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6 « S ! T j ____________________ SE N A T E ___________
B A N K IN G A N D CURRENCY
HEARINGS
BEFORE THE
COMMITTEE ON BANKING AND CURRENCY
UNITED STATES SENATE
SIXTY-THIRD CONGRESS
FIRST SESSION
ON
H. R. 7837 (S. 2639)
A BILL TO PROVIDE FOR THE ESTABLISHMENT OF FEDERAL
RESERVE BANKS, FOR FURNISHING AN ELASTIC CUR
RENCY, AFFORDING MEANS OF REDISCOUNTING COM
MERCIAL PAPER, AND TO ESTABLISH A MORE
EFFECTIVE SUPERVISION OF BANKING
IN THE UNITED STATES, AND FOR
OTHER PURPOSES
IN THREE VOLUMES
VO L. I l l
(I N D E X A T END O F V O L U M E )
WASHINGTON
GOVERNMENT PRINTING OFFICE
63 d C ongress )
1st Session
j-
bi^JNAID
j D ocument
No. 232
B A N K IN G A N D C U BREN CY
HEARINGS
BEFORE THE
COMMITTEE ON BANKING AND CURRENCY
UNITED STATES SENATE
SIXTY-THIRD CONGRESS
FIRST SESSION
ON
H. R. 7837 (S. 2639)
A BILL TO PROVIDE FOR THE ESTABLISHMENT OF FEDERAL
RESERVE BANKS, FOR FURNISHING AN ELASTIC CUR
RENCY, AFFORDING MEANS OF REDISCOUNTING COM
MERCIAL PAPER, AND TO ESTABLISH A MORE
EFFECTIVE SUPERVISION OF BANKING
IN THE UNITED STATES, AND FOR
OTHER PURPOSES
IN THREE VOLUMES
VOL. I l l
(IN D E X
AT END OF VO LU M E)
WASHINGTON
GOVERNMENT PRINTING OFFICE
1913
RESOLUTION BY MR. OWEN.
,
I n t h e S en a te of t h e U n ited S tates ,
November 6 1913.
Resolved, That the Committee on Banking and Currency is hereby
authorized to have printed the indexed hearings by the Banking
and Currency Committee of the Senate on the pending banking and
currency bills (S. 2639 and H. R. 7837), bound in paper as a Senate
document, * * *.
A ttest:
J ames M. B a k er ,
Secretary.
ii
COMMITTEE ON BANKING AND CURRENCY.
UNITED STATES SENATE.
ROBERT L. OWEN, Chairman . . Oklahoma.
GILBERT M. HITCHCOCK . . . Nebraska.
JAMES A. O'GORMAN . . . .
New York.
JAMES A. R E E D ..................................Missouri.
ATLEE P O M E R E N E .................................Ohio.
JOHN F. SH A FR O TH ...........................Colorado.
HENRY F. HOLLIS . . . .
New Hampshire.
KNUTE N E L S O N ............................... Minnesota.
JOSEPH L. BRISTOW
........................Kansas.
COE I. CRAWFORD . . . .
South Dakota.
GEORGE P. McLEAN
. . . . Connecticut.
JOHN W. W E E K S ........................Massachusetts.
J ames W. B eller , Clerk.
hi
LIST OF WITNESSES.
I Roman numerals indicate volume of heariugs.]
Aisthorpe, J. S. (vice president. Illinois Bankers’ Association, Cairo,
111.)----------------------------------------------------------------------------------- nr,2194-2202
Allen, William H. (New York, N. Y .)____________________________ i. 375-382
Ailing, Newton D. (vice president, National Nassau Bank, New York
C ity)-------------------------------------------------------:------------------------------ i, 406-456
Baldwin, W. W. (vice president, Chicago, Burlington & Quincy Rail
road Co., Burlington, Iow a)________________________________ m , 2131-2137
Banfield, N. F. (vice president, First National Bank, Austin,
Minn.)---------------------------------------------------------------------------------m , 2449-2452
Barry, David (cashier, First National Bank. Johnstown, Pa.)___ h i , 2321-2334
Bassett. J. C. (president, Aberdeen National Bank, Aberdeen,
S. D ak.)----- A_________
ii, 1657-1682
Berry, William II. (Chester. P a .)________________________ 1,560-582,586-655
Blinn, Charles P. (president, Massachusetts Bankers’ Association, Bos
ton, M ass.)__________________________________________________ ii , 1178-1220
Bolton, J. W. (president, The Rapids Bank, Alexandria, L a .),___ n, 1571-1583
Bowman, Henry H. (president, Springfield National Bank, Springfield,
M ass.)---------------------------------------------------------------------------------- i i , 1225-1248
Bucholz, W. II. (vice president, Omaha National Bank, Omaha.
Nebr.)_____________________________________________________ h i , 2419-2432
Cannon, J. G. (president.'Fifth National Bank, New York, N. Y.)_ in, 213S-2191
Chapman, Joseph (vice president, Northwestern National Bank, Minne
apolis, Minn.)____ _____________________________________________ i, 1S7-192
Claflin, John (II. B. Clafliu Co., New York C ity)__________________ i, 543-550
Clark, Hovey C. (Minneapolis, Minn.)___________________________ ii , 1059-1068
Comstock, A. H. (vice president, Marshall-Wells Hardware Co, Duluth,
Minn.)______________________________________________________ ii , 1050-1059
Conant, Charles A. (New York. N. Y .)___________________________ n, 1378-1513
Coxey, Jacob S. (Massillon, Ohio)__ ___________________________ in, 2967-2976
Crebs, John N. (Carini, 111.)____________________________________in , 2229-2232
Crozier, Alfred Owen (College Hill, Cincinnati, Ohio)----------------- in , 2886-2905
Daniel, T. Cushing (Virginia)__________________ ii , 1159-1174; m , 3140-3152
Dawson, A. F. (president, First National Bank, Davenport, Iowa)_ in, 2082-2131
Dickson, T. H. (secretary, Mississippi Bankers’ Association, Jackson,
Miss.) __________________________________________________________ n, 1645
Dos Passos, John R. (New York, N. Y .)__________________________ 1,491-497
Drury, F. A. (president, Merchants National Bank, Worcester,
Mass.)___________________________ 1________________________ 11,1221-1248
Fisher, Edmund D. (deputy comptroller, New York C ity)-------------------in.
2487-2513, 3138-3140
Fisher, Irving (Yale University)______________________________ n,1129-1159
Flannagan, William W. (Montclair, N. J .) _________ i, 738-808; in , 2726-2729
IV
LIST OF WITNESSES.
V
Fo&te, Francis W. (vice president, First National Bank of Commerce,
Hattiesburg, M iss.)_______________________________ n , 1514-1532, 1613-1621
Forgan,James B. (president, First National
Bank,Chicago,
111.)25-42, 44,125-189, 19S-200, 201, 277-283, 304-306
Fowler, C. A. N. (Elizabeth, N. J .)____________________________ n, 1863-1931
Frame, Andrew Jay (president, Waukesha National Bank, Waukesha,
W is.)_________________________________________________________ 1,674-738
French, Nathaniel (Davenport, Iow a)_________________________ ii , 2069-2082
Frenzel, John P. (vice president, Merchants’ National Bank, Indian
apolis, Ind.)_______________________________________________ 11,1533-1539
Frenzel, J. P __________________________________________ i i , 1610-1613.1628-1639
Gilbert, Alexander (president, Market & Fulton National Bank, New
York)______________________________________________________ iii ,2733-2834
Hallock, James C. (Brooklyn, N. Y .)----------------- ------------------------n. 1684-1709
Harrington, Charles M. (Minneapolis, Minn.)-------------------------------- 1,960-966
in
Harris, B. F. (vice president, First National Bank, Champaign, 111.)___
2202-2215
Hill. E. J_______________________________________________________ i. 2S3-287
Hulbert, E. D. (vice president, Merchants' Loan & Trust Co., Chicago,
111.)----------------------------------------------------------------------------------------- i i , 1094-1129
Ingle, William (vice president, Merchants & Mechanics National Bank,
Baltimore, M d .)___________________________________________ h i , 2369-2419
Jenks, Jeremiah W. (New York University, New York C ity)__________
h i,
2552-2634, 3153-3196
Jewett, H. C. (Aberdeen, S. D ak.)_____________________________ii , 1682-1684
Johnston, John T. M. (president, National Reserve Bank. Kansas City,
M o .)_________________________________________________________ 1,109-123
Jones, Breckenridge (president, Mississippi Valley Trust Co., St. Louis,
Mo.) ---------------------------------------------------------------------- i i . 998-1038,1048-1050
Jones, Gordon (president, United States National Bank. Denver, Colo.)_
in,
2259-2272, 2272-2281
Ivenaston, F. E. (Minneapolis, Minn.)___________________________ n, 967-998
Kent. Fred I. (vice president. Bankers’ Trust Co., New York,
N. Y .) ------------------------------------------------------------------------------- ui,2977-3002
Larrabee, F. S. (Farmers’ National Bank, Stafford, K ans.)_____ i si, 2356-2366,
3069-3071
Lassen. Alexander C. (president, Lassen Realty Co.. New York,
N. Y .) ---------------------------------------------------------------------------------111,3112-3125
Law, F. M. (First National Bank, Beaumont, T ex.)___________ h i , 2334-2337
Long, Richard II. (Framingham, M ass.)______________________ h i , 2835-2849
McCaleb, W. F. (president-, West Texas Banking & Trust Co., San An
tonio, Tex.):-------------------------------------------------------------------------11,1591-1610
McCulloch, J.L. (president, Marion National Bank. Marion, Ind.)_ i i . 1621-1628
McMorries, Edwin
(president. First National Bank, Meridian,
M iss.)-------------------------------------------------------------------------------- 11,1583-1591
McRae, Thomas C. (president. Bank of Prescott, A rk.)__________ i i , 1275-128S
Maddox, Robert F. (vice president, American National Bank, Atlanta,
Ga.)------------------------------------------------------------------------------------------1,192-218
Marshall, F. E. (New York, N. Y .)__________________ i, 456-491; ii, 1175-1177
Millikeu, It. C. (monetary statistician. Washington. I' C .)______ iii , 2453-2484
Moelilenpah, II. A. (president, Wisconsin Bankers’ Association, Clinton,
W is.)____________
11,1539-1565
Montgomery, S. B. (Quincy. 111.)___________________ iii , 2192-2194. 2223-2225
Morawetz, Victor (New York, N. Y .)___ _____________________ iii , 2635-2720
i,
VI
LIST OF WITNESSES.
Moses, E. R. (president, Citizens’ National Bank, Great Bend.
Kans.) _____________________________________________________ h i ,2366-2368
Mosher, Curtis L. (secretary, Citizens’ League ot Minnesota, Minne
apolis, Minn.)--------------------------------------------------------------------------------------n, 1091-1094
Newton, Oscar(president, Jackson Bank, Jackson, M iss.)----------------------------- n, 1639-1645
Peck, L. T. (cashier, First National Bank of Hawaii, H onolulu), in , 2875 2883
Perkins, James H. (president, National Commercial Bank, Albany,
N. Y .) _____________________________________________________ h i , 2338 2349
Reynolds, George M. (president, Continental & Commercial National
Bank, Chicago, 111.)_______ i, 198,199. 200, 224-257, 288-296, 297-306, 311-315
Rhodes, Bradford (president, First National Bank, Mamaroneck,
N. Y .) _____________________________________________________ h i . 3003-3013
Rogers, George W. (cashier, Bank of Commerce, Little Rock,
A rk.)________________________________________ 11,1565-1571; in , 2247 2259
Scott, J. T. (vice president, First National Bank, Houston, T ex.)—ii , 1646-1656
Scudder, S. D. (vice president, Richmond Trust & Savings Co., Rich
mond, V a.)_______________________________________________ in , 2232-2247
Sexton, Henry D. (president, Southern Illinois National Bank, East St.
Louis, 111.)__________________________________________________ ii , 2215-2223
Shibley, George H. (director, American Bureau of Political Research.
Washington, D. C.)_______________________________ ii , 1724-1827; h i , 2534
Shields, Edward E. (secretary, group 2, Pennsylvania Bankers’ Associa
tion, West Chester, P a .)____________________________________ in , 3092-3111
Simmons, W. D. (chairman, banking and commerce committee of Cham
ber of Commerce of United States, St. Louis, Mo.)_in , 2484-2486, 2513-2519
Sprague, O. M. W. (Harvard U niversity)_____________________________ i, 297.
306-310, 358-373, 497-534, 551-560
Swinney, Edward F. (president, First National Bank, Kansas City.
Mo.) _____________________________________________________ iii , 2037-2052
Syme, F. J. (New York, N. Y .)________________________________ iii , 2872-2875
Thomas, Charles Spalding(Senator from Colorado)--------------------- m , 2432-2449
Tilton, McLane, jr. (president, First National Bank, Pell City,
Ala.) ___________ 1_______________________________________ iii , 2306-2321
Tregoe, J. II. (secretary, National Association of Credit Men, New York,
N. Y .)______________________________________________________ ii , 1038-1048
Trernan, Robert (president, Tompkins County National Bank, Ithaca,
N. Y .)_____________________________________________________ iii , 2350-2356
Untermyer, Samuel (New York C ity)-------------------------------------------i, 808-942
Untermyer, Samuel (New York. N. Y .)________________________ ii , 1288-1369
Vanderlip, Frank A. (president, National City Bank, New York.
N. Y .)______ _________________________ ii , 1933-2037, 2052-2069, 2911-2967
Varney, Justin E. (vice president and cashier, Bay State National Bank.
Lawrence, M ass.)_________ _________________________________ n, 1248-1264
Vinson, Taylor (Huntington, W. V a .))_________________________iii , 2849-2871
Wade, Festus J. (president, Mercantile Trust Co., St. Louis.
Mo.) ------------------------------------------------------------------------- I, 125-186, 141-187
Wells, Edward B. (Minneapolis, Minn.)__________________________ i, 942-960
Wexler, Sol. (vice president, Whitney Central National Bank, New Or
leans, L a.)___________________ i, 42-109, 201-212. 219-224, 315-358, 373-374
Wheeler, H. A. (vice president, Union Trust Co.. Chicago, 111.)_iii , 2519-2534
White, William C. (president, Illinois National Bank. Peoria Ul.)_ in , 2225-2229
Willis, Henry Parker (New York, N. Y .)____________ iii , 3013-3068, 3071-3088
Winston, F. G. (Minneapolis, Minn.)----------------------------------------ii , 106S-1076
Woodruff, George (president, First National Bank, Joliet, 111.)_ iii , 2281-2306
H E A R IN G S ON H . R. 7 8 8 7
W EDNESDAY, OCTOBER 8, 1913.
C o m m ittee on B a n k in g and C u rr en c y ,
U n ited S tates S e n a t e ,
Washing ton, D. G.
The committee assembled at 11.05 o’clock a. m.
Present: Senators Owen (chairman), Hitchcock, O’Gorman, Reed,
Pomerene, Shafroth, Hollis, Nelson, Bristow, McLean, and Weeks.
The C h a ir m a n . Mr. Vanderlip, the committee will be glad to hear
from you in regard to this bill, and I will ask that you give the
stenographer your banking affiliations.
STATEMENT OF FRANK A. VANDERLIP, PRESIDENT OF THE
NATIONAL CITY BANK, OF NEW YORK, N. Y.
Mr. V a n d e r l ip . I am president of the National City Bank, o f
New York. I have other banking affiliations as director. I suppose
you only mean my official position?
The C h a ir m a n . I think that will suffice, unless the committee care
to have the other affiliations. We will be glad to have your views
on this bill.
Mr. V a n d er lip . I feel t h a t th e re a re tw o im p o rta n t th in g s to be
acco m p lish ed b y a n y le g isla tio n — th e m o b iliz a tio n o f reserve a n d th e
c re a tio n o f a n elastic cu rre n c y . I th in k th is m easu re h a s g one a lo n g
w a y to w a rd th a t, b u t h a s fa ile d o f a c c o m p lish in g b o th o f th o se
th in g s. I feel t h a t th e m o b iliz a tio n o f th e reserv e h a s g o t to come
a b o u t b y w h a t is p ra c tic a lly a sin g le reserve re se rv o ir, a n d th a t th e
12 reserv e re se rv o irs w h ich h a v e been p ro v id e d in th e b ill w ill n o t
p ra c tic a lly b rin g t h a t ab o u t. I believe a sin g le re se rv o ir w o u ld be
best, a n d a n y re d u c tio n fro m 12 w ill be a n im p ro v em en t. I th in k
i f you cou ld red u ce i t to 4, i t w o u ld p ro b a b ly w o rk p r e tty n e a rly
as w ell as 1, a n d w o u ld p e rh a p s h av e som e a d v a n ta g e s o ver 1.
The C h a ir m a n . Is your reason for that because you think that if
the regions were small the demands upon a particular region at
seasonal periods would be too exacting on the local reserve bank?
Mr. V a n d er lip . Yes. There is no spreading of the conditions in
the small regional reserve center. If the demands on all banks
were of the same character and came at the same time there would
be no object in having such an arrangement as we are here providing.
The advantage of this comes through one bank having a strain on it
at a time when another bank is flush, and an averaging of those con
ditions. It follows from that that if you establish a regional center
in a geographical location, where all of the trade conditions in that
circle are the same, where all the demands are coming upon the
banks at the same time, and is of largely the same character, you
will defeat your purpose. You will have a condition where there
will be great danger of exhausting the resources of that bank, because
conditions are the same throughout the territory of the bank.
1933
1934
BANKING AND CUEBENCY.
Senator H itc h c o c k . D o you care to be interrupted as you go along,
or do you prefer to complete your statement ?
Mr. Vanderup. I am perfectly willing to be interrupted.
Senator H itc h c o c k . Then T would like to ask you whether it is
not true that in all European systems—take, for instance, France—
the conditions are practically the same throughout that country in
which that central bank is the central reservoir. There is no diversity
of interest there, where they have a very small geographical extent
of territory.
Mr. V a n d er lip . There is diversity over the whole nation there,
whatever it is, and it must be considerable. You can not say that
France, speaking from the point of demands for borrowing at the
bank, is an absolutely homogeneous country. There is the wineproducing district, the agricultural districts, the manufacturing dis
tricts, and their demands all come at different times and are of a
different character. The one central bank there covers all those de
mands and has the advantage of a flush condition at one point and
a strained condition at another and equalizes those conditions.
Senator H itch co ck . But geographically France is not larger than
some of our States.
Mr. V a n d er lip . But in its business requirements it is certainly
larger than any of them, and those requirements are very seasonal.
With us, however, the seasonal variation is very pronounced accord
ing to geographical location.
Take the central bank established in the territory around New
Orleans. The borrowing there will come from cotton raisers very
largely. It will all come at the same time. The pressure on New
Orleans comes at one season of the year. Now, if that can be equal
ized by including in the territory of the New Orleans bank territory
that is not similar in its climatic conditions or in its industrial or
manufacturing conditions, so that the pressure for loans in one part
of that territory comes at one season and in another part at another,
you will have a far sounder situation and a situation that a reserve
bank can stand up under; whereas if you make these areas too small,
in that they are too similar in condition, you will endanger the bank
and make it almost certain that it will have to go to the larger banks
for help.
#
Senator H itc h c o c k . The reserve bank still has the resource of
procuring currency.
Mr. V a n d er lip . But it may be credit, not currency, that it wants,
and it must have the reserve of gold to support the currency. If the
bank loans down to 33 per cent it can not get any more currency
until it gets some more gold.
It seems to me there are many impressive reasons why there should
be a fewer number of reserve districts.
The C h a ir m a n . If there is a certain number, would you think it
advisable to have a Federal reserve board with power to require one
branch to accommodate another?
Mr. V anderltp . The power of the Federal reserve bank to force
one bank to rediscount for another is obnoxious, but it is absolutely
necessary if we are to have the benefits of the central reservoir and
if you are to have a number of regional banks. A central reservoir
is the desideratum. That is what we must have. You have planned
here to organize 12 banks, and recognizing that after all 12 reser-
BANKING AND CURRENCY.
1935
voirs will not do—that there must be one—then you undertake to
pipe those 12 reservoirs together, and properly so. You must pipe
them together. You undertake to pipe them together by giving con
trol to this Federal board to force loans. I think the Federal board
must have that authority, obnoxious as it is. The obnoxious charac
ter of it would disappear entirely with one central bank. It will dis
appear in a measure as you reduce the number of central banks. I
believe that with four banks the management of those four banks
wrnuld get together with a sufficient understanding of mutual condi
tions so that there would not have to be any arbitrary use of that
power, but power must be lodged with the Federal board, because you
must pipe the banks together, and you must make, in etfect, one cen
tral reserve reservoir.
Senator H itc h c o c k . Would not that same argument go to show,
really, there ought to be one central reservoir for all Europe, and
that all those countries should unite ?
Mr. V a n d er lip . It possibly might be better; but there are condi
tions of language and conditions of government which would prevent
that. It would perhaps be better to have one government in Europe;
but we would hardly undertake that.
Senator H itc h c o c k . I s it not a fact, however, that funds flow from
one bank to another, according to the demands of trade and local
conditions? If there is a stronger demand for money or credit in
one country than another, is there not a tendency for the flow to go
in that direction?
Mr. V a n d er lip . There is a tendency and it is a pretty free flow.
Senator H itc h c o c k . If that is the case in Europe, why would not
that flow naturally result between these 12 banks if it is made volun
tary instead of compulsory?
Mr. V a n d er lip . 1 think there would be very little likelihood of a
voluntary flow for this reason: Let us say the condition at New
Orleans, as we have been using that town as an illustration, becomes
close, while in New York it is comparatively easy. The individual
banks in New Orleans would then probably borrow from the indi
vidual banks in New York. I think the management of the Federal
reserve bank in New York would say that that is the natural way
for New York to relieve New Orleans; that is the natural channel
through which credit should flow, from a community where the rate
is low to a community where it is high, through individual banks.
They would say, if the individual banks in their judgment did not
think it wise to loan to the individual banks where the rate is higher,
“ then probably it is not wise for us, holding the reserves of the in
dividual banks, so to loan.” The individual banks would be perfectly
free to loan to the individual banks in a high-rate community, if all
the conditions of credit and business outlook were such as to warrant
their doing so? Therefore the managers of the reserve bank in New
York, or wherever a low-interest rate was prevailing, would feel, so
far as it was wise, that the individual banks, members of their associ
ation, should make the loans to individual banks, members of the
other association. But it would not be wise as a common practice for
the managers of the reserve bank themselves to loan those funds and
deplete its reserves for that purpose.
Senator H itc h c o c k . But you would empower a body to order it
to do so ?
1936
BANKING AND CUEBENCY.
Mr. V a n d er lip . I would; yes. I would do it with great regret. It
is obnoxious to think of forced credit, but you havegot to obtain, in
effect, a central reservoir, and you can not obtain it unless you can
bring the water level of the supply reservoirs together.
There are other reasons why I think there should be a fewer num
ber of reserve banks. Some of the gentlemen here regret to see the
importance of New York emphasized. To anyone holding that view
I would like to call attention to the fact that the more reserve banks
you have the more you will emphasize the importance of New York.
New York has a fixed minimum of size. You can not very well divide
New York into two central reserve banks, and the greater the num
ber the smaller will be all the banks outside of New York and the
more pronounced will be the predominance of New York. Then, I
think there is this further argument: The Federal reserve board will
presumably be subjected to some political pressure—not political
pressure; I do not mean political pressure, I mean local pressure,
pressure arising from local conditions. That pressure would be
very much relieved if the Federal reserve bank covered a wide terri
tory, and thus became subject to the pressure of diverse local condi
tions and harmonized that pressure. If there is a reserve bank, let
us say, in New Orleans, with a territory in which conditions are
uniform, the pressure from that locality upon the Federal reserve
board to compel loans from other banks would be governed simply
by their view of their own local conditions. Therefore, if that Fed
eral reserve bank in which New Orleans is located took in a very
large territory where there were varied conditions, the reserve bank
instead of the reserve board would be subject to the pressure from
these different localities, and they would be harmonized in the bank,
and the reserve board here in Washington would only have to con
sider the larger and in a less degree these local conditions.
Senator H itc h c o c k . N ow , Mr. Vanderlip, as it is now, the bankers
of the central reserve cities, and especially the bankers of New York
City, respond voluntarily to these various seasonal needs in various
parts of the country. Why, by the same argument would not the
reserve bank of New York City respond voluntarily, by analogy?
Mr. V a n d er lip . They respond now voluntarily, and they will con
tinue to respond voluntarily to as great a degree as it is wise for New
York to be depleted. But the managers of the New York bank, I
believe, would feel that the judgment of how much New York should
loan to other places should rest with the individual bankers. If
these bankers reached a point where they would not loan any more,
it would be hardly the part of the organization holding their re
serves to deplete these reserves by loaning.
Senator H itc h c o c k . If it is the custom of the banks in New York
City now to make these advances to the various parts of the country
when the seasonal demands arise, it seems to me when these New
York banks are united in a reserve bank, holding the stock in that
reserve bank, they would have then, jointly, naturally the same power
that they have now individually.
Mr. V a n d er lip . They are not united to do a general business; they
are united to hold their joint reserves. General business-will still be
done by the individual banks. It is, I trust, no part of this plan
that general business is to be done by these Federal banks. In
normal times the Federal reserve banks ought not to have any large
BANKING AND CURRENCY.
1937
amount of rediscounts. Their power should be conserved. They
should run with very high reserves under normal conditions, and
they should never have money making as a factor in their conduct.
That point, by the way, I thipk is very important and if I may
digress a moment, I believe the plan for dividing the earnings, after
5 per cent is paid upon the stock, in the proportion of 60 per cent to
the Government and 40 per cent to the depositors of the bank, is
absolutely wrong. There should be no division of earnings after the
stock has received a proper dividend. It may be, and I believe it is,
wise to give the stock 6 per cent instead of 5, but it should have no
further participation in the profits. There should never be that fac
tor in the management to make it endeavor to earn profits. The
profits should all go to the Government after the interest has been
earned on the capital stock for which the banks have subscribed. If
there were to be a division, this method of division is wrong. It
amounts to a payment of interest on deposits. The division is to be
made of profits on the basis of the average deposit which a bank
maintains. That is merely another way of saying wTe will give
interest on deposits. You might find a bank under a strong incentive
to work for profit in order to pay interest on its balances. The
theory of the division is wrong, and any division at all is wrong.
Senator R eed . Y ou think, then, that after there has been a reason
able interest paid upon the money contributed by the banks, in the
way of capital or reserves, all of the money should go to the Gov
ernment ?
1
Mr. V a n d er lip . I am perfectly clear on tha .tl believe a great
element of danger will enter in the management of the banks if any
other course is adopted.
Senator S h a fr o t h . D o you believe that these reserve banks will
earn anything above the 5 or 6 per cent?
Mr. V a n d erlip . I think it is impossible to calculate that. From
such calculation as I have been able to make, I would rather doubt—
well, no; let me say it is impossible to state. There are too many
unknown elements. The Federal board is permitted to charge the
banks interest on the Government deposits. How do we know what
they will charge? They will pay it into the profits, whatever it is.
The Federal board is permitted to charge so-called interest on the
notes. What will the charge be? I do not know; nobody knows.
It is impossible to figure the profits of these banks.
Senator S h a fr o t h . It can be made profitable, or make really a
very little profit, depending upon the administration they have?
Mr. V a n d er lip . Yes. sir.
Senator S h a fr o t h . One person here the other day said it was im
possible for any of these banks to make any money whatever, even
to make the 5 per cent.
Mr. V a n d er lip . Well, that, o f course, is hardly a correct view.
Senator S h a fr o t h . Yes; it can not be, from the fact that the Gov
ernment alone will have an account there, at the present time, of
$285,000,000. Then the reserves of the banks amount to $400,000,000
or $500,000,000, and then this capital which is paid in amounts to
$105,000,000. It is impossible to conceive that with $700,000,000 or
$800,000,000 no return whatever can be made from them. But I
would like to have your view; and, of course, as you said, it is a
factor.
1938
BACKING AND CURRENCY.
Mr. V a n d e r l ip . There ought to be no difficulty in earning the 5 per
cent. It is conceivable that the earnings might be very much more
than that.
Senator S h a fr o t h . Would not the tendency to have a division of
60 and 40 per cent, as indicated in the bill, be to make these banks
do business with the regional or reserve banks?
Mr. V a n d er lip . It will have the tendency to put the whole man
agement on a money-making basis. Rather than have them stand in
the attitude of conservation, it will put them into the open market
for investments at times when they ought to be carrying a very large
reserve. Suppose the country bank to-day finds it is in an easy
money market. If its customers are not able to absorb its loanable
funds it goes into the commercial-paper market and buys com
mercial paper. In a little while conditions change, and they come
around with their hat in their hand and say, “ We are sorry; we
made a mistake. We ought not to have bought this paper, and we
want you to take it off of our hands.” Now, we do not want the
reserve banks to get into that situation. We do net want them, in
case they have TO or 80 per cent reserve and are under a compulsion
to make earnings, to feel they must invest that money, and there
fore go into the market, and then, if a change comes, find themselves
unable to meet the responsibilities that are really on their shoulders.
I am very much opposed to the banks being run for profit.
Senator S h a fr o t h . N ow , Mr. Vanderlip, one of the great desires
of this bank is to provide for the raising and the lowering of the
discount in order to influence the flow of gold. Will you give us
your opinion as to whether that is practicable under this bill, and
whether it is not necessary for a bank to go out into the market and
attempt to corral securities or corral money in order to establish
a condition of that kind?
Mr. V a n d er lip . The bill is not clear in its definition of the power
of the bank to go into the open market. I find two opinions as to
what the power of the bank is in that respect. One holds that the
bank may go into the open market and buy prime commercial paper,
although 1 believe it says “ banker’s bill” in the law.
Senator S h a fr o t h . What is a “ banker’s bill” ?
Mr. V a n d er lip . “ Banker’s bill ” is really an English term—a bill
that has been accepted by a bank, a bill that is drawn against a bank
and has been stamped with its acceptance, or a piece of commercial
paper that has been indorsed by the bank.
Senator S h a fr o t h . Is there much of that paper in this country?
Mr. V a n d er lip . There is none of it in just that fo rm . We h av e
not anything in this country that we could p ro p e rly designate, I
think, as a “ banker’s bill.”
Senator H itc h c o c k . I s an acceptance a banker’s bill in Europe?
Mr. Va n d erlip . If it is an acceptance by a bank.
Senator S h a fr o t h . Y ou New York bankers ought to know about
the way to get this gold into this country better than anybody else,
and I would like just to have your views as to how that ought to be
done.
Mr. V a n d er lip . In the first place, I would like to see the law
made clear as to what the powers are that are given to this bank.
It will be very obnoxious to the member banks to have the reserve
banks competitors in the open market with them. Possibly that is
BACKING AND CURRENCY.
1939
necessary. I do not think it is myself, but, as I read the law, I have
supposed that the banks could not go in the market and buy paper,
except such paper as was indorsed by a member bank. But I am
inclined to think I am in error on that point, as I find a good many
other people who think the law provides that they could go into
the market and buy your notes or anybody's note.
Senator S h a fr o t h . I think the bill as originally framed did not
take into consideration the necessity for going into the market in
order to raise or lower the discount, and I think when attention was
called to it they thought they could not establish a rate without that
power.
Mr. V a n d er lip . The best way of doing that, in my opinion, has
been suggested by Mr. Paul Warburg. He believes that a portion
of the present 2 per cent bonds in circulation should be purchased
by the Federal reserve banks, and the circulation retired; that these
bonds should be converted into one-vear notes of the Government,
the banks agreeing always to renew those notes for 20 years on each
maturity.
Senator R e e d . What banks do you mean?
Mr. V a n d er lip . I mean the Federal reserve banks. This would
give the Federal reserve banks a large amount of one-year Gov
ernment notes that would employ their money in times when
otherwise they might have to compete in the market with member
banks thus depleting their reserves, with the result that they would
be able to meet their responsibilities properly when a strain did
come. But it would give them this power: If they wanted to raise
the discount rate, if they believed we were facing a dangerous situa
tion, and that money rates were too easy and that a check ought to be
put upon affairs and the discount rate raised, they would be able to
sell those notes in the open market and deplete the open market of
the reserves, drawing the reserve strength to themselves and dis
posing of those short-time notes. The effect would be immediate,
and the discount rate would of necessity advance.
These notes would also be of great value in the period when gold
exports were imminent or were going on and we did not want to
lose gold. Such notes as these would be available in any market of
the world at the very lowest possible discount rate, and if we were
in a position where Europe could demand gold from us and we
could not with ease part with the gold at the time, then the banks
could sell these notes abroad and liquidate the pressing adverse bal
ance, and in that way retain our gold and bridge over the strain. I
believe something can be worked out in that direction which will give
the banks the opportunity and the power to control the discount
market to an extent. Of course it is only to a limited extent that the
banks ever could control the discount market, but it will greatly assist
them in controlling the gold movement.
Senator H itc h c o c k . That is a little after the English custom?
Mr. V anderlip. Yes; after the “ exchequer b ill” of the English
Government.
Senator H itc h c o c k . Has the Imperial Bank of Germany that
same method?
Mr. V a n d er lip . I can not answer positively. I think it has. I
know the German Government issues short-term notes.
1940
BANKING AND CURRENCY.
Senator H itc h c o c k . In the sale of those notes would not the re
serve bank always suffer loss?
Mr. V a n d e r l ip . It would apparently suffer loss, but it would be
able to recoup itself by the loans that it would be able to make at
a higher rate on the basis of the increasing reserve which it would
have. It would sell the notes and bring in the reserve. The result
of that action would be the depletion of the reserves of the outside
banks and the increase in the rate, and probably this would later
compel the outside banks to borrow. The reserve bank would not
have to borrow, because it had largely increased its reserve by the
sale of the notes, and, I think, in the double operation would recoup
itself for the apparent loss of interest on the notes it sold.
Senator N elson . What rate of interest would you have on those
notes ?
Mr. V a n d er lip . Three per cent.
Senator R e e d . Mr. Vanderlip, at the risk of repetition, I want to
be sure that I understand you. Your proposition is that the present
2 per cent bonds running now for 20 years should be converted into
bonds running for one year—short-time bonds? That is the first
proposition ?
Mr. V a n d er lip . My proposition is that a portion of them should
be converted; some two or three hundred millions should prob
ably be.
Senator R eed . Then you doubt that the banks would agree to re
convert them into long-time bonds?
Mr. V a n d er lip . N o, sir; that they, equally with the Federal
reserve banks, should agree to accept the one-year notes at each ma
turity, not to demand payment, but accept in payment the new oneyear notes.
Senator R eed . That would be all right, as long as the Federal
reserve banks hold these notes. But when they sold these notes in
Europe to get gold, of course, the notes would then go into the hands
of outside parties. What sort of plan would be devised then to avoid
compelling the Federal Government, at the maturity of this bond,
this one-year bond, from having to go into its Treasury to pay them ?
Mr. V a n d erlip . The Federal reserve banks must be under contract
to protect the Government from that. They must always stand
ready to take new one-year notes to the amount which is necessary
to redeem those maturing.
Senator R eed . Then, the plan amounts to nothing more than this,
that the Federal Government would issue these one-year notes and
give them to the banks as a matter of accommodation, to be used by
the banks, and the banks be, in turn, compelled to protect the notes
at maturity and renew them indefinitely, so long as the Government
desired ?
Mr. V a n d er lip . Yes. The advantage of that to the bank is that
the one-year note of that character would be the very highest type
of banking security, whereas the 20-year bond would be an invest
ment security, not a banking security.
Senator R eed . I see. Now, how would you first get these bonds
into the possession of the banks? The Federal Government now
has 2 per cent 20 year bonds out; most of them are held by the banks,
and most of them have been utilized for currency issues. What
would be the method you would suggest ?
BANKING AND CUKRENCY.
1941
Mr. V a n d er lip . The Federal banks would buy at par a certain
amount of these 2 per cent bonds that are now owned by the national
banks and are at the Treasury as security for national-bank-note
circulation.
Senator R eed . Would they then retire the national-bank circula
tion ?
Mr. V a n d er lip . They would probably substitute the new notes
that are provided under this law.
Senator R eed . I will call them asset notes.
Mr. V a n d er lip . Very good. They will substitute those notes. At
first they might not have any commercial paper to secure such an
issue of notes and they would put these new one-year Government
notes under the----Senator R eed (interposing). But we still have not got the oneyear Government notes; that is the first step.
Mr. V a n d er lip . Let me see if I can trace the matter. The Federal
bank will buy from the national banks some of those 2 per cent bonds.
Senator R eed . Y ou mean the National Government ?
Mr. V a n d er lip . N o ; the Federal reserve bank will buy some of the
2 per cent bonds the national bank now holds and has deposited with
the Treasury to secure national-bank circulation.
Senator R eed . Instantly, then, the currency that was issued upon
that bond will have to be retired ?
Mr. V a n d er lip . At that moment; yes. It might also be provided
at that moment that the Federal reserve bank can take out these new
notes, using either the 2 per cent bonds it has just bought as a basis
to secure them or a newTone-year note, into which it, at the moment,
exchanges the 2 per cent bond—the one-year note of the Government.
Senator R eed . That goes into the custody of the Government?
Mr. V a n d er lip . Goes into the custody of the Federal agent in the
same way as commercial paper.
Senator R eed . The one-year Government bonds or the old 20year Government bonds into the custody of the Federal agent?
Mr. V a n d er lip . Yes. Now, as fast as the Federal reserve bank
accummulates commercial paper it could substitute it in the hands
of the Federal reserve agent for these one-year notes, leaving the oneyear notes free in its hands, where it would be in a position to put
them out wThen it wanted to raise the discount rate.
Senator R eed . I am coming to that next step.
I
have cleared up in my own mind this method. We have your
suggestions on that. Now, the gold is flowing out of the country;
we will assume the gold reserves are getting low here. Then you
would simply take these one-year notes and send them to Europe and
sell them, getting gold and bringing it back in ?
Mr. V a n d er lip . Gold, but more probably exchange, which would
amount to the same thing, and would stop the flow of gold.
Senator R eed . And, then, you would put money in your bank,
in the reserve bank, and the reserve bank would raise its rate of in
terest to the member banks desiring to borrow from it to a point
that would recoup any such loss it had suffered bv reason of pur
chasing this gold ?
Mr. V a n d er lip . In that particular case it might or might not h av e
a loss. It might be able to sell those on a 3 per cent basis, or it might
1942
BANKING AND CURRENCY.
not. If Europe was strong and was importing gold it is possible it
could sell those notes for less. It would recoup just as you suggest.
Senator R eed . Y ou have got the Government one-year bond_
that is the proper name by which to call it, I suppose—bearing 3 per
cent interest, and it is now sold to a banking house in London, and it
draws 3 per cent interest. It is simply the credit of the Government
loaned to the Federal banks, extended to it.
Mr. V a n d er lip . Yes, sir; instead of a 2 per cent bond that the
Government formerly was obligated to pay.
Senator R eed . Yes. N ow , does the Government pay that 3 per
cent interest or does the bank pay it?
Mr. V a n d er lip . The Government w ould p a y it.
Senator R eed . Then the Government would have to stand the ad
ditional rate of interest under that plan. Do you think that would
be just and equitable to the Government ?
Mr. V an d erlip . It does not make any difference whether the Gov
ernment or the bank pays it. Let the bank pay it, if you prefer,
because it comes out of the Government. I mean it only reduces the
profits the bank will eventually turn in to the Government. Let the
bank pay it, if you like.
Senator R eed . Your plan would involve the banks taking care of
the principal of that bond at its maturity and also taking care of its
interest ?
Mr. V a n d er lip . And the bank would be in a position to make a
profit because it was able to lend the notes it had secured upon these
new one-year Government notes, and receive interest on those notes.
It would therefore be in a position to recoup the Government.
Senator S h a f r o t ii . Air. Vanderlip, would the withdrawal or the
refusal of the reserve banks to renew the 90, 60, and 30 days paper
upon which they had advanced money or loans, have a tendency to
control the flow of gold?
Air. V a n d er lip . I do not think I quite comprehend your question.
Senator S h a f r o t ii . We will suppose there is a flow of gold to
Europe, and there are notes that have been presented by the in
dividual banks or drafts which have been discounted, and the regional
banks desire to stop the flow of gold. Would there be a tendency to
stop that flow by the banks saying they would not issue any more
currency ?
Mr. V a n d er lip . Anything that will raise the interest rate will tend
to check the flow of gold.
Senator S h a f r o t ii . Well, will not the tendency to stop having so
much circulating medium have that effect ?
Mr. AA n d e r l ip . Any reduction of the circulating medium other
than the normal redemption of bank notes would raise the rate of
interest and would tend to check the flow of gold.
Senator S h a f r o t ii . Could it become effective, do you think, by the
exercise of that power alone, on the part of the reserve banks?
Mr. V a n d er lip . N o. The interest rate would have to be advanced
too violently. It would have to be advanced too far, and even within
any reasonable limits might not check the flow of gold. If European
nations are in an exchange position to demand gold, even though the
rate were very high here, they might still demand it, and the ability
of the bank here to sell something abroad and produce a credit to
meet exchange demands which the European nations hold against us
BANKING AND CUBBENCY.
1943
is the effective way to stop the flow of gold. You can not stop a flow
of gold permanently. If we buy more than we sell we have to pay
for it some time. For a season, for a brief time, we can prevent that
flow of gold. Or at a time when a depletion of our reserves is going
to come with great severity upon 11s, we may be warranted in going to
unusual measures to check the flow of gold at that moment. But we
can not check the flow of gold for a long period if balances are against
us.
Senator H itc h c o c k . Will you explain the exact method which the
bankers in*New York now adopt to check the flow of gold?
Mr. V a n d er lip . They have absolutely no method, [Senator. We
can advance the rate of interest a little, but we have no joint way of
doing that. We may not legally even confer on the subject. New
York City is the greatest free-gold market in the world. Anybody
with credit in New York can get gold, and there is no way at all of
effectively checking it.
