
Government and thereupon the United States Government shall dej>osit and
keep with the Federal Reserve Bank all its cash balance and pay its current
obligations by check or draft upon the Federal Reserve Bank.
S e c . 75. That whenever the accumulations from the tax upon the national
bank notes shall reach an amount equal to 5 per centum of the national bank
notes outstanding during the preceding six months after paying all the ex
penses growing out of the administration of the four organizations established
by this act— the commercial zone, the bankers’ council, the boards of control,
the Federal Reserve Bank—and the 1 per centum per annum upon all the 2 pei
centum bonds or consols is being currently paid, the excess from whatever
source remaining over, allowing for such a reserve as is deemed necessary,
shall, on each succeeding tenth days of January and July in each year, be paid
into the division of the trust fund of the United States Treasury in gold coin;and as soon as the Secretary of the Treasury shall receive and cancel an
amount of United States notes equal to the gold so paid in, he shall issue gold
certificates therefor.
S e c . 76. That when the Secretary of the Treasury of the United States shall
have received from all sources, the sum of one hundred and ninety-six million
six hundred and eighty-one thousand and sixteen dollars in gold coin for the
purpose of redeeming and converting a like amount of the United States notes
BANKING AND CURRENCY.
1931
into gold certificates, and he shall have received, canceled, and destroyed a cor
responding amount of United States notes, making due allowance for the United
States notes estimated to be lost or destroyed, he shall then transfer all the
gold coin and gold bullion in the reserve fund, amounting to one hundred and
fifty million dollars, with all the accumulations, to the division of redemption of
the trust fund; and thereafter no national bank shall hold a United States note
as a part of its reserve, nor shall there be paid out of the United States Treasury
any United States notes; but the same when received shall be canceled and de
stroyed, and gold certificates shall be issued therefor.
C o m m e n t . — You will have noted in Sections 77 and 96, also in Section 97, that
provision has been made for paying gold into the trust fund, which is the fund
behind the gold certificates, and that a corresponding amount of greenbacks are
to be canceled and the same amount of gold certificates are to be issued in their
place.
The amount of greenbacks is $346,681,016. The present amount of the reserve
fund is $150,000,000. Now, after we have paid into this fund $196,681,016, the
greenbacks will be converted into gold certificates. I estimate that this will
take 12 to 15 years.
Then all our bank reserves will, practically, be in gold coin or gold certificates,
because the silver certificates will be cut up into one and two dollar pieces and
will be token money in the pockets of the people, the tills of the stores, and will
constitute small cash for the banks.
Sec. 77. That when substantially all the United States notes shall have been
converted into gold certificates, as in this act provided; when practically all of
the bank notes secured by Government bonds have been returned to the United
States Treasury and canceled; and when practically all the silver certificates of
the larger denominations have been cut up into one and two dollar certificates
or coined into subsidiary coins; and when the Federal Reserve Bank shall be
acting as the fiscal agent of the United States Government, it shall thereupon
assume the maintenance of the parity of the silver certificates and silver coins
with gold coin.
(Thereupon, at 5.45 o’clock p. m., the committee adjourned until
to-morrow, Wednesday, October 8, 1913, at 11 o’clock a. m.)