Senator H itc h c o c k . Y ou do adopt some methods occasionally?
Mr. V a n d er lip . N o ; we really adopt no method. If gold is going
out and our reserves become impaired, if they fall below the legal
limit, naturally, the interest rates will rise and the rise in interest
rate tends to check the gold movement.
Senator H itc h c o c k . Can you explain how it tends to check th e
gold movement?. What is the exact operation by which the move
ment is checked?
Mr. V a n d er lip . If funds are worth much more in New York than
they are in London the banks, or the individual with funds, which
they can have in either place, will choose to keep some part of their
funds in the higher interest community. There wmuld be the tendency
to draw from New York, if the exchange situation warrants Europe
in drawing, but to some extent this would be counteracted by the
attractiveness of the rates in New York. If a bank can loan money
in New York at a very high rate it will not draw it home at a low
rate.
Senator N elso n . Y ou mean a foreign bank?
Mr. V a n d er lip . A foreign bank; yes, sir. I mean if an English
bank finds money at 6 per cent in New York and 3 per cent at home,
and has a credit in New York, and believes the New York loan is
secure, it will leave at least some portion of the money it could draw
at the New York bank there in order to take advantage of that high
rate.
Senator H itc h c o c k . What I want to find out is how the London
bank maintains those funds in New York. Are they on deposit with
the New York bank?
Mr. V a n d er lip . They are on deposit in the New York banks, and
the New York banks have a fluctuating rate of interest, according
to the call-loan rate. A London bank may also loan in the call-loan
market in New York through its New York correspondent.
Senator H itc h c o c k . H ow many banks, international banks of
that character, are there that use New York as a loaning market?
Mr. V a n d er lip . I am unable to say exactly, but a large number. .
Senator H itc h c o c k . A large number?
Mr. V a n d er lip . Yes. Nearly every important European bank h as
a New York correspondent.
S. Doc. 232, G3-1—vol 3---- 2
1944
BANKING AND CUREENCY.
Senator H iic h c o c k . I s that merely for the purpose of exchange,
or for the purpose of taking advantage of the high rate in the New
York market?
Mr. V a n d er lip . It is more for the purpose of exchange. They do,
however, permit exchange to accumulate during a period of highinterest rates.
Senator S h a fr o t h . Y ou say that this is a fluctuating rate. Is
your payment of interest to outside parties a fluctuating rate?
Mr. V a n d er lip . Not to domestic banks; it is to European banks.
Senator S h a fr o t h . S o that your rates may be 2, 2£, or 1 per cent,
varying each day?
Mr. V a n d er lip . Hardly each day. We would vary it, perhaps,
fortnightly.
Senator H itc h c o c k . Can you give us any idea of the am o u n t of
European capital that is in use at any one time in that way ?
Mr. V a n d er lip . I could not say exactly the amount.
Senator H itc h c o c k . Does it vary?
Mr. V a n d er lip . Undoubtedly.
Senator H itc h c o c k . It is varying with the exigencies of trade ?
Mr. V a n d er lip . It varies with the exigencies of trade and the
demands for money. If there is not a keen demand for money
abroad, and if there is a keen demand for money in New York, a
portion of the funds will stay in New York and be loaned there, and
vice versa. We have in New York frequently loaned very large
amounts to Germany in the last two or three years. Germany has
paid 7 or 8 per cent—that is, the first-class banks there—and we have
permitted funds to accumulate there and made loans because we
could get a higher rate of interest there.
Senator H itc h c o c k . Are those funds in the shape of deposits?
Mr. V a n d er lip . Sometimes, a n d sometimes in actual collateral
loans.
Senator H itc h c o c k . D o you think a regional bank located in New
York would have a better opportunity to control that international
situation than the New York banks now have?
Mr. V a n d erlip . Undoubtedly.
Senator H itc h c o c k . It would unify them?
Mr. V a n d er lip . Yes.
Senator H itc h c o c k . Why are they not united now in that matter?
Mr. V a n d er lip . The Sherman antitrust law may be one reason. I
know of no business whatever where the competition is keener or
more complete than it is in the banking business to-day. We are
as keen to compete in order to get the other man’s customer and secure
the deposits as you will find in any business whatever.
Senator H itc h c o c k . There has been some testimony here and be
fore other committees in Washington to the effect that there really
was no competition on a large transaction in New York; that there
was a combination among the great New York houses, by which if
one named a rate or terms the others abided by it, and the man or a
concern was unable to get credit elsewhere.
Mr. V a n d er lip . I think that is wholly without foundation. It is
true that a banking house which has been doing the financing for a
corporation, and has carried that corporation along through bad
years and good years, furnished them money when they could not sell
BANKING AND CURRENCY.
1945
bonds, and generally fathered them in a financial way—such a bank
ing house feels that the financing of that corporation is its business
and that other banking houses or banks ought not to interfere with it.
To an extent that is respected. Your statement in regard to credits,
however, I do not think holds good at all, because there is the keenest
sort of competition, perfectly open competition, among the banks to
gain deposits and credit.
Senator H it c h c o c k . There is a system of interlocking directors to
some extent ?
Mr. V a n d e r l i p . T o some extent.
Senator H itc h c o c k . And a joint ownership in some other cases?
Mr. V a n d er lip . Yes.
Senator H it c h c o c k . N ow , surely that would result in rather a
community of interest among those banks.
Mr. V a n d er lip . Even in those cases the keenness of the competi
tion is surprising, as I have pretty good personal knowledge. I am
on the boards of some other banks, but I know that the National City
Bank will go after the business, and the other banks will go after the
same business. Competition is very keen, and while there may be
some community of ownership and some interchange of directors, it
does not extend to the officials of the banks. They are working for
the banks by which they are employed, and working very hard and
very keenly.
Senator H itc h c o c k . I s there a standard rate of interest in New
York as there is in London, fluctuating from time to time?
Mr. V a n d er lip . N o, sir. There is a standard rate of interest that
is paid by banks on the balances of other banks—the reserve deposits
of other banks. That is 2 per cent. There is another rate of interest;
that is the call-loan rate. That is the rate that money is loaned at
on the stock exchange to the members of the stock exchange on stockexchange collateral.
Senator H itc h c o c k . H ow is that rate fixed ?
Mr. V a n d er lip . By competition, just as the price of stock is fixed.
Brokers go in there and offer money to brokers who Want to borrow
it, and they compete for it.
Senator H itc h c o c k . Then, there are other rates besides that?
Mr. V a n d er lip . That rate fluctuates daily. Then there is the time
rate on stock-exchange collateral, and the commercial-paper rate, the
rate to commercial borrowers. Of course one of the great things for
legislation to accomplish is to make it unnecessary for us to have to
go into the call-loan market.
At the present time the one place that we have in this country
to loan money to-day and get it back to-morrow, if you want it, is
in the New York call-loan market. Call loan means a call loan in
New York. Practically it does not mean a call loan anywhere else.
In New York it means a call loan repayable at the option of the
lender. If you make a call loan in New York to-day, you can call
it to-morrow without any compunction.
Senator W e e k s . It is equally true that it is payable at the option
of the borrower if he sees fit ?
Mr. V a n d er lip . I mean that in New York a loan is payable at the
option of the lender; elsewhere payment is theoretically at the option
of the lender, but practically at the option of the borrower. It is the
1946
BANKING AND CUBBENCY.
one place you can lend money and be certain you will get it back,
and you can not always be absolutely sure then, because there are
certain times when you can only get it back where the loan is shifted,
and the loan can not be shifted.
Senator R eed . Why is that sy stem in existence in New York and
not elsewhere ?
Mr. V a n d e i i l i p . Because the New York Stock Exchange offers the
one great market for collateral security. If we loan on a stock ac
tively traded in on the New York Stock Exchange, we know that the
borrower can be forced to pay the money, because he can sell. We
demand a margin of 20 per cent between the market price and what
we loan, and under almost any conceivable conditions there will not
be a drop of 20 per cent before you could compel the borrower to
sell the collateral.
Senator R eed . D o you regard that system of loaning large sums
of money upon that class of security as an element of safety or of
danger in the banking system ?
Mr. V an d erlip . An element o f danger and unsound banking, but
the soundest banking we can do under our present system.
Senator R eed . If it is unsound, it ought to be stopped ?
Mr. V a n d er lip . It ought to be, and no one is more anxious than
the great banks of New York to aid in that situation.
S e n a to r R eed . W h y do th e y n o t v o lu n ta rily sto p it?
Mr. V a n d er lip . Because they have nothing to take
its place. We
have got to have a large amount of loans that we can certainly get
when we want the money.
Senator R eed . In other words,you feel that in order to m ake money
that you must keep your capital employed up to a certain limit, and
here is a place where you can employ more of it because you can
demand it back quickly; is that the thought?
Mr. V a n d er lip . The bank of which I am president has $200,000,000
of net deposits; it must keep 25 per cent of that in cash. It pays in
terest on a large amount of deposits and upon all deposits obtained
from other banks. It must therefore employ those funds in order to
get an interest return. It keeps 25 per cent in cash, and it keeps a
secondary line of reserve, amounting to 60 or 70 or 75 millions of
dollars in demand loans, in loans that we can get back, unless the
whole machinery of doing business on the stock exchange is clogged.
Senator R eed . Now, Mr. Vanderlip, you say this is bad banking,
but that it is necessary, however, under our present system, but that
it ought to be done away with, and that implies, of course, something
substituted in lieu of it. What is the system that could be substituted
in lieu of it?
Mr. V a n d erlip . It implies a bank of rediscount, where banks can
be certain that under any conditions they can rediscount their paper.
That converts commercial paper into a quick asset, and permits it to
take the place of call loans. If such a bank can be had, it will turn
several hundred millions of dollars that are now employed in call
loans and other stock exchange loans, into commercial channels. It
will be of vast benefit to the commerce of the country.
Senator R eed . Then, if I am not interrupting you ?
Mr. V a n d er lip . Not at all.
Senator R eed . I thought you had completed your answer.
BANKING AND CURRENCY.
1947
Mr. V a n d er lip . Yes; I h a d .
Senator H eed . Then, if you had a place where you could take paper
and get money on demand, you would loan your money out on 30, 60,
and 00 days, and in that way use that part of your funds which you
now loan on call loans?
Mr. V a n d er lip . Exactly.
Senator R eed . And the thing that is necessary is some machinery
whereby you can certainly turn a 30, 60, or 90 day piece of paper into
cash at once?
Mr. V a n d er lip . That is the thing that is necessary.
Senator R eed . Before I ask you as to the method, I want to have
you tell us just what element of danger there is in the banking sys
tem, in your judgment, arising out of the present method of loaning
money on call, and having it used on the exchange?
Mr. V a n d er lip . There is a disadvantage in that a very great sum
of money, several hundred million dollars that ought to be devoted to
the commerce of the country, is employed in carrying securities.
That is a disadvantage and not a danger. The danger is that we are
depending solely upon these call loans as our secondary line of re
serve. Everything works all right so long as those loans can be liqui
dated, and they can be liquidated as long as they can be shifted from
one bank to another, but there is nothing of a liquidating character
about a loan on stock exchange collateral.
The ideal security for a bank is a self-liquidating loan. A loan to
a merchant for goods that can be sold is a seli-liquidating loan.
Making self-liquidating loans is the business a bank ought to do. It
ought not to loan on real estate, and it ought not to loan an undue
amount of its funds on the securities of corporations, for they will not
liquidate themselves; the only way the bank can get the money is to
shift that loan to some other bank or have the owner of the security
sell that security to somebody else.
Senator R eed . Then, when trouble comes what happens to the
bank which has a large amount of money loaned upon these call
loans, the proceeds of which have been utilized upon the exchange?
Mr. \ a n d er lip . When tro u b le comes the bank forces the borrower
to sell. He must sell, perhaps at considerable sacrifice. All investors
are disconcerted by this fall o f borrowing needs; all investors are
upset because the price of the securities has declined, and there is a
general demoralization of the security market, which involves many
people who have had nothing at all to do with the original loan.
Senator R eed . It becomes a center o f disturbance w hich m ay de
velop into a financial cyclone?
Mr. V a n d er lip . Yes, sir; and it is certain to extend to the com
mercial borrower.
Senator R eed . And to what extent d o you think that factor con
tributed to the trouble of 1907?
Mr. V a n d er lip . It was undoubtedly a considerable factor. Of
course, the trouble in 1907 was occasioned by the banks, but really
caused by our system of disconnected reserves which forced the banks
to seek, properly enough, to protect themselves—for no one else was
going to protect them—and they drew to themselves undue reserves.
1 am speaking of the country banks. They drew to themselves more
reserves than were necessary, because they became alarmed. They
1948
BANKING AND CURRENCY.
put an impossiole burden on the central reserve city banks, a burden
that could not be borne under our system. The central reserve citi
banks did deplete their reserves; they did everything that was
humanely possible under the system, but the system broke down and
there was general suspension.
Senator R eed . Then, of course, if there had not been this deposit
by one bank with another, a large part of it finally terminating in
New York City; if the money had not been there to have gone down,
of course you would not have had that money to loan, you would not
have had it out on call, and therefore, if the reserves had not been
there in the first place----Mr. V a n d erlip (interposing). You think the trouble would
have been avoided? No, sir; it would not have been avoided unless
you had had a central reserve reservoir; if you had had a law----Senator R eed (interposing). Would you not have avoided at least
a part of it? Would it not have been minimized?
Mr. V a n d er lip . It would have been minimized. But if you had
had a law requiring every bank to keep all its reserve in its own
vault, the same sort of trouble might have occurred. That is, every
bank would still have drawn to itself an undue amount of reserves
at the expense of its neighbors, and would still have created—might
largely have created—just the same situation.
Senator R eed . Y ou said “ reserves.” You mean it might have
drawn to itself an undue amount of money?
Mr. V a n d er lip . Yes, sir.
Senator R eed . Over and above th e reserve?
Mr. V a n d er lip . Over and above the legal reserve; yes, sir.
Senator R eed . But to the extent that the banks had their reserves
in New York, to that extent this trouble was increased, because they
had that much more money there to pull away from you at the very
hour when you needed it? That is correct, is it?
Mr. V a n d er lip . That is correct. . And I will say that I believe the
reserve system provided for in this measure is superior to the exist
ing system.
Senator N elso n . I am glad to hear you say so; that is my view.
Mr. V a n d er lip . I will say that although it means the loss of $50,000,000 deposits to the bank I represent, I believe it is sounder eco
nomically than the existing system, and I would be glad to see it in
force.
The reduction of reserve which is provided, from 25 to 18 per cent,
is essential and is not too much.
Senator R eed . Why is that essential?
Mr. V a n d er lip . The reserve of 25 per cent has been carried be
cause we carried the reserves of larger banks. If we are no longer
to carry the reserves of larger banks, there is no longer the necessity
for us to carry that excess reserve. As a matter of fact, if we no
longer carry the reserves of larger banks I can see no reason why a
city bank should carry more reserve than a country bank.
Senator B ristow . That is what was in my mind.
Mr. V a n d er lip . A city bank has more liquid assets than a country
bank. It is in a position to recoup itself for any loss of cash more
quickly. It has far more facilities, and why there should be any
classification into country banks and central reserve city banks if
BANKING AND CURRENCY.
1949
the central reserve city bank is to carry no country bank reserves,
I am unable to see.
Senator H itc h c o c k . While you may not have the reserves of these
banks under the new system, you still have large country balances
subject to withdrawal.
Mr. V a n d er lip . I doubt it, sir. I can see no reason, if the national
clearing-house feature works, why one bank need keep a balance with
another bank.
Senator H itc h c o c k . Y ou still continue to pay the 2 per cent inter
est on balances?
Mr. V a n d er lip . Yes; but they will not keep it for that alone.
Senator H itc h c o c k . I s it not a fact that they have in New York
all the time a much larger amount of money than in country banks
and larger than the law calls for?
Mr. V a n d er lip . Yes, sir; because of the collection system. If you
have a national collection system, a national clearing house, there
will be very little, if any, need for one bank to keep a deposit with
another. I believe that for a good while the small borrowing banks
will prefer to do business with their old friends, and banking rela
tions rather than go to the new reserve bank to rediscount, and there
will be a tendency to continue the old relationship. And there may
be, therefore, some considerable balances, but I look for the almost
complete elimination of national bank balances with other banks.
Senator H itc h c o c k . N ow , Mr. Vanderlip, is it not a fact that you
pay 2 per cent on country balances?
Mr. V a n d er lip . Yes, sir.
Senator H itc h c o c k . If the law prohibited you from paying 2 per
cent on country balances, would there not be a very material reduc
tion in the amount of balances that the country banks would keep in
New York?
Mr. V a n d er lip . With the existing reserve provision?
Senator H itc h c o c k . Under the existing law; yes, sir.
Mr. V a n d er lip . There would be a considerable reduction.
Senator H itc h c o c k . Can you estimate how much that would be?
What per cent it would be?
Mr. V a n d er lip . I would hardly want to venture a guess without
giving it more consideration.
Senator H itc h c o c k . Does not that fact prove it is to secure the 2
per cent interest that the large balances are kept and that the New
York banks give the 2 per cent in order to get the balances to use in
New York?
Mr. V a n d er lip . No ; it does not prove that, I think. It proves that
the country bank is doing with its balance just what we are doing in
the call market; it is providing a secondary reserve upon which it
gets a low rate of interest, but which it can call and turn into money
at any time it wants to. That is what we do with call loans; we
sacrifice the interest rate to immediate availability, and the country
bank keeps a balance at a lower rate than it could get otherwise, and
even a higher balance than is made necessary by the legal require
ments in order that it may get it quickly if it should want it.
Senator R eed . Mr. Vanderlip, this bill provides for these reserve
banks. It is safe to assume that one of them would be located in
New York.
1950
BANKING AND CURRENCY.
Mr. V ander I i p . I have' n o t kn o w n w h e th e r it w as safe to assum e
or not, I am g la d to h e a r it.
Senator Reed. I think it is a reasonably safe assumption. N owt, if
that were done and this bill were enacted into law and that bank
established, do you think, after a study of the bill, that that would
provide a safe means, practical working means by which the banks
of New York and that region could obtain money in time of necessity,
so that it would take the place of your call loans and the system
which is now in vogue? Would a bank have enough money? Would
it have enough facilities?
Mr. V a n d er lip . There are two fundamental shortcomings in the
bill that will prevent it working successfully to accomplish what you
outline. The one is—a subject I have referred to—the fact that you
have not got a central reservoir; you have 12 reservoirs. I believe that
will work very much against its successful operation. The other is that
you have not provided an elastic note issue. That is just a question
of mathematics. Not to go into the subject of whether the Govern
ment or the bank should issue the note, I will say parenthetically I
am perfectly clear in my mind that the bank and not the Government
should issue the note. But passing.that, you have provided that the
2 per cent bonds now in circulation can be redeemed, 5 per cent a year,
into threes, and there has been a presumption that the bonds would
be so redeemed and the $741,000,000 of national-bank notes would be
retired.
I
challenge that assumption. The 2 per cent bonds with the cir
culation privilege will be worth more than the 3 per cent bonds with
out the circulation privilege. A bank buying 2 per cent bonds at
par, taking out circulation and losing from its reserve the 5 per cent
redemption fund as the bill provides, will still make a profit of 1.18
per cent if it can keep the circulating notes out. That, with the 2
per cent the bank gets as interest on the bond, makes a return of 3.18
from the 2 per cent bonds, wThereas the return from the 3 per cent
bond is only 3 per cent. I t is just a question of mathematics. The
twos will sell higher than the threes. If the twos will sell higher
than the threes they will not be exchanged; they will continue as
a basis for the existing national-bank-note circulation. That ex
isting circulation of nearly $750,000,000 is irreducible, and you will
have no room for an elastic note issue. You will have to reduce the
present national-bank notes in order to make room for elasticity.
We have circulation enough now for any ordinary conditions. It
is onty under extraordinary conditions, or at least under the condi
tions of special claims of crop-moving periods, that we need any more
than we have now. We probably have really a redundancy, and
there wTill be no room for expanding and contracting currency until
we retire some of the present national-bank notes and replace them
with the note issue that will respond to the demands of commerce.
Therefore, I say you have not provided an elastic currency, which is
one of the essentials of a good measure.
Senator R eed . I am not sure that I followed your mathematics on
the 2 per cent and 3 per cent bond question. The present 2 per cent
bond, of course, pays its 2 per cent, and then currency is issued upon
it. Then the currency can be loaned out----Mr. V an d erlip (interposing). And we pay a tax on the currency
of half of 1 per cent and we pay certain expenses of the compth a t
BANKING AND CURRENCY.
1951
troller’s office, and we have to put up, under this law, a 5 per cent
redemption fund, which will not count as reserve. Therefore, on
$100,000 of twos we Avould get $95,000 of loanable currency. The
result of taking out the currency and loaning it in that way is a profit
of 1.18. A bank buying twos at par, taking out circulation, depos
iting a 5 per cent redemption fund with the Treasury and not count
ing that in its reserves will make a total equivalent of 3.18 per cent
on the bond.
Senator S h a fr o t h . Y ou deduct also the one-half per cent tax?
Mr. V an d ek lip . I am deducting also the one-half per cent tax.
Senator H ollis . What rate do you assume you w ill lo an at?
Mr. V a n d er lip . Five per cent.
Senator R eed . Following that suggestion of Senator Shafroth’s,
the interest rate, of course, varies ?
Mr. V a n d er lip . I am assuming a 5 per cent interest rate.
Senator R eed . If you take the 3 per cent bond, of course, you do not
get any currency upon it?
Mr. V a n d er lip . Y ou just get your straight 3 per cent.
Senator R eed . S o, you say, the present 2 per cent bond, with the
circulation privilege, is a more valuable investment than the 3 per
cent bond without it?
M r. V a n d er lip . Y es, sir.
S e n a to r R eed . By 0.18 o f 1 p e r cent?
Mr. V a n d er lip . Yes, sir.
Senator W e e k s . That is, to the bank?
Mr. V a n d er lip . T o a b a n k ; yes, sir.
Senator R eed . Of course, that would indicate
then—-your objection
is that this plan retires the national-bank note?
Senator N elson . No ; that it does not.
Mr. V a n d er lip . My objection is that it does not retire the nationalbank note, which should be retired.
Senator R eed . In other w o rd s, you mean the national-bank note
should be issued upon the 3 per cent bonds ?
Mr. V a n d er lip . N o, sir.
Senator R eed . Issued upon what?
Mr. V a n d er lip . I mean that at least some portion of the present
mass of national-bank circulation should be retired. To do that you
must refund or buy some portion of the 2 per cent bonds that are now
under the national-bank note circulation.
Senator R eed . This bill provides for the retirement of those
bonds----Mr. V a n d erlip (interposing). In 20 years. That is n o t soon
enough.
Senator R eed . Five per cent a year.
Mr. V a n d er lip . But the banks will not retire 5 per cent a year. If
the bank finds the 2 per cent bond more valuable, it will not volun
tarily give up the 2 per cent bond for the 3 per cent bond, and there
fore I say that during the 20 years you will not get the retirement.
Senator R eed . So this claim that these 2 per cent bonds are not
worth their face would not seem to be very well taken, would it?
Mr. V a n d er lip . The bonds are worth their face to any bank that
will hold them to maturity and that is certain to be able to keep out
the circulation.
1952
BANKING AND CURRENCY.
Senator R eed . Suppose that we keep out this $750,000,000 of bank
circulation and that there is no change in the amount which we now
have. Still is there not an element of elasticity provided in this bill
when it is stipulated that promissory notes indorsed by regional banks
can be turned into money ? Is not that an element of elasticity ?
Mr. V a n d er lip . It is an element of elasticity if people want more
currency. There is no thing that the law has less to do with than the
amount of money you carry in your pocket, and the amount of money
that the people of this country carry in their pockets will not be in
fluenced by your legislation. They will determine that, and the sur
plus they will redeposit in banks. If they want an increasing amount
of currency they will get it. If they do not get it in the form of a
bank note—which is the form in which they ought scientifically to
have it—they will have it in gold. They will carry in their pockets
what they need. They are the ones to determine the volume of cur
rency circulation. They alone will determine it; the regional banks
will not determine it nor will any Federal board. It will be the people
themselves. And any surplus will always be deposited in the banks;
and any demand for more will come out of the banks’ reserves. You
can not help th a t; you have got to start with that as something that
is fixed outside of your deliberations.
Senator R eed . I understand, of course, that the people are always
going to carry around some money. They always have. Rut the
question I am asking—and I am not sure 1 made myself plain; per
haps I did not grasp your answer—is this: If it is provided that any
national bank or any member—I will use that term—desires money
it can bring up its securities and turn them into money, and that
would provide a means when that bank needed money for it to get
it, would it not?
Mr. V a n d er lip . Let me ask you, what does a bank need w ith
money ? It has two needs: One is for reserve money and one is for
money to pay out. The people will determine whether the bank is
paying out money or receiving money. The bank will not determine
that. For reserves under this bill it does not need all money; it only
needs part money and part balances with a Federal reserve bank.
These notes, of course, would not count as reserve in any event, so
the bank will only need notes if the people need more of them. If
the people do not need more notes the bank can not make any use of
them. It can not go and get these notes and put them in its reserve.
They will not count there. The bank can only get rid of them if
people want more money in their pockets.
Senator R eed . That is the one time it needs them.
Mr. V a n d erlip . They have money enough in their pockets now, so
it is only in the exceptional case that we will be using these new notes
unless we retire some of the present notes.
Senator R eed . Yes; but, of course, if we cut down our currency
that is now out one-half it would follow that immediately they wpuld
begin using a large amount of this new money.
Mr. V a n d er lip . Yes.
Senator R eed . I grant you that. But suppose we do not cut it
down, still if we had a plan by which in the event of a demand for
money that demand could be satisfied this bill would be elastic, or
would provide an elastic system to that extent?
BANKING AND CUBBENCY.
1953
Mr. V a n d er lip . For the peak of the load; yes.
Senator R eed . It would not be elastic for all times, but for all
abnormal times----Mr. V a n d erlip (interposing). It performs about the same thing
that the Aldrich-Vreeland bill would perform were the taxes there
imposed not so heavy.
Senator R eed . What you would prefer would be to retire a part of
our present circulating medium, and, having cut it down, to at once
create a necessity for some of this other money, and then that banks
should issue—your preference would be that the banks should issue
that additional amount of money?
Mr. V a n d er lip . My preference would be to retire a considerable
amount of the present national-bank notes, to replace them with new
notes, such as provided in this bill, and replace the 2 per cent bonds
that secure these present notes with one-year Treasury exchequer bills.
Senator N elson . Three per cent?
Mr. V a n d er lip . Three per cent.
Senator R eed . And I believe you mentioned about $300,000,000?
Mr. V a n d er lip . That w o u ld be ample.
Senator H itc h c o c k . What is your ground for saying that, in your
opinion, the present currency is redundant?
Mr. V a n d er lip . There is a constant redemption, of course, of the
present bank notes, at certain seasons of the year. In the springtime
they pile up on us in New York; they pile up everywhere. We all
have too much money. The interest rate drops too low. There is
not a proper redemption of them, and, if they are redeemed, they
are put right out again.
Senator H itc h c o c k . I s there not a very well-known cause why
those national-bank notes pile up on you in New York? Is it not
because the banks of the interior are unable to use them in their re
serves, and the only way they can make a proper use of them is to
send them to you, where they would count as reserves? And when
they reach you you can not count them as reserves and you send them
to the Treasury to get something that will count as reserves?
Mr. V a n d er lip . And then the Treasury sends them out and they
are at once paid out by the banks, and the circle goes on.
Senator H itc h c o c k . Yes; but it is because they do not count as
reserves, and the bank is constantly striving to maintain a reserve
that they send them to you?
Mr. V a n d er lip . Yes; that is an important factor in their redemp
tion—
Senator H itch co ck (interposing). My point is this, that redemp
tion does not necessarily indicate redundancy, but merely indicates a
scarcity of reserve money.
Mr. V a n d er lip . That is true.
Senator H itc h c o c k . It seems to me that that does away with your
statement----Mr. V a n d erlip (interposing). I do not think it necessarily indi
cates a scarcity of reserve money, and it may indicate a redundancy.
Senator H it c h c o c k . Why otherwise would a bank, say, in my town,
Omaha, send national-bank notes to you instead of gold certificates?
Mr. V a n d er lip . Because we will pay 2 per cent interest. The gold
certificates do count as reserve.
Senator H itc h c o c k . That is the reason they keep them in Omaha ?
1954
I
BAN K IN G AND CURRENCY.
Mr. V a n d e r l i p . Yes.
Senator H itc h c o c k . And, therefore, the redemption of these na
tional-bank notes—$300,000,000 a year, right from New York City —
indicates no redundancy of currency, it seems to me, but a lack of
reserve money; a struggle to get hold of reserve money. Is not that
true ?
Mr. V a n d er lip . It indicates a disposition to retain reserve money
in their own vaults and get rid of money that will not count as
reserve.
Senator H itc h c o c k . Before you proceed, do not the statements of
all the national banks combined show that the actual amount of re
serve money in all those banks during the past year has been down to
a minimum?
Mr. V a n d er lip . Yes; almost at the lowest in our history.
Senator H itc h c o c k . Does not that indicate a lack of money, in
stead of a condition of redundant currency?
Mr. V a n d er lip . It may indicate a very expanded state of loans.
Senator H itc h c o c k . Have you any other reason for saying that,
in your opinion, the currency is redundant?
Mr. V a n d er lip . I do not state that the currency is redundant,
except at certain seasons. As we stand now, the volume of bank
notes remains about the same, in spite of these redemptions, from
month to month. It is no larger in October than it is in April.
The need for currency is probably $300,000,000 less in the spring
than it is in the fall, so it is either very redundant in the spring or
lacking in the fall, one or the other. I presume we are about at an
average balance, that we are lacking in the fall to some extent and
redundant in the spring to some extent, but we have no conformity
of volume to our needs.
Senator H itc h c o c k . N ow , h a v e you any estimate as to what de
gree of elasticity should be given to our whole volume of currency?
Mr. V a n d er lip . Why, really, it ought to be just the decree that
the people want a bank note instead of a bank balance. The thing
ought to be interchangeable. Anybody with a credit in a bank ought
to be able to take that credit in the form of a balance on the deposit
books of the bank or in the form of a circulating note. That is the
ideal elasticity—the same elasticity as there is with a check. You
write a check when you need it, and it is returned when you are
through with it, when it is paid.
Senator H itc h c o c k . Assuming we have gold and currency com
bined of something like $3,000,000,000, gold currency and silver com
bined of $3,000,000,000. what per cent of that should be subject to
contraction and expansion?
Mr. V a n d er lip . My estimate is—but I will say there is no way
I know of making a very accurate estimate—that we need $300,000,000 more currency in the crop-moving season than we do in the
springtime.
Is that about right, Senator?
Senator W e e k s . I did not understand that.
Mr. V a n d er lip . We need $300,000,000 more currency in the cropmoving season than we do in the springtime.
Senator W e e k s . We know about what the East, commencing with
• Chicago, ships South for that purpose, and I suppose $200,000,000
to $250,000,000. I am not quite sure.
BANKING AND CURRENCY.
1955
Senator H itc h c o c k . D o you mean bv that, in the season when we
need the least we have an excess now of $300,000,000?
M r. V a nderlip . We have an excess now of some p a r t of $300,000,000. In seasons when we need it most we have a deficiency of some
part of $300,000,000. I will not undertake to say just where the
line is.
Senator H itc h c o c k . Let us divide it between the two and say
$150,000,00. Then, why do you favor the tearing up of the whole
bank-note systme as it now exists in order to secure an excess of
$150,000,000 at certain seasons of the year?
Mr. V a n d er lip . It is just as important to secure th e redemption
of that $150,000,000 at the other season of the year.
Senator H itc h c o c k . Because it p iles it up in New York?
Mr. V a n d er lip . Yes.
Senator H itc h c o c k .. Suppose the law prohibited the piling of it
up in New York?
Mr. V a n d er lip . The la w can not prohibit all the things it under
takes to.
Senator H itc h c o c k . The law can direct where the national banks
shalls keep their reserves.
Senator N elson . Where they pile it up somewhere in the country;
it does not do any harm where it accumulates in the country bank.
Mr. V a n d er lip . Would not the country banks have the same mo
tives as the city banks if it finds it is very flush in funds? Would it
not be apt to make loans it otherwise would not?
Senator H itc h c o c k . It is not the experience. The trouble always
originates in New York.
Mr. V a n d er lip . The trouble rarely originates in New York, but is
always exhibited there, because it come up along the line. The
country bank calls on the reserve correspondent, and the reserve cor
respondent calls on New York. I t is merely exhibited there as a
culmination of the pressure.
Senator H itc h c o c k . The experience of France, even with their
very expansive currency—the aggregate of the expansion and con
traction, as I recall it, is something like only 8 or 10 per cent. Maybe
it is only G or 8. The expansion occurs in January or February, and
the contraction occurs in August, almost with a uniformity. The
great mass of the banking currency of France remains always out
side.
If the great body of our currency must be always outside, why
have that part elastic? Why not allow the permanent part to remain
as it is now and only provide an elastic cushion on top of it?
Mr. V a n d er lip . That is all you have done in this bill. The
cushion is extremely thin—so thin it won’t save you from jars.
Senator H itc h c o c k . Y ou think it would not be taken up to any
great extent?
Mr. V a n d er lip . Yes.
Senator H itc h c o c k . Would not, in a short time, the growing needs
of the country demand another increase of bonds, and would not
increased needs of the currency arise and cause aji elastic demand
for this provision?
Mr. V a n d er lip . They will in time, if you want to legislate for the
future instead of for the present. In this connection there iS one
great danger to which I want to call your attention.
1956
BANKING AND CURRENCY.
Senator S h a fr o t h . Just before you leave that, you indicated this
currency would not be taken up. How much paper do you estimate
there is now of the kind specified in this bill as being required in
order to issue currency upon?
Mr. V anderlip. I would not undertake to estimate it in dollars. I
believe the supply is ample, or at least would soon become ample as
we adjust our business practices to the needs for creating this type of
paper. I think the discount provisions are wise and well considered.
Senator S h a fr o t h . H ow much call money is there used in New
York City, if you can give a rough estimate of it?
Mr. V a n d er lip . I have not the figures in m y mind. I have one
interesting figure in that connection. At the moment there happens
to be $180,000,000 of outside bank money loaned on call in New York
City, and I have known it to be as high as $300,000,000.
Senator S h a fr o t h . It varies and fluctuates?
Mr. V a n d er lip . Yes. That is outside money loaned on commer
cial discounts.
Senator S h a fr o t h . There would be, in addition to that, some New
York discounts, would there?
Mr. V a n d er lip . Many millions.
Senator S h a fr o t h . D o you think it is as much as a hundred mil
lion dollars?
Mr. V a n d er lip . More th a n th a t.
The C h a ir m a n . In the hearing, on page 773, is a table of those
outside loans, Senator, which were gathered together by the comp
troller’s office.
Senator S h a fr o t h . Yes; I will be glad to look at that; but I want
to ask one more question in this connection: When your banks make
a call for a loan—that is, a call loan—where does the man get his
money from to pay you?
Mr. V a n d er lip . From another bank.
Senator N elson . If he can get it?
Mr. V a n d er lip . Yes; if he can get it, or b y selling the security.
There is no other way. There are just two ways of getting it, either
by shifting the loan or selling the securities.
Senator S h a fr o t h . And then he has to sell at a sacrifice when he
has to sell his securities?
Mr. V a n d er lip . Yes.
Senator W e e k s . Mr. Vanderlip, I would like to clear up something
you have just stated. You say at present there are $180,000,000 of
money loaned by New York for country banks on call loans. Does
that include loans made for foreign banks as well?
Mr. V a n d er lip . I presume it does. That amount would not be an
important part of it, however.
Senator W e e k s . You have stated that at times there is a consider
able amount of money loaned for foreign banks, varying, of course,
with rates.
Mr. V a n d er lip . Yes.
Senator W ee k s . Three or four years ago I was on a committee to
look into the Canadian system, and the Canadian banks were verv
free to tell us how their loans were made and where they were made,
and I was amazed at the amount of money they loaned to New York,
or were loaning at that time. I do not remember the definite figures!
BANKING AND CUBKENCY.
1957
but it would be a very large per cent of $180,000,000, loaned by banks
of New York on stock-exchange collateral. I know it impressed me
with the idea if the Canadian banks on some one day called all of
their loans it would create a very serious condition in the New York
market.
Mr. V a n d er lip . That condition is very serious. There is no re
serve held against the possibility of those demands from the outside.
If a New York bank loans on call, it loans a deposit and it keeps a
reserve against that deposit, so that it has something there against
that liability. But the outside banker loaning it can demand the
whole of the loan and take it right out of New York, and it is a
factor of very great danger and one that in time of trouble has
several times been shown to be of great danger.
Senator B ristow . Mr. Vanderlip, I was interested in your state
ment to Senator Reed, that the 2 per cent bonds were worth par for
circulation purposes. Why are they now selling below par?
Mr. V a n d er lip . Because the bankers, I suppose, do not know just
what legislation we are going to have. They have seen a bill
started without a provision for these bonds. This bill may now
pass without any provision for the bonds. I, as one banker, do not
want to accumulate bonds until I know something about the future
legislation that will protect their value. I said, too, that they would
be worth par for that purpose. They are worth par if a Govern
ment obligation paying 3.18 is worth par. If a Government obliga
tion paying that was not worth par, these bonds would not be. They
are worth more than par if a 3 per cent bond is worth par. Of
course when a 3 per cent bond is not worth par, this new issue of
bonds would not sell at par. The present 3 per cent bonds, without
the circulation privilege, are quoted just under par now, and with
any large addition to the volume of such bonds, I am certain they
would go further below par. No foreign Government ever floats
a bond at anything like that basis.
Senator B ristow . New York is the market place for these bonds,
is it not?
Mr. V a n d er lip . Y es.
Senator B ristow . A re m any o f them being put on the m arket
there now ?
Mr. V a n d er lip . Not very many, because there is no one who is
willing to buy them and there is no increase in circulation. The
tendency now is to decrease circulation. The thing that always held
up the bonds has been a constant demand for increase in cir
culation. Now that demand has ceased, and certainly no one wants
to buy them for investment. The only market for the 2 per cent
bond is made by the banks, and the banks not being clear as to the
future are not disposed to buy. On the other hand, there is not a
large disposition to sell at a sacrifice. The tendency is to hedge, and
there is very little doing.
Senator H itc h c o c k . Su p p ose th e b ill provided that all o f the
n ation al banks h a v in g circulation should continue to have circula
tion on a bond-secured basis, w ould there be a m arket?
Mr. V a n d er lip . The bill does provide fo r th a t.
Senator H itc h c o c k . T here is no provision for retirem ent?
Mr. V a n d er lip . N o forced retirem ent; only voluntary.
Senator H itc h c o c k . At the end o f 20 years it is forced ?
1958
BANKING AND CURRENCY.
Mr. V a n d er lip . Yes.
Senator B ristow. I can hardly understand your statement, then,
that these bonds are profitable to the bankers if they retain the cir
culation privilege.
Mr. V a n d er lip . That is, you do not see, then, why the banks do
not buy them?
Senator B ristow . I do not see why they want to sell them if they
are profitable—more profitable than any other Government bonds
will be.
Mr. V a n d er lip . Because they are not sure what this legislation is
going to do.
Senator B ristow . Suppose the circulation privilege is going to con
tinue for all these bonds?
Mr. V a n d er lip . They may, then, have in mind to retire from
the national-bank system, and these bonds in the hands of any other
holder than a national bank would not be worth par; they would
be worth less than par.
Senator B ristow . D o you think the indication, then, is that the
national banks expect to leave the system or fear others will ?
Mr. V a n d er lip . Undoubtedly.
Senator B ristow . It is an indication of the unpopularity of the
bill?
Mr. V a n d er lip . There are many indications of that.
Senator W e e k s . Would not you say “ uncertainty relating to the
bill ” rather than “ unpopularity ” ?
Mr. V a n d er lip . I think there is both among bankers.
Senator B ristow . D o I understand you then, Mr. Vanderlip, that,
in your opinion, the reason the 2 per cent bonds are now sold for
95 is that country banks or national banks are contemplating the
sale of these bonds and offering them for sale with a view of getting
out of the national banking system?
Mr. V a n d er lip . Or fear other banks may go out of the national
system and there will be more of these bonds for sale than the banks
can absorb, and in the hands of holders other than banks they are
worth very much less than the present price.
Senator B ristow . Of course, I suppose you will come to that, but
I would like to follow that up now or at some other time, as to why
these banks expect to go out of the national-banking system.
Mr. V a n d er lip . They object to forced subscription of capital;
they object to the risk that that capital will perhaps not earn 5 per
cent, or if it earns 5 per cent it will pay less than their other invest
ments. They object to joining a bank if it may be forced against its
will to loan to another bank. The country bank objects to the na
tional clearing-house measure, which I believe will be of great
economic advantage to the country, but which I recognize will cost
the country bank some profits in its collection business, just as I
believe that the new reserve requirements are superior to the present
reserve requirements, although the change will cost my bank $50,000.000 of deposits.
Senator N elson . D o you mean $50,000,000 of deposits or $50,000,000 of profits?
Mr. V a n d er lip . Oh, deposits. It takes us a long time to make
$50,000,000 of profits. [Laughter.]
The C h a ir m a n . Y ou recognize the difference?
BANKING AND CURRENCY.
195 9
Mr. V a n d er lip . It is a class of deposits, too, Senator, that is the
least profitable of any we have. I believe we will make up for those
in various ways, some ways, perhaps, that will not be altogether to
the satisfaction of those who want ito see the importance of New
York reduced as a financial center. I do not believe this measure
will so reduce New York.
Senator R eed . What are those ways? I am interested right now.
[Laughter.]
Senator N elso n . He wants it out at Kansas City.
Senator R eed . No ; I want to be frank, because when a man jests
here, he is liable to be misunderstood.. I would not make war on New
York. I would like to know what might happen under this bill, and,
incidentally, if I could move it to Kansas City, I would, if Senator
Nelson did not keep it from us and take it up to St. Paul.
Mr. V a n d er lip . To-day the National City Bank keeps $70,000,000
of demand loans. Under this new requirement I do not see that it
would have to keep any, or at least a very much smaller amount.
That will release, then, some considerable portion of that $70,000,000,
which we can devote to other purposes. We can lise it for commer
cial loans, and that will be one field where the city banks will become
more active. I believe we will go out in the country for commercial
business.
The C h a ir m a n . And it is a much more profitable business, is it
not?
Mr. V a n d er lip . It is a very much more profitable business. And
I think, too, that the city banks would come in competition with the
country banks for this commercial business. We are restrained from
coming in competition with the country banks now, for two reasons:
We do not want to interfere with our correspondent, our client who
keeps his money with us, and we do not want to go into his field and
take business away from him. Furthermore, we can not offer quite
equal terms to the borrower, because we have to charge for the col
lection of all of his checks. Under the new arrangement, having no
relations with our correspondent bank, his deposit having been with
drawn and placed in his own vault or the Federal reserve bank, we
would have no compunctions, certainly, against invading his field and
going after commercial business. Further than that, we can offer to
the country commercial borrower the same terms for collecting his
checks as his local bank could offer. So I think we will become com
petitors for business in a much wider circle.
Then, this will release some part of this $70,000,000, which we can
use for financial operations. I do not look upon this measure as a
blow at the size and the future of New York banks, providing you
will fix up some of these things which, as I am trying to indicate,
will, I believe, keep it from working and fulfilling the mission you
want it to fulfill.
Senator R eed . If your bank to-day wanted to buy paper in the
country, there are plenty of places it could go to buy paper that
yon need not conflict with any of his customers, are there not?
Mr. V a n d er lip . Buying paper is one thing and having deposit
relations with the borrower is another. Of course we buy paper
by the millions, right along. We buy that from the commercialpaper brokers and have no relations with the maker of the paper.
With our customer, we loan in return for his keeping a balance.
S. Doc. 232, 63-1—vol 3----- 3
196 0
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BANKING AND CURRENCY.
i
S e n a to r H e e d . Y ou m ean , th e n , t h a t th e re su lt o f th e b ill m ay be
you w ill h av e m o re m oney to lo a n on co m m ercial p a p e r ?
Mr. V anderlip. Yes.
Senator R eed . That, after having known a merchant, we will say,
in Pittsburgh, who desires, at times, large accommodations, he would
deposit perhaps in your bank a portion of your own funds. Instead
of putting them in his bank and having his bank carry them over
there, he would carry them there himself?
Mr. V a n d er lip . Y es.
Senator R eed . And
thereby would establish banking relations
with you, and when he needed an accommodation he would come
to you for it ?
Mr. V a n d er lip . That is exactly what will happen, I believe. And
it will be an advantage to the merchant. One of the aims of this
bill, as I understand it, is an equalizing of the interest rates. It will
raise the rates in the cities and lower them in the country, and we
will get a higher average interest rate than we do now. We have
had to take a low interest rate on the great mass of call loans. We
will be able to devote that to commercial purposes and get a higher
average rate than we do now, and I welcome the change.
Senator R eed . Just in proportion as your bank will do business
with individuals through the country, and comes thereby in com
petition with the local bank, the borrower will get a benefit in that
competition ?
Mr. V a n d er lip . Yes.
Senator R eed . And he is the most numerous class.
Senator W e e k s . D o you know what the average interest you get
on stock-exchange loans is, and what would be the average you got
on commercial loans for the past year, or a period of years ?
Mr. V a n d er lip . I do not believe I could give you th e commercial
loans.
The C h a ir m a n . I put a table of those interest charges in the
record, running through from 1906 to date.
Senator W ee k s . Y ou mean on different classes of loans?
The C h a ir m a n . Yes.
S enator W e e k s . I would like to have Mr. Vanderlip give it to us.
Mr. V a n d er lip . In 1909 the average was 2.74; 1910 the average
was 2.95.
Sen ator R eed . W h a t is that on?
Mr. V a n d er lip . Call loans.
Senator N elson . Par m oney?
Mr. V a n d er lip . Par money. In 1911 the average rate was 2.60,
and in 1812 the average rate was 3.70, and for 9 months of this year
the average was 2.92. The average for the 4 years and 9 months
has been 2.98.
Senator W ee k s . Without figuring the cost of doing business, just
what do you have to get to break even?
Mr. V a n d er lip . 2.66. Y ou are speaking o f bank deposits?
Senator W ee k s . Yes.
Mr. V a n d er lip . We pay 2 per cent on bank deposits. We
can
only loan 75 per cent of these deposits. We must loan at 2.66 in
order just to break even, to say nothing whatever of expenses.
BANKING AND CUBKENCY.
1961
Senator W e e k s . Then, eliminating the cost of doing business, you
have made a profit during the years which figures in that of 0.32
of 1 per cent?
Mr. V a n d er lip . That would be so if we had loaned all of our bank
balances on call. We loaned a large part of them on call, but not all,
and the average rate would be higher.
Senator R eed . H ow is the ordinary com m ercial rate in New Y ork
C ity? W hat does it run?
Mr. V a n d er lip . Four to five and one-half per cent, I would call an
ordinary rate. When it reaches 6 it is considered very high. When
it reaches 4 it is pretty low. That is about the range for the com
mercial borrower.
Senator N elson . T h at is the tim e borrower?
Mr. V a n d erlip . Yes.
Senator B ristow . D o you now handle a great deal o f com m ercial
paper from the country?
Mr. V a n d er lip . Yes.
Senator B ristow . A gentleman in my town complained to me,
referring to a personal incident for illustration, that last fall, while
he had been getting money in New York (he was a wholesale mer
chant) at certain seasons of the year at from 34 to 4£ per cent, they
were now charging him 6. Do I understand you to mean that if you
did not have these reserve deposits and were not loaning on time
loans you would handle more of that kind of business?
Mr. V a n d er lip . Y ou understand me to say that if we have a cen
tral bank, at which we can rediscount commercial paper, making
commercial paper a liquid asset, we will then have no necessity for
devoting a large amount of our funds to call loans on stock exchange
collateral, and can divert the funds now used for that purpose to
commercial loans.
Senator B ristow . Yes; I understand now , I think. That is, th is
commercial paper you can turn into cash at any time?
Mr. V a n d er lip . Yes; under the proposed p la n , i f i t w orks.
Senator B ristow . B y g o in g to the F ederal bank?
Mr. V a n d er lip . Y es.
Senator B ristow . And that makes that valuable
because it w ill
carry a higher rate of interest than you have been getting on stockexchange loans?
Mr. V a n d er lip . Exactly.
Senator B ristow . Suppose the farm mortgage could be cashed in
at those Federal reserve banks just the same at any time you wanted
to. Would that be desirable?
Mr. V a n d er lip . It would be most undesirable, just as it is most
undesirable to permit those banks to rediscount loans made on stockexchange collateral. The liquidating character is different. There
is nothing liquidating about a farm loan.
Senator B ristow . But if the Federal bank will discount the farm
mortgage for you, just as it rediscounts a piece of paper, it would
not make any difference to you?
Mr. V a n d er lip . Not until the bank got involved. It might then.
Senator B ristow . Y ou think the Federal bank might get involved?
Mr. V a n d er lip . I kn o w i t w ould.
1962
BANKING AND CURBENCY.
Senator N elso n . There is this difference, Senator, that I want to
call to your attention, although I am in favor of farm loans. They
have in New York a market for stocks and bonds, and I know t»f no
market equivalent to that for farm mortgages.
Mr. V anderlip. That is exactly the difference.
Senator N elson . If you had that same market for farm mortgages
as you have for stocks and bonds on the New York Stock Exchange,
then I should regard farm mortgages as liquid as those others.
Mr. V a n d er lip . Neither should be acceptable for rediscount.
S e n a to r N elson . In tim es o f strin g e n c y , the only liq u id loans are
b ills d ra w n u p o n p ro d u c ts — b ills o f la d in g drawrn u p o n p ro d u c ts
th a t a re salable.
Mr. V a n d er lip . Yes; that is substantially so.
Senator N elson . The product pays your bill.
Senator B ristow . The commercial paper, however, is not exactly
that kind of security.
Mr. V a n d erlip . It should be a self-liquidating loan that is made
to a person who will receive the money to pay it off as a result of
the completion of the cycle of the trade he is engaged in.
Senator B ristow . That takes in a very small part of our business,
does it not, as a country?
Mr. V a n d er lip . N o ; I think it takes in a very large part. It is
true the borrowings of the manufacturer for an extension of his
plant would not come within that definition. If he borrows to build
a new building, you might just as well loan a farmer on his real
estate mortgage. That is capital invested. If he borrows to buy
raw material, if he borrows to pay labor, all of which is going to
work out in the manufacturing product, so that when that product
is sold he can repay his loan, that is the proper type of security to
put in the rediscounts of the reserve bank.
Senator B ristow’. Suppose he borrow’s to buy a herd of cattle,
w’hich he expects to feed and turn off.
Mr. V a n d er lip . An ideal loan.
Senator B ristow . But under this bill, under the 90-day provision,
it is not available, because you can not make 90-day notes for that
purpose.
Senator S h a fr o t h . Oh, yes you can. That is perfectly available.
Senator B ristow’. N o. They make their notes for six to nine
months, as a rule.
Senator S iia f r o t h . Oh, well, they can cash them after the ex
piration of three months.
Senator B ristow’. Oh, yes; but it is not available at the time it is
made.
Senator N elson . The same rule, Mr. Vanderlip, would apply to a
merchant in the interior wTho buys a big bill of goods in New York
from the wholesaler, and he expects to retail those goods, and he
expects to pay for the goods out of the proceeds of his retail sales,
wmuld it not?
Mr. V a n d er lip . That is a typical example of a bank loan.
Senator N elson . That would be like the other case you put, of the
manufacturer?
Mr. V a n d er lip : Yes.
Senator S h a fr o t h . Mr. Chairman, I suggest the hour of 1 o’clock
has arrived when, according to our resolution, we are to recess.
BANKING AND CURRENCY.
1963
Senator N elson . I would like, Mr. Chairman, to have Mr. Vanderlip permitted to go through and indicate what he thinks are the
defects in this bill, and what he thinks ought to be the proper form
of the bill.
Senator H itc h c o c k . Y ou mean instead of having the questions?
Senator N elson . Yes. Let him make one clear statement, and
then ask the questions afterwards.
The C h a ir m a n . If that is the pleasure of the committee, when
the committee reassembles after the recess, we will do that. The
committee will now take a recess until 2.30 o’clock p. m.
(Thereupon, at 1.05 o’clock p. m., the committee took a recess until
2.30 o’clock p. m.)
AFTER RECESS.
STATEMENT OF FRANK A. VANDERLIP— Continued.
The C h a ir m a n . Y ou may proceed, Mr. Vanderlip.
Mr. V a n d er lip . I w ill a d o p t th e m e th o d o f ta k in g th e b ill up
section b y section.
I object to the number of reserve districts. I explained this morn
ing the reason for that. I believe that one would be the ideal thing.
If that is not possible, any reduction below 12 is better than 12. I
believe it would work much more satisfacoritly with no more than 4.
There would be a more intimate relation and better understanding
between the managements, and with the four city centers, their geo
graphical extent would be sufficient to express varying conditions,
and for many reasons they would be preferable to 12. I still think
that 1 would be preferable to 4.
I note that the bill says that—
No Federal reserve district shall be abolished or the location of a Federal
reserve bank change except upon the application of three-fourths of the mem
ber banks of such district.
I think it would be an improvement to say one-half. It would be
be very difficult to get three-fourths to agree to a change which a
majority might clearly see would be an improvement.
1 am not going to confine myself entirely to offering objections to
the bill, but discuss it generally. There is a very general objection,
on the part of many bankers, to being required to subscribe to the
stock. That is not pleasant, but I believe it is necessary in order ever
to get a bill into operation. I think one bank would be waiting for
another, and without the required subscription to the stock it would
be very difficult ever to get the reserve bank started. The amount of
the stock issue subscription seems to me correct.
Senator H eed. What page are you dealing with?
Mr. V a n d erlip . Page 3. There certainly should be no bank or
ganized with less than $5,000,000 capital, and I believe it is desirable
to increase that amount and no thave too small Federal reserve banks.
Senator N elson . If we had four we could easily increase that?
Mr. V a n d er lip . If you had four you could have a capital of $25,000,000, if all the national banks came in.
Senator P omerene. When you speak of the amount, you mean the
amount of the capital stock of the original bank, and not the amount
which the member bank is required to subscribe?
1 964
BANKING AND CURRENCY.
Mr. V a n d er lip . I referred to the amount that each member bank is
required to subscribe when I said the amount seemed correct. I have
no objection to the 20 per cent of the stock of a member bank being
the amount it must subscribe. There is, of course, objection to that
on the part of the banks that feel that that is a forced use of their
capital at a lower rate than they are in the habit of earning.
Senator H itc h c o c k . What would you th in k about organizing one
or two at the present time on a voluntary basis, allowing the others to
come along naturally?
Mr. V a n d er lip . I am afraid that on a voluntary basis you would
have every bank waiting to see what would happen, and you would
not get anywhere. This is not a house that you can build a story at
a time. The principles which must be involved in correct legislation
are so interrelated that you must recognize and embody practically
all of them to have a workable system.
Senator H itc h c o c k . What would you think about making it obli
gatory upon banks of a certain capital, say, $250,000, and optional
with smaller ones ?
Mr. V a n d er lip . That would probably save the national banking
system from a great depletion of national banks. I believe if the bill
passed in its present form a great number of small banks would cer
tainly go out of the national banking system, and possibly a great
many large banks would also. In some States there would un
doubtedly be a tendency to turn national banks into State banks and
then take time to consider whether they would join or not.
The bill leaves it optional with State banks. It is therefore quite
possible for a national bank to convert to a State bank charter
and take its time to see how this thing works.
There is no longer left any reason why a bank should be a national
bank instead of a State bank, except a small profit that it can make
during the next 20 years on note circulation. That is almost a
negligible thing. But there is no other reason that I see where there
is an advantage in a national charter over a State charter.
There are many reasons why a State charter is more advantageous
than a national charter, and I should think there were likely to be
many banks which would surrender their national charters and take
out State charters, some, perhaps, immediately, and join the Fed
eral reserve banks and others which wait and see how the thing
works.
The C h a ir m a n . Mr. Vanderlip, if the country banks were to with
draw their reserves and not send them to New York, would they not
have their money at home to lend at a higher rate and therefore
make a profit out of it ?
Mr. V a n d er lip . I do not quite comprehend your question.
The C h a ir m a n . Y ou stated that from your own bank $50,000,000
would be withdrawn ?
Mr. V a n d er lip . Yes.
The C h a ir m a n . Where they now get 2 per cent. Since they would
have a place where they could get money if necessary—out of the re
serve bank—would they not be able to use the money they have now
tied up at 2 per cent and lend it in their own neighborhood at a
higher rate ?
BANKING AND CUBRENCY.
.1 9 6 5
Mr. V a n d er lip . With the reduction in the reserve requirement the
country banks could extend their loans a good deal. That reduc
tion would lead the country banks to extend their loans.
The C h a ir m a n . Then it w ould be beneficial fo r them, w o u ld it not?
Mr. V a n d er lip . I think in a reduction in the reserve requirement
down to a point that is safe for the bank to run on so that it may
extend its loans would be beneficial for them.
The C h a ir m a n . And if the country banks had a place from which
they could get money instead of, as now, relying upon the central
reserve cities, they would rely upon the central reserve bank and in
that way could lend the money which they now have tied up at 2
per cent.
Mr. V a n d er lip . Yes; the country banks would undoubtedly be
pretty well situated and satisfied if the Senator’s suggestion that
banks of $250,000 be compelled to come in and the smaller banks
not be compelled to come in.
Senator W e e k s . All of that $50,000,000 to which you referred
would not be available to loan, because the country bank would have
to transfer a certain part of it to the reserve bank.
Mr. V a n d er lip . There is only 3 per cent; the difference between
15 and 12 per cent.
I was going to say that the country bank would probably welcome
the organization of such a system which would be imposed only on
the larger banks, leaving them to operate outside the system, and with
the assurance that the larger banks, through the facilities of the sys
tem, would always be in a position to rediscount for them. The aver
age country banker would rather do this business with his old cor
respondents than take the chances of having to rediscount with the
new Government organization, which will impose a good many regu
lations that might be trying to the borrower.
Senator H itc h c o c k . Would not there be another advantage in
that—that a country bank in a western State, doing business through
a correspondent, would rediscount paper with the correspondent,
and that correspondent, if necessary could rediscount that paper
with the reserve bank. The reserve bank would naturally discount
a good deal of paper for the larger western banks that would in turn
discount for the smaller banks ?
Mr. V a n d er lip . U ndoubtedly.
The C h a ir m a n . The country
banks would get the benefit of the
system without bearing any of its burdens?
Senator R eed . Not all of the benefits.
The C h a ir m a n . They could get the accommodation they wanted
from the reserve city banks.
Senator R eed . They still would be required to keep in their own
vaults their full reserve when this system was working. They could
not put it into the central bank or the regional bank and have it
earning anything.
The C h a ir m a n . The suggestion of Senator Hitchcock, as I un
derstand it, wTould involve the keeping of the reserves as they are at
present if those banks did not come in?
Senator H itc h c o c k . Yes.
Senator R eed . Of course they lose some advantage. But they
would have this advantage: They would get relief through the relief
1 966
BANKING AND CURKENCY.
(which could be given to the larger banks, the larger banks in turn
accommodating them.
Senator H itc h c o c k . I do not see why they should not be permitted
to keep their reserves with the regional reserve banks as well as with
a member bank.
Senator B ristow . A number of country bankers who have ap
peared before us say that 5 per cent reserve is not enough for them
to keep in their vaults; that they require more than that. Most of
them say they carry from 8 to 10 per cent.
Mr. V a n d er lip . Under the new conditions they probably would
find that they would not need as much in their vault as they need
now; that is, if they were close to a reserve bank or a branch of a
reserve bank where they could quickly get additional currency. There
might be banks where 5 per cent would not be enough. On the other
hand I think there are many banks where 5 per cent is more than
necessary, and wyhen I come to the section about reserves I should
strongly recommend that the banks be not compelled to keep 5 per
cent in the vaults, but to keep as small an amount as they choose, and
that they ought to have an option as to where they keep it.
Senator W e e k s . If that option wyere given to banks in a center like
New York, they would keep substantially all the reserve in a reserve
bank?
Mr. V a n d er lip . Substantially all of it; only keep till money. We
would prefer to carry a bank credit than the actual cash.
Senator S h a fr o t h . Y ou could borrow7 part of it back, also?
Mr. V a n d er lip . Yes; that is, the member banks could borrow it
back and use it in other transactions. Two-thirds of the deposited
reserves the reserve banks could use in the ordinary transactions of
their business.
The C h a ir m a n . His suggestion wyas as to the country banks, which
are required to carry 5 per cent with the reserve bank, 5 per cent in
their own vaults, and 2 per cent optional; that they have practically T
per cent optional, so that they could use that without its being a
violation of the rules, and 5 per cent could be loaned.
Mr. V a n d er lip . N ow , Mr. Chairman, passing on to the election of
the directors of Federal reserve banks, it is provided that all the
banks shall be divided into three groups of equal number, and as
nearly as may be of similar capitalization in each group. Taking
the country as a whole that would result in groups of 2,464. The
first group would represent $67,000,000 of capital; the second group,
$142,000,000 in capital; and the third group, $836,000,000 in capital.
You therefore propose to give the same voting powTer to representa
tives of $67,000,000 in capital that you give to representatives of
$836,000,000 in capital. I question whether that is fair or not. In
any event I see no permanent purpose in this division into groups.
In the first election each group is to elect one director, as I under
stand it, and thereafter only one director is elected at a time, because
the terms eventually become three-year terms and all the groups will
be voting for one candidate. As I read the bill this division will
only apply to the first directors elected.
The power of the Federal reserve board to remove, at its discre
tion, the directors of class B is objectionable. It is declared that they
may remove if it appears at any time that any such director does
BANKING AND CURRENCY.
1967
not fairly represent the commercial, agricultural, or industrial inter
ests of his district. I do not see exactly how a Federal reserve board
is to be a good judge of whether the director fairly represents those
interests or not. In any event, it is obvious that the control which
the Federal reserve board will have over the local Federal reserve
banks might be subject to bad use, as long as it can remove the three
directors that it appoints, and can also remove three other directors
that have been elected. It is true that the removal of those directors
would be followed by the election of other directors by the stock
holders, but it seems to me an unnecessary power, and I know that
bankers generally regard it as one of the distinctly unsatisfactory
features of the bill.
Senator S h a fr o t h . Would not the fact that the three directors
had to be reelected by the stockholders act as a deterrent on the part
of the Government or the administration in removing them unless
there was good cause?
Mr. V a n d er lip . I can imagine a Federal board telling those three
men to shape their views to coincide with the views of the Federal
reserve board or they would be removed, and rather than be removed
they would shape their views that way. I think this might allow
a malign influence.
Senator S h a fr o t h . That would not be a removal on the ground
that they did not represent the commercial, agricultural, and in‘dustrial interests of the districts they represented.
Senator N elson . It is discretionary; it would be simply their
judgment that they did not represent them.
Mr. V a n d er lip . And there is no appeal from that.
Senator N elson . There is no trial of that issue. They could
simply assign that as a reason, as a ground, without any foundation
in fact.
Senator S h a fr o t h . I do not believe they would do that.
Mr. V a n d er lip . Section 7 provides for the division of earnings.
It tends to make the bank managers run the banks for profit, as I
understand that the way the earnings are to be divided is that they
are proportionate to the deposits.
Senator H it c h c o c k . Does not that tend to the mobilization of re
serves ?
Mr. V a n d er lip . I do not comprehend that it does in the least.
Senator H itc h c o c k . If you offer an inducement for the banks to
keep substantial deposits there, that certainly intensifies mobiliza
tion. A bank might keep its required reserve and nothing more, but
if it has an inducement to keep more, if there is any virtue in
mobilization, this encourages mobilization.
Mr. V a n d er lip . I think that this reserve might better be employed
as a basis for commercial loans in its community.
Senator H itc h c o c k . That is assuming that the reserve has been
fixed at the ideal point, and it is assuming that it can make the loans
in its own community. Suppose it has a surplus. Instead of lending
that surplus and that deposit, it has an inducement to put that in
the reserve bank.
Mr. V a n d er lip . It would no longer deposit it in other banks.
Senator R eed . One of the arguments which has been made for this
or some similar measure has been that there is a shortage, at times,
1968
BANKING AND CURRENCY.
of money in one section of the country and a surplus in another, or
a shortage in one community and a surplus in another, and it has
been argued that if this surplus, wherever it existed, went into a
center, then it would be in a position to be loaned out to the part of
the country that wanted that money. You do not think there is much
in that argument, I take it?
Mr. V a n d er lip . No ; that is not exactly the correct theory in this
bill, as I see it. The surplus will not be put in as a reserve, but in the
discount market, to buy commercial paper, where the interest rate
is high and the need is great.
Senator R eed . Not as a reserve, but the idea, to express it a little
more fully, as it has been urged here with persistence, has been that
there is always enough money in the country to do the business of
the country, but that it piles up in some one city, we will say, in New
York City, at a given period of the year and that at the same time
they need money in some other part of the country. It has been said
that if a proper bill were drawn it would make that money available
at all times where it was needed.
Now, assuming that the reserve bank has in it simply legal de
posits, that is, legal reserves, and that there was a profit to be real
ized from the operations of that bank, and that there was a surplus
of money in the banks of some section of the country, the question is
whether they would then be deposited and the reserve bank be put in
a position to discount paper which came in from other banks and re
lieve the situation of that community ?
Mr. V a n d er lip . The situation would be relieved in two ways. A
bank in a community where there is a plethora of funds would keep
its reserve with a reserve bank, but would use its surplus of loanable
funds to buy in the discount market, paper that originated in a com
munity where there was a deficiency of funds. The bank in the com
munity where there was a deficiency of funds would be able to re
discount at the reserve bank, and make good any depletion that that
demand for funds had caused in this reserve. So that a proper
measure will operate in those two ways, the creation of a discount
market, and the creation of a central reserve reservoir; and the insti
tution that can rediscount for the banks whose reserves are depleted,
having all the reserves in this reservoir, has a basis for this power
so to rediscount.
Senator R eed . Y ou would apply that simply to the reserves and
not to the surplus over the reserves ?
Mr. V a n d er lip . The banks in the district where there is easy
money will probably not keep any more than their legal reserve with
the reserve bank. They will employ that in the discount market.
If they can not loan it in their own community they will go where
they can get a higher rate.
Senator R eed . That would be true to-day. Now, the question is----Mr. V a n d erlip (interposing). It is not altogether true to-day,
Senator.
Senator R eed . If we apply this system, is there any advantage in
having the reserve bank always in a position to receive surplus
moneys from one community and buy the paper of another com
munity where they need that money?
Mr. V a n d er lip . That is not the business o f the reserve bank. The
surplus moneys o f one community should be invested in the discount
BANKING AND CUEBENCY.
1969
market in the purchase of paper originating in the other communi
ties. The business of the reserve banks is to hold the reserves and to
rediscount for reserve purposes the paper of member banks, but not
to invest here and there, according to whether money is easy or not.
Senator R eed . Then we come to the proposition that you do not
think there is very much in the argument that the central bank, the
reserve bank, would become the market place in which the surplus of
one community would be transferred to the other place?
Mr. V a n d er lip . I think it would be very bad banking, and if it
did become the market place, the market place would be the discount
market, and that you can not create without a central bank. In order
to have a discount market you have got to make liquid the commodity
you sell there; that is, commercial paper. You can only do that by
having a central bank, to which the purchaser can go to rediscount.
A central bank is necessary for the creation of a discount market,
and the discount market is the place where surplus funds will be
invested.
Senator W e e k s . Let me ask you if you do not think the greatest
difficulty in our situation in the past has been that under our law
New York and the central reserve cities have really been put in a
position of creating central banks, and that those banks have been
given the power to recoup their resources in case of a strain, so that
New York has really been the clearing house of all their troubles?
Mr. V a n d er lip . We have a one-armed central bank. We have
held the reserves and had no power to issue notes, and the moment
circulation was diminished we have had to give up our reserves. It
has been an impossible role to play. It has been like creating a
central bank without creating a note-issue privilege.
The C h a ir m a n . It also compelled you to lend on the stock market,
did it not, on call loans?
Mr. V a n d er lip . We are absolutely compelled to do it. There is
no desire whatever for the banks of New York to loan upon stockexchange collateral. Why should they want to loan at 3 per cent
when they could otherwise get 4 or 5 per cent ? They are compelled
to do it, because they are compelled to have this secondary line of
reserve. They are compelled to place their funds where they can get
them back quickly.
When a New York bank buys a piece of commercial paper, that
paper has got to lie in its portfolio until it matures. There is noth
ing the New York bank can do with it. It will not do to invest its
funds in commercial paper. It must invest in something it can turn
back into money if its country correspondents demand money. So
we have hundreds of millions of dollars invested in call loans.
Senator W e e k s . D o you believe, Mr. Vanderlip, that you express
the views of New York bankers generally on that subject ?
Mr. V a n d er lip . In just what particular?
Senator W e e k s . I mean in the particular that it is undesirable to
loan so much money on stock-exchange collateral.
Mr. V a n d er lip . I think so.
Senator B ristow . Mr. Vanderlip, if you did not pay interest on
these reserve deposits, you would not have to make these loans in
orders to keep even, would you ?
1970
BANKING AND CURRENCY.
Mr. V anderlip. Well, we are doing business for profit. That is
the object of running a bank.
The C h a ir m a n . Y ou have to do that in any event in order to have
quick assets; in order to have a quick reserve you have to do that?
Mr. V a n d e r l ip . Yes. I do not care whether it is bank deposits or
anything else; you have got to have a quick reserve. Our legal limit
is 25 per cent. If we get a call that takes us below it, we are in
an illegal position and we have got to be able to recoup ourselves.
We can not sit still and wait for a commercial note to mature. We
have got to get money. In order to do that we must have some of
our funds in call loans.
Under the new plan our commercial paper is available for money.
Now when we make a commercial loan it must mature. Under the
new plan we will have two ways of converting it into money—one
to sell it in a discount market and the other to take it to the reserve
bank and rediscount it.
Senator B ristow . Having these millions upon which you are pay
ing 2 per cent, it becomes imperative that you get some return, does
it not?
Mr. V a n d er lip . It is imperative, anyway, Senator, that we have
invested some of our funds that we can quickly realize on. Suppose
the New York banks had no bank deposits, but merely commercial
deposits, and suppose the reserve was fixed at 25 per cent, or any
other amount. The desire to make money will tend to make us loan
down to the legal minimum of 25 per cent. If we have any sudden
call from any customers and get below our limit, it is necessary to
recoup ourselves. In order to do that we have to have some invest
ment we can dispose of. We can not dispose of commercial paper.
All we can do is to sit and wait for the commercial paper to ma
ture. So we must either carry an investment or make a loan on call
that we can get back. You get commercial paper which has the
quality of being turned into cash and you do away with this neces
sity, and there is no motive but necessity for investing in call loans.
Senator R eed . Y ou could carry a sum much larger than your legal
reserve and use that, but that would cut into your profits very
materially?
Mr. V a n d er lip . Yes, sir. If you are running a bank for profit,
you would run with as low a reserve as permissible.
Senator N elso n . The other alternative would be that these $180,000.000 that you have in call loans—the other alternative would be
to keep that money in your vaults?
Mr. V a n d erlip . Exactly; and the figure is much larger than
$180,000,000. That figure is what out-of-town banks are loaning in
the call-loan market at the moment.
Senator N elso n . If you could not have a secondary reserve, you
would have to have an immense primary reserve?
Mr. V a n d er lip . Y ou have got ,to have it in one or the other.
Senator H itc h c o c k . I think you testified that the average rate
was 2.90.
Mr. V a n d erlip . The average for the last five years.
Senator H itch co ck . And your own deposits cost you 2.66?
M r. V a n d er lip . Y es, sir.
Senator H itc h c o c k . S o that
per cent?
your net earnings are one-third of 1
BANKING AND CURRENCY.
1971
Mr. V a n d er lip . T h a t w o u ld be th e case if we in v ested all o u r b a n k
d e p o sits in call loans.
Senator H itc h c o c k . Just take i t for illustration; there is a mar
gin of one-third of 1 per cent ?
Mr. V a n d er lip . Yes.
Senator H itc h c o c k . Suppose you stop paying interest and simply
invested these country bank deposits in perfectly good bonds which
fluctuate very slightly. Why would not the country be better off,
and you be better off?
Mr. V a n d er lip . Bonds fluctuate very slightly, unless they are
forced upon the market at a time when there are no buyers. Suppose
we are in the position of having invested the reserves of the country
in bonds, and the country wanted those reserves from all New York
banks that had done that. Our position would be very precarious.
We would have to sell the bonds in order to get money, and there
would be no buyers. We would have to take losses.
Senator H itc h c o c k . Suppose you invested only one-half of your
reserves in 4 per cent bonds; you would be better off, as far as interest
was concerned; you would have a larger amount of cash.
Mr. V a n d erlip . We do invest some part of the bank surplus in
bonds. The National City Bank carries about $30,000,000. I regard
that as a proper investment for a portion of a bank's capital. I do
not regard it as a proper investment for any considerable amount of
a bank’s deposits.
Senator H itc h c o c k . What would be the effect if the law prohibited
you from paying interest on reserves?
Mr. V a n d er lip . It would be rather a happy effect for the New
York banks, I should think. If the reserve law were the same as it
is at present, we would hold less of the money of the country banks.
Senator H itc h c o c k . More w ould be kept at hom e, w o u ld it not?
Mr. V a n d er lip . Not very much more. They keep at home all they
nped. It is as I have said. In the event of the establishment of this
central reserve bank, a New York bank would keep about all of its
cash with the central reserve bank. A bank would rather have a
sound-bank credit than to be burdened with cash, if it does not need
the cash. I do not believe that a country bank would keep any more
cash than it needs.
Senator H itc h c o c k . Is there not an inconsistency in arguing
against a reserve bank dividing its earnings, as a party at interest, on
country bank balances, and yet advocating the paying of interest
on country bank balances by New York banks?
Mr. V a n d er lip . The function of the two is entirely different. The
New York banks are run for profit; that is why they are there. If
conditions are such that they can not make profits, they will not be
there. The Federal reserve banks ought to be run for the conserva
tion of the resources of the country.
Senator H itc h c o c k . Because the New York banks are run for the
purpose of making money it has been deemed disadvantageous to
have the large balances pile up there under the form of investment,
but because the reserve banks are run for the benefit of the country
it seems to be desirable to pile up reserves there and mobilize the bal
ances of the other banks. So it seems to me your arguments ought
to be reversed, and you ought to be in favor of not allowing the New
1972
BANKING AND CURRENCY.
York banks to pay interest, and you ought to be in favor of having
the reserve banks pay interest.
Mr. V a n d er lip . I would prefer to have the surplus funds invested
in the discount market, so that the money will find its way into some
other channel, in fact, where the demand is greater and the interest
rate higher.
Senator R eed . H ow would you reach this stock-exchange call loan
proposition? Would you do it by prohibiting the loaning of money
upon stocks as collateral?
Mr. V a n d er lip . I think nothing could be more foolish.
Senator R eed . H ow would you do it?
Mr. V a n d er lip . I would do it by providing a place to rediscount
commercial paper, so that banks can have their commercial paper
liquidable, and they will then need no prohibition. They will loan
where they will get the highest rate. As long as commercial paper
will pay a higher rate than a stock-exchange loan they will loan
through buying commerical paper.
Senator R eed . Suppose the stock-exchange rate went up, would
they not be in danger of going there and investing their money unless
they were prohibited from doing it?
Mr. V a n d er lip . I s there anything criminal in a man’s owning
security and borrowing on it ?
Senator R eed . Not the least; but we are speaking of the objection
which you described as dangerous this morning, namely, the loaning
of money on call upon stock-exchange securities, which you said
was an element of danger. We want to avoid that. I am asking
you to tell us, as a practical man, how that can be avoided. We have
already spoken now of the plan for providing a place where banks
can cash their commercial paper, which removes a part of the tempta
tion that now is before the bank; indeed, we might say the neces
sity which is now before the bank.
I want to know how we can absolutely prohibit that kind of busi
ness. Is there any way you can do it ? A moment ago you charac
terized my suggestion as a very foolish one.
Mr. V a n d er lip . Oh, no; I did not know you made that suggestion.
I characterized as foolish a suggestion that would prohibit any loan
ing upon corporate securities. It would not only be foolish; I think
it would be disastrous.
Senator R eed . I did not make that suggestion. I asked you a
question.
Mr. V a n d er lip . Y es.
Senator R eed . T hen you leave the banks free-----Mr. V an d erlip (interposing). I leave the banks free.
Now, they
are under necessity to do this, but under the new condition they
will not be under a necessity. And they never will do it unless the
stock-exchange loan pays more than the commercial loan.
Senator N elson . A nd, as a rule, they do not?
Mr. V a n d er lip . A s a universal rule they do not now.
Senator R eed . But you see no objection, if a man wanted to bor
row money of a bank and came down and wanted to give his note for
1 day or 30 days presenting as collateral the stock of the Steel
company or a railroad company----Mr. V a n d er lip (interposing). I see no objection to that form of
loan. I see great objection to it becoming the predominant thing
BANKING AND CUKEENCY.
1973
and the only basis for the secondary reserves which is our present
situation, but I see no objection to that type of loan.
Senator R eed . In other words, if a bank had some of that, but
had some place to go and cash its commercial paper when it needed
money no danger would exist beyond the short time call loans?
Mr. V a n d er lip . That is the exact statement of it.
Senator B ristow . N ow , Mr. Vanderlip, in answering Senator
Hitchcock when he suggested that if you had this money that you
have in call loans invested in good 4 per cent bonds, it would be more
profitable than carrying, as you do now—when you get only about
one-third of 1 per cent—your objection was that you could not real
ize cash on the bonds?
Mr. V a n d er lip . Yes, sir.
Senator B ristow . N ow , if you could take those bonds to the Fed
eral reserve bank and get cash would it not answer the same purpose ?
Mr. V a n d er lip . I would consider that absolutely wrong m
principle.
Senator B ristow . N ow , w h y ?
Mr. V a n d er lip . For this reason: It is simply a shifting of the
loan, and there is no way of immediately liquidating that loan. The
only way holders of such a loan can get their money is by shifting
it from one place to another. The thing that should be the basis of
all loans at the central bank should be their inherent self-liquidating
quality.
Senator B ristow . Y ou expect the central bank to collect this loan
and you be relieved entirely—the Federal bank collects this paper
which you rediscount there, does it not?
Mr. V a n d er lip . Practically, yes.
Senator B ristow . And you have nothing more to do with it ?
Mr. V a n d er lip . No ; we have rediscounted it. It is in their port
folio, and when it becomes due it will be paid at whatever point has
been provided in the note, supposing there was no intervention on the
part of the discounting bank. It might be that the bank discounting
the note would want to have the note in its possession and get it
paid and would substitute some other note of a longer maturity a
few days before its own maturity.
Senator B ristow . H ow is that? The bank that discounted it
would take another note, and they would take that other note up.
Mr. V a n d er lip . It would be quite likely, if it wanted to take up
its loan at the central bank. It would then substitute a new note for
a maturing note, and it is to be presumed it would do that a day or
two before the maturity, so as to have the note in its own hands when
it matured.
Senator B ristow . And then, if it wanted to extend that note, or
collect it----Mr. V a nderlip (interposing). It would be free to do what it chose.
Senator B ristow . That would be very convenient for the bank
that was in the same city where the Federal bank was, but it would
be very inconvenient for a bank that was 1,000 miles away from
that city.
Mr. V a n d er lip . There never ought to be that distance intervening.
There should be many branches. I have no objection to multiplying
branches as much as you choose, within reason. I think no banks
should be more than overnight from a branch, and in the practical
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BANKING AND CURRENCY.
working out, it should probabty never be but a few hours away from
a branch. It would be with the branch that this paper would be
lodged.
Senator B ristow . Now, in the country a vast amount of this bank
able paper is not expected to be paid, and is not paid; it is renewed
from month to month. I think that is not true in the cities so much.
But would not this system put that country bank that does not have
this three-months’ paper under a very great disadvantage as com
pared to the city branch ?
Mr. V a n d er lip . Yes, sir; it would put that country bank at some
disadvantage as compared with a State bank doins business in that
city, because the State bank would say to the customer, “ We will
make a nine-months’ loan to you.” The national bank would say,
“ We will make a three-months’ loan, and we will renew it.” The
customer would say, “ Maybe they will renew it and maybe they
won't. Perhaps it would be better to make this for nine months, and
I will go to the State bank.” There is going to be that disadvantage,
and that is one of the reasons why there will be a change of small
banks into State banks.
Senator N elson . In that connection, would there be any harm in
extending this paper from 90 days’ to 6 months’ maturity—not all of
it, but a certain proportion of it. I mean. Would there be any
harm in allowing the bank to take a certain proportion, say 25 per
cent, of 6-months’ paper----Mr. V a n d erlip (interposing). In principle I should rather be
against that. I believe there is enomrh 90-day paper for all the
needs. Take a bank that makes all of its loans for 6 months.
Naturally half of that bank’s portfolio is always 90-day paper, if it
does a business that is the same the year around, a business that is
continuous. I believe there will be amnle 90-dav paper.
The C h a ir m a n . I remind the committee that the table I put in the
record shows there is over $36,000,000 of 90-day paper available.
Mr. V a n d er lip . You must remember that the rediscounts o f na
tional banks now are comparatively small. I believe the figures
show $109,000,000 as the highest they have been in a long time. The
average country bank never borrows: it is only the exceptional bank
that borrows. I think there will be no shortage of 90-day paper.
Senator W e e k s . Well, under the present system the reserve banks
have discouraged borrowing, which has kept the natural borrow
ings down to a minimum.
Mr. V a n d er lip . The borrowings will naturally be much larger
under this system. It is not considered very <rood practice for a
bank to borrow except in the South, where it is the general practice.
To go on with the detailed suggestions, on page 13 it is provided
that there shall be—
a sinking fund to be held for the reduction of the outstanding bonded indebt
edness of the United States, said reduction to he accomplished under regula
tions to be prescribed by the Secretary of the Treasury.
That is leaving very broad discretion with the Secretary of the
Treasury. It seems to me it might be better to amplify what the
ideas of Congress are in regard to the reduction of the debt. I would
rather see it made more definite as to just what the ideas of Con
gress are with reference to the reduction of the debt.
BANKING AND CUBBENCY.
1975
S e n a to r R eed . Y ou w o u ld w a n t th e law to p rescrib e?
Mr. V anderlip. Yes, sir.
Senator W e e k s . What would you say, Mr. Vanderlip, to a proposi
tion to try to pay the national debt in connection with this legis
lation?
Mr. V a n d er lip . I think it very desirable to pay the national debt.
The objection which some have raised to this, that there would no
longer be any basis for note circulation, disappears with this meas
ure, and it would seem a most appropriate time to consider the ulti
mate retirement of the national debt.
S e n a to r W ee k s . I s n o t t h a t b asis o f n o te c irc u la tio n th e o nly re a
son th e s in k in g fu n d s h av e n o t been m ad e a p p lic a b le to th e p a y m e n t
o f th e d eb t, a n d h a s th e re been a n y o th e r sin g le reaso n w h y th e d e b t
h a s n o t been p a id ?
Mr. V a n d er lip . I think there is no other single reason, and I think
there has been a good deal of neglect on the part of the Treasury
Department in not keeping up the sinking fund.
Senator N elson . It w o u ld be a good plan to devote the whole of
this sinking fund to the retirement of our national debt?
Mr. V a n d er lip . Admirable.
Senator N elson . And put it in specific terms in th e b ill?
Mr. V a n d er lip . Yes, sir; rather than leave it to the discretion of
a bank. We already have laws providing for sinking funds, but
for years they have not been very carefully observed.
Senator R eed . Would you use any means o f retiring the debt ex
cept the employment o f a sinking fund?
Mr. V a n d er lip . I think it is always an admirable thing for a coun
try with a surplus revenue to devote that to the retirement of its
debt, rather than incur unnecessary expenditures.
Senator N elson . There ought to be a provision in the bill that
when the surplus exceeds a certain amount it shall be devoted to
the payment of the debt.
Mr. V a n d er lip . That would be a wise provision.
Senator N elso n . Would not $100,000,000 be ample? I mean, when
ever it exceeded $100,000,000----Mr. V a n d erlip (interposing). $100,000,000 is less than the Treas
ury has usually had as a free asset.
Senator N elson . What would you put the figure at?
Mr. V a n d er lip . Making a v e ry offhand guess, without any study
of the subject, I think $125,000,000 would be an ample Treasury free
asset.
Senator N elson . Or, put it a little higher and say $150,000,000.
Whenever the surplus exceeded $150,000,000 the overplus should be
devoted to the retirement of the national debt from time to time.
Would not that be a good plan to put into the bill ?
Mr. V a n d er lip . I th in k it w ould.
Section 10 of the bill provides for State banks being converted
into national banks, or for State banks becoming members of the
Federal reserve bank without being converted. They are permitted
to do this upon a regulation provided for----Senator R eed (interposing). You refer to the last three lines on
page 15, “ under such rules and regulations as it may prescribe ” ?
Senator N elson . It is lines 21 and 22 on page 15.
S. Doc. 232, 63-1—vol 3----- 4
1976
BANKING AND CURRENCY.
Mr. V a n d er lip . I am now looking on page 16 at line 16. It reads:
Such by-laws shall require applying banks not organized under Federal law
to comply with the reserve requirements and submit to the inspection and
regulation provided for in this and other laws relating to national banks.
That word “ regulation ” needs more definition, it seems to me. It
is going to become very important under what terms you will admit
State banks to membership in the central reserve banks. If they are
to have all the regulations that apply to a national bank, they might
as well be converted into national banks and there is no need of
permitting them to become members.
Senator N elso n . Let me interrupt you by stating that one of the
bankers here—I do not recall his name—made an objection to that
word “ regulation.” He held the effect of it was to compel them to
do just what the national banks did in every respect, and on that
account he objected to the word.
Mr. V a n d er lip . That would be my own opinion. If they are to be
regulated so that in every respect they must do just as a national
bank, then they might as well be a national bank and there is no
point in permitting a State bank to become a member. I think that
ought not to be left to the Federal board to determine either. I
think the law ought to be pretty specific, so we will know what a
State bank can do and under what terms it may become a member.
Senator R eed . Then, too, if there were a regulation made by the
Secretar}^ of the Treasury, I presume there is nothing in this bill—
I see nothing—to keep the next Secretary of the Treasury from
changing the regulation.
Mr. V a n d er lip . Nothing.
Senator R eed . There w o u ld be rather an uncertain tenure?
Mr. V a n d er lip . Yes.
Senator N elso n . H ow
would it do to substitute the words “ submit
to the inspection and supervision” ; substitute the word “ supervi
sion ” for the word “ regulation ” ?
Mr. V a n d er lip . A s I remember it, Mr. Glass in his exposition of
the bill said that the reserve requirement, the capital requirement,
and the examination requirement were all that this meant. If that
is so, it ought to say so. It does not say so in the bill.
Senator H itc h c o c k . Then, a State bank, like a foreign exchange
bank in New York City having branches, could become a member
under this system ?
Mr. V a n d er lip . Y es, sir.
Senator H itc h c o c k . That
would be a considerable advantage over
a national bank?
Mr. V a n d er lip . Very much. And the thing you are in danger of
doing here, is passing a bill that will make all national banks turn
State banks, and, instead of consolidating the banking business under
the national charter, you are going to disperse it. If there were
some way of attracting State banks into this scheme rather than
putting a premium on national banks going out of it, the ultimate
success would be very much more probable.
Senator W e e k s . If you were managing a State bank and this bill
were put up to you as the law, you probably would hesitate about
going in until you had seen how it was working?
Mr. V a n d er lip . Being in the fortunate position of having an
option whether to go in or not, I would wait. I would take advan-
BANKING AND CURRENCY.
1977
tage of my position and see how it worked. I would see what this
word “ regulation” meant. I would see what the success of the
measure was likely to be.
Senator W e e k s . Naturally, if other men felt in the same w ay,
we need not expect to see State banks go into the system at once?
Mr. V a n d er lip . Not a t once.
Senator R eed. Y ou said that the foreign exchange bank w hich
has branches would have an advantage over the national bank ?
Mr. V a n d er lip . Yes, sir.
Senator R eed . If you let it come in ?
Mr. V a n d er lip . S o will any State bank organized under the laws
of New York, because the}^ have much more liberal privileges than
national banks.
Senator R eed . H ow are we to equalize that so that the national
bank will not suffer by virtue of that situation?
Mr. V a n d er lip . By seeing if you can not extend some privileges
instead of putting all your attention on new prohibitions. That
seems to me to be one direction that the committee’s thought ought
to take, so as to undertake to attract State banks into this system.
Senator R eed . Yes; but what I am speaking of is this: Here is
a bank with a lot of branches. That gives it an advantage. Now,
we bring that bank into the system and give it the advantages of this
system. Now, we have created an institution that is empowered
to do the very thing that all national banks are denied the right to
do. Would you suggest extending to national banks the right to
have branches?
Mr. V a n d er lip . I certainly would suggest it, in the cities in which
they are located. There is no conceivable reason, to my mind, why
that should be prohibited. As a matter of fact, the act does not at
present prohibit it. There has been a ruling of the comptroller;
there has never been a court decision on the subject. But it would
be highly desirable if the national banks could have branches within
the city where they are located.
Senator R eed . And you would limit it to their city ?
Mr. V a n d er lip . I w ould.
Senator H ollis . Why limit it?
Mr. V a n d er lip . It is a question on which there are certainly two
points of view. The strength of an institution that is practically
under one control, is very much greater than that of an institution
with branches all over the country. There would be this on the other
side: There is such political prejudice—a prejudice that seems to me
very unreasoning—against it that I have almost ceased to think it
possible to talk about having general branches for a bank.
Senator R eed . But you think that if they were limited to the city
in which the principal bank exists, that would be placing such a
limitation upon their extent as to meet, at least in a measure, the
objection that they might grow too large and their influence become
too commanding? Is that the thought?
Mr. V a n d er lip . That is my thought; and it would come as a sur
prise to the national bankers, because it would be the first advantage
they had been offered since the creation of the system, I think. It
would be a most happy thing to offer the national banks something
in addition-----
1978
• BANKING AND CUERENCY.
Senator R eed (interposing). Would you limit the number they
could maintain?
Mr. V a n d er lip . Not at all.
S e n a to r R eed . Y ou w o u ld ju s t lim it it te r rito ria lly ?
Mr. V a n d er lip . There is one bank in London that has 100 branches
in the city of London.
Senator S h a fr o t h . Would that be satisfactory to the other banker ?
Mr. V a n d er lip . Y ou are legislating for the national banks, and it
would be very satisfactory to them.
Senator S h a fr o t h . All of them? Or would there be a rivalry
against the one bank that had so many branches?
Mr. V a n d er lip . Then they would have to do better banking and
compete successfully. No; I think that, on the whole, national banks
would be glad to have that privilege.
Senator B ristowt. It would reduce the number materially, would
it not?
Mr. V a n d er lip . Yes.
Senator R eed . I s there not a control which the Federal Govern
ment exercises over these banks which meets some of the objections
which ordinarily pertain to combinations, namely, that the Federal
Government can limit the amount of capital of a bank if it wrants to,
and it otherwise has a very complete control over it? That would
be an offset.
Mr. V a n d er lip . Yes.
Senator R eed . I am not
committing myself to that, but I am sug
gesting the thought.
Senator N elson . N ow , Mr. Vanderlip, Canada has some 18 or 19
chartered banks, my recollection is, and they probably have over a
thousand branch banks.
Mr. V a n d er lip . Yes.
Senator N elso n . Scattered all over. I do not know, but they have
2,000. I have heard the criticism made that those branch banks—
for instance, out in the prairie Provinces in Alberta, Saskatchewan,
and Manitoba—that they pull in the money in that country and send
it down to the head banks at Toronto and Montreal, and drain the
country. Then if they apply for loans to those branch banks, as a
rule, they can not get any satisfaction, especially if money is a little
tight, until they hear from the head bank at Toronto or Winnipeg.
In other words, the system, as developed in Canada to that extreme,
I do not think has worked as well as it might. What is your in
formation on that?
Mr. V a n d er lip . I fancy a true analysis of that situation would
show that those complaints were not well founded. We have heard
the same complaints made that in certain Southern States they de
posit money in New York and can not borrow any when they want
it. I have looked up the record and find that they borrow five or
six or seven times as much as they deposit. I presume you will find
that these small western communities borrow very much more from
the reserve city banks than they actually deposit in the banks.
The action of a bank with many branches is to equalize the supply
of loanable funds, and the funds will flow where the interest rate is
the highest. The interest rate will be highest in the smallest com
munity, and I expect you will find that the Canadian banks have
worked to the benefit of those few small communities rather than
taken their funds and loaned them to the centers.
BANKING AND CURRENCY.
1979
Senator H itc h c o c k . H ow do you interpret this paragraph now
in relation to branch banks? Can a State bank having branchee
come in?
Mr. V anderlip. I am unable to interpret it and no one can inter
pret it until he can interpret the meaning of the word “ regulation,”
and that must lie in the mind of the Secretary of the Treasury or the
Federal reserve board.
Senator F eed. Y ou think, I take it from your remarks in regard
to this section and the preceding one, that when a man comes to
invest his money or go into a great system that involves his money,
he ought to have fixed rules of law which prescribe his rights and
specify his obligations that he should not be required to depend
upon the individual opinion of some man, however good that man
may be.
Mr. V a n d er lip . I w ish I had the power to state my views as pre
cisely as that. That is exactly what I think.
Senator R eed . And you would apply that to the entire currency
system, would you not, except where you come to the point of passing
upon the question of whether a particular piece of paper is good
or bad?
Mr. V a n d er lip . That is making the statement a little too sweep
ing. In general, however, wherever it is possible to put the specific
thing in this bill, I would do so rather than leave it discretionary
upon a board.
Senator P o m eren e . What have you in mind as proper conditions
or regulations upon which the State banks should be-admitted into
this system?
Mr. V anderlip . If you want to get the State banks into the sys
tem, then I would say have the capital the same as a national bank
under similar conditions. Have the same examinations and the same
reserve requirements. If you stop there, you must recognize that
there will be more advantages under the State charter than under
the national charter. If you impose all the conditions of the national
charter on the State bank it would not accept them and would not
come in. You have your choice.
Senator R eed . That leaves us with the question still unsolved?
Senator N elson . N o ; he has put in the limitations there. Capi
tal—this provides for reserves----Mr. V an d erlip (interposing). Capital, reserve, and examination.
Senator N elso n . A s to capital you would include an exception?
Senator R eed . Y ou said if you made their requirements too strin
gent on them and cut them off from their present rights they would
not come in; if you made it too liberal, as I understood, Mr. Vander
lip, then the national banks might go in----Mr. V a n d erlip (interposing). That is exactly what they will do.
Senator R eed . N ow , that leaves the question unsolved. The ques
tion is how we can keep the national banks in, and induces the State
banks also to come into this system?
Mr. V a n d er lip . By liberalizing the terms of the national c h a rte r
and the regulations under which national banks are operated so t h a t
they can compete fairly with the State bank.
Senator P o m er en e . In what respect?
1980
BANKING AND CURRENCY.
Mr. V a n d e r l ip . In respect to branches, in one particular; in re
spect to doing a trust business iji another. I do not know that I
would undertake to enumerate the advantages that a State bank has
over a national bank, but those are different in various States.
Senator B ristow . But not loaning on real estate?
Mr. V a n d er lip . Never.
Senator N elso n . Nearly all the State banks can do that.
Senator R eed . Y ou are giving some very interesting testimony
here, but we have come to a point now that is very greatly troubling
me, whether this bill is not going to send all the national banks out
of the system and into the State bank system, or else so limit the
rights of State banks coming in that they will not want to come in.
Now, I do not know if you are prepared to make your suggestions as
to what advantages could be given to the national banks that are of a
practicable and reasonable character, but I wish before you leave
you would try to give us those suggestions.
Mr. V a n d er lip . I shall be very glad to submit those in detail.
Senator W ee k s . And at the same time the provisions which you
think would induce State banks to come into the system.
Mr. V a n d er lip . Yes.
Senator H o llis . D o you not think, Mr. Vanderlip, that the mere
name of national bank is of some value to them ?
Mr. V a n d er lip . I t is of some value in a small community. It is
of no value in New York City, for instance, or any of the great
cities.
To take up section 11, relative to the Federal reserve board: Here
is the point, I suppose, that most bankers raise as the principal objec
tion to the bill. It is a pretty general feeling that the bankers con
tribute capital for these reserve banks, should have representation on
the Federal reserve board. I, myself, believe it would be very
good, if they had a minority representation on the board. However
if that is impossible I particularly object to the constitution of the
board in its present form.
I believe it is bad to have ex officio members on that board and to
have ex officio members whose duties are already sufficient to engross
their time fully. This will be a very important board; it wilHbe a
man’s size job to be a member of this board. He ought to be devoting
all his time to it. He ought to have experience. The board should
have continuity. If you put Cabinet officers on that board they
will of necessity go out with each change of administration, and
may go much more frequently than that. They are fully engrossed
if they are properly looking after their other duties, and they can
not, I believe, perform in a creditable manner the duties of this
Federal reserve board.
If it is going to be constituted entirely by Government appoint
ment, I would increase the salaries, I would have longer terms
and I would have the men appointed devote their time to this work
exclusively. Continuity of management is a great thing. You
might have a change of the majority of the board on the change of
a President. You make the thing the toy of politics in this'way.
It ought to be removed from politics as far as is the Supreme Court!
I think it would be about as proper to appoint the Attorney General
to the Supreme Court, because he happens to be in the Cabinet, as it
is to put the Secretary of Agriculture on this board.
BANKING AND CUKKENCY.
1 981
Senator R eed . B u t don’t you th in k the experience o f the Secretary
o f A gricu ltu re ou gh t to be o f value in h an d lin g a financial propo
sition o f th is sort?
[L aughter.]
B u t, Mr. V anderlip, seriously,
under the plan you su ggest w ould you exclude the Secretary o f
the T reasury?
Mr. V a n d er lip . That is debatable. I should prefer to see a board
of inspection created that was headed by the Secretary of the Treas
ury and that embraced the comptroller and any other Government
officials you chose, which had the power of inspection anywhere
down the line to see that the law was being obeyed. There are some
reasons for putting the Secretary of the Treasury on, because he has
the depositing of the Government moneys. There are other reasons;
but this makes the whole board rather subservient to the Secretary
of the Treasury.
The bill frequently says that things shall be done by the board
under direction of the Secretary of the Treasury. This board ought
to be superior to any Cabinet officer. It is not an appendage of the
Treasury; it is a great organization. Members should be of the
highest caliber; men that were paid salaries sufficient to attract and
keep able men. Now, keep men; there is the point. You develop a
good men here at $10,000 a year and I will hire him at $25,000. You
want to pay men so you can keep them here. You want continuity of
management.
Senator R eed . I t is true that this bill as drawn does frequently,
as you say, say that certain things shall be under under the direction
of the Secretary of the Treasury. But I call your attention to the
fact that this bill requires that every dollar that is now in the Fed
eral Treasury, except that held on special deposit, shall at once go
into the banks, and every dollar hereafter gathered in by the Fed
eral Treasury must at once go into the banks. And. of course, the
special deposits, most of them, can speedily be removed there by using
the gold and silver certificates to withdraw them. Now, if the
Secretary of the Treasury is not to have a broad discretion, do you
not think that provision ought to be changed so that the discretion
would be vested in the Government to put all or part of its money in?
Mr. V anderlip. That would be much more desirable than to give
the Secretary of the Treasury the power that is given here, where it
says that the manager of the Federal reserve board shall be subject
to the supervision of the Secretary of the Treasury and that the
manager of the Federal reserve board shall be the active executive
officer of the Federal reserve board.
The C h a ir m a n . Y ou w o u ld strike out “ Secretary of the Treas
u ry ” in that line?
Mr. V a n d er lip . I certainly w ould.
Senator R eed . And you would modify the other section allowing
the Secretary of the Treasury to have some discretion about putting
the people’s money into this institution ?
Mr. V a n d er lip . I would not expressly object to that. I think nonpartisanship is not accomplished when you say that not more than
two shall be of the same political party; it rather emphasizes that the
other two shall be of the same political party. I do not believe that
helps the measure much.
Senator B ristow . I s n ot th at an in v itation to p u t partisans on the
board ?
198 2
BANKING AND CURRENCY.
Mr. V anderlip. Why, it is almost a command.
Senator H itc h c o c k . Would not the board be a good place to put
our ex-Presidents? [Laughter.]
Senator R eed . Barring one, you would answer “ Yes,” would vou
not ?
Mr. V a n d er lip . I was thinking of that one. [Laughter.]
Senator B ristow . Some o f us might think he was the very man to
put there.
Senator W e e k s . Seriously, Mr. Vanderlip, you refer to paying the
members of this board large salaries. Now, there is a standard of
salaries in connection with the Government service which must be
maintained, and it would probably be impossible to compete with the
National City Bank in paying salaries to a board like that. Don’t
you think the honor of being a member of that board coming to a
man who is fit to be a member would be sufficient so that he would
accept such a place and serve, notwithstanding the fact the salary
was not commensurate wTith the kind of service ?
Mr. V a n d er lip . Undoubtedly there would be a tendency that way.
The Government has a great advantage in that respect.
Senator N elson . Would you not get superior men in that way?
Mr. V a n d er lip . Superior men at a smaller salary than at a larger
one?
Senator N elson . Than if you just made it a question of salary?
Mr. V a n d er lip . I sh o u ld n o t m ak e it ju s t a q u estio n of s a la ry by
a n y m e a n s; I w o u ld m ak e i t so th a t th e s a la ry fro m som ew here else
w o u ld n o t c o u n te rb a la n ce th e s a la ry a n d th e h o n o r to g eth er.
Senator H itc h c o c k . A Cabinet salary?
Mr. V a n d er lip . It ought to be as high as a Cabinet salary, I should
think. You want men for this position who are capable of earning
large salaries. You want men who have earned large salaries, or
who have been successful. You do not want unsuccessful men, finan
cially speaking, in this business. You want men who have been suc
cessful.
Senator B ristow . N ow , Mr. Vanderlip, do you think political ap
pointments are made with a view to whether a man has been success
ful or not ?
Mr. V a n d er lip . I do. I think they are frequently made with a
view to the fact that he has not been successful.
Senator B ristow . That he has failed in the last campaign and
needs a job. [Laughter.]
Senator R eed . We can call them political appointments if we
please, but the Supreme Court of the United States and all the
Federal judiciary are appointed by a political power and confirmed
by another branch of political power. And yet, speaking of the
question at large, we have a very superior class of men in those po
sitions, and that is because the position is regarded as one of great
honor and not a position of profit, is it not?
Mr. V a n d er lip . Undoubtedly.
Senator R eed . We have got to go to one source or the other fo r
these guardians of this contemplated system. Either we must go to
the banks, which may have a selfish interest, or we must go to the
Government, or we must go to both.
Senator N elson . The great business men are merchants?
Senator R eed . Yes.
BANKING AND CURRENCY.
1983
Mr. V a n d er lip . Ia m not nearly so much afraid of malign political
influence as I am of lack of wisdom. I want to establish a con
tinuity of management here. I want to see men qualified by ex
perience. I am not so much afraid of the political side of this thing.
I am very much afraid of the inexperience side of it.
Senator H eed . And therefore willing to have always at least a
majority of men on this board who are connected with banks and
who are familiar with it?
Mr. V a n d er lip . Certainly, a majority; and I would say, as far as
. possible, men of long experience. Of course, some new men might
get on.
Senator P o m er en e . I am glad to hear you say you have faith in
your Government.
Mr. V a n d er lip . Thank you.
Senator R eed . Generally speaking, there has been a good deal of
loose talk about politics, just as there has been a good deal of talk
about banks. Sometimes it is justifiable and sometimes it is not
justifiable. Do you think that any President of the United States
would be likely to make these appointments without having a proper
regard for the importance of the place that he is charged with the re
sponsibility of filling?
Mr. V a n d er lip . When I look ahead I have a good deal of faith.
When I look back, and see some of the appointments that have been
made, my faith is shaken a little. I do not mean recent appoint
ments ; I mean looking back historically at men who have filled im
portant places.
Senator R eed . Let us take the position of the Secretary of the
Treasury. Some of us have differed with the policies of the Secre
tary of the Treasury, but as a general rule they have been a pretty
sincere type of men, have they not?
Mr. V anderlip. Yes; as a general rule.
Senator R eed . And, making allowances for inexperience, they have
done pretty well as a general proposition, have they not?
Mr. V a n d er lip . Yes.
Senator R eed . N ow , do you know any other way by which these
men could be selected except by the banks or by the country?
Mr. V a n d er lip . N o. We do not want to return to the old Spartan
way of selecting by lot, I suppose. They should be selected one way
or the other—by the banks or by the Government.
Senator R eed . Are there not objections to banks selecting, which
would be an objection to the bankers themselves? That is to say,
if your bank had a friendly representative upon this board might it
not be of great advantage to your bank? Pardon me for using your
bank for illustration, but I was using it as an illustration of a class.
Mr. V a n d er lip . I think it might. But I shall hope it shall have
a friendly representative upon this board, and that all banks wfill
have a friendly representative upon the board.
Senator R eed . I meant more than that. I meant a representative
who might be specially interested in the bank. That woud not be
right, of course, but are not there just as many objections on that
side as there are on the other when you come down seriously to talk
about it, and that is what we are trying to do this afternoon?
Mr. V anderlip. I do not think there are quite as many, but per
sonally I shall be satisfied with a political board if I am assured of its
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BANKING AND CURRENCY.
continuity—that the members will be devoting their entire time to it
and that every precaution is taken to make it of the highest possible
type.
Senator R eed . I think I agree with you on that, that the board
ought to devote its entire time, unless it is the Secretary of the
1 reasury.
Senator H itc h c o c k . What discretionary power do you think that
board should have to regulate the volume of currency ?
Mr. V a n d er lip . I think it should have none. I will come to that
point later, when I come to that part of the bill. But it seems to me
completely wrong that it might refuse a bank the privilege of taking
out currency. Personally I think there should be no tax on that
currency. So far as the Government is concerned, it is merely tak
ing it from one pocket and putting it into the other. The people
are the ones to determine the volume of currency. No one else can
determine it. They will use bank notes, or they will use gold re
serve; it does not make any difference to them. They will have in
their pockets a given amount, and they will determine that amount.
A bank note that does not count in the reserve is of no value what
ever to the bank. It is only of value to the person who can use it
in his pocket. I think there is no danger in giving these central
banks the power to issue all the currency that the people will use.
The banks can not use that currency. The people will use the cur
rency. The currency is of no value in the hands of the banks, as it
does not count as reserve.
Of course, to digress a moment, there is the trouble with your
dual system of State banks and national banks, concerning the ques
tion of reserves with the State bank, and that is a trouble that you
want to find some way, if you possibly can, to eliminate. I think the
best way would be to construct a system so that it would be attractive
to all State banks to come in. There is grave danger to the whole
system; there is grave danger to the Treasury Department and to
the Government in permitting a large amount of these notes to find
their way into the reserves of State banks.
Senator H itc h c o c k . That is permissible in Germany now?
Mr. V anderlip. Suppose such a situation exists here. We have
many millions of these new notes held in the reserves of the State
banks, and suppose something happens that alarms the holders of
those notes to an extent where they think it will be wiser to convert
them into other forms of reserve money, into gold and lawful money.
You might get a presentation of the whole mass within a short time.
The redemption of them would be an almost impossible thing, for
the amount would be.so large. And in proportion to the size of it
the danger is great. I know of no way you can prevent a State
bank holding those bank notes in its reserve except to induce the
bank to come into the national system, where you can properly bar
them from the reserves.
Senator H itc h c o c k . I suppose it could be prevented in those
banks, where they were subjected to the same laws which the national
banks are subjected to.
Mr. V anderlip. That will apply to those who come in, but re
member that there are $12,000,000,000 of deposits in State banks
now, against $8,000,000,000 in national banks. Under this bill, I
believe State banks will increase and national banks will decrease,
BANKING AND CURRENCY.
1985
as it stands, so that the chance of getting a very great mass of these
bank notes into the reserves, for the support of this $12,000,000,000
of deposits, is serious.
Senator H itc h c o c k . Under this bill, as it stands now, how co n
siderable do you interpret the power of the reserve board to be, as
to the contracting or expanding of currency ?
Mr. V a n d er lip . The bill is not clear as to whether this rate of
interest, so-called, could be changed after notes were outstanding.
I think there is a good deal of confusion about the rate of interest.
It is not clear whether the Federal board could charge a different
rate in different sections of the country or a different rate at differ
ent times to the same bank, or change the rates after notes were out
standing. I do not believe they should have either the power to
refuse the notes or the power to tax them.
S e n a to r H itc h c o c k . Y ou th in k t h a t w h en ev er secu rities w ere p re
sen ted to th e reserv e b a n k a n d i t h a d th e necessary g o ld reserv e it
sh o u ld issue th e m ?
Mr. V a n d er lip . The gold reserve is the limit.
Senator H itc h c o c k . N ow , has not Germany, with practically that
same law, rather gotten into difficulties ?
Mr. V a n d er lip . Germany has saved itself from the greatest diffi
culties. The Reichsbank management is a monument to what can
be done with a scientific banking system.
Senator H itc h c o c k . The Reichsbank notes are made reserve fo r
the other banks in Germany ?
Mr. V a n d er lip . That I am not familiar with.
The C h a ir m a n . And they are also made legal tender.
Senator H itc h c o c k . Yes; they are also made legal tender.
Senator R eed . H ow much reserve in gold should there be held as
against notes issued?
Mr. V a n d er lip . I think the reserve provided for of 3 3 | per cent
is ample.
Senator R eed . Y ou think that is much safer than now?
Mr. V a n d er lip . Yes.
Senator R eed . And if made a little higher the system would be a
little safer, would it not?
Mr. V a n d er lip . Undoubtedly. And if you will put a tax on de
ficiency of reserve instead of taxing the notes you will control the
issue. There is the place to put the governor—a tax on the deficiency
of the reserve ?
Senator H itc h c o c k . That would be better; it would be permanent.
Senator R eed . Make it graduated, though.
Mr. V a n d er lip . Yes; make it a graduated tax.
Senator H itc h c o c k . I t would not be left to the option of some
board ?
Mr. V a n d er lip . N o ; a n d i t o u g h t n o t to be.
Senator H itc h c o c k . I agree with y o u there.
Mr. V a n d er lip . N ow we come to this much-debated clause of the
power to compel loans. I believe that is a necessary power as long
as you have more than one central bank. The power to permit loans
I do not consider is a necessary power to give to the Federal board.
If these banks choose to loan to one another, very good. As a
matter of fact, they will not choose so to loan. The management of
the bank will leave it to the members of that bank to deal with the
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BANKING AND CURRENCY.
members of another bank where the interest rate is high, thus hav
ing individual banks discount for individual banks rather than for
the central bank to discount for the central bank in the high interest
rate community.
Senator R eed . There has been a matter, and your answer suggests
the thought again, that has been bothering me a good deal. There
have been a number of bankers here who have objected most strenu
ously to the provision that one of these reserve banks should advance
moneys to another reserve bank, and they have said that is very
wicked and very wrong, and yet in the same breath those gentlemen
will advocate one central bank. Now, if all the money was put into
one central bank, then that management would necessarily have to
loan money to all of the member banks all over the country. And if
there are 12 of these banks and the idea of one bank is so admirable,
it seems to me the closer we draw the twelve banks together the
nearer we are approaching the idea of one bank.
Mr. V a n d er lip . Certainly. The greater the decentralization here,
by making numerous reserve centers, the more arbitrary the power
you must give to the reserve board. If you make one reserve center
you have to give no power to the Federal board at all, because the
thing is accomplished. But with numerous centers arbitrary power,
obnoxious as it is, must be given to the reserve boards in order to
pipe those reserves together.
Senator R eed . The more cooperation you have, the nearer you come
to the strength that lies in one central institution ?
Mr. V a n d er lip . And that is what you really are all after. You
may not quite know it, but I think that is what you really all want.
Senator N elson . Thjat provision there, in effect, makes one central
bank ?
Mr. V a n d er lip . Certainly; except that in practical operation it
will never work. Now, instead of saying that this is an obnoxious
provisions and ought to be taken out, I am forced to admit I do not
believe it is strong enough. It will never work. Why won’t it
work ? Because loans can only be made at from 1 to 3 per cent above
the highest rate prevailing. That, in the first place, is not very clear.
I suppose it means above the highest rate prevailing in the com
munity that is going to borrow. Why should a New Orleans bank
borrow from New York at 3 per cent higher than it is loaning? It
won’t work; they won’t do it.
Senator H itc h c o c k . Maybe that means 3 per cent higher than the
reserve board is charging for currency.
Mr. V a n d er lip . Well, you have to look a long ways to re a d that
meaning into it. At any rate it is not a clear law.
Senator N elson . It has to be an interest charge to accommodate
the banker. It is to accommodate the banker who has to pay it.
Senator R eed . What is the highest rate at which he pays the in
terest ?
Senator N elso n . Not less than 1 or above 3 per cent of the highest
rate prevailing in the districts immediately affected.
Mr. V a n d er lip . But what does “ rates prevailing” mean? Is it
the rates charged by the central banks?
Senator R eed . Manifestly, then, if New Orleans had a 6 per cent rate
and New York had a 4 per cent rate and New Orleans wanted money
from New York, under that provision the rate would at least have to
BANKING AND CURRENCY.
1 987
be 7 per cent to New Orleans, which is a rate higher than anybody
pays down there. Now, why in the name of common sense would
anybody want to borrow money under those terms? I t was just as
Mr. Vanderlip said.
Mr. V a n d er lip . They won’t; the thing will not work.
Senator R eed . All of which leads to the conclusion we ought not
to look to this bill any further?
Senator W e e k s . Are you going to discuss the desirability of th e
same discount rate in all regional banks?
Mr. V a n d er lip . I will discuss it.
Senator W e e k s . Let me ask you a definite question: Why should
not a bank in Oklahoma, having a piece of paper that comes within
the requirements of the law, get a rediscount of that piece of paper
on exactly the same terms that the New York bank would do with
the same quality of paper?
Mr. V a n d er lip . A s a matter of abstract right, I think it should.
As a matter of prevailing interest rates in those two communities a
similar piece of paper will bear a higher rate in an Oklahoma com
munity than it will in New York, because of many reasons I do not
need to go into.
Senator W e e k s . If we are going to make a national law, should
it not be country-wide in its provisions?
Mr. V a n d er lip . I do not think it should necessarily be country
wide as regards the same discount rate for all of these banks.
Senator H itc h c o c k . Is not the present divergence o f interest rate
due to our peculiar system, which we are now proposing to abandon?
Mr. V a n d er lip . Not altogether. The more settled communities
will have the lower rates in any banking system.
Senator N elso n . In that connection, we must not overlook the fact
that paper discounted from Oklahoma might bear interest at 7 per
cent, while paper discounted up in New York might only draw 4 or
5 per cent.
Mr. V a n d er lip . That is perfectly true.
Senator W e e k s . I s not that true to-day? But would it not equal
ize those rates in years to come if the discount rate should be made
the same?
Mr. V a n d er lip . Never entirely.
Senator W e e k s . I agree with you never entirely, because develop
ing sections would always carry a higher rate of interest.
Senator R eed . Mr. Vanderlip, how are we going to adjust this
proposition: Let us say that the prevailing rate for commercial
paper in New York is 4 per cent; that the prevailing rate in my
part of the country is 6 per cent. Now, the New York banker wants
money, and he brings up 4 per cent paper and gets $100,000 on
$100,000 worth of 4 per cent paper. The banker in Kansas City
wants $100,000 and he brings up 6 per cent paper and just gets
$100,000, yet his paper draws a greater rate of interest.
How is that to be adjusted in this law?
Mr. V a n d er lip . Why, he gets the interest on his paper.
Senator R eed . He collects it himself?
Mr. V a n d er lip . He collects it h im self. He has discounted the
note and has gotten that.
Senator R eed . Then the central bank h as to collect this interest for
him if they collect the securities. On the other hand, he can take
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BANKING AND CURRENCY.
money there and take up his own securities. Now, is not that the
way it will practically be done, instead of the central bank collecting
the securities? Will not the bank secure the money and pay the
note and take back the collateral while it has not matured ?
Mr. V a n d er lip . Very likely. The average bank will dislike to
have a customer know that it has rediscounted his note, and they
will be glad to get the notes back before the day of maturity, in
order to have the customer pay it over its own counter and hand
the note to him.
Senator H itc h c o c k . Would he not know it has been rediscounted?
Mr. V a n d er lip . Yes, he will; because it will have to be indorsed;
that is true.
Senator N elson . But if you place the circulation on the discount
value of the paper, would not that be a fairer basis than to take it
on the mere face value of the paper?
Mr. V a n d er lip . That is what you will do, sir. It will operate
that way. The amount of money you get is the discount value of
the paper.
Senator N elson . Yes; but it is not clear in the bill, if you will
notice.
Mr. V a n d er lip . I had presumed that would be the way it would
work. In any event, it is a rather insignificant difference.
Senator N elso n . I know it is a small difference, but would not
that be the principle applied?
Mr. V a n d er lip . I think it would.
Senator B ristow . Let me get that clearly in my mind. I do not
know whether I comprehend that fully. Take Senator Reed’s illus
tration: What is the value of that paper? They are both good, one
is as good as the other, but the Kansas City paper bears 6 per cent
and the New York paper 4. It is taken to the Federal bank for
discount. What is to be the discount value of the two papers? Is
the one drawing 6 to be more than the one drawing 4 ?
Mr. V a n d er lip . If those were discounted notes they are both
worth, at the date of maturity, $1,000 each, if they are $1,000 notes.
The man who has discounted them got less than $1,000—the one by
4 per cent the other by 6. That is where the variation came in.
The $1,000 note that was discounted at 6 per cent produced less than
the $1,000 note discounted at 4 per cent.
Senator B ristow . But they are not discounted. In fact, that
note bears 4 per cent, one of them does, and the other bears 6. Out
in our country where we take six months’ paper, why it may run
three months, and in New York it may be a 90-dav note.
Mr. V a n d er lip . Let us suppose the New York bank has these two
pieces of paper and goes to a central bank and borrows at 5 per cent.
What it will really do will be to convert this 6 per cent note to a 5
per cent basis and the 4 per cent note to a 5 per cent basis. The
central bank will take those notes on a 5 per cent basis. The 4 per
cent it would take a little under par and the 5 per cent a little over
par.
Senator N elson . That is exactly the way it will work.
Senator B ristowl Yes; I can see that. I can see no objection to
that system, provided that the value of the note given it by the in
creased rate the interest is taken into consideration.
BANKING AND CURRENCY.
1989
Mr. V a n d e r l ip . It certainly would be.
Sen ator B ristow . O therw ise it w ould be very unjust to a certain
part o f the country.
Mr. V a n d er lip . It would be taken into consideration.
Senator H itc h c o c k . That raises another question, Mr. Vanderlip.
You said, and I entirely agree with you, you should not only include
90-day paper, as stated in the bill, but out West and down in the
South 6 months and perhaps 9 months paper, which is commercial
paper to the same extent, growing out of certain transactions. But
up in those countries where 6 and 9 months paper is given the interest
is not deducted in advance, and how are these notes to be discounted
under those circumstanes ? The interest is generally payable at ma
turity.
Mr. V a n d er lip . Just as I say. If it is a nine-months note at 6 per
cent, and you are disposing of it on a 5 per cent basis, you will get
more than the face of the note for it.
Senator R eed . What you mean, in a word, is this, that the bank
will do just what your bank will do. If the interest has been paid, it
will take that out of the note. If the note is still drawing interest, it
will take that fact into consideration and arrive at the actual value.
Mr. V a n d er lip . And that value will be either above the face or
below it, as the basis upon which it is being discounted varies from
the rate the note bears.
Senator H itc h c o c k . Then some of the notes taken in that way
may have the interest already paid, and on the other notes the inter
est may be payable at maturity.
Mr. V a n d er lip . Yes. Now, on page 22, section E, it is provided
that the Federal board may reclassify----Senator H itch co ck (interposing). You did not say anything
about those reserve requirements. You are passing that over. Do
you think the Federal board should have the power of suspending
the reserve requirements?
Mr. V a n d e r l ip . I passed that over because I am doubtful; I have
a feeling it should not. But I have heard some arguments lately in
favor of it. The balance of the opinion, in my mind, is that it should
not have that power, but I see some rather impressive reasons why it
should have it.
Senator H it c h c o c k . This means they have the power not only to
suspend the reserve requirements as far as the 12 banks are concerned,
but to suspend the reserve requirements of the national banks and
even the reserve requirements of State banks.
Mr. V a n d er lip . Yes.
Senator B ristow . Unless I am interrupting Senator Hitchcock,
what is the use of any such power as that, when we are supposed to
have a system that can bring relief in any kind of an emergency ?
Mr. V a n d er lip . I do not believe it is necessary. Of course it is
not necessary now, as bad as our present system is. But in reality
we sometimes disobey the law now. We do invade our reserves. It
would be wiser, perhaps, to have somebody with power to suspend
that reserve requirement rather than have all of the banks more or
less break the law. But even that I am not sure of. On the whole,
1 should be opposed to that, but I can see some reasons on the other
side.
1990
BANKING AND CURRENCY.
Senator B ristow. And are you not providing, or endeavoring to
provide, at least, facilities here by which it. is never going to be neces
sary for you to break the law ?
Mr. V anderlip . It do not think it would be necessary. I think it
is positively unnecessary to have this provision on that score alone.
Senator W ee k s . D o you recall the arguments which you have re
ferred to which were in favor of this provision, why it should be in
the bill—by whom they were made?
Mr. V a n d er lip . They rather take this form, that a reserve that is
fixed by law is simply an irreducible amount of money. It is of no
value at all for paying the depositors, and you have no leeway what
ever between the minimum that you are probably going to loan out
and the legal point that you must not go below—that the suspension
of reserve requirements under pressure would permit you to pay out
a certain amount of your reserve to relieve the situation around a bad
corner. I do not think that is very much of an argument, and, per
haps, I have not presented it very well.
Senator W e e k s . D o you agree that under this system, if it is estab
lished, or the system that is contemplated, we can practically
eliminate the amount of reserve which would be required of banks,
permitting them to follow, practically, the policy that is followed in
European banks?
Mr. V anderlip. In the end, I think you could. There ought really
to be no legal-reserve requirement, but in this country we have grown
so accustomed to it I think it is dangerous to abandon it all at once.
Senator W e e k s . That is, in the course o f 5, 10, or 15 y e a rs we can
greatly change the reserve requirements o f this law ?
Mr. V a n d er lip . I think so, undoubtedly.
Senator H itc h c o c k . What would be the effect on the public mind
if the reserve board should announce the suspension of the require
ments of the reserve banks when they come down to 33^ per cent?
Mr. V a n d er lip . That depends upon what the condition of the pub
lic mind was before they announced that. I could imagine circum
stances under which it would produce a feeling of relief to the public
mind.
Senator H itc h c o c k . The whole world has reached the conclusion
that central banks should have a larger reserve than 33^ per cent.
All the central banks of Europe have a much larger reserve, and this
bill has adopted a smaller one than at present need be. Now, take a
condition where they have reached the limit. The reserve board lets
down the bars altogether. What would be the effect on the public
mind ?
Mr. V a n d e r l ip . It would have to be a very serious situation when
they did that, and, generally speaking, whenever they did do it
confidence in the whole system would be pretty well destroyed and
would have been destroyed when they did it.
Senator H itc h c o c k . It would tend to confirm the fear and really
aggravate it?
Mr. V anderlip . Y es.
Senator R eed . What
was the effect in 1907, when the Comptroller
of the Currency notified the banks they need not keep any reserve
against the Government deposits?
BANKING AND CURRENCY.
1 991
Mr. V a n d er lip . It did not have any effect, because the banks
thought they knew at what points they ought to keep reserves, and
they kept them there.
Senator R eed . There never was a proclamation of the right to
do so?
Mr. V a n d er lip . There was a proclamation of the right that they
need not keep reserves against the Government deposits. Of course
the comptroller has no more right than you to change the law.
Senator R eed . No ; I understand.
Mr. V a n d er lip . His proclamation was that they need not keep
reserves against the Government deposits.
Senator N elso n . They need not keep that money over their
deposits ?
Mr. V a n d er lip . N o.
Senator R eed . That d id not affect the public mind a t that time?
Mr. V a n d er lip . N o ; it was rather a technical matter that the
public mind did not grasp.
Senator H itc h c o c k . Was there any reason to keep a reserve
against them?
Mr. V a n d er lip . There is the same reason, so far as the Govern
ment is concerned, but no reason so far as the bank is concerned. The
reserve is to help pay deposits, and the fact that you have secured
the deposits does not change the reserve.
Senator N elso n . It does not relieve their paying?
Mr. V a n d er lip . N o, sir.
The C h a ir m a n . Did not the suspension of the reserve in the
English system in 1847, 1857, and 1866 abate the panic on those three
great occasions?
Mr. V a n d er lip . Undoubtedly. I presume that the drawing o f
some parallel between them and the present conditions was what led
to putting this in, but I doubt the wisdom of the parallel. I would
rather say not.
Senator R eed . D o you think really it is a good thing to have a
reserve you do not use, that you do not invade?
Mr. V a n d er lip . I think it would be a better thing to have no
regular limits on your reserve at all, but I believe it would be danger
ous now. We have grown too accustomed to a regular limit to re
move that altogether.
Senator N elso n . And, besides, Mr. Vanderlip, under this new
system, without a reserve requirement you would not have capital
enough for these banks?
Mr. V a n d er lip . N o.
Senator N elso n . That is just part of their capital that comes from
this reserve provision?
Senator P o m er en e . The reserves here are 12 and 18 per cent.
What would you say as to the wisdom of providing that this board
might, by unanimous vote, reduce or raise those reserves?
Mr. V a n d er lip . By no means. I would not give to that board the
discretion to change the whole basis of the banking system. We
would not know where we stood at all.
Senator P o m er en e . T h e th ou gh t is these figures are fixed and,
to a certain extent, it is problem atical as to w hether they are fixed at
S. Doe. 232. 63-1—vol 3----- 5
1992
BANKING AND CURRENCY.
the proper point. Now. that being so, if the experience of future
years should indicate that the reserves were too high or too low, for
that matter, then they might be raised or lowered ?
Mr. V a n d er lip . I w ould rather let the board m ake representations
to C ongress and have C ongress handle it.
Senator N elso n . I want to call your attention
to an ambiguity in
this paragraph, to suspend for a period not exceeding 30 days, and to
renew, and so forth, any and every reserve requirement specified in
this act. Now, there are two distinct reserve requirements: One is the
requirement of the member banks, and then there is the other reserve
requirement of the regional banks of 33 per cent. So that this would
cover both classes of reserves, both the reserves for member banks
and the reserves required of the regional banks, the issuing bank.
In the case of the regional bank it is 33 per cent, and in the case of
these others, so far as the reserve is concerned, it would be 5
per cent at the end of 36 months. So you see this would cover both.
Mr. V a n d er lip . Y es.
Senator H itc h c o c k . Y es; or the gold reserve— that the bill does
not require but probably w ill— it m ay change that.
Senator N elso n . O f course. I t is am biguous. I t w ould cover
both classes o f reserve.
Senator W e e k s . Y ou do not keep reserves on G overnm ent deposits
now ?
Mr. V a n d er lip . Y es, w e do.
Senator W e e k s . Are you required to by order of the comptroller?
Mr. V a n d er lip . N o.
Senator W e e k s . That order has never been rescinded, that they
need not keep reserves against Government deposits?
Mr. V a n d er lip . I think not.
Senator W e e k s . Then, the comptroller’s order was a permanent
one, rather than a temporary one to meet that contingency?
Mr. V a n d e r l ip . I believe so.
Senator N elso n . Further, in that connection I call your attention—
commencing on line 21, it is provided that “ it shall establish a
graduated tax upon the amounts by which the reserve requirements
of this act may be permitted to fall below the level hereinafter speci
fied,” etc. What do you think about that provision ?
Mr. V a n d er lip . I believe that is a correct theory o f the control o f
the situ ation — the ta x in g o f deficient reserves, rather than the ta x in g
o f notes.
Senator N elso n . And you would apply that to the 33 per cent
required, and not to the reserves that member banks put in ?
Mr. V a n d er lip . Oh, yes. The member banks I would leave alone.
Senator N elson . That is what I mean.
Senator B ristow . This puts a tax on the deficiency of the g o ld
reserve in the Federal reserve banks?
Mr. V a n d er lip . Yes; the reserve carried by the Federal reserve
banks.
Senator R eed . What would be the use of levying a tax on that?
If you had a system here that was paying, say, 5 per cent to member
banks on their capital investments and the balance of it went to the
Government, and then there was a profit, and we levy a tax on going
below 33 per cent gold reserve, we collect it from our own pockets.
BANKING AND CURRENCY.
1993
Mr. V anderlip. If you endanger the 5 per cent dividends, you
would find the management of those banks very keen.
Senator H eed. Yes; if you endangered the 5 per cent dividends.
When you reach that point, and up to the time you reach that point,
it would be taking money out of your own pockets.
Mr. V anderlip . Yes.
Senator R eed. Would it not be well, in that case, if it went below,
to collect that tax out of the 5 per cent—commencing there?
Mr. V anderlip. Possibly. That is an ingenious suggestion. Sec
tion E, on page 22, gives the board power “ to add to the number of
cities classified as reserve and central reserve cities under existing
law,” etc. I can not see what the distinction between reserve and cen
tral reserve cities will be under this act. None of the banks hold
reserve deposits, and I see no force in such a distinction. Then it goes
on further and says that they have the power tQ designate the banks
therein situated as country banks, at its discretion. That is, they
could go into a central reserve city and designate a particular bank
as a country bank, as I read this. That is certainly a power they
never should have.
Senator H itc h c o c k . If they made it optional for the national b a n k s
to come into the system and a number stayed out it might be neces
sary in central reserve cities?
Mr. V anderlip. Those that stayed out would have to surrender
their charters.
Senator H itc h c o c k . I say, if it is made optional.
Mr. V anderlip. Oh, yes; if it is made optional, that is true. But
it is not made optional, and if you made it optional you never would
get anywhere with the system. That is the unfortunate part of it.
Senator O ’G orm an . What is that last statement?
Mr. V anderlip. If you made it optional whether or not a bank
should come into the system you would never get the system started.
S e n a to r O ’G orm an . W h a t is y o u r ju d g m e n t, as a citizen , n o t as a
b an k er, as to w h e th e r i t o u g h t to be o p tio n a l o r co m p u lso ry ?
Mr. V anderlip. It would be vastly better to have it optional, if
there were any hope of making it work. Looking at it as a citizen,
and not as a banker, I see that bankers are very conservative and un
imaginative people. They would like to wait and see. You give
them permission to join when they choose and they will all wait
for the other man to start it. They will wait to see how it works.
Senator O ’G o rm an . Suppose it was compulsory, what do you think
would happen?
Mr. V anderlip. I fear that a great number of the national banks
would be converted into State banks.
Senator O ’G orm a n . About what percentage of the national b an k s
do you think may surrender their charters?
Mr. V a n d e r l ip . That is very difficult to say until the law is in
completed form. I think many of the small banks would, and I can
see very distinct advantages in the large banks surrendering their
national charters, taking out State charters, and then joining the
system as a State bank.
Senator O ’G orm an . That is upon the assumption that this b ill
would be enacted as it is now?
Mr. V a n d er lip . Y es, sir.
1994
BANKING AND CURRENCY.
Senator O ’G orm an . I suppose I do not exaggerate the situation
when I state that there is no member of this committee, no single
member, who favors enacting this bill as it stands to-day.
Mr. V a n d er lip . I have directed my remarks to the b ill as it
stands.
Senator W e e k s . What do y o u think of the proposition which has
been made to the committee, to reduce the period from one year to
three months during which the national banks should have the
privilege of deciding whether they are coming in or forfeit theii
charters ?
Mr. V a n d e r l ip . I should say that would be a very short time.
You found the national bankers very slow to comprehend the pro
visions of the bill, I understand, from many of them who have
been before you, and I think the national bankers as a rule would
not comprehend the thing sufficiently to arrive at an intelligent
decision.
Senator W e e k s . In your opinion what would be the effect of
shortening the time; would it force more out or force more in ?
Mr. V a n d er lip . That is hard to say; I do not know.
Senator W e e k s . Y ou think it would not be wise or just?
Mr. V a n d er lip . It would not be just. They ought to have time
in which to digest this thing.
The C h a ir m a n . They ought to have time to read it ?
Mr. V a n d er lip . Yes.
The C h a ir m a n . They have not read it yet?
Mr. V a n d er lip . S o I u n d e rs ta n d .
Senator W e e k s . Your fear that the banks will come in unless it is
made compulsory is justified by the experience under the AldrichVreeland bill? The currency associations were not formed until the
Treasury Department brought pressure to bear, and as a result of
that pressure the associations were formed?
Mr. V a n d er lip . Yes.
Senator W e e k s . There was no proper reason why they should not
have been formed, but there was no initiative about it ?
Mr. V a n d er lip . Yes.
Senator N elso n . What would you think o f making it optional with
the small country banks having a capital, say, o f $100,000 or less—
making it optional with them? Would that mar the plan?
Mr. V anderlip. If you reduce that to $50,000 or less, I do not
know that it would seriously mar the plan. But just where would
these banks that would not come in keep their reserves ?
Senator N elso n . I do not know. You would have to have some
plan for that. You would have to make----Mr. V a n d erlip (interposing). The very small banks are not essen
tial to the working of this plan.
Senator N elso n . The $25,000 bank ?
Mr. V anderlip. Yes; and even the $50,000 banks.
Senator N elso n . We have about 2,000 of them, I think.
Mr. V a n d er lip . We have more than that, I believe.
Senator H itch co ck . Suppose you provided that a small bank
which had subscribed no capital might have the right to discount
paper at a regional reserve bank, provided it has kept its reserve
there and has otherwise complied with the law ?
BANKING AND CUBBENCY.
1995
Mr. V a n d er lip . That Avould be, perhaps, unfair to the banks which
had been compelled to subscribe capital, but it would be workable.
Senator W eeks. In that event you would be conferring a benefit
upon the country banks without exacting any return ?
Mr. V a n d er lip . Exactly.
Senator R eed . Mr. Vanderlip, suppose the lawTrequired these banks
engaged in interstate commerce to keep a certain reserve in these
reserve banks and did not require any bank to put up any part of its
capital stock; what do you think would be the result of that?
Senator O ’G orm a n . Where would you get the capital ?
Senator R eed . They would have reserves there mighty quick. As
far as capital is concerned, to-day capital is almost a mere bagatelle.
We are talking about compelling people to come into this system.
The Government does have one power that is tremendous, and that
is its control over interstate commerce. Suppose you established a
system and simply said that any institution that engaged in inter
state commerce in the banking business must put a certain amount
of its deposits in these central banks to be established by the Govern
ment for the purpose of rendering secure our financial system.
Mr. V a n d er lip . Have not the courts decided that b a n k in g is notinterstate commerce ?
Senator R eed . I do not know. I am asking you that, as the
thought occurred to me here. It was not matured.
Mr. V a n d er lip . I am not a lawyer, but I think that is true.
Senator R eed . My opinion is that whenever notes go from one
place to another, or checks, that that is interstate commerce. Sena
tor Nelson would know, I think.
Senator H ollis. They could compel them in the way of-----
Senator N elson (interposing). I think the courts have held that
insurance policies are not interstate commerce.
Senator R eed . I know they have held that.
Senator N elso n . Insurance policies written in one State and pay
able in another.
Senator B ristow . Mr. Vanderlip, do you not think that any sys
tem which we may have devised, which would have to resort to such
drastic measures as that, would not last very long, and would soon
be superseded by another?
Mr. V a n d er lip . I think it would be very indefinite.
Senator B ristow . D o you think such a system would last very
long?
Mr. V a n d er lip . It w o u ld be s ta r te d u n d e r v ery po o r auspices, at
least.
I sh o u ld o b ject to th e p ro v isio n ------
Senator R eed (interposing). We are asserting here now our rights,
at least our desire, to control the banking system of this country
within certain limitations, and we are talking about saying to all
the national banks that have been organized and had their charters
for 20 years, that they must come into this system or they must go
out of the national-banking system. That is tolerably radical, but
I am not saying the other thing could be done. That is the thought
which occurs to me here.
Senator N elso n . There is a grave question, a very serious ques
tion, where a bank has a charter that has run for 10 years, say, a
charter which they took out for 20 years, and the bank has not
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BANKING AND CURRENCY.
violated any law; there is a grave question whether you can have
that charter forfeited simply because they will not go up to this
new trough and drink water out of it.
Mr. V a n d e r l ip . I object to the power given to the Federal re
serve board, as stated at the bottom of page 22, to perform the
duties, functions, or services specified or implied in this act. That
word “ implied ” might be made to cover almost anything we have
ever thought of.
T h e C h a ir m a n . W h a t page?
Mr. V a n d er lip . Page 22, the
last line on the page. I will take
up now the Federal advisory council, as referred to on page 23.
Senator B ristow . What do you suppose that means, in that last
paragraph on page 22, “ to perform the duties, functions, or services,
specified or implied, in this act ” ?
Mr. V a n d er lip . I suppose it means that the Federal reserve board
would be able to demonstrate that they had almost any powers they
were of a mind to conceive.
Senator P o m eren e . That would be given a legal significance,
meaning such powers as are legally implied for the purpose of carry
ing out the provisions of the act.
Mr. V a n d er lip . This is a pretty broad, blanket power, I believe.
I do not like it.
Taking up now the question of the Federal advisory council, if
bankers are not to be permitted to have any representation on the
Federal board, then I should emphasize in every way possible the
importance of this Federal advisory council. For instance, it is
provided here that they shall receive no compensation for their serv
ices. I can see no reason whatever for that. Why should they not
receive compensation if the banks choose to give it to them?
It is provided that they will meet four times a year or oftener if
called together by the Federal board not if called together by them
selves. I think if you make a Federal board that is composed en
tirely of Government representatives and permit the members of this
advisory council to sit at all the deliberations of the board, to take
part in the discussions and debates—not to have any votes, but
to give the Federal board the advantage of close, intimate touch in
the discussion of all questions with the advisory council—it will be
a very good thing.
Senator W e e k s . S hould its hearings be p u b lic?
Mr. V a n d er lip . Not necessarily. They are not exactly hearings;
they are general discussions which the Federal board may have; I
mean, they are official meetings. I would empower this council to
call for any sort of information. I would give them the power to call
for any sort of information that the Federal board itself might call
for. 1 would put them on a parity with the Federal board—almost
make them a part of it—but give them no vote. Give the Federal
board the advantage of that relationship.
Senator W e e k s . W h at do you th in k o f the value o f an advisory
board— a volunteer board, p ractically so— w hich has no ultim ate
resp on sib ility ?
Mr. V a n d er lip . I think it of very little value as this section is
drawn. I think it could be made of considerable value.
Senator P o m eren e . Without any provision o f that kind, do you
not feel that if there is any matter that comes up which seriously
BANKING AND CURRENCY.
1997
affected the banks, that they would have their representatives wait
upon this board for the purpose of presenting their views?
Mr. V a n d er lip . I t is very different h av in g a representative w a it
in g on the board from h a v in g a representative w ith fu ll righ ts sit at
the table w here the m eetin g is g o in g on.
Senator P o m eren e . T h at is true i f th ey are to sit and take part
in the final deliberation. T h ey w ould be like D elegates in the H ouse
o f R epresentatives.
Senator N elso n . D elegates from the T erritories, w ithout a vote.
The C h a ir m a n . Would you give them unlimited debate?
[Laughter.]
Mr. V a n d er lip . N o ;
[L au g h ter.]
I th in k there should be a cloture rule.
I now come to a very important and somewhat technical matter.
Section 14 provides that the Federal reserve banks may receive for
collection all sorts of checks and drafts drawn upon solvent banks.
The national-bank act at present says a reserve shall be kept upon
the deposits. There is no definition there of gross deposits and net
deposits, but the distinction which has grown up not by law, but by
regulation, is very important. Grass deposits are the total deposits
to the credit of the depositors in the bank. Net deposits are the de
posits after certain deductions, among which are all items that are
in the process of collection. For instance, if a bank in New York
has $10,000,000 of deposits, and a bank in Pittsburgh deposits a
million-dollar check drawn on a Chicago bank, the gross deposits of
the New York bank would be $11,000,000, but in figuring the reserves
we would deduct that $1,000,000 check until it had been collected,
and we would figure reserve on $10,000,000, which is the amount of
net deposits.
U n d er the present practice the reserve o f the P ittsb u rgh bank is
increased a m illion dollars, alth ou gh the N ew Y ork bank is not keep
in g any reserve a gain st th at deposit, and that constitutes a reserve
for th e P ittsb u rgh bank u n til it collects the money.
There is nothing said in this bill about gross deposits and net
deposits. If reserves were figured on gross deposits, and these Fed
eral reserve banks undertook all the collection business of the coun
try, as they certainly will under these provisions, there would be a
mass of deposits with them which would, in fact, only be items in
process of collection but against which they would have to keep
reserves. That mass of items in process of collection would be
so great that it would use up a large part of the reserve bank’s
available funds to keep a reserve against it. I think the reserve
banks should be permitted to deduct from their deposits items in
process of collection, just the same as national banks now deduct in
that way, and it would be more nearly correct and not permit the de
positing bank to count uncollected items in its reserve until they are
collected, although at the present time the depositing bank does
count in its reserve all deposits created by the uncollected items,
although the bank receiving them on deposit keeps no reserve against
this amount but deducts it from gross deposits.
T h is p o in t is very im portant, because if reserves were to be figured
on the gross deposits o f F ed eral reserve banks it w ould sw am p the
F ed eral reserve bank.
1998
BANKING AND CURRENCY.
Senator H itc h c o c k . On the other hand, is it not permissible under
this bill for the Federal reserve bank to charge to a member bank
having deposits checks when they are received in the Federal reserve
bank ?
Mr. V anderlip. It must, without charge, credit at par checks
drawn by member banks on it, checks drawn on member banks that
are members of its region, or checks drawn by member banks of any
other region upon the central reserve bank of that region. Those
must all he credited at par. It can charge for checks drawn on mem
ber banks of other regions, checks drawn by member banks upon
member banks of any other region, or checks drawn upon any solvent
bank. The charge for the collection does not cure the tiling. If
these are counted as deposits they have to keep a reserve against
them; it will consume a large part of the reserve if they have to keep
a reserve against these uncollected items.
Senator H itc h c o c k . I think that while it is true that checks would
come in constantly, in large volume, which would go to the credit of
a member bank, vet the same member bank would be charged with
checks that came in the same mail. That would reduce the deposits?
Mr. V anderlip. Certainly it will. Just as fast as collection is
made of the deposit, the deposit is reduced.
Senator H it c h c o c k . N o ; I think you misunderstood me. The
checks coming into the reserve bank, drawn on a member bank, when
cashed by the reserve bank wTould be charged to the account of the
member bank.
Mr. V anderlip. That is true, but what about checks coming in
drawn by members on other banks? Suppose there is deposited bv
a New York bank in the central reserve bank in New York a check
drawn by a San Francisco bank on another member of the San Fran
cisco Federal reserve bank? That is going to take some time to
collect.
Senator H itc h c o c k . That would be a different situation?
Mr. V anderlip. Yes.
Senator H it c h c o c k . A s far as the member banks of the central
reserve banks are concerned------
Mr. V anderlip (interposing). They ought to clear every day.
Senator H itc h c o c k . And it ought to be counted in their deposits?
Mr. V a n d er lip . Yes.
Senator H it c h c o c k . It ought to be counted in the reserve in the
deposit also.
Senator W e e k s . It will be necessary to give prompt notice to the
banks that certain charges have been made against its account, other
wise it might overdraw very frequently?
Mr. V a n d er lip . Exactly. Section 15 is translated in different
ways by different people. I have supposed that it meant that the
Federal reserve bank could go into the market and buy paper that
had the indorsement of a member bank somewhere in the system.
I have been told that is not what it means; that it can go into the
market and buy any paper.
Senator N elson . Anywhere.
Mr. V a n d er lip . Anybody’s paper.
Senator O ’G o rm an . That is for the purpose of regulating the dis
count rate?
Mr. V a n d er lip . Yes; to flatten rates o r to accumulate b ills to sell
at a time of threatened gold exports.
BANKING AND CURRENCY.
1 999
Senator O ’G orm an . Can you suggest any better way of regulating
the discount rate?
Mr. V a n d er lip . I suggested this morning, at some length, the idea
of converting part of the 2 per cent bonds into one-year Treasury
notes, which should be renewed, as often as they matured, by the
Federal reserve banks that would hold them. They would have in
their possession 200 or 300 million dollars’ worth of such notes that
they could offer in the market whenever they wanted to control the
rate and that could be used to great advantage in the gold situation.
Senator O ’G orm an . Just as the Government has done in the past
in that respect.
Mr. V a n d er lip . Yes, sir.
Senator B ristow . Why should not the Government do that direct?
It seems to me that is a very cumbersome way to secure gold.
Mr. V a n d er lip . H ow would the Government secure gold?
Senator B ristow . Sell bonds direct.
Mr. V a n d er lip . The Government would have no machinery for
that. It would not want to sell bonds. Of course it might sell
short-time notes, but it is not the special concern of the Government
whether gold is exported at a certain time or not. It is of concern
to the banking situation, and not a concern of such moment that the
Government ought to take action. These bankers, however, ought
to have the power so that they could in some measure check the out*
flow of gold. You can not check it to any great extent; you can only
dam it up a little; you can hold it up for a while, possibly until a
crop movement brings you credits so you do not have to have any
gold movement. That is only a slight, but it is a very important,
power.
Senator W e e k s . If the reserve banks were given the power to
invest in foreign bills and made a practice of doing it to a consid
erable extent, could not they regulate the flow of gold by purchasing
or selling foreign bills?
Mr. V a n d er lip . That is provided for in here. It is extremely
important, but of the 12 regional banks that would probably only be
done by the one in New York. There might be two or three wdiich
would engage in the purchase and sale of foreign bills, but it is
rather doubtful if banks operated by people who were not familiar
with foreign exchange would trade in foreign bills.
Senator W eeks. That is still another argument in favor of reduc
ing the number of banks?
Mr. V a n d er lip . Yes; th e y are almost numberless.
Senator S h a fr o t h . Mr. Vanderlip, I want to ask you about the
raising of the discount rate. I have not gotten it clear in my mind
whether this would be to the advantage of the people to do that or
not. Of course, there is a certain amount of benclit that comes to a
nation in getting gold into it, but if you raise the discount rate and
make the people pay higher interest for accommodations it is a
dilemma that has two features to it, one a bad feature and one a
good feature.
Mr. V a n d er lip . Y ou may be rendering a great service to the peo
ple by checking too great expansion and free loaning.
Senator S h a f r o t h . Y ou mean b y the increased discount rate?
Mr. V a n d er lip . By the increased discount rate.
Senator S h a fr o t h . But th e man w h o wants money never goes
there.
2000
BANKING AND CURRENCY.
Mr. V a n d er lip . Therefore he is not the correct man----Senator S h a fr o th (interposing). You say the rate can not be con
trolled absolutely, anyway?
Mr. V a n d e r l ip . Oh, no; only slightly.
Senator S h a fr o t h . I agree with you that whatever is absolutely
needed in foreign countries is going to get there if they willing to
bid for it more than we are, and for that reason I do not see but
what there is almost as much loss to the people by reason of attempt
ing to regulate the discount rate as there is benefit
Senator N e l s o n . Mr. Vanderlip, I want to call your attention to
line 6 on page 27. What do you understand by the term “ prime
bankers’ bills,” as distinguished from bills of exchange, the words
below ? What is a prime bankers’ bill ?
Mr. V a n d er lip . A prime bankers’ bill has the indorsement of a
banker.
Senator N elso n . Y ou mean acceptance?
Mr. V a n d er lip . A cceptance or indorsem ent.
Senator N elson . And a bill of exchange is a
bill that has not been
accepted yet ?
Mr. V a n d er lip . Yes, sir.
Senator N elso n . N ow , would this include what I call finance bills,
as distinguished from commercial bills? You know the difference?
Mr. V a n d er lip . A finance b ill is d ra w n a g a in s t secu rities, n o t
d ra w n a g a in s t co m m ercial tra n sa c tio n s.
Senator N elso n . But it has an acceptor?
Mr. V a n d er lip . Oh, yes; it has an acceptor,
just as a commercial
bill.
Senator N elso n . Would this include a finance bill as well as a
commercial bill?
Mr. V a n d er lip . I should think not.
Senator N elson . Y ou d o not think so?
Mr. V a n d er lip . N o, sir.
Senator N elson . It would not do to include that,-would it?
Mr. V a n d er lip . I think not.
Senator B ristow . D o you think that section 15 offers the regional
banks an opportunity to go out and transact a general banking
business ?
Mr. V a n d er lip . I do not know, but I am very sure it ought to be
made perfectly clear whether or not it is permitted to do so.
Senator B ristow . What do you think; should it or should it not?
Mr. V a n d er lip . I think it should not be. Of course, it has to
have something to make its discount rate effective. If you do not
adopt this one-year Treasury note plan, I am not certain but what
it is necessary for the bank to do this open-market business to make
its rate effective. It must have some power to do that. It is ob
noxious to be creating an institution with our own capital which is
going into a market to compete with us.
Senator O ’G orm a n . Y ou will observe by the language of section
15 that it is not designed that that power will be used always. I t is
only to be used in the contingencies which will be governed by the
rules and regulations of the Federal reserve board. Can you not
confide the exercise of that power to the judgment and discretion of
the Federal reserve board?
Mr. V anderlip. We would first confide it to our own representa
tives and directors in the Federal reserve bank, and I should say we
BANKING AND CUEBENCY.
200 1
would be willing to confide it to them rather more than to the Fed
eral reserve board. We create a majority of the directors of the
Federal reserve bank, and we ought to be able to control the compe
tition of the bank.
Senator O’Gorman. Suppose a provision substantially similar to
the first paragraph of section 15 were in this act, you would advise
the elimination of this reference to the reserve board establishing
rules and regulations?
Mr. V anderlip. I do not see any reason why it should establish
rules and regulations.
Senator O’Gorman. Except that it is in keeping with the general
tenor of the entire bill that they will exercise a supervision and
control over all reserve banks.
Mr. V anderlip. I have not especially found fault with the powers
given to the Federal reserve board there. I have merely voiced the
objection that is very common among bankers, to the Federal reserve
bank competing with existing banks. The feeling on the part of
many bankers is that the Federal reserve board should never buy any
paper that did not have the indorsement of some member bank of the
system. Then you are not in direct competition with the banks.
To come to the note issue, I believe it is fundamentally wrong to
have the Government issue the notes. I think they should be an
obligation of the Federal reserve banks. While I am perfectly clear
that it is improper and unscientific, I will admit that I believe it will
work in this form. There is danger that this guaranty of the Gov
ernment will sometimes embarrass the Government. That is the
chief practical objection to the working of this thing. It is unsound
in theory for the Government to issue these notes, but I think the only
really serious trouble that could ever come out of it would be that
the Government might be embarrassed in carrying out the responsi
bilities here imposed upon it.
Senator P omerene. Under what conditions have you in mind?
Mr. V anderlip. Under conditions where the Federal banks are
down to the limit of their reserves, a large amount of notes coming
in for redemption because of some fear of the inability of the banks
to redeem them, and the fact that there is not gold enough to cover
the notes, the only cover for them being a loan upon commercial
paper.
Senator H itchcock. F iv e per cent?
Mr. V anderlip. They have 5 per cent reserve deposited with the
Government. That is an insufficient reserve.
Senator P omerene. If these are in fact Government notes, it would
reduce to a minimum such conditions as you have described?
Mr. V anderlip. I think so.
Senator P omerene. Assume for the time being that this bill was
so changed as to make them obligations of the member bank instead
of the Government; it is true the provisions of this bill are sufficient
for the protection of those notes, so as to insure their redemption?
Mr. V anderlip. Probablj7. I presume you meant the obligation
of the Federal reserve bank instead of a member bank.
Senator P omerene. The regional reserve bank.
Mr. V anderlip. I can imagine, with a large number of regional
banks, instances of mismanagement—perhaps the exercise of too
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BANKING AND CUBEENCY.
optimistic views by the board of some bank—so that it would be in
a position of difficulty in redeeming these notes. The community
where these notes were circulated, even though it knew the bank that
issued them was rather weak, would not be concerned with that bank
at all if the Government were guaranteeing the notes. I think the
community ought to be concerned if the bank issuing the notes be
comes weak enough so as to raise some question as to its ability to
redeem these notes promptly. I certainly can imagine a condition
where one of these banks would not be able to redeem these notes
promptly. It is very probable. The risk of the guaranty is very
small, but if it is nothing there is need for it. If there is any risk,
the Government ought not to assume it. There is no more reason
why the Government should be liable for notes than for deposits.
Senator P o m e r e n e . Y ou have here the security of the reserves, the
double liability, the capital of the bank, and the fact that there is a
first lien upon the assets of the bank. That ought to make it pretty
secure.
Mr. V a n d er lip . It ought to make it quite secure enough for the
note holder. It makes it absolutely secure, I believe. Therefore,
why add the guaranty of the Government to it?
Senator P o m eren e . If it is absolutely secure, what risk is the Gov
ernment taking?
Mr. V a n d er lip . It is not taking any risk, if it is absolutely secure.
It is probably secure, and, therefore, a guaranty is wholly unneces
sary.
Senator W e e k s . Suppose we got into a serious war and it were
necessary for the Government to issue its Treasury notes, as it did in
the sixties, do }7ou not think that having these notes at that time with
practically a Government guarant}7, would be an important consid
eration ?
Mr. V a n d er lip . Very important; yes; important to the Govern
ment in that it would make it difficult for them to issue notes as they
did in the sixties with a guaranty. It would be much better for the
Government to let the bank notes stand by themselves.
Senator S h a fr o t h . Would it be any worse than to have bonds
issued to carry on a war?
Mr. V a n d er lip . Very much worse; inexpressibly -worse.
Senator S h a fr o t h . Y ou mean because the rate at which they
would buy the bonds would be above par ?
Mr. V a n d er lip . N o ; I mean because an emission of fiat money en
tails for the country that issues it instead of selling bonds to pay the
expenses of the war a burden of rising prices and increased expenses.
Senator S h a fr o t h . That depends on whether they can maintain
the gold reserve.
Senator R eed . Mr. Vanderlip, you say that if this currenc\r is se
cure, it needs no Government back of it. If it is not secure, it should
not have the Government back of it. Now, is not one of the great
elements in floating any currency the confidence that the people have
in the ultimate redemption of that currency ?
Mr. V a n d er lip . Yes, sir.
Senator R eed . And just in proportion as you increase that con
fidence you decrease the likelihood of the currency being attacked
or raided or beaten down in the market. Therefore, if the Govern
ment of the United States puts its indorsement upon all currency
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that is issued, does it not add to that currency a great element of
stability and value?
Mr. V a n d er lip . I do not believe in this case that it does add very
much. And I do not believe that it is desirable to add any. I be
lieve that these banks ought to be under the compulsion of so conduct
ing themselves that the public would have, absolute confidence in this
currency.
Senator R eed . Do you not think that in establishing any financial
system that the confidence of the public is, after all, one of the very
great elements?
Mr. V a n d er lip . Y es, sir.
Senator R eed . Now, do you
not believe, Mr. Vanderlip, that taking
the average citizen of the United States he regards anything that the
Government stands back of as the safest and best security on earth?
Mr. V a n d er lip . Y es.
Senator R eed . Well,
if that is true, then why not give to this sys
tem that added stability, particularly when you say it can be done
without really jeopardizing the Government?
Mr. V a n d er lip . I say it can probably be done without jeopardizing
the Government, but if it ever did jeopardize the Government it
would be a very serious matter.
Senator R eed . Why, certainly. And if we are going to enact a
bill here that is so bad that the structure will fall so heavily as to
bear down the Government or greatly injure the Government, then
we are embarking upon a most hazardous undertaking.
Mr. V a n d er lip . I do not think you are going to do that. And I
do not think this bill, in all human probability, if enacted, would
ever involve the Government; but the principle of having the Gov
ernment issue these notes is wrong. The guaranty of the Government
is an unnecessary and illogical thing. The notes will float perfectly
well without any guaranty.
Now, practically, I tell you my opinion is that the thing will work.
It is wrong, it is unscientific, it is not a correct way of approaching
this subject, but I think it will work, and the strong probability is
that the Nation’s credit will never become involved. But I can
readily conceive of circumstances under which it will become in
volved, and I think you would be doing the wrong thing to issue the
notes in this form.
Senator N elso n . One question there, Mr. Vanderlip. I think, as a
matter of general principle, you are right, but don’t you think that
in time of financial stress and disturbance, where the holders of these
bills knew that the Government was back of them, there would be a
less disposition among them to make a run and try to obtain gold for
their paper?
Mr. V a n d er lip . There might be.
Senator N elson . Would there not be less likelihood of a rush to the
bank or the Government vaults, saying, “ I want gold for this paper,”
if the holders knew the Government was back of it ? .
Mr. V a n d er lip . If they were to rush to the vaults and get gold,
they ought to rush to the vaults and get gold. That is the position
this bank ought to keep itself in.
Senator N elso n . N o ; I mean would not the people when they got
frightened, as they were in 1907, when they got scared and ran for
their deposits—suppose they got scared in the same manner about
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this new currency; wouldn't they be less likely to make a run for
the gold if the Government were back of the bills than if it were
simply a bank?
Mr. V a n d er lip . They would be somewhat less likely to. On the
other hand, the banks would be much less likely to get in a position
that would cause such a run if the whole responsibility was upon
them.
Senator H itc h c o c k . Mr. Vanderlip. the very fact that men sit
around a table seriously discussing the safety of these notes seems to
me a reason why we should not issue any more of them than necessary
for the purpose of elasticity, and leave that bank currency which we
already have and which is beyond any question.
Mr. V a n d er lip . It is beyond any question of security, but it has
disabilities that are very serious and which should cause its removal.
Senator H itc h c o c k . Its d isab ilities relate only to its in elasticity,
and th at can we provide for in th e future.
Senator S h a fr o t h . A n d the fact they can not act as reserves.
Senator R eed . W e can m ake them act as reserves in this bill.
Senator P o m eren e . Mr. Vanderlip, I do not share your views as
to the riks to be run by the Government issuing these notes, but I do
want to make them as absolutely secure as it is possible to make
them— if there is any thing more secure than absolutely secure. I
have this thought in mind: You suggested a few moments ago that
the earnings of the regional reserve bank over and above the dividend
should be converted into sinking fund for the redemption of the
bonds. Now, why would it not be wise to set apart a portion of
those earnings as a securitv or guaranty fund against possible loss
upon any of these notes which might be issued by the banks?
Mr. V a n d er lip . That would be rather an unnecessary tying up o f
gold, because it would be set aside in gold if it were set aside at all.
Senator P o m er en e . That is, you think these notes are so absolutely
secure it would not be necessary to have that additional guaranty?
Mr. V a n d er lip . I do not believe it would.
Senator N elso n . Would you have these notes redeemable in gold,
or gold and lawful money?
Mr. V a n d er lip . I should think they ought to be redeemable in
gold. And, by the way, the bill is out of harmony in that respect, in
that the banks----Senator N elson (interposing). What page are you referring to,
please?
Mr. V a n d er lip . On page 32 it is provided that the Federal reserve
banks must “ maintain on deposit in the Treasury of the United
States a sum in gold equal to 5 per cent of such amount of Fed
eral reserve notes,” etc. On the preceding page it says, line 20,
“ shall be exchanged for lawful money out of the 5 per cent re
demption fund hereinafter provided.”
The redemption fund is provided to be in gold, and the responsi
bility on the Treasury for redemption out of this fund is stated to
be in lawful money. If the words “ lawful money ” were changed
to “ gold,” in line 20 page 31-----Senator O'G orman (interposing). Mr. Vanderlip, the relation
there is so close that there would be no room to doubt that the expres
sion “ lawful money” on page 31 would mean gold, because it has to
be taken out of that 5 per cent.
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2005
Mr. V a n d er lip . If there is no room to doubt it. then these notes
are redeemable in gold at the treasury.
Senator N elson . Should not the banks who issue this currency
provide the necessary gold, and not cast the burden upon the Federal
Government in any event?
Mr. VANDERLiP. They are providing it.
Senator N elson . N o ; they are not; if you leave the words “ lawful
money ” in it, because the banks can redeem in lawful money, and
that throws the burden on the Government. The regional bank re
deems in greenbacks, and the man who gets the greenbacks would
walk up to the Treasury and demand the gold.
Mr. V a n d er lip . Gold is the proper money for ultimate redemption.
Senator N elso n . And as long as you leave the words “ lawful
money ” in there you ultimately cast the gold burden on the National
Government, do you not?
Mr. V a n d er lip . Y ou do, if “ lawful money,” as Senator O’Gorman
says, means gold here.
The C h a ir m a n . It lacks two minutes of half-past 5, the hour at
which the committee adjourns, under a previous resolution. The
chairman would like to know what the wish of the committee is with
regard to meeting to-morrow morning.
Mr. V a n d er lip . I am at the service o f the committee.
Senator N elso n . We should like to have you with us.
Senator R e e d . I move, with a view to expediting the hearings, that
we meet at 10 o’clock.
The C h a ir m a n . The Iowa bankers were invited to be here to
morrow.
Senator N elso n . The Senate meets at 12, so we had better meet at 10.
Senator W e e k s . Mr. Dawson of the Iowa bankers is here, and the
other two representatives will be here to-morrow, but I am inclined
to think they will subordinate their wishes to the desires of the com
mittee about appearing to-morrow or the next day.
Senator B ristow . I think it is very important we have Mr. Van
derlip with us to-morrow. I have a lot of questions I want to ask
him.
The C h a ir m a n . With that understanding then, the committee
when it adjourns, will adjourn till 10 o’clock.
But before the committee adjourns I should like to have it noted
on the record that the statement of the Senator from New York, that
not a single member of this committee was in favor of this bill in its
present form, must not be understood to mean more. Some members
of this committee think the bill should be amended; it must not be
construed to mean more than that.
Senator W e e k s . Haven’t you a large number of amendments your
self?
The C h a ir m a n . I have several amendments myself.
Senator W e e k s . That is what the Senator from New York said as
I understood it.
The C h a ir m a n . I thought there might be some other inference
drawn from it.
(Thereupon at 5.30 o’clock p. m. the committee proceeded to the
consideration of executive business, and afterwards adjourned to
meet to-morrow, Thursday, October 0, 1913, at 10 o’clock a. m.)
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BANKING AND CURRENCY.
T H U R S D A Y , OCTOBER 9, 1913.
C o m m ittee on B a n k in g and C urren cy ,
U n ited S tates S e n a t e .
Washington, D. C.
The committee assembled at 10.30 o’clock a. m.
Present: Senators Owen (chairman), Hitchcock, O'Gorman, Reed,
Pomerene, Shafroth, Hollis, Nelson, Bristow, and Weeks.
The C h a ir m a n . Gentlemen, the time is so short that I think that
even although the members are not present we had better proceed.
Senator N elson . Yes; Mr. Vanderlip’s statements are so import
ant we want to be sure to get them.
The C h a ir m a n . We ought to have them, but we have only two
hours until 12 o’clock, when the Senate meets, and this afternoon
the Iowa people will be here expecting to be heard. So if we do
not let Mr. Vanderlip go ahead we may not get his views at all.
There are a number of other gentlemen who have been notified to
appear.
Mr. V a n d er lip . I s it your wish that I should proceed?
The C h a ir m a n . Yes.
STATEMENT OF FRANK A. VANDERLIP— Resumed.
Mr. V a n d er lip . The provision for a national clearing house, on
page 34, I believe can be of great economic value to the country and
a great economy in the conduct of the business of the country. I be
lieve it is a feasible thing, always remembering what I said yester
day about figuring net deposits, for if the reserve banks undertake
these collections and keep a reserve against the items in process of
collection they will be swamped.
The C h a ir m a n . It would be necessary to have the banks, then,
keep a margin to cover their own exchanges—the special exchanges
on them—would it not? Do you think that would be necessary in
addition to the reserve ?
Mr. V a n d er lip . I think uncollected exchange items ought not to
count in a reserve, and no reserve ought to be carried against them.
You ought to be able to reduce your gross deposits by the amount
of uncollected exchanges. That rule ought to apply right down the
line, and uncollected exchanges ought not to constitute balances that
could be counted as reserves.
I think that a full comprehension of the working of this national
clearing house would clear up, in the minds of many bankers, some
objections that they see to the bill. Bankers are inclined to feel
that they will have to keep accounts for exchange purposes, and ob
ject to the removal of their reserve balances from central reserve
city banks, because they feel that they will still have to keep balances
there for exchange purposes. I suspect they do not fully appreciate
the function of this national clearing house and the method by which
that wdll supply them with exchange without the necessity of keep
ing central reserve city balances.
If a Kansas City banker wants to remit to New York it can be
done with a check on the central reserve bank of which the Kansas
City bank is a member. I t does not need to have a balance----The C h a ir m a n (interposing). You mean the Federal reserve bank,
do you not?
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2007
Mr. V a n d er lip . Yes; I mean the Federal reserve bank. It does
not need to have a balance in New York with another bank that it
can draw a draft upon, because its check on the Federal reserve bank
of which it is a member is at par in New York. It will be credited
at once. Presumably there will be telegraphic clearances between
the several Federal reserve banks, so that everything that is pro
vided to be deposited at par—that is, checks or drafts of member
banks on their Federal reserve bank, checks of member banks on
other member banks, any checks on member banks or checks drawn
by member banks of another region on their reserve bank—will all
clear in one day. Those items that are to be deposited at par will
clear in one day by the aid of telegraphic clearances between the
several Federal reserve banks, and the result will be some small
balance to be remitted one way or the other between the Federal
reserve banks, in the same way that a city clearing house operates.
I do not, therefore, see the necessity of banks having to keep bank
balances with other member banks in order to remit exchange. The
clearing-house feature seems to me very important. It follows the
lines of the best practice in Europe. I believe it is feasible. I think
it will work a great economy in the commerce of the country and a
great saving in the cost of doing that class of business.
Senator W e e k s . D o you think that country banks will be able to
carry on all of their domestic exchange business through the reserve
banks so that it will not be necessary for them to keep any deposit in
the larger centers?
Mr. V a n d er lip . There is a certain class of business that is not pro
vided for in the functions of the Federal reserve banks. The collec
tion of a due promissory note, the collection of coupons, drafts
drawn upon individuals, and items of that character, would still have
to be made through a bank. The bank will do that either for a cor
respondent who keeps a balance with it to recompense it for the
work, which is the present system; or it would do it for a fee, which
is the European system, and which would in the end be quite as sat
isfactory probably, if the fees were properly adjusted. The Federal
reserve banks, through their clearing-house function, will collect
any check drawn on any solvent banker. That takes in all bank
paper, but promissory notes, coupons, due bonds, and matters of that
character would still have to be collected through a bank in the
locality where they were payable.
Senator W e e k s . Could you make any estimate of the amount of
that business—of what it would cost or how much of a deposit would
be necessary in order to continue it under the present arrangement?
Mr. V a n d er lip . For the average country bank it would be very
little. The only thing that I think of that would be of importance
to the country banks would be that if the country bank entered the
discount market and bought notes that were payable elsewhere it
would have to have some arrangement for having remitted or de
posited to its credit the proceeds of those notes at maturity.
Senator W e e k s . N o w , there is this one facility of the larger banks
which the country banks make use of now very largely, and that is
the use of the credit department of the large banks. I presume it is
your experience and the experience of the managers of all large
banks that their country correspondents ask them to O. K. com
mercial paper whenever they buy it, unless they are very familiar
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BANKING AND CURRENCY.
with it. Now, it has always seemed to me that that was of material
advantage to the country bank, and that he would not want to give
up that facility entirely and would necessarily keep more or less
money in such banks as he has been doing that kind of business with.
Mr. V a n d er lip . Undoubtedly the country bank will keep deposits
with certain city banks for that and other reasons. I believe that it
will be the disposition of the average country bank, which seldom
borrows, to look to its old-time friend—the bank—that it has been
with for a long time as a place to borrow rather than the Federal
reserve bank—for a time, at least.
I believe that there will be the advantage that you speak of, an ad
vantage in getting credit information, which will lead to at least one
balance with whatever bank the country bank regards highest in the
line of obtaining credit information. I do not believe that these
balances of country banks will disappear altogether, but, of course,
they will be on quite a different basis. At the present time country
banks maintain balances for the purpose of having collections made
and for the purpose of securing collections to be made by them. That
is a very important element in securing bank accounts. For instance,
Philadelphia, adopting a practice of collecting free, or at least with
very small charges, has accumulated a great amount of country
balances, although those balances do not count as reserves, for reserve
city banks. Still Philadelphia collects so cheaply as against the
charge made in New York, that large balances have accumulated
there. Under this arrangement there would be no need of a balance
there for the purpose of collection or with the object of securing col
lections upon which the depositing bank could make a profit. There
would still be some reasons for balances, and the one you mention of
credit information will be an important one.
Senator W e e k s . I think you place those reasons at a lower esti
mate than any witness that has been before the committee, and it is
something the committee will have to consider, because I think many
members of the committee—I have myself—have had in mind that
it will be necessary for the country banks to keep considerable de
posits in the large centers, or certainly in one large center. And
whether it would be desirable to allow any part of that to be used as
reserve, at least temporarily until they had acquired new habits and
new methods----Mr. V a n d erlip (interposing). That is permitted temporarily by
the bill.
Senator N elso n . Three years. Now, I want to get at one point
there. In the part of the bill referring to the reserve on deposits,
would the phrase that checks, drafts, bills, etc., in process of collec
tion shall be deducted from the----Mr. V an d erlip (interposing). Gross deposits?
Senator N elson . Gross deposits—something of that kind----Mr. V a n d er lip (interposing). That will do it.
The clause in regard to refunding bonds I have already discussed
pretty fully. I have said that I do not believe it will work in the
way that has been anticipated, because the 2 per cent bonds will have
greater value in the hands of a banker taking out circulation than
the 3 per cent bonds. A suggestion that has occurred to me would
be to convert all the twos at once into threes with the circulation
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2009
privilege and with a tax of 1| per cent instead of one-half per cent.
That would leave the result the same to the Government in so far as
the bonds were used for circulation purposes, and it would give the
banks the option of using the bond for circulation on the same basis
that a 2 per cent can be used, or of selling it as a 3 per cent straight
investment bond, if there were a market.
There would be a disadvantage to the Government if the banks did
sell them and there ceased to be circulation. There would be a com
pensation for that disadvantage in that, so far as the national-bank
notes were reduced, there would be room for the new notes to be
issued, and the Federal reserve banks would make a profit on the new
notes, which profit would in turn go back into the Government’s
pocket.
Senator W e e k s . I assume you would agree that the circulation
tax should be increased if they should issue circulation on these
new bonds, so that the net return would be exactly the same as on
the twos?
Mr. V a n d er lip . That is what I said, that the circulation tax
would be Id per cent instead of one-half per cent. But the Gov
ernment would in the end be compensated for any loss through the
earnings of the bank.
In taking up the section in regard to bank reserves, I will say that
my general calculation has shown that there will be a pretty sharp
contraction in the central reserve cities at the end of the first 60
days. It would not be so sharp, however----Senator O ’G orman (interposing). What do you mean by the first
60 days?
Mr. V a n d er lip . The first 60 days after----Senator O ’G orm an . After the new system is in operation ?
Mr. V a n d er lip . After the new system is in operation and re
serves can be transferred.
That contraction, although sharp, will not be so sharp but that
it can be met, I think, without exceptional difficulty. At the end
of three years there will be a possible expansion of $1,500,000,000 to
$1,700,000,000. To reach such an expansion means that all the Fed
eral reserve banks will have loaned down to the full limit so that
they have only 33 per cent reserve, and that member banks would
have loaned down to the legal minimum. It is not at all presumable
that such a condition would arise.
That figure looks very large, but as we look back and note that in
the last three years national-bank loans have expanded $700,000,000,
I do not regard the possibilities of expansion as excessive. I see
no reason to anticipate that the expansion would be to the limit, that
banks would not still be managed conservatively as they have been,
and I should say that the possibilities of expansion were not dan
gerous, but, on the other hand, were ample.
With respect to the reserve requirement, the law says that banks
shall keep a certain minimum in their vaults----Senator P o m erene (interposing). Before going to that would you
object to a question? You say there would be a contraction within
the 60 days. Now, for what reason?
Mr. V a n d er lip . For the reason that the central reserve city banks
have to repay balances to both the reserve city banks and the country
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banks, and the contraction will come from the great reduction of
central reserve city balances, which have to be paid out in full in cash.
That will be compensated for in part by the reduction of the reserve
requirements in the central reserve cities, but it is not fully compen
sated for.
In this connection, I fail to see, as I said yesterday, why a central
reserve city bank need keep any more reserve than a country bank
after the time has past that it keeps any reserve for a country bank.
I do not see why the reserve requirements should not be the same all
around. As a matter of fact, the city bank is more liquid than the
country bank, and why it should have to keep 50 per cent more re
serve—18 per cent instead of 12 per cent—although it has no reserve
responsibilities whatever to the other banks in the system, is not clear
to me.
Senator N elson . It is on exactly the same footing as the country
banks after the 36 months; it is no longer the reserve agent for any
country banks.
Mr. V a n d er lip . Exactly.
Senator P o m er en e . That is one of the thoughts I had in mind when
I suggested yesterday the propriety of giving to this board, subject,
perhaps, to the approval of the President, the right to reduce or to
increase these reserves, realizing all the while that when we fix a
reserve arbitrarily, without practical experience under the new sys
tem, it is necessarily somewhat problematical.
Mr. V a n d e r l ip . There is certainly force in that view. It is p ro b
lematical whether we can hit on the right reserve. I believe we may
sometimes come to the point where we will not have to have any re
serve requirement at all, but leave that to the judgment of the banker.
The C h a ir m a n . But you are very clear that the reserve which is
to be kept in the vaults of the bank may be left optional, either to
be kept in the vault or with the Federal reserve board.
Mr. V a n d er lip . There can be no doubt about that. Why should
you force a bank to keep in its vault money which it does not need
and which it would prefer to keep with the central reserve bank?
The C h a ir m a n . There is a variable requirement in regard to banks,
is there not?
Mr. V a n d er lip . There is; and it occurs to me that there might be
some banks with deposits fluctuating so rapidly that the amount you
say must be kept in their vaults may not be sufficient.
The C h a ir m a n . And in some cases it may be much larger than
necessary ?
Mr. V anderlip. Yes; that would particularly be so with the large
city banks.
The C h a ir m a n . The banks which are in immediate proximity to
the reserve banks?
Mr. V a n d er lip . Yes.
Senator O ’G orm a n . Do you think this matter might very well be
provided for by having a minimum figure mentioned, or contained in
the bill, but conferring upon the reserve board a discretion to modify
that requirement in a given case?
Mr. V a n d er lip . Personally I dislike too much discretion to be
given to this reserve board, at least for the present. Banks like to
know what it is they are facing; they like a definite law rather than
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a regulation which may be changed without discussion or notifica
tion.
Senator O ’G o rm an . But you have rather intimated that it would
be well to have such a discretionary power lodged somewhere to
cover a given situation.
Mr. V a n d er lip . I t would be well to look forward to a time when
we can change these requirements if we have discovered they are
not right. Whether that had best be left to the discretion of the
Federal reserve board or whether it is a question to be brought back
to Congress is a matter for a difference of opinion.
I should have said, Senator, in speaking of the reason for the
contraction in central reserve cities, that those banks also, in common
with all other banks, must pay in capital to the central reserve bank.
That is another reason for contraction.
Senator P o m er en e . My thought as to that was that perhaps this
bill should be so amended as to permit of the taking of the com
mercial paper at once and rediscounting it for the time being so as
to avoid the necessity of paying so much cash into a vault and keep
ing it there as dead capital.
Mr. V a n d er lip . The language of the bill leaves it open to question
whether a central reserve city bank could discount before it began to
deposit.
Senator P o m er en e . I think that is true, but it seems to me it
ought to be modified.
Mr. V a n d er lip . I think a central reserve city bank should be able
to discount before it begins to deposit, because it has to meet drafts
immediately on the law becoming effective.
In section 22, which fixes the reserve which Federal reserve banks
must keep, it is declared to be 33J per cent of its outstanding demand
liabilities. I have already spoken of the necessity of calculating net
deposits, but I think demand liabilities ought to be more fully de
fined. For instance, a bank might have borrowed abroad; it is per
haps hardly presumable that it would have borrowed on demand, but
it might. You would not want it to keep a reserve against such a
liability. I would rather see that section expanded to indicate what
the total is upon which reserves are to be calculated.
Senator N elso n . Suppose you put into this “ from circulating
notes and net deposits ” ?
Mr. V a n d er lip . That covers the case.
Senator N elso n . In lieu of the language in the bill.
Mr. V a n d er lip . Yes, sir.
Senator N elson . And then somewhere in the bill define what net
deposits are.
Mr. VANDERLir. Yes, sir.
Senator W e e k s . Why do you think it ought not to be necessary to
keep a reserve against a liability made abroad?
Mr. V a n d er lip . I think it ought not to be necessary; I am afraid
it might be necessary here.
Senator W e e k s . Why do you think it ought not to be necessary?
Mr. V a n d er lip . It is true that if it were a demand liability there
perhaps might be a necessity for a reserve.
The C h a ir m a n . But the assets against a foreign demand of th a t
kind are of such a character that that in reality is a species of reserve
against it; it not that true?
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BANKING AND CURRENCY.
Mr. VANDrRLip. I think so—the collateral that probably would be
lodged against such a loan.
The C hairman . The collateral is of such a character that it is
really a liquid collateral, and for that reason you do not think a
reserve necessary?
Mr. V anderlip. Yes.
Senator W eeks. Why do you think there would necessarily be
collateral against such a loan?
Mr. V anderlip. It might be either way. If there were no col
lateral and it were a demand obligation, I suppose it is fair to say
that there should be a reserve against it.
Senator P omerene. What is the fact from a practical standpoint;
is there usually collateral against these obligations ?
Mr. V anderlip. From a practical standpoint I doubt if there would
be a demand obligation of this sort. But I think I should say that
if the bank borrowed abroad it would probably not borrow on
demand.
Senator O ’G orm a n . But if you would exclude the foreign demand
liability you would afford a ready means to bankers to evade this
requirement. If they had reached their limit here in this country,
they could then transcend it by securing this accommodation abroad.
Mr. V anderlip. That would be possible.
Senator O ’G orm a n . And there would be no limitation.
Mr. V anderlip. I think, on further consideration, that demand
liability in the form of foreign borrowing, at least without collateral,
ought to have a reserve against it.
I have no fault to find with regard to the clause concerning bank
examinations, except that I feel that central reserve city banks seem
to be regarded as needing more careful supervision than country
banks, and more numerous examinations are provided.
Senator O ’G orm a n . Let me ask you this, Mr. Vanderlip: You have
several times spoken of central reserve banks; you mean the Federal
reserve bank?
Mr. V anderlip. N o, sir; I mean the banks in designated central
reserve cities.
Senator O ’G o rm an . The existing banks?
Mr. V a n d er lip . Yes, sir.
Senator N elso n . Under existing law ?
Mr. V a n d er lip . Yes, sir. That law is, curiously, continued with
out any reason for it.
- Senator N elso n . Yes; they keep up the distinction in th is law . as
I think, unnecessarily.
Senator P o m er en e . And you see no reason at all for that d is tin c
tion in this bill ?
Mr. V a n d er lip . N o reason for it.
Senator O ’G o rm a n . If you have the one system ?
Mr. V a n d er lip . Yes, sir.
Senator O’Gorman. And if we do not, as suggested yesterday, pro
vide for the national banks that may not want to come into this
system ?
Mr. V a n d er lip . Yes.
Senator O ’G orm an . On that point, Mr. Vanderlip, if I get your
idea, if this change in our banking law is to accomplish any good, it
ought to mean the creation of a uniform and a single system.
BANKING AND CURRENCY.
2013
Mr. V anderlip. Undoubtedly; that is the ideal to be worked for.
Senator O ’G orm a n . We can not have half the banking system
under this plan and half under some other plan.
Mr. V anderlip. Y ou can not so have it and have it anything like
a success; and I fear this plan will emphasize the difference rather
than draw the banks together.
Senator O ’G orm an . S o, then, assuming we have one plan operating
upon all national banks, at least, you see no particular reason why
the central reserve banks should be continued?
Mr. V anderlip. If the plan of reserves herein provided—that these
reserves shall be either in the vault or in the Federal reserve bank—
is carried out, then there is no reason for the distinction between a
country bank, a reserve city bank, and a central reserve city bank.
If you change this so as to permit some of the reserve deposits to
be left with national banks, then there would be reason for the dis
tinction.
Senator N elson . And this bill obliterates that?
Mr. V anderlip . A s the b ill stan d s; absolutely,
The national banks do not object to examinations; they object to
continuous examination. We do not want so many that we have to
keep open nights in order to be examined; and I think a good many
examinations are being provided here for the present reserve city
banks.
We have, in addition to the examinations provided here, an ex
amination by the clearing house, which might or might not be con
tinued. It has been, I believe, the most effective and thoroughgoing
examination that the banks have ever had. We also have examina
tions by our directors.
There is this thought also in connection with the examination of
banks doing a large foreign business: Foreign bankers will refuse
to reconcile for examination purposes as many as nine times a year,
which might be necessary under this bill.
The C hairman . They will refuse to do what?
Mr. V anderlip. T o reconcile their accounts; that is, to O. K. the
account up to a definite date. It is too complicated. It is usually
done every six months, and you can not get foreign bankers to meet
this new condition. They simply won’t do it, so your examination,
in that particular, might be ineffective in spite of anything either the
examiner or the bank could do. There are rather too many examina
tions provided here, I think, although I am making no plea what
ever for scant examination.
Senator O ’G o rm a n . Mr. Vanderlip, as I read this provision, the
minimum number of examinations is two, the power being confided
to the reserve board to order others if necessary.
Mr. V anderlip. There are examinations by the comptroller, ex
aminations by the board, and there may be examinations even by the
Secretary of the Treasury.
Senator O ’G orm a n . I s there any reason to apprehend that there
will be an unnecessarily large number of examinations each year?
Will it not depend upon the view that the reserve board and the
Secretary of the Treasury may take as to the necessities of a given
situation?
Mr. V anderlip. I think that is possible. I think, however, there
are too many examinations actually provided for. It says here that
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BANKING AND CUKBENCY.
the Federal reserve board as often as it deems best, and in any case
not less frequently than four times each year, shall order examina
tions of national banking associations in reserve cities. Why dis
criminate against reserve cities?
Senator O ’G orm an . What line are you reading from now?
Mr. V a n d er lip . P a g e 41, line 14.
Senator O ’G orm a n . That relates to reserve cities. But, from the
view that has been expressed lately, we may abandon these reservecity definitions entirely if this plan or any similar plan is adopted.
I had in mind a moment ago a provision in the first few lines on page
40 which speaks of examinations of national-bank associations at
least twice a year.
Mr. V a n d e r l ip . It is distinctly desirable that there should be
power to have a special examination of any bank concerning which
there is any doubt. But to have regularly at least four, as is provided
here, and possibly more, I think is bad.
Senator W e e k s . I I ow m uch does it cost the national banks for
the exam inations that are now made?
Mr. V a n d er lip . I th in k it costs o u r b a n k ab o u t $3,300.
Senator W e e k s . A year?
Mr. V a n d e r l ip . For each examination; and I believe the fees of
the New York examiner are something like $35,000.
Senator B ristow . H ow m any exam iners are there?
Mr. V a n d er lip . Only one; he has assistants, of course. There is
one examiner in New York.
Senator B ristow . Only one, and he pays his assistants?
Mr. V a n d er lip . He pays his assistants. I think his net fees are
about $35,000.
Senator O ’G o rm an . W ho appoints him ?
Mr. V a n d er lip . T he P resid en t, on the recom m endation o f the
C om ptroller o f the Currency.
Senator B ristow . T he Secretary o f the T reasury, does he not?
Mr. V a n d erlip . I think not: I th in k it is the President.
Senator B ristow . I s he made an exception?
Mr. V a n d er lip . N o ; it is the Secretary o f the Treasury.
Senator B ristow . Upon the recommendation of the comptroller?
Mr. V a n d er lip . Upon th e re c o m m en d atio n o f th e c o m p tro ller.
Senator B ristow . I s that accurate— the Secretary o f the Treasury
or the com ptroller?
Mr. V a n d er lip . I am informed he is appointed by the Comp
troller of the Currency, with the approval of the Secretary of the
Treasury.
Senator O ’G orm a n . We are probably getting away from the fea
tures of this bill, but it is instructive. What charges are made to
the banks for these examinations?
Mr. V a n d er lip . A charge on the percentage of the bank’s busi
ness. I can not give you the exact percentage, but my recollec
tion is that the fee the National City Bank pays is in the neighbor
hood of $3,200.
Senator P o m eren e . A year?
Mr. V a n d er lip . F o r each e x a m in a tio n .
Senator O ’G orm an . Can you roughly estimate
about how much
is paid annually by all the city banks in the city of N ew York for
these examinations?
BANKING AND CUBKENCY.
2015
Mr. V a n d er lip . If my information is correct that the examiner
receives net in the neighborhood of $35,000, it would be that plus
what he pays to a half dozen other men that he employs at more
moderate salaries. It would be in the neighborhood, then, of $45,000
or $50,000.
Senator O ’G orm an . Does he fix the salaries of his subordinates ?
Mr. V a n d er lip . He employs them and pays them o ut of his gross
receipts.
Senator O ’G orm an . Are his gross receipts affected by his activities
in examining and reexamining?
Mr. V a n d er lip . His gross receipts are based upon the number of
examinations, but the number of examinations is provided by law to
be two a year.
Senator O ’G orm a n . Arbitrarily fixed at th a t?
Mr. V a n d er lip . Yes, sir.
Senator O ’G orm a n . S o he could not, if he w ished, enlarge the num
ber o f exam inations?
Mr. V a n d er lip . He sometimes gets in three a year; we have had
three in a year, but I think that is a lapping over. We have had
three in a calendar year, but I think the average is two a year.
Senator O ’G orm an . What is the average compensation of his as
sistants ?
Mr. V a n d er lip . I do not know, but I would presume from $1,200
to $1,800.
Senator O ’G orm an . A n d they are fa ir ly w ell-equipped accountants?
Mr. V a n d erlip . Fairly well-equipped accountants. There may be
one or two that would get $2,500. I know nothing about that per
sonally.
Senator O ’G orm an . What does the chief examiner do for his
$35,000?
Mr. V a n d e r l ip . He superintends the work a n d is r e s p o n s ib le for
the reports.
Senator O ’G orm a n . T hen it is a sort o f farm ing-out process?
Mr. V a n d er lip . H a rd ly that.
Senator O ’G orm an . The examiner is compensated by the various
banks whose accounts he examines, and he in turn employs such
assistants as he may require?
Mr. V a n d er lip . Y es, sir.
Senator N elso n . In a big
bank, you know, the chief examiner
has to go there with his assistants, and it practically, for the time
being, suspends the business, does it not?
Mr. V a n d er lip . It does not suspend, but it interferes with it
greatly. We walk into the bank some morning and find all of our
cash sealed, and we can not open anything except with the consent
of the examiner or some one who is in charge. And if we have that,
happen four or six times a year it gets to be rather trying. That is
not necessary.
I want all the examination necessary to insure the soundest bank
ing and the most complete observation of the law; I have no objec
tion whatever to that, but I do not want to hamper business unduly
to accomplish that.
Senator W e e k s . Y ou have an auditor in your bank?
Mr. V a n d er lip . Yes, sir.
Senator W e e k s . W ho is exam in in g all the time?
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BANKING AND CURBENCY.
Mr. V a n d e i h .j p . All the time, unexpectedly taking departments;
he is working all the time with a force.
Senator N elso n . I have always thought, Mr. Chairman, that this
was an anomaly in our law, for bank examiners to be paid by the
respective banks. It seems to me that they ought to be paid a regular
salary by the Government and not have the banks pay for these ex
aminations. The pay is based upon the size of the bank and the vol
ume of business, and the disposition has been—take it out in the
West—for these examiners to get over the ground as rapidly as
possible.
The C h a ir m a n . Some of them have as high as 200 banks to ex
amine.
Senator N elso n . Yes; and the disposition is to go over these banks
as rapidly as possible, and instances have occurred where they have
done it in a very perfunctory and reckless manner. I think it would
be a most wholesome reform to have these men on a salary.
Senator S h a f r o t h . I s there not som ething in th is b ill on that ?
The C h a ir m a n . Yes. Mr. Vanderlip, I wanted to ask you some
thing about the examinations by the clearing-house examiners. How
often do they make these examinations?
Mr. V a n d er lip . Once a year, and they are extremely thorough.
They are very ably done. We have taken great care to secure there
the best possible staff. The examiners are highly paid, and are a
very capable class of men.
The C h a ir m a n . H ow many men are employed by that force ?
Mr. V a n d er lip . About 10 men.
The C h a ir m a n . About 10 men under one man?
Mr. V a n d er lip . Yes, sir; a n d a n u m b e r o f th em are f a ir ly highly
s a la rie d m en, too.
The C h a ir m a n . What is paid the chief examiner ?
Mr. V a n d er lip . I d o n o t know th a t th e re is an y o b jectio n to m a k
in g th a t p u b lic. It is $20,000.
The C h a ir m a n . And are his subordinates paid as the subordinates
of the national-bank examiner—$1,200 to $1,800?
Mr. V a n d er lip . Much m ore.
Senator O’G orman. W hat is their average pay?
Mr. V a n d e r l ip . There are men who get around $5,000.
The C h a ir m a n . And they act in concert with the chief examiner?
Mr. V a n d er lip . Yes, sir.
Senator P o m er en e . Are those examinations made on his own mo
tion or at the suggestion of members of the clearing house?
Mr. V a n d er lip . On his own motion entirely, and the result of
the examination is never revealed to members of the clearing house
unless there is cause for criticism. There is the utmost secrecy main
tained in regard to those examinations until there is cause for
criticism. If there is cause for criticism, that criticism is made to
the clearing-house committee, and in that case it is most confi
dentially treated. I have been chairman of the clearing-house com
mittee, and I am familiar wdth that. This year I am not chairman,
and I have not heard a lisp of any criticism. Nothing whatever
has leaked from that committee to me, although I was chairman
of it last year. I do not know of a single criticism that a clearing
house bank examiner has made.
BANKING AND CUBBENCY.
2017
The Chairman . Then those clearing-house examinations are not
open to the review of the different member banks ?
Mr. V anderlip. By no means.
The C hairman . They do not know, from those examinations,
where stocks were located ?
Mr. V anderlip. They have not the slightest knowledge. They do
not hear anything except the report that the bank is in a sound con
dition and being properly conducted, if that is the case. If there
were ground for criticism, it would first be taken up with the bank
to see if the bank would itself correct it upon the complaint of the
examiner. Frequently that has been done and great good has been
worked. It is only after the examiner has been unable to harmonize
his views with the views of the management of the bank that the
matter comes to the clearing-house committee. It is treated in the
utmost confidence by the clearing-house committee.
Senator P o m eren e . Suppose a man were a borrower in excess o f
what was a proper amount at two or three different banks, would
that fact be made known to those several banks?
Mr. V anderlip. It would be made known to those banks, probably
by the bank examiner. That is, in the case of the bank he was ex
amining, if he found a loan there from some one who had loans in
numerous banks he would explain that to the bank under examina
tion. Whether or not he would also go to a bank not under ex
amination and call their attention to the fact I am not certain.
Senator B ristow . In regard to these examinations; of course, you
were in the Treasury Department, and you had a very wide experi
ence. Do you not think the present system of paying bank examiners
inevitably "tends to haste and inefficient examinations?
Mr. V anderlip. Undoubtedly a bank examiner is desirous of com
pleting as many examinations in a year as he can, since his compensa
tion depends upon the number he completes.
Senator N elson . That has been apparent to me for a great many
years, out in the West.
Senator P o m eren e . I was going to ask one more question along
the line I was interrogating you upon. Suppose that the cashier
of bank A would have reason to believe or have curiosity to learn
whether a certain particular borrower did not have large amounts
borrowed at other banks in the city. Would he be privileged to
inquire of the bank examiner as to whether or not this borrower
had accommodations at other banks; and if so, where and to what
amount?
Mr. V anderlip. He would be privileged, I think, to make the first
part of that inquiry; has the borrower unduly expanded his loans.
I do not think he would be privileged to ask where. I do not believe
that the bank examiner would give him anjr information as to the
condition of any other bank, even though the inquiry were based
on the desire to iearn the condition of one of his customers.
Senator O ’G orm a n . Would such information be acquired through
your clearing-house association?
Mr. V anderlip. No, sir.
Senator P omerene. I.had reference to the examiner employed by
the clearing house, and from him you could get the information to
the extent you have indicated?
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BANKING AND CURRENCY.
Mr. V a n d er lip . Yes. sir.
Senator W e e k s . Did you, as chairman of the clearing-house com
mittee, know or have knowledge of what other banks were loaning,
unless there was complaint that there was an overloan ?
Mr. V a n d er lip . I had no more knowledge of the business of any
other bank after the examination was completed than you have at
this moment, if the examiner certified that the bank was solvent and
being conducted on sound lines.
Senator W e e k s . And you did not know what particular stocks and
bonds they were loaning?
Mr. V a n d er lip . I had not the slightest information. The only
report the examiner makes in the case of a sound bank is that he has
examined the bank under such a date and found the condition satis
factory.
Senator P o m eren e . I s this exam iner under bond?
Mr. V a n d er lip . I should not think so; he has no
fiscal responsi
bility.
Senator N elson . Y ou mean the clearing-house examiner?
Senator P o m eren e . Yes.
Senator N elson . He does not handle any funds.
Senator H itc h c o c k . The United States examiners are bonded.
Senator N elson . Yes; they give bonds. They are appointed as
quasi public officials, and then the public does not pay them. They
are paid by the banks.
Senator P o m er en e . The secrecy of a borrower’s business would de
pend entirely upon the honor of the man who was employed in the
position of examiner?
Mr. V a n d er lip . Yes. I have, after large experience with them,
the utmost confidence in their honor and in the fact that these exam
iners would regard as absolutely confidential any information that
came to them.
Senator B ristow . Who have usually been appointed as bank ex
aminers in New York by the comptroller?
Mr. V a n d er lip . They have usually been of good experience; per
haps not of very wide banking experience. As I think back, I do
not recollect that examiners have usually had a very large banking
experience. Our present examiner there is an excellent accountant.
He had no banking experience, I think, up to a year or two ago,
when he was for a time employed by the First National Bank. He
later left that employment and returned to the position of examiner.
Senator O 'G orm a n . Is th a t th e official ex am in er?
Mr. V a n d er lip . Yes, sir; Mr. Starek.
Senator P o m er en e . Give his full name.
Mr. V a n d er lip . Charles Starek.
Senator B ristow . Whom d id he succeed?
Mr. V a n d e r l i p . I am not sure.
Senator O ’G orm a n . What was his position in this bank?
Mr. V a n d er lip . N o official p o sitio n .
Senator O ’G o rm an . What was the character of his employment?
Mr. V a n d er lip . I am not aware as to what his duties were.
Senator O ’G orm a n . Clerical work or the work of an accountant?
Mr. V a n d er lip . I think the work o f auditor and accountant.
Senator O 'G o rm an . What is the usual pay of an auditor and
accountant in a bank?
BANKING AND CURRENCY.
2019
Mr. V a n d er lip . An auditor would probably,
ceive as much as $10,000.
Mr. O ’G orm an . I s th is a large bank?
Mr. V a n d er lip . The First National Bank of
in a large bank, r e
New York. Let me
sav that the fee in New York has always until rather recently been
divided between two examiners. Recently one of the examiners,
Mr. Ilorebeck, has been dropped and we have now only one ex
aminer there.
Senator N elson . And he gets $35,000 a year in fees, less what he
pays out for his help?
Mr. V a n d er lip . I think plus what he pajrs out. As to that fee I
have no accurate information. That is what I have been told.
Senator O ’G orm an . When you speak of that figure you have in
mind the net income o f the present auditor and examiner?
Mr. V a n d er lip . Y es. I f there were tw o exam iners-----Senator O 'G orman (interposing). That would be divided?
Mr. V a n d erlip (continuing). It would be divided between
the
two. There have hitherto been two examiners; there is now only
one.
Senator O ’G o rm an . Why, if you know, was this change made.
Why was Mr. Rorebeck dropped?
Mr. V a n d er lip . I have no knowledge.
Senator O ’G orm an . When did that take place?
Mr. V a n d er lip . Since the beginning o f the present administra
tion.
Senator H itchcock. When the examiner comes to your bank, how
many assistants does he bring?
Mr. V a n d er lip . A bout six.
Senator H itc h c o c k . Do they
all have a knowledge of the affairs
of your bank, when they have completed the examination?
Mr. V a n d er lip . Everything we have is opened to them; under
present day conditions our correspondence is given to them.
Senator H itc h c o c k . D o they have a knowledge, for instance, of
vour loans and collateral?
Mr. V a n d er lip . A b solu tely.
Senator H itc h c o c k . All of the men ?
Mr. V anoerltp . A ll o f th e m ; yes, sir.
Senator H itc h c o c k . S o that the knowledge
of the affairs of the
bank is not entrusted simply to a United States examiner and the
clearing-house examiner, but to all of these assistants?'
Mr. V a n d er lip . All of these assistants have access to the affairs.
Whether or not the work may happen to be so divided that one man
counts the cash and another checks collateral. I can not say. There
is no reason, so far as the bank is concerned, why every one of the
bank examiner’s staff should not have information about anything
in the bank.
Senator O ’G orm a n . Have you ever known a case where any of
these assistants to the bank examiner have made any improper use
of the information they acquired in the examination of a bank?
Mr. V a n d e r l ip . I never have.
Senator P o m er en e . Under the present national banking law, as I
understand it, the examiners make their reports to the Comptroller
of the Currency, and I assume that under your State banking laws
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BANKING AND CURRENCY.
in New York the examiners there would make reports of their exam
ination of the State banks to the State banking department ?
Mr. V a n d er lip . Yes, sir.
Senator P o m eren e . Neither one of them would have anv means of
knowing what the condition of the other set of banks was ?
Mr. V a n d er lip . A s a matter of fact I think they do cooperate.
Senator P o m eren e . What I was thinking to get at was this, that
the examiner employed by the clearing-house association would have
the means of knowing the condition of all the banks, both State and
national, wffiile, primarily at least, the examiner of the national banks
would only know the condition of the national banks, and the State
examiners of the State banks.
Mr. V a n d er lip . That is quite true.
Senator O ’G o rm an . Mr. Vanderlip, from your knowledge of bank
ing conditions in New York, do you think the examinations can be
conducted efficiently with one bank examiner?
Mr. V a n d er lip . I think almost any piece of business can be con
ducted efficiently with one head, if he properly organizes his business.
Senator O ’G orm an . I s it usual for the examiners to participate in
the examination of each bank?
Mr. V a n d er lip . It is usual, yes, sir; and I should think it was
practical.
Senator O ’G orm an . S o that each examination requires his per
sonal presence?
Mr. V a n d er lip . Theoretically it does, and I think practically he is
there.
Senator O ’G orm a n . I s i t possible for one examiner to be present
a t the examinations being conducted at each bank in the city of New
York in a year?
Mr. V a n d er lip . I am very certain that that has been possible in
the examination of the National City Bank, and that he has been
present.
Senator O ’G o rm an . H ow many national banks are there in the
city of New York?
Mr. V a n d er lip . There are 52 central reserve banks in New York,
Chicago, and St. Louis.
Senator W e e k s . There has been a recent order o f the comptroller
which prevents bank examiners from engaging in any other exami
nations and doing any other work. Do you think that is desirable,
as far as the examinations of banks other than national banks is
concerned ?
Mr. V a n d er lip . Before I answer that question I will answer Sena
tor O’Gorman. There are 36 national banks in New York.
Senator O ’G o rm a n . In the city of New York?
Mr. V a n d er lip . Yes, sir.
The C h a ir m a n . H ow many days does it take to examine your
bank?
Mr. V a n d er lip . Ordinarily, about a week. We have had an ex
amination recently, however, that has extended over two or three
weeks.
Senator N elso n . Your bank?
Mr. V a n d er lip . In our bank; yes. sir.
Senator O ’G orm a n . And that occurs twice a year?
BANKING AND CUBBENCY.
2 021
Mi\ V a n d e r l ip . Yes. Now, I will answer Senator Weeks’s ques
tion. I suppose a bank examiner would naturally be pretty busy con
ducting the duties of his position. Banks have found it rather de
sirable sometimes to have a bank examiner come in to make a special
examination at the instance of directors, and directors have chosen
national-bank examiners to do that work because they believed they
would do it more efficiently.
Senator W e e k s . Y ou mean directors of State banks?
Mr. V a n d er lip . Yes, sir. I see no great harm in it.
Sen ator O ’G orm a n . W ould you find th at directors o f S tate banks
w ere also directors o f nation al banks ?
Mr. V a n d er lip . I was thinking of directors of State banks who
had need for the national-bank examiners.
Senator O ’G orm a n . Even there it is necessary, where, at the in
stance of the directors of a national bank, an examination has been
conducted ?
Mr. V a n d er lip . Yes; and that independent examination conducted
by the national-bank examiner. Of course, it is the practice of New
York banks to make at least one and sometimes two examinations a
year by the directors. Sometimes it is done in person by the directors
and sometimes they delegate it to a chartered accountant or others
who will make a very thorough examination.
Senator W e e k s . What I am trying to get at is this, without any
criticism of the department. There is a recent order, which, I under
stand, prevents a national-bank examiner from examining State
banks, trust companies, or other institutions. He has to devote his
entire time to the examination of national banks. In a community
like New York, where there are a great many trust companies, it
seems to me you are only getting a partial statement of the conditions
of the banks in the community, unless the same man is going to be
privileged to examine all the banks.
Mr. V a n d er lip . That is an advantage we gain from the clearing
house examination.
Senator W e e k s . From the Government’s standpoint it is somewhat
important and advantageous to have some man who will be familiar
with the affairs of State banks and trust companies as well as na
tional banks.
Mr. V a n d e r l ip . I think it would be very advantageous.
Senator W e e k s . Then if that is so the recent change made prob
ably would bring less net knowledge out of the result of those exam
inations ?
Mr. V a n d er lip . I should think so.
Senator H itc h c o c k . Mr. Vanderlip, do you think that the inter
locking of directors in those 36 national banks is a source of com
plaint?
Mr. V a n d er lip . I think it is a source of strength, a source of good
management, a source of a better understanding of the credit sit
uation.
Senator H it c h c o c k . Then they have a knowledge o f each other’s
affairs?
Mr. V a n d er lip . They h av e, to som e extent.
Senator H itc h c o c k . That has been charged as one of the serious
things in New York which has tended to establish a banking monop
oly to the detriment of those who were seeking credit.
2022
BANKING AND CURRENCY.
Mr. V a n d e f l ip . It has been so charged, but I do not believe there
has been a single instance cited of harm having been done. I will
challenge anyone to show an instance where interlocking directorates
has led to unfairness to a borrower.
Senator H itc h c o c k . Then it has been charged, too, that it was
practically impossible to finance a new railroad company, for instance,
for the reason that the sources of credit in New York are so largely
controlled by the great owners of the railroads. You have, for in
stance, as an illustration, the case of Mr. Dave Moffit, out in Denver.
Mr. V a n d er lip . We have had the illustration of the Western
Pacific, which was built paralleling the Central Pacific. Money for
that was found in New York.
Senator H itc h c o c k . But afterwards the Western Pacific was
forced to a compromise and a settlement with the Central Pacific, was
it not?
Mr. V a n d er lip . N o, sir; there never has been a compromise or
settlement.
Senator H itc h c o c k . Was that the Gould line you are referring to?
Mr. V a n d er lip . Yes, sir.
Senator H itc h c o c k . Did it happen that Gould had one such bank,
and that he was able in some independent way to finance the system?
Mr. V a n d er lip . I would not say an independent way. That was
financed, I believe, through Blair & Co. They are very important
bankers. There is no trouble whatever in getting a sound thing
financed in New York if there is money there to finance a sound
enterprise.
Mr. Stillwell complained that his Oriental road could not be
financed there. It could not. It could not have been financed any
where, in my estimation, if anybody had sound judgment about the
building of such a road.
Senator N elso n . Where was that road to be built—in China?
Mr. V a n d e r l ip . From Kansas City to Mexico, generally speaking.
Senator H itc h c o c k . There was a time when some very unsound
railroads were financed in New York, because there was apparently
no combination of banking interests. What new development is this
that has enabled the banking interests to discriminate and to exclude
some propositions when they come to them ?
Mr. V a n d er lip . I should not think there ever was a time that un
sound business could be done in New York because there was no com
bination. If there are people in New York with capital which they
are ready to put into an unsound enterprise they can be found to-day
as readily as they could any other time.
I belieVe there is no such discrimination, or no such combination.
The charge can not be sustained that a sound commercial enterprise,
a sound proposition for railroad building, can not be put through in
New York because it might compete with some existing business.
If it will so compete as to endanger its own success, certainly it
can not be done if the people in control of the capital have sound
judgment. But the fact that it would compete with some existing
enterprise, which enterprise was financed by the strongest house in
New York, would not be a barrier against finding capital for it if it
is essentially sound in itself and will not have its own future en
dangered by the competition which it will encounter.
BANKING AND CUBBENCY.
2 023
Senator R eed. Y ou mean if there is room for two?
Mr. V a n d ek lip . Yes, sir.
Senator H itc h c o c k . Suppose a project was undertaken to finance
a railroad to compete with the Jim Hill system and such a project
came to the attention of what we will call the Morgan banks.
Would not those banks inevitably feel interested in discouraging
that project?
Mr. V a n d e e l ip . I can say that the National City Bank has financed
a railroad project in the Southern Railway field, the Southern Rail
way Co. being a Morgan enterprise, and this project being directly in
competition with the Southern Railway Co.
Senator H itc h c o c k . H ow lately was that ?
Mr. V a n d er lip . It is now in process of building.
Senator H it c h c o c k . About how large a project is it?
Mr. V a n d e r l ip . $10,000,000 or $12,000,000.
Senator N elson . It is not long ago since the New York banks
financed the extension of the St. Paul road to the coast, in competi
tion with the Northern Pacific and the Great Northern, which are
commonly called Morgan roads?
Mr. V a n d er lip . The National City Bank financed that extension.
Senator R eed. A s I understand you, Mr. Vanderlip, the test is
this—as you put it—whether there is room for two enterprises. If
there is room for two enterprises, then you claim that there would
be no barrier; if there is not room for two enterprises, then nobody
but a foolish person would put his money into a competing line when
the competing line would never pay ?
Mr. V a n d er lip . That is exactly what I mean. There is no such
thing as a strong interest putting out a ban on the financing of a new
railroad proposition and saying to New York financiers that this new
road must not be financed because it is going to compete with an
existing railroad that has been financed by this strong interest. The
thing is not done. It does not exist. It is not true.
Senator H itc h c o c k . Y ou mean the heavy railroad owners are in
terested in the banks of New York?
Mr. V a n d e r l ip . They are interested in the banks; yes. But the
banks are run primarily by themselves. The bank officers solely are
in charge of the conduct of the bank.
Senator B ristow . That is, you claim that a railroad may be inter
ested in a bank, and be a most important factor in the management
of that bank, and still that bank would pay no attention to the
affairs of that road as far as financing its competitors is concerned?
Mr. V a n d e r l ip . N o such condition exists. There is no bank that
I am aware of in which a railroad is an important factor in the
management of the bank. The relation is the other way around.
Senator N elso n . It is the railroads which need the banks?
Mr. V a n d er lip . Yes, sir.
Senator H it c h c o c k . Take the firm of Kuhn, Loeb & Co., they are
heavily interested in the Union Pacific?
Mr. V a n d er lip . Yes, sir.
Senator H itc h c o c k . Would it not be natural that th e y would dis
courage a system competing against the Union Pacific ?
Mr. V a n d er lip . Naturally they would discourage any competitive
system, but Speyer & Co. would not, and Morgan & Co. would not.
S. Doc. 232, 63-1— vol 3----- 7
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BANKING AND CURRENCY.
Senator H itc h c o c k . Would not Kuhn, Loeb & Co. have such
large interests in banking institutions as to make their influence
potent ?
Mr. V a n d er lip . That is exactly the thing that does not exist. I
do not think there would be the slightest hesitation on the part of
other firms perfectly competent financially to finance a road in com
petition with another road that was financed by another institution,,
if the sound judgment of the firm was that the road would be suc
cessful in spite of the competition.
Senator H itc h c o c k . Then if Speyer & Co. would finance some
thing that would seriously endanger a great interest of Kuhn, Loeb
& Co., Kuhn, Loeb & Co. would retaliate, would they not?
Mr. V a n d er lip . Undoubtedly. But not for the purpose of re
taliation. They would not retaliate in that way. If there were
some territory in wThich Speyer & Co. were interested, and if there
were sufficient business to make the new road successful, I do not
doubt but what Kuhn, Loeb & Co. would finance that, and they
would do it now or after such a situation as we have outlined. That
is not retaliation; that is good business. There is plenty of banking
capital, there are plenty of individual banking houses to finance
good business.
Senator H itc h c o c k . Then when witnesses come before th is com
mittee and say that there is a combination in New York they are
mistaken ?
Mr. V a n d er lip . They are mistaken. It is a figment of their
imagination. They probably have read newspaper headlines and
heard statements, and they do not know the truth.
Senator H itc h c o c k . When they come and testify of their own
knowledge and experience?
Mr. V a n d er lip . Then I advise you to analyze very carefully that
experience and check it up, because the combination does not exist.
Senator B ristow . N ow , Mr. Vanderlip, you claim that the men
who run the New York banks, and who control them, are different in
the moral and mental make-up than the average banker of the>
country ?
Mr. V a n d er lip . I make no such claim whatever. Nothing can be
further from my mind.
Senator B ristow . Do y o u think the average banker would finance
a proposition if it was detrimental to his largest stockholder and the
most important depositor?
Mr. V a n d er lip . T o his largest stockholder; no. To his most
important depositor, perhaps, yes. It would be then a case of
weighing the advantage between the deposit and the advantage of
financing that enterprise.
Senator B ristow . And if the advantage of the deposit was greater
than the advantage of the enterprise, he would not finance it?
Mr. V a n d er lip . Probably not. But in no case, sir, is a deposit o f
sufficient importance to prevent any banker from financing an im
portant enterprise, a very important enterprise.
Senator O ’G o rm an . In that connection, let me ask you this ques
tion. At the present time, perhaps during the memory of those now
engaged in the banking business, is there not a keen competition for
business between banking interests in the city of New York?
BANKING AND CURRENCY.
2 025
Mr. V a n d e r l if . I believe there is no line of business in the country
where competition is more keen.
Senator O ’G orm a n . Would not that competition be keener in New
York to-day than in any other part of the United States?
Mr. V a n d er lif . I th in k so.
Senator O ’G orm a n . Because of the great volume of money in New
York?
Mr. V a n d er lip . Yes, sir.
Senator R eed . H ow much money does your clearing house carry?
Mr. V a n d e r l ip . The c le a rin g house c a rrie s no m oney, sir.
Senator R eed . They have no deposits of any kind ?
Mr. V a n d er lif . They have no deposits of any kind; that is not the
function of the clearing house. The clearing house does have in its
vault a certain amount of gold which is merely there in the nature
of being in a warehouse, so that we do not have to move gold about.
There are never any deposits.
Senator R eed . Who puts up that gold ?
Mr. V a n d e r l if . Any banker who would prefer to have a piece o f
paper, a clearing-house certificate, for $10,000 instead of $10,000 in
cash.
Senator R eed . Really, the bankers put up a central deposit of
gold?
Mr. V a n d er lip . N o, sir. There is no deposit at all. That is purely
a warehouse function for banking purposes, to aid us in paying bal
ances between the banks, and permitting us to give an order on this
warehouse instead of carting the gold about the streets.
Senator R eed . Where is the gold kept?
Mr. V a n d er lip . In a vault in the clearing-house building.
Senator R eed . Where does the gold come from to get into that
vault ?
Mr. V a n d er lip . From any banker who chooses to deposit gold
there and take up certificates to represent it.
Senator R eed . In settling your balances you use these certificates ?
Mr. V a n d er lip . Yes, sir.
Senator R eed . I inquired about the amount that was kept,
Mr. V a n d er lip . My recollection is that there is about $90,000,000.
That figure will not be exactly correct.
Senator R eed . N ow , I want to come back to matters that concern
this bill, and I asked that question simply for the purpose of know
ing how much gold there might be in the one place.
Mr. V a n d er lip . That has no relation whatever to the reserves of
the banks, or the money market. That is only a physical conven
ience.
Senator R eed . In settling your balances, instead of counting out
gold to each other, you simply check against this gold?
Mr. V a n d er lip . Yes, sir.
Senator R eed . And settle it in that way?
Mr. V a n d erlip . Yes, sir.
Senator N elson . It is simply a warehouse where you can keep
gold on which you can draw, instead of keeping it in your vault?
Mr. V a n d er lip . Yes, sir.
Senator R eed . Y ou do not have to draw gold from there; you
send the certificates around and have a little balance left?
2026
BANKING AND CUKBENCY.
Mr. Y a n d er lip . Yes, sir.
Senator R eed . I want to ask you about a matter of great impor
tance in this bill concerning which I do not think you have been ques
tioned before. How much gold reserve do you think ought to be kept
in the regional banks?
Mr. V a n d er lip . In normal times perhaps as much as 80 per cent.
Senator O’Gorman. H ow much?
Mr. Y a n d er lip . Eighty per cent. That is a very difficult question
to answer, and my reply is a sort of shot in the dark. In normal
times these banks ought not to be used for conducting the current
business of the country. They ought to run with very strong re
serves. They ought to be under no compulsion to earn money, and
they ought to conserve reserves in order that they may be enabled to
make these rediscounts when necessary.
Senator O’G orman. The larger the gold reserve the safer the
whole structure would be, in your opinion?
Mr. Y a n d er lip . The larger the gold reserve carried, the safer. I
can not say the larger legal minimum.
Senator O’Gorman. Where do you think the law ought to put the
minimum ?
Mr. Y a n d er lip . I think the law as it is drawn, with a minimum
of 33| per cent is all right. As a matter of fact, I do not believe in
legal minimums, anyway. I believe that should be left to the con
servative conduct of good managers of banks.
Senator O’G orman. D o you not think there ought to be a sentence
of penalization for going below a certain point, in order to encourage
keeping above that point?
Mr. Y a n d er lip . A penalization in this case is not a very effec
tive sentence. You penalize the earnings that come out of the Gov
ernment.
Senator O’Gorman. That is what we discussed yesterday. Now,
3rou have examined this bill with reference to the possibility of in
flation, have you not?
Mr. Y a n d er lip . Yes, sir.
Senator O’G orman. I believe you said you thought there was a
great power of inflation in it. Of course, a 33£ per cent gold reserve
would be some check on paper inflation, and the larger the gold
reserve the greater the check; is that not true ?
Mr. Y a n d er lip . Just w h a t do you m ean by p a p e r in flatio n ?
Senator O’Gorman. I mean this money that is to be issued from
time to time upon collateral, notes, etc.
Mr. Y a n d e r l ip . Please do not confuse inflation of credit w ith in
flation of currency. You can not have an inflation of currency if
you have ample redemption facilities. Gold will not be held in
people’s pockets; the currency can not be held in reserves. It will
be deposited in banks by the men who do not want it in their pockets,
and it will be retired. There will be in the way of the correct operat
ing of that principle the fact that these notes may find their way into
the reserves of State banks. Were it not for that, there would be as
great conformance to business needs in note issue as in deposit bal
ances. And deposit balances ought to be readily interchangeable
with notes according as the customer wants credit as a deposit bal
ance, or wants it as a note. There is no more reason for the Govern
BANKING AND CUBBENCY.
2027
ment charging interest on these notes or guaranteeing these notes
than there would be for the Government to guarantee the deposits in
these banks.
Senator R eed. I know that is a favorite theory with bankers, but
nevertheless I hardly think that it is practical at this time to expect
that sort of theory to be carried out.
Now, I want to direct your attention to this thought as bearing
upon that theory. You say that if a man has a bank credit of $10,000,
he has the right to issue his check against that credit, and that that
is simply a method by which he uses that bank’s credit, makes it
available, and if the bank, instead of giving him a bank credit and
check against it, was to issue to him bank bills and let him put them
in his pocket and carry them away, that that is only a bank credit.
That is the argument. Now, in the practical operation is there not a
tremendous difference?
I get a credit with your bank for $10,000, and I put my check book
in my pocket, and I draw checks. There is only one place in the
world to redeem those checks, and they do not pass current from
hand to hand. They may pass to one man that I happen to know and
will accept my check because he happens to know me, but to all prac
tical purposes those checks go back into the bank within 24 hours
after they are issued, on the average, and the transaction is closed.
But if you give me $10,000 of your bank notes, and I put them in my
pocket, they may travel all around the United States and be in circu
lation six months or a year before they get back to your bank. Is
that not true?
Mr. V a n d er lip . That is not true unless there is need for them for
just that purpose.
Senator R eed. Let us see if that is sound. I question the soundness
of it most emphatically, although I do not want to get into a financial
argument with you, for I would be on very doubtful ground. Do
you not confuse the term “ need ” with the man ? A man is engaged
in a lot of wild-cat circulation. He is booming railroads that may
never develop into paying propositions. He is buying acre property
and laying it out into town lots and building houses, for which there
will never be a real demand, and he needs money mighty badly.
Mr. V a n d e r l ip . Pie needs credit, not money.
Senator R eed . He needs something that will pass for money, and
therefore if he got hold of these notes he would be engaged in trans
actions in which he could constantly be using them; and yet, is it
not true that as a matter of fact, the very existence of that money
tends to promote this wildcat speculation, and is that not the trouble
with all inflation, and is it not true of a bank note, as it is true with
any kind of other money that circulates?
Mr. V a n d e r l ip . Let me see if I can not make this very simple and
clear. Let us suppose a community has no outside financial connec
tions. This community is doing its business with the exact amount
of currency in its pockets that it wants and a certain amount of reserve
in its banks. A wildcat real estate operator buys some outlying land
and cuts it up into lots and builds houses on them that will not sell.
At no time during this process has that community got any more
money in its pockets than it had before, no matter how much money
in the form of circulating notes this man might have succeeded in
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BANKING AND CURRENCY.
drawing from a bank on sound collateral. He could not get the
notes without sound credit. He has bought a piece of land and paid
for it, we will say, with $10,000 of notes. What will any man who
receives the notes do with them? Will he carry them around with
him? Xot at all. You know what he will do with them. He will
take them to his bank and deposit them. They are of no value to the
bank's reserve, and therefore they will be redeemed.
Senator R eed . Y ou see the trouble with that illustration is that
you leave out of it, I think, two important propositions. In the hist
place, you have not got a circumscribed community. You nave got
an enormous country, and the note starts on its course. Then, I
think, that you leave out of your argument another very important
consideration, and that is that while there may be no more money,
but there is something that performs all the functions and uses of
money.
Mr. V a n d e r l ip . Oh, but these notes do not.
Senator R eed . They do, while they are out
passing from hand to
hand; and, as long as they are out, they might just as well be in
money. And then I think you leave out of consideration the fact
that when that man begins to build those houses he has bought from
the lumberman an unnecessary amount of lumber, and he has boomed
the lumberman’s business. The lumberman who sold his lumber
buys from the sawmill, and he has boomed the sawmill man’s busi
ness. The sawTmill man goes out to buy more timber land, and he
has boomed the land business. He hires a lot of men to cut down
trees, and they have boomed the lumber-camp business. All these
things have boomed the grocery business, the dry-goods business, and
the wholesale business, and you have, after all, a vast structure of
business and credits based upon an original bad investment, and all
of it carried on because there is plenty of this stuff circulating around
that they call money.
Mr. V a n d er lip . Based exactly as you say, on an original bad in
vestment—not based on the issue of notes. The bad investment could
have gone on exactly the same with the plan of deposit credits
instead of notes.
Senator R eed . There is just the point I raised. This man comes
down with security to the bank, with his own note, and he puts it
up and the bank issues this thing that circulates as money. If the
banker did not have the right to do that, he would have to look in
his till, and if he did not have good hard money there the transaction
would stop. And I can not see why—because we all admit that wild
inflation brings wild results—why the bank note that goes and circu
lates three months, six months, or a year and gets out in almost un
limited quantities can not produce exactly the same result that it
would if the Government could issue wildcat money.
Mr. V a n d er lip . That is because you believe men will carry more
money in their pockets if there is facility for turning a bank credit
into a bank note. I hold they will not. That is an absolutely fixed
quantity, determined by the habits of the people. There will be no
more money in the people’s pockets under any scheme of note issue
where there is an adequate redemption facility back of it. Those
notes will come right back into the bank—right back for redemp
tion—the moment there is any redundancy of them. I think you
confuse an issue of notes with an overissue of credit.
BANKING AND CUKRENCY.
2029
Senator R eed. Perhaps I do. I wanted to suggest the idea to you
with a view to perhaps modifying yours, but I see I am not going to
be able to do that.
Mr. V a n d er lip . I am very earnest and honest in my opinion.
Senator R eed. I know you are, and I am just as earnest in mine;
and I will pass on to something else, where, whether we can agree or
not, I can get your view. I want to ask you about the value of the
currency system to the whole financial structure, to this large reserve
which the Government now has, against which it issues gold certifi
cates and which it holds back from the banks.
Mr. V a n d er lip . I do not regard the gold back of gold certificates
as a gold reserve at all. The Government is acting as a warehouse
m an .
Senator R eed . Well, call the Government a warehouseman. Is it
of value to our financial system? Does it add to its stability?
Mr. V a n d er lip . Certainly it does, because it represents the gold
certificates that are in the bank reserves. It is also true that there
are many in the hands of the people. They are there to a much
larger extent than they should be, because you have reduced the
size of the gold certificate, which, in my opinion, was quite a wrong
thing to do. The $10 gold certificate is now largely in the hands of
the people, when it ought to be in the reserves.
Senator R eed . The mere fact, I take it, that there is piled up an
immense amount of gold, although there are gold certificates out
against it, has a very steadying effect upon our financial system.
Mr. V a n d e r l ip . Not the slightest in that sense.
Senator R eed . In what sense?
Mr. V a n d er lip . It is the fact that these certificates are in the h a n d s
of the banks, are in the reserves of the banks, that has the steadying
effect, and the knowledge that the certificate is backed by gold. The
function of the Government is merely one of physical convenience,
just as I said in discussing the warehousing function of a clearing
house, with its clearing-house certificates issued against the gold.
It is thus possible to have this gold in the form of convenient paper
instead of actual coin, and that is the only function the Government
is performing.
Senator R eed. I am just trying to get one question settled—whether
it is a good thing in our financial system to have that gold piled up
in the vaults of the Treasury of the United States.
Mr. V a n d e r l ip . It is neither good nor b ad.
Senator R eed. It is utterly useless?
Mr. V a n d er lip . No ; it is not utterly useless, because it is a great
convenience to the business of the country. We could not do busi
ness freely with actual money. Of course we could do it, but it would
be an annoying thing.
Senator R eed. I think this: I think that in view of the fact that
gold is the ultimate money of redemption the world over, the mere
fact there was a large amount of it in the vaults of the Treasury of
the United States, although there were gold certificates that were out
against it, would have a tendency to inspire confidence in our ability
to take care of ourselves.
Mr. V a n d er lip . I t would have a tendency to inspire great fear
if they thought you were going to use that gold for any purpose
2030
BANKING AND CURKENCY.
other than the purpose of placing it in a warehouse for the redemp
tion of the certificates out against it.
Senator O'G orman. Right there, Mr. Yanderlip, is it not of great
importance, in considering the security of our credit, that in the
United States, whether in the Government vault or in the vaults
of our banks, we should have the actual physical possession of a
large quantity of the gold of the world ?
Mr. Y a n d er lip . Certainly it is, but it is not of importance whether
that gold is in the bank or whether it is in the Treasury and the
representative of it, the gold certificate, is in the bank. It is not
the fact that that gold has been collected in the Treasury that is
important, but it is important that in this country, in the reserves of
the banks, and elsewhere, there is either the gold or the representative
of it—the gold certificate.
Senator R eed. I t is im portant that you have it in the country.
Mr. Y a n d er lip . Yery important; tremendously so.
The C h a ir m a n . Mr. Yanderlip, I want to ask you a question:
Suppose the Government were to take the gold which is now in the
Treasury as a current fund and place it in the redemption division
as a reserve fund, and issue against that the Treasury gold notes,
payable in gold at Washington, and put them out in small denomina
tions as legal tender, would it not have a beneficial effect on the gold
reserve of the United States?
Mr. V a n d er lip . Well, of course, you are presuming the calling
in of the gold certificates.
T he C h a ir m a n . N o.
Mr. V a n d er lip . Why, it would have a m ost disastrous effect, for
you to take the gold that is back of the gold certificates out of the
Treasury.
The C h a ir m a n . I am not proposing anything of the kind; I made
no such suggestion. What I said was that suppose the current gold
that is there as a part of the general fund we have now in the
Treasury, as part of the current fund, over $100,000,000 of gold,
and I was suggesting that the Treasury issue in lieu of that a Treas
ury gold note of small denomination, payable in Washington City,
but taking the gold itself and putting it in the redemption division
as against those notes issued in that way.
Mr. Y a n d er lip . I can see no essential difference between that note
and the gold certificate, but in making them payable in small de
nominations you encourage their use in the hands of the people
instead of retention in the reserves of the banks. That is where the
gold should lodge. The money in the hands of the people should be
bank notes, and the gold certificates should lodge in the banks. Your
plan would merely give a Treasury note dollar for dollar, payable in
gold, instead of a gold certificate dollar for dollar.
The C h a ir m a n . It would have the effect, would it not, of putting
these notes out in the hands of the people, where they would not
come back for redemption, and in that way leave this additional
gold as an additional reserve against the outstanding greenbacks?
Mr. V a n d er lip . I t w ould have that effect; yes.
T he C h a ir m a n . A n d in th a t w ay it w ould strengthen the position
o f the G overnm ent as far as redeem ing those notes is concerned?
Mr. Y a n d er lip . T h e p osition o f the G overnm ent w ould be
strengthened, so far as redeem ing the greenback was concerned.
BANKING AND CURRENCY.
2 031
Senator R eed . H ow could you redeem the greenback? That is
gold put away and gold certificates issued against it.
Mr. V a n d er lip . He does not propose to issue gold certificates
against it.
The C h a ir m a n . It is not to be a warehouse receipt, but simply
an issue, dollar for dollar for gold, payable at the Treasury in Wash
ington, in gold.
Mr. V a n d er lip . Yes.
Senator N elso n . The volume would be measured in the volume of
the gold?
The C h a ir m a n . But the gold would belong to the United States,
and not belong to the holder of the notes, unless he would come in
and bring them for redemption. They would not be a warehouse
receipt.
Mr. V a n d er lip . N o. But the notes you issued would be on a parity
with the greenback—that is, they would have a claim of the same na
ture as the greenbacks against the total fund, dollar for dollar, of
gold, to be represented by Treasury notes, plus $150,000,000 now
back of the greenbacks and plus the free gold.
The C h a ir m a n . Yes; a claim against assets or funds of the United
States.
Mr. V a n d er lip . Yes.
Senator S h a fr o t h . Mr. Vanderlip, I read an interview with you
in the newspaper four or five weeks ago, in which you stated in New
York there was a demand, in your judgment, for $2,000,000,000 for
the purpose of developing water power in the United States. Can
you tell what, in your judgment, is the legitimate demand for devel
opment of all kinds in the United States?
Mr. V a n d e r l ip . In the first place, I would like to correct the im
pression as to what my exact statement was. You probably read an
address I made in regard to the development of the electrical industry
of the country.
Senator S h a fr o t h . Yes.
Mr. V a n d er lip . I s ta te d t h a t in th e n e x t five y e a rs I believed th e
to ta l e le c tric al d ev elo p m en t, p o w er s ta tio n s, w a te r p o w er, ra ilw a y
ele c trifica tio n — a ll th in g s in c id e n ta l to th e e le ctrical business— m ig h t
p ro p e rly consum e $2,000,000,000 c a p ita l. I believe th a t is a co n serv a
tiv e e stim ate. I do n o t say th e y w ill, because I d o u b t if th a t am o u n t
of c a p ita l is re a d ily a v a ila b le fo r t h a t p u rp o se.
Senator S h a f r o t h . What, in your judgment, is the total demand
for all enterprises that could legitimately be considered as good
enterprises in the United States in the*next five years?
Mr. V a n d er lip . I would not want to make an offhand estimate of
that. I do know that the needs for railroad development are perfectly
tremendous. I believe so great an authority as Mr. Hill stated they
would equal $1,000,000,000 a year. That would seem to me to be a
pretty high estimate. Certainly it is more than they are likely to
get, but there will certainly be several hundred millions a year, right
along, necessary for railroad development.
Senator S h a f r o t h . Well, in other lines do you think that there will
be in fact a great deal?
Mr. V a n d er lip . We are now spending a v ast amount the country
over on building good roads. There is need for a large sum for
municipal loans and other loans of that character. All sorts of in
2032
BANKING AND CURRENCY.
dustrial development will go on and will require capital. It is quite
impossible to say, with such information as I have at hand, what
would be a fair estimate of the total.
Senator S h a f r o t h . N ow , Mr. Vanderlip, the difficulty with the
national-bank notes at the present time in seeking redemption at
Washington is due to the fact that it is not constituted a legal reserve
of the bank, is it not?
Mr. V a n d e r l ip . Yes.
Senator S h a fr o t h . That is the reason it comes to Washington?
Mr. V a n d er lip . Yes.
Senator S h a fr o t h . And that redemption now amounts to pretty
near the total issue every year?
Mr. V a n d er lip . Yes.
Senator S h a fr o t h . If this bill goes into effect a n d all the State
banks come into operation under it, the State banks would no longer
use the national-bank notes as reserve.
Mr. V a n d er lip . N o ; the State bank which would become a member
bank, presumably, could no longer use these notes as reserve, though
it is not specifically so stated in the bill. There is merely the word
“ regulation,” which is open to any construction you may choose to
put upon it.
Senator S h a fr o t h . What is required of the reserves here in this
bill is that it shall be the same as that now required for the national
banks to keep in their vaults.
Mr. V a n d er lip . Yes.
Senator S h a fr o t h . Which, I take it, would not include the notes
that are issued in this system here.
Mr. V a n d er lip . That is c e rta in ly p resu m ab le, a n d w ould su rely
be d esirab le.
Senator S h a fr o t h . Then, if State banks come in there will be an
enormous demand for more reserve money, will there not ?
Mr. V a n d er lip . N o ; not a very enormous demand for more re
serve money, because part of the reserves, which they now presum
ably keep in cash, could be kept as balances with reserve banks. I
am not aware, and I think no statistics are available, as to how
many national-bank notes are in the reserves of State banks. I think
it is not considerable.
T h e C h a ir m a n . T h a t is reported.
Mr. V a n d er lip . That is reported? I was not aware of that. At
any event, I do not believe it is large.
T h e C h a ir m a n . T h a t is n ot large.
Mr. V a n d er lip . N o. That, as you say, would not make an enor
mous new demand for reserves.
The C h a ir m a n . The national-bank notes in State banks and na
tional banks combined would not exceed $75,000,000. That is the
reason why I was asking you about building up this reserve, because
1 thought it would prove to be an expedient to retire that amount
of national-bank notes, taking up the 2 percents, and putting the
2 per cent bonds then in the redemption division as 3 percents, and
issuing a legal-tender note in lieu of these national-bank notes, pay
able in gold at the Treasury, which might be used as reserves by the
member banks.
Mr. V a n d erlip . I have two or three rather important suggestions
I want to make before the hearing closes.
BANKING AND CURRENCY.
2033
The C h a ir m a n . It is 20 minutes to 12 now, and I think we had
better proceed.
Senator H eed. Mr. Chairman, Mr. Swinney is here, and I wanted
him to have at least 30 minutes.
Senator B ristow . W e w ill m eet th is afternoon.
Senator R eed . But he is leaving on the 3 o’clock train.
The C h a ir m a n . The committee can meet at any time it
wishes,
or might continue the session.
Senator N elso n . W e m ig h t m eet at h a lf past 1 o’clock.
Senator R eed . I was going to suggest that in view of
the fact
that he does have to leave, and I think has a short message to deliver,
possibly we might hear him now.
Mr. Vanderlip is not going to be able to get through, and as Mr.
Swinney will only take a few minutes, I was going to suggest we
hear him now, if that will be satisfactory to Mr. Vanderlip.
Mr. V a n d er lip . It is perfectly satisfactory.
Senator N elson . Y ou can be with us this afternoon?
Mr. V a n d er lip . I am entirely at your service.
Senator R eed . However, as it has been suggested that we meet a t
half past 1 o’clock, suppose we let Mr. Vanderlip go on for the
present.
The C h a ir m a n . I remind the committee that there are some gen- .
tlemen here from Iowa, bankers or business men from that State,
who have been advised they could be heard to-day.
If it is agreeable to the committee, we will hear Mr. Swinney now.
Senator R eed . The final suggestion was that we meet at half past
1 o’clock and hear him then.
The C h a ir m a n . Very well; that will be the order i f there is no
objection.
Mr. V a n d er lip . I can finish in five minutes myself, unless you.
have questions to ask me.
The C h a ir m a n . All right; proceed, Mr. Vanderlip.
Mr. V a n d er lip . In regard to the section on farm loans, I do not
believe in a commercial bank having real estate mortgages. Prac
tically, however, the limitation in here, that no bank shall use more
than 25 per cent of its capital and surplus for this purpose, makes
it safe. I recognize the competition that national banks are under
with State banks in the West, and the fact that these loans are
perfectly secure, as a rule. They may be perfectly secure, but they
are also perfectly unliquid. I do not believe in encouraging that
type of business for commercial banks, but even with that view, I
do not think that the clause as here drawn will lead to any disaster,
and the limitation is a proper one.
Senator W e e k s . Won’t y o u add to the suggestion also that it
limits the commercial bank on demand deposits?
Mr. V a n d er lip . Of course that is what I mean. A commercial
bank having demand deposits ought not to devote any considerable
amount of its resources, at least, to investment in unliquid assets
in making unliquid loans. Taking up the savings-bank feature, I
have paid no great attention to that, because in any event it prob
ably would not interest the large city banks. In one particular it
is so drawn that it could not interest the large city banks. I t states
that the amount segregated as the capital of the savings departments
shall in no case be less than $15,000 or a sum equal to 20 per cent of
2034
BANKING AND CURRENCY.
the paid-up capital and surplus of the national bank. That would
mean that the National City Bank, in order to establish a savings
department, would have to segregate $11,400,000 of its capital to
do so. This 20 per cent ought to be changed, if you desire at all to
encourage the large banks to have savings-bank departments. It
means a segregation of too much. A $15,000 limitation is probably
wise, and perhaps at the other end you might have a $200,000 or
$500,000 limitation. But to say that the bank, no matter how large,
if it desires to start a savings department, must segregate 20 per cent
of its capital and surplus is equivalent to saying a large bank never
will do it.
Senator B ristow . Your suggestion would be, after “ $15,000,” in
line 6, to strike out “ or than a sum equal to 20 per cent of the
paid-up capital and surplus of the said national bank,” in the
next two lines, and then make it read “ not less than $15,000 or more
than $200,000 ” ?
Mr. V a n d er lip . No ; I would let it be as much as any one wants
it to be, but if you feel that a large banker should not be governed
by the $15,000 limit, then I would say that banks of a million capital
should segregate 5 or 10 per cent. But to make them segregate 20
per cent practically prohibits them from ever undertaking the
business.
Senator R eed. W hat is the use of making any limitation at all?
Mr. V a n d er lip . None at all that I see.
Senator R eed . What is the use of saying a bank should set aside
20 per cent in the savings-bank business? Why not prohibit them
from doing it at all ?
Mr. V a n d er lip . Oh, but it is done, to a very large degree. Every
report of the comptroller shows that.
The C h a ir m a n . There is now $820,000,000 invested in savingsbank departments.
Mr. V a n d er lip . $820,000,000, according to the last call?
Senator R eed . What is the amount held on deposit ?
Mr. V a n d er lip . That is the same thing.
Senator H o llis . Half of them have savings-banks departments,
now. Just about half.
Senator R eed . I do not believe they have any legal right to estab
lish a savings-bank department.
Mr. V a n d er lip . The comptroller winks at it.
Senator R eed. T hen, he is not fo llo w in g the law .
Senator N elson . I do not believe the small country banks would
avail themselves at all of this. They prefer the present system. It
has worked well.
Mr. V a n d er lip . On page 45, line 11, the power is given national
banks to act as trustee for mortgage loans. Taking that in connec
tion with this section, I presume that means farm-mortgage loans.
It ought to be cleared up. I should be glad to see it extended, so
that a national bank may act as trustee for any mortgage loan—that
is, corporate mortgages. That is one of the things that a trust
company does that a national bank can not do, and it is very profit
able to the trust companies. I see no reason why a national bank
should not act as trustee in such cases. The language is not clear,
however.
BANKING AND CURRENCY.
2035
The provision in regard to foreign branches is a very desirable
thing. I t is impossible for any national bank to engage in foreign
business now. I have given careful consideration to the subject of
banking in South America, and have found it was quite impossible
for us to engage in business as the laws now stand. There are other
reasons, too, that make the development of this business difficult. I
think the law is not clear where it says a certain amount of capital
shall be set aside. I do not know just what that means—set aside.
Senator N elson . What page are you on?
Mr. V a n d er lip . Page 50, line 4 ; whether there shall be the com
plete segregation that is provided for in the savings-bank clause,
where all capital segregated shall be used to pay all deposits of the
particular department where it has been segregated, before any of it
is used to pay other deposits or not. That is not fully enough ex
plained ; it does not tell exactly what is meant.
Senator N elso n . Would you weaken the foreign department if
you limited it?
Mr. V a n d er lip . Very much. And if you do not limit it, the “ set
ting aside ” means nothing.
Senator N elso n . Ought not that to be left optional with the
banks ?
Mr. V a n d er lip . I think it ought; yes. As a matter of fact, if you
have a foreign branch, your whole credit is really involved in its
success or failure.
Senator N elson . And o u g h t to be involved?
Mr. V a n d er lip . And ought to be involved. There ought to be no
setting aside whatever. The Aldrich bill permitted the formation
of a specific foreign bank, the stock of which could be owned by the
parent bank. That made the two somewhat distinct, but did not
involve the capital of the national bank any more than to the amount
of the capital held in the foreign bank. I do not recommend that
particularly as the course to be followed; at any event, I call your
attention to this as not being clear.
Senator N elson . It seems to me the foreign branch bank should
be on exactly the same basis as the domestic bank.
Mr. V a n d er lip . I should think so.
Senator R eed. And then they ought to have some means of in
specting that foreign branch bank.
Mr. V a n d er lip . That is provided and should exist, of course. The
F ed eral reserve board is given power to refuse the application for
a foreign branch if there are reasons—that is, for any reasons it
sees fit. All those grants of power when you do not know how a
board is going to act or what may be intended are uncertainties in
the minds of the business men. You do not know what to think
of the law when you do not know just what the law means.
Senator S h a fr o t h . It can not be worse than it is now, where they
have no law.
Mr. V a n d er lip . Oh, yes. A very unsound banking system, I
suppose, could be worse.
Senator S h a fr o t h . I means as to the discretion given to the board.
2036
BANKING AND CUKRENCY.
Mr. V a n d er lip . That is perfectly true, although it might permit
one of our competitors to have a foreign branch and to say to us
that we could not, and we would not like that.
Senator S h a fr o t h . There is no authority now to establish a for
eign bank?
Mr. V a n d er lip . None whatever.
Senator H itc h c o c k . Can you not accomplish the same thing
through a correspondent there?
Mr. V a n d er lip . By no m eans.
Senator H itc h c o c k . Suppose those interested in your bank organ
ize a private bank in London; can you not do business with each
other, practically ?
Mr. V a n d er lip . Let us think about that. Those interested in our
bank. That means a good many hundred people, interested in dif
ferent relations. Say we attach the ownership of a foreign bank to
the stock of our bank, in some wTay. What shall we do? There
would at once arise a complicated situation. You have got to have
the interest of the foreign branch on all fours with the interest in
the parent institution. You must not make it possible for a few in
siders to own the foreign branch and juggle the United States bank
for their benefit. That would not be wise or desirable. The interests
of the two must be on all fours; they must, in some way, be part of
one another. It may be either by a branch, provided here, with a
clear understanding as to what “ setting aside the capital ” means,
or by the establishing of an entirely distinct foreign bank, all of the
capital stock of which is owned by the national bank that considers
it a branch.
Senator H itch co ck . Can a State bank in New York have a branch
in London ?
Mr. V a n d er lip . It can and does. Several of them now have; also
in Berlin and Paris.
Senator H itc h c o c k . That is one o f the advantages they have, the
State bank, in New York City?
Mr. V a n d er lip . Yes.
Senator N elson . It seems to me, Mr. Vanderlip, in order to help
our foreign commerce, our branch banks in foreign countries, for
instance, in London, ought to be of such a character that the accept
ance of that bank which would represent the foreign bank in this
country, should be of such value that their acceptance would be as
good as the acceptances of the foreign bank.
Mr. V a n d er lip . And to have it of value, you must have all of the
capital stock back of that acceptance—the whole strength of the bank
must be back of it.
Senator N elson . Yes; the whole strength o f the bank must be
back of it. For instance, I had a case here of importing coffee----Senator O’Gorman (interposing). Senator Nelson, I call your at
tention to the fact that it is now nearing 12 o’clock, when the Senate
meets, and you want to be there.
Senator N elson . Yes; I will not ask any further questions now.
The C h a ir m a n . The committee will stand adjourned until half
past 1 o’clock.
(Thereupon, at 11.55 o’clock, a. m., a recess was taken until 1.30
o’clock p. m.
BANKING AND CURRENCY.
2037
AFTER RECESS.
Senator B eed . Gentlemen of the committee, you all know Mr.
Swinney, the president of the First National Bank of Kansas City.
Will you permit me to ask Mr. Swinney one or two question in order
to put certain facts in the record ?
Senator W e e k s . Before you begin will you let me refer a matter
to the committee?
Senator B eed . Certainly.
Senator W e e k s . Mr. Wilson Gilbert, who was president of the
New York Clearing House in 1907, has indicated that he would
come before the committee if he were invited. He is an old man
and in somewhat infirm health and does not feel like making the
trip unless he is wanted. I suggested the other day to the chair
man that perhaps he was a man from whom wTe could get valuable
information. If the committee desires it and wishes to secure him I
think it might be well.
The C h a ir m a n . Y ou might bring that up when we have a quorum.
Senator W e e k s . I have to go away early, and will ask you to
bring it up.
Senator B eed . Personally I am in favor of hearing him.
Senator B ristow . Yes; I am very much in favor of hearing him.
I think we ought to get all the information we can.
STATEMENT OF EDWARD F. SWINNEY, PRESIDENT OF THE FIRST
NATIONAL BANK, KANSAS CITY, MO.
Senator B eed . Mr. Swinney, you are president of the First Na
tional Bank of Kansas City, Mo.?
Mr. S w in n e y . Yes, sir.
Senator B eed . And what is its capital stock?
Mr. S w in n e y . $1,000,000.
Senator B eed . What is its surplus?
Mr. S w in n e y . $1,000,000; and undivided profits, $1,000,000.
Senator B eed . What do its deposits ordinarily amount to?
Mr. S w in n e y . About $27,000,000.
Senator B eed . They run very much higher than that, I think, a t
times?
. Mr. S w in n e y . Y es.
Senator B eed . H ow many country banks are depositors with you?
Mr. S w in n e y . Between 700 and 800.
Senator B eed . And, generally speaking, over what section o f
territory are they spread?
Mr. S w in n e y . We cover the West largely—Kansas, Missouri,
Nebraska, Texas, and Oklahoma, principally.
Senator B eed . What amount of deposits do you keep in eastern
banks, or in other banks, and where? I do not mean all the time,
but as a general proposition.
Mr. S w in n e y . Well, we keep our reserves, of course, in the three
central reserve cities.
Senator B eed . St. Louis, Chicago, and New York.
Mr. S w in n e y . Yes. Our reserves with those reserve banks will
run from $5,000,000 to $7,000,000.
2038
BANKING AND CURRENCY.
Senator R eed . N ow , Mr. Swinney, you told me there were one
or two matters about this bill to which you would like to call the
attention of the committee.
Mr. S w in n e y . Well, Mr. Vanderlip has covered the proposition so
thoroughly that it hardly leaves anything for me to say.
The C h a ir m a n . D o you substantially agree with Mr. Vanderlip
in his views ?
Mr. S w in n e y . Largely; yes, sir. But what I am going to say on
one or two matters—one especially—shows that men in the same busi
ness look at matters from a different standpoint on account of the
fact that they do business in different localities.
I wanted especially to speak of these country banks having to
keep their entire reserve either in their vaults or in the regional
bank. As it is to-day we use our reserve as working cash, and are
able to manipulate it from one city to the other as we need it. Mr.
Vanderlip, though, in his talk this morning, seemed to think that
would all be done away with, on account of the regional banks being
general clearing houses for all of the national banks doing business
with them. If that is the case, perhaps it could be worked, but it
strikes me that when they got started on it they would find that the
national banks doing business with these regional banks would have
such an enormous amount of business it would simply flood the in
stitution.
I did not bring this memorandum with me for the purpose, but
happened to have it, and will refer to it just to give you a little idea
of that. In our institution alone we in one day handled 25,518
country checks—checks on country banks. Now, that is not an un
usual day, but we take it off once a year. We do not take it off
on the largest day, but any day in the week. Now, if every bank
in Kansas City piled that into the regional bank, and the banks all
around the country in the same proportion, you see they never could
get through the business.
Senator R eed . Mr. Swinney, you have a tabulation that you
showed me of that one day’s business, which you say you took off
merely as a bank record ?
Mr. S w in n e y . Yes, sir.
Senator R eed . And it was not a selected day, but just a day that
you took an account of your business, and that was done some months
ago?
Mr. S w in n e y . December 18, 1912.
Senator R eed . Will you put into the record that day’s business, in
order that we may have some gauge to go by ?
Mr. S w in n e y . The entire thing?
Senator R eed . The entire day’s business.
Mr. S w in n e y . Well, through the mail that morning we received on
ourselves 1,707 checks, amounting to $900,000. I won’t give you the
odd figures.
Senator R eed . Y ou will put the tabulation in later, will you?
Mr. S w in n e y . Yes. On other Kansas City banks there were 2,826
checks, amounting to $1,000,000. Of out-of-town checks—those from
the country—there were 15,119, amounting to $1,600,000. Total
checks received in the mail, 19,654; total amount, $3,500,000.
We received over the counters 1,651 checks on ourselves, amount
ing to $ls500,000. On other banks we received 9,413 checks, amount-
2 039
BANKING AND CURRENCY.
ing to $1,000,000. Out-of-town checks, 8,865, amounting to $1,000,000. Total checks over the city, 19,929, amounting to $3,600,000.
The total business for the day was $9,098,000. The total number of
-checks handled that day was 45,454, and the total amount of cash
handled was $353,127.85.
Senator R e e d . W h at was the am ount o f business you did through
th e bank that day by checks ?
Mr. S w in n e y . $9,098,000.
Senator R eed . And how much was cash?
Mr. S w in n e y . $353,000. The cash decrease that day was $150,000.
Senator R eed . D oes th a t com plete the tabulation you have ?
Mr. S w in n e y . There are a lot of other matters there. It shows
the changes in various items, how much was eastern and how much
was western. We sent to the East 2,568 checks, amounting to
$817,000. Indirectly we sent 1,451 checks amounting to $166,000.
Senator R eed . I should like to have that tabulation printed in the
record.
T h e C h a ir m a n . Let i t g o in th e record.
(T h e statem ent referred to is as fo llo w s:)
C h e c k s h a n d le d W e d n e s d a y , D e c . 18, 1912.
On this bank.
Num
ber.
Amount.
Received by mail. 1,707 $918,753.84
Received o v e r
counter............. 1,651 1,542,758.39
P a i d through
clearing house.. 4,339 1,822,918.01
On other Kansas
City banks.
Out-of-town items.
Num
ber.
Num
ber.
Amount.
Amount.
Total.
Num
ber.
Amount.
2,826 $1,021,798.35 15,119 $1,610,446.74 19,652 $3,550,998.93
1,029,791.05 8,865 1,057,893.07 19,929 3,630,442.51
9,413
7,697 4,284,430.24 12,239
1,534
2,051,589. 40 25,518
5,873
1,916,564.77
2,761,986.57 45,454
93,646.76
9,098,006.21
Number.
Total number checks handled..................
Total amount of checks handled..............
Total amount of cash handled.................
Cash decreased..........................................
Deposits decreased....................................
Total number of individual checks..........
Total number of individual credits..........
Individual balances which changed........
Individual accounts.................................
Sent for credit charged on country books.
Total bank drafts on us............................
Total bank credits....................................
Bank balances which changed.................
Country bank accounts............................
Certificates of deposit outstanding...........
Holders of certificates of deposit..............
Sent eastern banks:
Direct...............
Indirect............
45,454
4,482
816
1,765
6,669
3,059
796
624
772
1,752
1,185
2,568
1,451
Amount.
$9,098,006.21
353,127.85
150,672.15
53,174.42
1,876,460.04
1,732,565.35
562,886.99
2,486,805.17
3,210,923.81
817,761.05
166,632.17
984,393.22
Sent to country for credit:
Direct..........................
Indirect.......................
S. Doc. 232, 63-1—vol 3----- 8
5,753
888
483,742.65
28.796.44
6,641
512,539.09
BANKING AND CURRENCY.
2040
C h e c k s h a n d le d W e d n e s d a y , D e c . 18, 1912 —
Continued.
Number.
Sent to country for returns:
Total indirect items (including 1,178 items, $43,436.19, through other Kansas City
Exclusive of railroad and other items payable here:
St. Louis drafts written (31)...................................................................................
Cashier’s checks written (18)................................................................................. .
Amount.
7,853
955
$865,356.98
50,710.59
8,808
1,999
257
3,670
22,100
916,067.57
90.239.14
50,548.58
208,215.07
2,515,863.47
3,294
246,139.20
19,351
2,116
2,300,536.01
202,703.01
99,753.56
271,325.99
184,629.24
11.704.34
19,581.26
Senator W e e k s . H ow much of that business would go through the
reserve bank, Mr. Swinney? What part of it?
M r. S w in n e y . A s I u n d e rs ta n d it, a ll of it ex cep t w h a t w as on
ourselves.
Senator W e e k s . What would be the relation between that amount
of business and the total business of Kansas City ?
Mr. S w in n e y . Well, I would say we do p e rh a p s a fifth of the
business of the town.
Senator W e e k s . Y ou naturally assume that there would be
branches in every considerable city of these reserve banks anyway,
and, of course, one in Kansas City, so that one bank wTould be doing
the whole exchange business of Kansas City if this bill becomes a
law?
M r. S w in n e y . Y es, sir.
Senator W e e k s . And not
necessarily the exchange business of any
other locality ?
Mr. S w in n e y . They would have to do all tributary to Kansas
City.
Senator W e e k s . Y ou are doing that, are you not?
Mr. S w in n e y . But under this bill we would not do it.
The C h a ir m a n . H ow many employees do you have to handle
those checks ?
Mr. S w in n e y . We have about 135 employees.
The C h a ir m a n . Handling those checks?
Mr. S w in n e y . In the bank, all told.
The C h a ir m a n . I mean handling those exchanges.
Mr. S w in n e y . I could not say about that. Of course, it is di
vided among the different departments. I could not tell you.
Senator H itc h c o c k . Y ou have only 135 altogether ?
Mr. S w in n e y . That is all, sir.
Senator H i t c h c o c k . I s not that a very small number for the size
of the bank you have?
Mr. S w in n e y . I expect it*is the smallest in the United States in
proportion to the business.
Senator H itc h c o c k . There is one bank in Missouri, much smaller
than yours, with 200 employees. Can you explain that?
BANKING AND CURRENCY.
2041
Mr. S w in n e y . N o; I can not. W e m anage to take care o f th e
business.
Senator R eed . I can explain it. Mr. Swinney knows how to es
tablish a system. He is too modest to say.
The C h a ir m a n . Perhaps Missourians are about twice as efficient,
too, as Nebraskans.
Senator R eed . No ; I would not say that. I might say that if it
were not for my regard for Senator Hitchcock.
Mr. S w in n e y . Regarding the capital of the proposed regional
banks, I will say in the first place that I am thoroughly in hopes you
gentlemen can get to some kind of proposition that will be workable
regarding the regional banks. We all realize, perhaps, to start with,
there will have to be many changes. There never was a business in
the world, no matter how long you worked on the proposition, that
when you got it started you did not have to make changes. And I
am sure some of you gentlemen have seen, even since I have been
here, that it is advisable to make changes; things have come up that
you had not suspected before.
The matter I was getting at is this, that the small country bank
has no use whatever for the regional bank. Their paper is not of a
class that could be used for that, and really I believe it would be bet
ter if banks of say less than $50,000 were not required to take stock
in this regional bank.
And right there I will say also that, while no man wants to be
forced, to be told he' must do a thing, at the same time I believe that
in this bill you will have to use the word “ must ” to ever get it
through. I am free to say that I would not go into it if I did not
have to until I found out how it worked.
Senator B ristow . Mr. Swinney, don’t you think it would be very
much better for us to provide a remedy for the things complained of,
without having to resort to a system of coercion, compelling men to
do things they do not think they ought to do ?
Mr. S w in n e y . T h a t is exactly w h at I say, Senator; but still, at the
same tim e, how w ould you ever g et it started i f you did not do it?
Senator B ristow . Suppose we had a Federal reserve bank estab
lished here in Washington, governed, if need be, by a board similar
to this board that is created in this bill. Let that be a bank of dis
count, and a bank of issue, and perform the functions that are in
tended to be performed very largely by these regional banks. Let
it have branches out through the country. Then suppose we let any
bank that wants to have its paper discounted transact business with
that bank without having to put up any capital stock or be a member
of anything.
Mr. S w in n e y . I do not think there is anything in the world the
matter with our banking system regarding the banking part of it; it
is only the currency part of it.
But I really believe, to make and have a safe currency proposition
and a credit proposition which would be elastic, that you must have
something of this kind. I really do not believe. Senator, that would
work. I do not believe it could work successfully where the Gov
ernment has to deal directly with the individual.
Senator B ristow . Well, suppose the bank dealt through its branch
banks with the individual banks?
Mr. S w in n e y . Oh, I see.
T hat sim p ly gets to a Federal bank..
2042
BANKING AND CURRENCY.
Senator B ristow . A Federal bank, yes; a Federal reserve bank.
Mr. S w in n e y . Well, if the Government wants to go into the bank
ing business that is a different proposition.
Senator B ristow . I s it not in the banking business when this bill
passes ?
Mr. S w in n e y . Well, indirectly, but not directly.
Senator R eed . I wanted to ask you about obtaining the capital for
these banks. Let us assume that the 12-bank idea is accepted, or
four banks or six banks. In any event this bill provides for each
bank paying in 10 per cent of its capital stock. Assuming that 10
per cent is to be paid in, when and how, in your opinion, should it
be paid in to least disturb the financial market and still permit this
plan to be carried into effect?
Mr. S w in n e y . I do n o t believe I h a v e ex pressed m y self on th a t
su b je c t, b u t I th in k th a t 12 b a n k s w o u ld m ak e th e p ro p o sitio n u n
w ield y . I believe th a t, to b eg in w ith , a n y w h ere fro m 3 to 5 b an k s
w o u ld be p le n ty , a n d i f w e sh o u ld need an y m o re w e could a d d to
th e system . I th in k t h a t 4 o r 5 b an k s, new in s titu tio n s , could be
h a n d le d in a b e tte r w ay th a n could 12.
As to the payment, if there should be, say, 5 banks, you would put
into those banks, say, 25 per cent to start with----Senator R eed (interposing). Twenty-five per cent of the 10 per
cent?
Mr. S w in n e y . Yes; 25 of the 10; and then, as the national bank
does now, pay in so much monthly. As you know, a national bank
now pays in, I believe, 50 per cent and then 10 per cent every month.
Senator R eed . And would that furnish money, do you th in k , rap
idly enough, so that the bank would have plenty of money on hand
to transact the business and increase the capital as the business
increased ?
Mr. S w in n e y . I think it would prevent them having too much
money, perhaps.
Senator R eed . And that would be done in that way, by the banks
paying in a part at a time on their capital stock, with less disturbance
to financial conditions than would result if you paid it in all at once?
Mr. S w in n e y . Of course it would. Some banks, I suppose, to pay
their reserve in would be required immediately to discount paper.
There is no doubt but what some of them would—perhaps not a great
many of them.
Senator R eed . Or contract loans?
Mr. S w in n e y . Yes.
Senator R eed . N ow , Mr. Swinney, there is one matter here that
has been much discussed, and you have referred to it—I will say to
the committee frankly that I was talking to Mr. Swinney the other
night and he mentioned this matter to me—and that is the use of
your present reserves. There has been a prevalent idea that a bank
when it carried its reserve over to another national bank was not
able to check that reserve out, utilizing it as an absolute balance, and
at the same time maintain the reserve and comply with the law.
Now, you stated to me that that was done every day, and I wish
you would tell the committee how it is done and the law complied
with.
Mr. S w in n e y . Well, by transfer of reserves. As it is, under this
law you make your reserve just as inelastic as our national currency
BANKING AND CURRENCY.
2043
is to-day. It specifies that you must have so much reserve in your
bank and it must remain there. What I was saying to you, Senator,
was that if we have money in the three reserve centers and we want
to transfer from St. Louis to Chicago or New York, we can do so
by checking from one to the other. But, as I said, Mr. Vanderlip’s
proposition does away with all of that, if such a thing should go
through.
Senator R eed . A s I understood you in that conversation—and I
am more anxious to get the point than I am about the way I get it—
assuming you had to have as a reserve under the law in other banks
$6,000,000, just for an arbitrary figure, and you had $2,000,000 in
Chicago, $2,000,000 in New York, and $2,000,000 in St. Louis. You
would just have your reserve. As I understood you, if you wanted
to draw on St. Louis for the entire $2,000,000, drawing it all out, you
could do so; and then that same day, by increasing your fund in
Chicago or New York to an equal amount, you would still have com
plied with the law, and nevertheless you would have been able to use
that money.
Mr. S w in n e y . Yes; simply transferring your reserve from one
point to another.
Senator R eed . S o that, as a matter of fact, you do, to a large ex
tent, get the use of your reserve under present conditions ?
Mr. S w in n e y . Yes, sir; it is a working reserve that we can trans
fer from one point to another.
Senator H itc h c o c k . I just want to ask you a question right there,
Mr. Swinney. The provisions in the bill which make checks of
member banks upon the reserve bank go at par would probably en
able you to draw your check upon the reserve bank and have it ac
cepted at par in New York, although your reserve bank was located
in St. Louis, would it not?
Mr. S w in n e y . I will say this, that if that proposition goes
through it would be a mighty good one for the banks.
Senator H itc h c o c k . Would there be any need of your carrying
the balances in New York if your check on the St. Louis regional
bank were taken at par in New York?
Mr. S w in n e y . None whatever. To give you an idea of that, in
1911 we had to ship $10,000,000 East to make our transfers good.
In 1912 we shipped $10,300,000. In 1913, up to October 1, we shipped
$8,200,000. We would get rid of all that expense if this proposition
should go through.
Senator R eed . Y ou have a table there, have you not, showing how
much money you have shipped during certain years?
Mr. S w in n e y . Yes.
Senator R eed . H ow is that table expressed? Are the figures car
ried out?
Mr. S w in n e y . They are in thousands.
Senator R eed . S o that if that table were printed, and it were
understood that these figures represented thousands, it would express
the right idea?
Mr. S w in n e y . I will say also that this table not only gives the
money we have shipped to the East and from the East, but it gives
the amounts by months that we have shipped to the country and re
ceived from the country.
2044
BANKING AND CURRENCY.
Senator R eed. I should like to have that printed.
The C h a ir m a n . Let it go in the record.
{The statement referred to is as follows:)
C u r r e n c y s h ip m en ts.
I N o t e .— The'armuriti
given in the following statement are expressed in thousands of dollars.]
TO THE COUNTRY.
Janu Febru March. April. May.
ary.
ary.
1911..
1912..
1913..
358
280
388
587
512
723
489
411
551
357
500
418
June.
387
353
469
432
344
579
July.
Au
gust.
No
Sep Oc
tem tober. vem
ber.
ber.
ber.
546
718
970
536 1,058 1,279
750 1,040 1,191
906
1,100
786
882
De
cem Total.
ber.
654
1,022
7,190
8,277
6.109
FROM THE COUNTRY.
1911..
1912..
1913..
781
521
874
356
229
401
816
288
503
700
386
448
371
420
472
630
574
537
365
417
376
273
259
264
243
164
296
218
344
293
362
250 1 5,296
494 4.458
597
270
596
462
415
632
619
611
802 1,180
990 10,015
1,142 10,345
8,281
TO THE EAST.
1911.. 1,619
1912.. 1,179
1,432
Ml>
414 1,032
582
525
634 1913..
953
797
806
930
829
879
760
1,165
1,515
1,294
8S0
1,050
1,050
FROM THE EAST.
” 566’
300
450
100
350
250
500
300
100
300
700
1,500
950
Senator H itc h c o c k . Y ou would not be compelled to ship that cur
rency to New York?
Mr. S w in n e y . It would fall to the lot of the regional bank.
Senator H itc h c o c k . Y ou would not be under any necessity of hav
ing an account in New York at all, would you?
Mr. S w in n e y . N o , sir; not under this proposition, as I under
stand it.
Senator H itc h c o c k . Would not that be a great benefit to the
country ?
Mr. S w in n e y . Well, I do not know. I am a sort of old-fashioned
banker, and we have had these associations for a great many years,
and there may be a great deal of sentimentality about it, but I should
hate to destroy all those connections.
Senator LIitc h c o c k . N ow , would the regional bank be put to a
similar expense in making shipments ?
Mr. S w in n e y . More or less; yes, sir. The trend from our country
is to the East for money.
S e n a to r H itc h c o c k . It m u st come back some tim e ; it can n ot
a lw a y s be g o in g in th a t d ire c tio n .
Mr. S w in n e y . The trend is in
that direction pretty much all the
lime.
Senator H itc h c o c k . Where do we get it from? Where does the
West get it from?
BANKING AND CURRENCY.
2045
Mr. S w in n e y . Oh, it comes through the pockets of the people in to
the banks.
Senator R eed . Senator, you have evidently entirely overlooked
Senator Tillman’s picture of the cow that was printed in the Record.
You notice the money all goes in one direction through that cow.
Senator H itc h c o c k . I am not an expert on cows, but I wanted to
ask whether you thought the regional banks would be put to a con
siderable expense in making a shipment of currency for members.
Mr. S w in n e y . In shipments of currency and collections—yes, sir;
to a very large expense, but still, I think, they could afford to do it
for the free deposit which they would get.
Senator H itc h c o c k . It would not be really as large an expense as
that which is now borne by the members ?
Mr. S w in n e y . N o ; you would simply transfer the debtor and
creditor balance.
Senator H itc h c o c k . S o Mr. Vanderlip was correct when he said
that the banks of the United States would no longer keep their bal
ances in New York, for the reason that customers would be satisfied
with a check upon the regional reserve bank?
Mr. S w in n e y . No ; they would have no use for New York then.
Senator N elso n . But the country banks complain of this clearing
house paragraph. They say that it deprives them of a great deal
of their source of revenue.
Mr. S w in n e y . It would be very unpopular wuth the country banks,
Senator.
Senator H itc h c o c k . Have you any estimate of the proportion of
national banks in Kansas which would come into the system?
Mr. S w in n e y . Well, I can not say. I think that, with some
changes in the bill, pretty much all of them would.
Senator H itc h c o c k . Take the bill as it is now.
Mr. S w in n e y . No ; they would not come in.
Senator H itc h c o c k . Would half of them come in?
Mr. S w in n e y . I do not believe half of them would. Of course,
Kansas has a very good State lawT, and so has Missouri.
Senator H itc h c o c k . How would those banks which stayed out of
the sj^stem conduct their exchanges and care for their reserves?
Mr. S w in n e y . Exactly as they do to-day.
Senator H itc h c o c k . S o that they would continue to deposit their
reserves in the reserve centers, but they would only be State banks?
Mr. S w in n e y . Yes.
Senator N elson . They would be guided by State laws in each case
as to the amount of reserves and where to keep them.
Senator H itc h c o c k . Well, they would not have the privilege of
using the regional bank for exchange, and they would have to draw
Newr York drafts just as they do now----Mr. S w in n e y . Y ou m ean those w ho w ere n o t m em bers o f th e
re g io n a l b a n k ?
Senator H itc h c o c k .
Mr. S w in n e y . N ow ,
Yes.
my proposition—I want to be understood on
that. When I said that I did not believe smaller banks should be re
quired to take stock in the regional bank I did not mean to give the
impression that they should not be required to do business with it
2046
BANKING AND CUEBENCY.
and keep their reserve there. I believe they should keep their re
serve there just the same as if they held stock.
Senator H itc h c o c k . I do not think you have discussed this yetr
but I should like to ask you, as a practical proposition, if you join
this new organization and subscribe for 20 per cent of your capital
and pay one-tenth of it and transfer to the reserve centers the proper
proportion of the country-bank balances which you now have, where
are you going to procure that money ?
Mr. S w in n e t . We would have to draw it out of New York.
Senator H itc h c o c k . What do your country-bank deposits amount
to of your national banks?
Mr. S w in n e y . About $8,000,000.
Senator R eed . All together?
Mr. S w in n e y . All the national banks.
Senator H itc h c o c k . H ow much of that $8,000,000 would you be
required to turn over to the reserve bank, probably?
Mr. S w in n e y . Oh, I figure—I thought I had the figures, but I
have not—that we would have to pay over to the regional bank some
where between $3,500,000 and $4,000,000.
Senator H itc h c o c k . In w h a t length o f time?
Mr. S w in n e y . At the end of the working season—36 months.
Senator H itc h c o c k . H ow much would it be in 60 days after the
banks formed?
Mr. S w in n e y . Well, not to any great extent would you have to
check on banks, because we could take our excess currency out of our
vaults to start with.
Senator H itc h c o c k . Y ou keep a large surplus over your reserve?
Mr. S w in n e y . N o. Your required reserve in the vault would b e
less, and therefore you could take the cash out of the vault first and
put it in the regional bank.
Senator H itc h c o c k . N ow , to what extent do you think you would
be under the necessity of contracting your loans?
Mr. S w in n e y . Why, that is very hard to say. It would just d e
pend upon whether we have any business from national banks. If
the entire $8,000,000 would go out, you can see we would have to con
tract our loans very largely.
Senator H itc h c o c k . What are the total country bank deposits in
the other national banks of Kansas City?
Mr. S w in n e y . $32,000,000; that is the total.
Senator N elson . Is that in y o u r bank?
Mr. S w in n e y . N o ; that is the total of country national bank de
posits in Kansas City.
Senator R eed . You say the country national banks. Now, what
are the total deposits of all banks in Kansas City? Can you give
that?
Mr. S w in n e y . What do you mean b y that?
Senator R eed . The State banks and trust companies that deposit
with the banks of Kansas City.
Mr. S w in n e y . I have not that.
Senator H itc h c o c k . N ow , assuming that your national banks in
Kansas City would be required to turn over the full $32,000,000 of
country bank deposits to the reserve bank of that district; where
would that $32,000,000 come from?
BANKING AND CURRENCY.
2047
Mr. S w in n e y . It w o u ld h av e to come o u t o f th e e a ste rn exchanges
w h ich we hav e, a n d th e cash o u t o f o u r v a u lts, a n d qu ite a re d u c tio n
o f loans.
Senator H itc h c o c k . W h at w ould th e borrowers do w hen those
loans w ere called?
Mr. S w in n e y . W ell, the banks w ould either have to go to the
regional bank and borrow or have them to pay.
Senator H itc h c o c k . T o what extent do you estimate that would
contract the loans in Kansas City^ ?
Mr. S w in n e y . I have some figures th at were made by our clearing
house m anager, but I do not know th a t th ey are correct. H e esti
m ates that for the first 60 days in K ansas C ity the loss o f deposits
w ould be $11,000,000.
Senator H itc h c o c k . Does he say anything about the contraction
of loans?
Mr. S w in n e y . N o ; he could not figure on that at all, because he
was figuring on the amount of money that would have to be paid out.
Senator H itc h c o c k . N ow , assuming that the contraction of loans
occurs not only in Kansas City, but in Omaha, St. Paul, Minneapolis,
Cincinnati, and all the other 40 or 50 reserve cities of the country;:
what would be the effect on business of that in the aggregate?
Mr. S w in n e y . Just as I said in the beginning, Senator; I do not
agree with Mr. Vanderlip. I think it would be a serious proposition
to the country to have to withdraw from the business the amount of
money that would be required. To a certain extent you eliminate the
national banking system, which would make greatly against business,
I believe. I do not believe that anybody cares to go and put him
self on record as having to borrow money right away to start this
proposition, which would be done, unless you cut loans.
Senator H itc h c o c k . N ow , have you any recommendation to make
as to any amendment to this bill so as to mitigate that possible con
traction ?
Mr. S w in n e y . Well, we hear that there is a pyramiding of de
posits, and that it finally gets into New York. I would suggest that
banks in reserve cities be allowed to keep one-third of their reserve
with central reserve cities, but in no central reserve city to exceed 2
per cent. For instance, we have 18 per cent—6 per cent in the vault,
6 per cent with the regional bank, 2 per cent in St. Louis, 2 per cent
in Chicago, and 2 per cent in New York.
Senator H itc h c o c k . A n d y et you said you w ould have no use for
N ew Y ork exchange, possibly.
Mr. S w in n e y . Under this other proposition is what I spoke of.
Senator H itc h c o c k . But it would lie kept there simply for the
purpose of not disturbing the banking business of the country unnec
essarily ?
Mr. S w in n e y . Yes, sir.
Senator H itchcock. That wTould give relief to the central reserve
cities, but it would not relieve the 48 or 49 reserve cities ?
Mr. S w in n e y . Well, let the country banker do the same thing on
exactly the same proposition. He could keep 4 per cent of his depos
its there, 4 per cent with the reserve agent, 4 with the regional bank,
and 4 in his safe, which would be 12 per cent.
2048
BANKING AND CURRENCY.
Senator N elson . That would keep up the volume of reserves to
some extent that we have now?
Mr. S w in n e y . It cuts it down considerably.
Senator N elson . But it would perpetuate the system .
Mr. S w in n e y . Yes, sir.
Senator R eed . If I understand, now, Mr. Swinnev, speaking about
the immediate contraction, the first thing the banks of Kansas City
would have to do would be to take an amount equal to 10 per cent
of their capital stock and transfer that to a regional bank which, let
us say, is located in St. Louis----Mr. S w in n e y . Which would be $875,000.
Senator R eed . From w h a t bank?
Mr. S w in n e y . The national banks; the capital of the national
banks.
Senator R eed . If the State banks and trust companies came in it
would be a very much larger sum ?
Mr. S w in n e y . Yes, sir.
Senator R eed . N ow , that you would have to take out of your vaults
or you would have to call loans in order to get it. Then the next
proposition would be you would have to take an amount equal to 6
per cent of your deposits, and that you would either have to take
out of your vaults or withdraw from New York, St. Louis, or Chi
cago. And if you withdrew from them, of course, it would contract
their currency to that extent and they would have to contract loans
to get the money. Now, you have in these banks in Kansas City
$38,000,000, did you say?
Mr. S w in n e y . $32,000,000.
Senator R eed . $32,000,000 of country bank deposits, and that
largely represents their reserves, does it not?
Mr. S w in n e y . Largely; yes.
Senator R eed . S o that if those country banks were to be required
to put up their reserve, not with you, but with the regional reserve
bank, they would have to draw that money awaj7 from you ?
Mr. S w in n e y . Yes, sir.
Senator R eed . And the result would be that whatever amount was
taken away in the aggregate would have to be deducted from the
loans that are made by the Kansas City banks?
Mr. S w in n e y . Or borrow from the regional bank.
Senator R eed . Or else they would have to discount at the regional
bank. That would look like a very radical contraction if it were
put into effect at once.
Mr. S w in n e y . Yes, sir; it certainly would, and it would cause
quite an upheaval in the credits of the country in my opinion.
S e n a to r R eed . N ow , if th is sy stem w ere p u t in to effect g ra d u a lly ,
a n d you w ere re q u ire d to p u t in o n ly, say, 2 p e r cen t of y o u r c a p ita l
a t first, a d d in g 2 p e r c e n t o f y o u r d ep o sits a n d th e am o u n ts th e re
a f te r to be g ra d u a lly in creased , th a t w o u ld a t least give m ore tim e
fo r re a d ju s tm e n t ?
Mr. S w in n e y . Oh, y e s; the more gradual you could make it the
better it would be.
Senator R eed . N ow , Mr. Swinney, I want to ask you one other
question, and that is one I asked Mr. Vanderlip and which he has not
yet answered. What inducement or reason is there for a bank re-
BANKING AND CURRENCY.
2049
maining a national bank after this bill is enacted, if it goes through
in its present form?
Mr. S avinney . None whatever, except to get credit—a place to use
credit; that is all.
Senator R eed . That is, with the regional bank ?
Mr. S w in n e y . Yes.
Senator R eed . But that is now opened by this bill to every bank
and trust company in the country that has a certain amount of capital
and which conforms to certain conditions.
Mr. S w in n e y . Oh, with the bill as it stands at the present time I
am confident it would be to the interest of the banks to go into the
State system.
Senator R eed . T o go into the State system?
M r. S w in n e y . Y e s; because th e y could g et so m a n y m ore p r iv i
leges.
Senator R eed . Can you suggest to us any improvement that might
be made to this bill which would keep the national banks in the
national banking system ?
Mr. S w in n e y . Well, just as I have said, this reserve proposition,
to a country bank, of which I am one, is one of the main points of
the contention with us, and one which would come nearer driving
them out of the system than anything else. That is the way they
feel about it.
Senator R eed . Well, if Ave modify that, still the advantage would
be with the State bank and trust company, because they have a wider
range of business, and of course if we modified as to one Ave prob
ably would as to all. What is there in the way of an advantage
which could be given justly to a national bank in order to have it
maintain its charter and continue as a national bank? Do you think
of anything that could be done? He used to have an advantage on
the matter of currency.
Mr. S w in n e y . At one time he had that advantage.
Senator R eed . What is there left, and what can be done?
Mr. S w in n e y . Nothing except that the only advantage they would
have is that there had always been just a little sentiment in favor of
a national bank, considering it, you might say, as a Government
institution, especially in a new country.
Senator H itch co ck . What is the total of capital of national banks
in Kansas City?
Mr. S w in n e y . $8,750,000.
Senator H itch co ck . Suppose a subtreasury Avere located in Kan
sas City, with the provision that the national banks there might
procure currency at any time at a reasonable rate of interest from the
Government, to the extent of 75 per cent of their capital, \Adiich, in
that case, would be something like $6,000,000, Avould it not?
Mr. S avinney . Yes, sir.
Senator H itc h c o c k . Possibly a little more. Would that facility
afford to the banks of Kansas City a means, in seasons of extra de
mand, for something to accommodate their customers?
Mr. S w in n e y . Y ou open u p th e re a v ery Avide su b ject, S en ato r.
I h a v e n o t tim e to ta k e th e m a tte r u p , b u t it is o nly in one season o f
th e y e a r w hen Ave need c re d it, a n d t h a t is o n ly fo r ab o u t six o r e ig h t
w eeks in th e fa ll o f th e y e a r, a n d a clearin g -h o u se p ro p o sitio n
2050
BANKING AND CURRENCY.
whereby they could join together and get currency, in my opinion,
is as good as anything we could have. Take, for instance, in 1907
when we banded together in Kansas City, as they did in other places.
We issued, against the law there, I might say, a currency, and in
two weeks that currency was going as good as a national-bank bill.
There was no question raised about it. Senator Reed will tell you
the same thing. It passed there, and we had occasion to make up a
pay roll for the Saute Fe Railroad of $100,000, and we used $50,000
of that and sent it out into Kansas, and it went right straight
through.
Senator B ristow . It circulated all over the State ?
Mr. S w in n e y . Yes, sir.
Senator H itc h c o c k . We had the same experience in Omaha, hut
there seems to be an objection that I can hardly appreciate, which is
made by some bank, to being compelled to show their hands to each
other in forming a currency association to guarantee others’ obliga
tions.
Mr. S w i n n e y . There is nothing in it, I think. It is simply a sup
position. We might take the same thing right here on this money
that the Treasury is putting out now. You might say the banks did
not care to show their hands. We met in Kansas City and agreed
what each one would ask for, submitted our collateral one to the
other, and it never caused any trouble. Nobody thought anything
about it. If they would get that proposition to working, there would
not be any question about it.
Senator H itc h c o c k . That is the Vreeland-Aldrich Act?
Mr. S w in n e y . Partly; only partly.
Senator H itc h c o c k . Under that Vreeland-Aldrich Act banks in
any community or neighborhood having an aggregate of $5,000,000
of capital, and numbering 10, can form a currency association, guar
antee each ether’s paper and secure this additional bank note circula
tion.
Senator R eed . These were not bank notes; they g o t Government
money.
Senator H itc h c o c k . That was a direct loan of the fund of the
Treasury, and the Treasury might or might not have a balance to its
credit. I am talking about a permanent arrangement for procur
ing, direct from the Treasury, from the United States, notes, which
this bill provides shall be furnished to the banks through the ma
chinery of regional banks. I am wiping out the regional banks,
and suggesting to you an arrangement whereby the Treasury can
furnish this currency direct to the individual national banks in, say,
50 cities of the United States where subtreasuries might be located.
Mr. S w in n e y . Well, if such a thing could be worked, Senator,
I think, as I say, I would believe it a good proposition. But we could
never work it. I do not think you could work it here in Washington.
Senator H itc h c o c k . W ill you explain w h y ?
Mr. S w in n e y . I do not think you could ever get a proposition of
that kind through here.
Senator H itc h c o c k . I am assuming that it would go through.
Mr. S w in n e y . Assuming it could go through, as I said in the be
ginning, the main thing we are after is to try to get an elastic cur
rency, or a currency that we can use a few months in the year, and
BANKING AND CURBENCY.
205 1
a proposition of that kind, to my mind, if it could be put through,
would be as good as you could ask for.
Senator H itc h c o c k . It is only a few months in the year when y o u r
banks would borrow that currency, and that particular season is in
the fall?
Mr. S w in n e y . Yes.
Senator H itc h c o c k . In New Orleans it would be another season,
and in the San Francisco region it might be another, so that in the
aggregate the Government would not be advancing at any particular
time a very tremendous sum of money, but the currency would be
elastic in the neighborhood where it was called for. At the end of
the particular period the banks would take up their securities, pay
back, either in gold or United States notes, and you would pay the
interest, and that would end the transaction. Do you think that
would work?
Mr. S w in n e y . It w o u ld s u it m e exactly .
I have only a few moments, gentlemen, and there are just one or
two other things I desire to call to your attention.
I am going to suggest a change, on page 40, in regard to bank
examinations. It says:
The Comptroller of the Currency shall so arrange the duties of national-bank
examiners that no two successive examinations of any association shall be made
by the same examiner.
That is different from our present form, and really 1 do not think
it is a good proposition. I believe a man who examines a bank once
and then comes to examine it again in six months is much more
capable of doing it than if he had never been in the bank before. He
becomes familiar with the credits and workings of the bank.
I go now to page 41, beginning at line 14, where it says:
The Federal reserve board shall, as often as it deems best, and in any case
not less frequently than four times each year, order an examination of national
banking associations in reserve cities.
With our clearing-house examinations which we have in Kansas
City, and which they have in other places, I think that is out of
reason. Two examinations are ample, and the comptroller can have
as many more as he wishes. That is the law now.
Here is another proposition in regard to the Federal board. We
all talk about the power of the board, but here is one place where
they should be given discretion which they are not given. It says:
The Federal reserve board shall, at least once each year, order an examina
tion of each Federal reserve hank, and upon joint application of 10 member
banks the Federal reserve board shall order a special examination and report of
the condition of any Federal reserve bank.
Now, if you take 10 banks in the country and they should get to a
place where they did not like something a regional bank had done,
they could make that application and the Federal reserve board
would have to make the examination. Why not use the word “ may ”
instead of “ shall ” ?
S e n a to r R eed . Y ou th in k a few fello w s m ig h t be d isg ru n tle d an d
m ak e an u n n ecessary d istu rb a n c e ?
Mr. S w in n e y . Ten men could make a request for an examination
of a Federal bank, and then in three or four weeks make another
2052
BANKING AND CURRENCY.
request, and keep on examining that bank right along. The Federal
board does not seem to have any discretion whatever there. By
changing that word from “ shall ” to “ may,” I think you would
cover that point.
Senator F eed. On what page is that ?
Mr. S w in n e y . On page 41.
Senator S h a fr o t h . Will you read the language of it again?
Mr. S w in n e y (reading) :
The Federal reserve board shall at least once each year order an examination
of each Federal reserve bank, and upon joint application of 10 member banks
the Federal reserve board shall order a special examination and report of the
condition of any Federal reserve bank.
Senator N elso n . It is peremptory; there is no doubt about that.
Senator S h a fr o t h . The only thing is if 10 large banks want an
examination, why is it not proper that it should be done, and that
it should not be left discretionary ?
Senator N elson . It says 10 banks; it does not say 10 large banks.
Senator S h a fr o t h . Or 10 small banks.
Mr. S w in n e y . If they were doing it to annoy a bank, it strikes
me the Federal reserve board ought to be given discretion as to
whether they should order an examination or not.
Senator N elso n . It would depend upon what the application pre
sented. If it presented facts that would warrant the board to go
ahead and make an examination, they would undoubtedly make it,
and if the application was simply a matter of pure cussedness they
ought not to be compelled to make the examination. I think Mr.
Swinney is right on that subject.
Senator R eed. At least that ought to be limited in some way.
Mr. S w in n e y . That is all I have to suggest, Mr. Chairman, and
I thank you for giving me the privilege of appearing before you.
The C h a ir m a n . We are much obliged to you for coming before us,
Mr. Swinney.
STATEMENT OF FRANK A. VANDERLIP— Continued.
Senator B ristow . Mr. Vanderlip, I understood you to say that you
believed national banks ought to be permitted to establish branches.
You limited it to the cities where they were located, but I inferred
that in your judgment you thought that limitation was not really
necessary, but probably you thought you could not get more than
that because of the prejudice against it. Do you believe there ought
to be such a limitation?
Mr. Y a n d er lip . I would not use the word “ ought.” There is no
inherent right of a national bank to have branches. I think it would
be desirable for the bank to have branches in the city in which it is
located, and desirable not altogether from the bank’s point of view,
but desirable from the point of view of the citizens of the city, from
the point of view of properly conducting the bank’s business, and
of giving to all the citizens of a large city the facilities of a large
bank.
In regard to branches elsewhere than in the city where the bank is
located I think, from the bank’s point of view, the weight of evi
dence would be that it would react in its favor if it had a right to
BANKING AND CUEBENCY.
2053
have branches anywhere. I think there are some factors of weakness
on the side of a bank having branches, but on the whole I think
many large banks would welcome the opportunity to have branches.
I do not regard it as their right.
Senator B ristow . That would reduce the number of national
banks, would it not?
Mr. V a n d er lip . I should think it would very much reduce the
number of fly-by-night private banking institutions in a city like
New York, where we have banks started that get the money of
rather ignorant depositors and frequently fail to pay it back.
Senator B ristow . Why would it reduce that kind of banking es
pecially ?
Mr. V a n d er lip . Because it would bring the branch of a wellknown bank in competition with a little private bank, or with a
little State bank, or even with a small national bank, and it would
give the strength of a great institution to that branch, just as much
as to the parent bank.
Senator B ristow . D o not your State laws protect the people from
these spurious banks?
Mr. V a n d er lip . No, sir; they do not protect the people from a
private bank.
Senator N elson . Y ou have private banks in New York?
Mr. V a n d er lip . There are a great many private banks on the
East Side of New York City.
Senator N elson . Protected under your State law?
Mr. V a n d er lip . Yes, sir.
Senator N elson . We h av e abolished them in Minnesota.
Senator B ristow . It would add to the power and‘strength of the
large banks, would it not?
Mr. V anderlip. It would add to their size; I am not certain it
would add to their power and strength. There is great strength in
having all your resources under one roof.
Senator B ristow . I s not a big bank more powerful than a small
one; does it not control vaster resources?
Mr. V a n d er lip . Yes; but a bank is not so very powerful, except
to do the right thing, because, no matter how big you are, you are
not powerful enough to make a bad loan.
Senator K eed. And make it into a good one.
Mr. V a n d er lip . Y ou could m ake th e lo an , b u t you could n o t col
lect it.
Senator S h a fr o t h . I have known banks to make loans to parties
who would pay nobody else but the bank. I have known of that
frequently. Is that not a good influence, a good power to exercise?
Mr. V a n d er lip . The bank probably had collateral which made that
necessary.
Senator S h a fr o t h . I have seen them do it without collateral.
Mr. V a n d er lip . They probably wanted to establish some connec
tions in the future. Of course, there was probably some hope of
reward in it.
S e n a to r B ristoav. D o y o u th in k t h a t th e d em o cratic system of
b a n k in g th a t Ave noAv h av e— th a t is, w here it is so w id ely diversified,
w here th e re a re so m a n y d iffe re n t in d iv id u a ls en g ag ed in it, is i t
d e sira b le or u n d e sira b le ?
2054
BANKING AND CURRENCY.
Mr. V a n d er lip . The whole question of the respective merits of
a general branch banking system, and the present democratic prin
ciple, is a clearly debatable one, with some excellent reasons on each
side.
The branch system will tend to equalize rates. I t will take the
funds of a low-interest community into a high-interest community.
It tends toward stability. It gives to a new community a sound
bank. It gives to the managers of branches experience that would
be valuable in a new community, where otherwise a bank might be
organized by people without banking experience.
The Democratic principle gives a local interest in the bank, gives
the management to people who thoroughly understand local condi
tions and local character, and keeps the money of the community in
the community where it originates, which may be good for the par
ticular community, but is not, I would say, for the best good of the
whole country if there is a surplus of funds there. Those, I think,
are the chief arguments on each side.
Senator B ristow . D o you think it is desirable, especially in the
banking business, that the bank should have the local friendship
and good will of the people with whom it comes in daily contact in
the management of its business ?
Mr. V a n d er lip . It is always desirable for a bank to have the
friendship and good will of the community where it is doing busi
ness. It is not at all impossible for a branch of a great bank to
have that friendship and good will if that branch has been conducted
in a broad-minded way.
Senator B ristow . But it would rob that bank largely of the indi
viduality which* it now has, would it not?
Mr. V a n d er lip . Undoubtedly. It makes it a part o f that great
bank.
Senator B ristow . It would be more mechanical in its operations
than it is now and have less personality in it?
Mr. V a n d er lip . I would say, perhaps, it would be less sentimental.
Senator B ristow . D o you not think it would take from a great
many men the opportunity of initiative in the building up of a busi
ness of their own?
Mr. V a n d er lip . I do. I think there is a distinct advantage on
the Democratic side in interesting the best men in the local commu
nity in the conduct of the bank. That, perhaps, is the great argu
ment for our present system as against the branch-bank system, and
it is an argument of weight.
Senator B ristow . The branch banking system existing in Euro
pean countries will result in very large banks ?
Mr. V a n d er lip . There is one bank in England with 600 branches.
Senator B ristow . And how much in deposits ?
Mr. V a n d er lip . About $400,000,000. That is the London City
and Midland, which is now the largest bank in the world.
Senator B ristow . And there are other banks that approach that
bank ?
Mr. V a n d erlip . Yes, s ir ; both in England and on the Continent.
Senator B ristow . What are the deposits of your bank?
Mr. V a n d er lip . Recently it h a s been running about $250,000,000
gross and around $200,000,000 net.
Senator B ristow . Y ou have the largest bank in the United States?
BANKING AND CUBBENCY.
205 5
Mr. V a n d er lip . Yes, sir.
Senator B ristow . If the branch banking system that prevails in
England prevailed here, it is fair to presume that your bank would
be very much larger than it is now, would it not ?
Mr. V a n d er lip . If we had embraced the branch-bank idea, I should
say it is fair to presume it would be larger. You see, the banking
resources of the country have grown very much more rapidly in per
centage outside of New York City than in New York City.
Senator B ristow . There is another matter that I am interested in
having your views on, Mr. Vanderlip. I have observed that the gen
tlemen who have been before us so far—the bankers—are very tena
cious for commercial paper to be made a basis for currency, addi
tional currency that is issued, and rediscount, etc. It seemed to me
that they have more interest in the enactment of legislation that pre
serves or maintains or promotes the branch of the business which is
conducted in that way, by short-time loans. Now, we have got just
so much currency and money. Most of you gentlemen seem to resent
the idea of long-time paper, mortgages, or securities of that kind
from being used in this way, which is a distinct advantage to the
security. It makes it more desirable and therefore will have a tend
ency to lower the rate of interest. The more of the country’s re
sources or its money that is used in handling commercial paper, the
smaller amount of it there will be used in these investment loans,
will there not?
Mr. V a n d er lip . Yes, sir.
Senator B ristow . England is pointed to principally as a model
country by some people. Now, in a country like ours, where we are
a producing Nation more than a commercial Nation, do you think it
is to the best interests of the country as a whole to favor the com
mercial end of our affairs more than the productive part of our
affairs?
Mr. VANDERLir. No question that has been asked would permit me
to make an answer that I am clearer about or that I feel more cer
tain that my answer will be right.
Any other conception than a conception that you say the bankers
have generally given here, that commercial paper should be favored,
is a misconception of the function of a bank. It is no part of the
function of a bank holding deposits repayable on demand to use
those deposits in any form that will tie them up in an unliquid shape.
The test of a proper bank loan is the self-liquidating character of
that loan within a reasonable period. I have already explained my
view of a self-liquidating loan, and I think you are familiar with
that. That is the test of sound banking. You can vary it to some
extent by employing some of your capital in the purchase of realestate mortgages, and, as I have said, the section that will permit a
country bank to employ half of its capital in the purchase of such
mortgages is not altogether sound, judged on a scientific basis, but I
believe is not dangerous. A city bank can use some of its funds in
investing in corporate securities. They are better for the purpose of
investment than some real-estate mortgages, not because they are
more liquid—in that respect they are exactly the same as a realestate mortgage—but because they have a larger market. But neither
is the ideal investment for a bank.
S. Doc. 232, 63-1— vol 3-----9
■
2056
BANKING AND CUKKENCY.
Banks are the great debtors of the country, not the creditors. You
asked me what our deposits are, and my answer means that we have
subject to demand between $200,000,000 and $250,000,000. We are
the great debtor of this country. No institution in America owes sa
much money on demand as the National City Bank. Therefore the
National City Bank must keep its investments in liquid form in
order to meet that demand obligation. It is not because of any dis
crimination against the character of a real-estate mortgage that we
do not take it, in so far as the safety of that mortgage goes. The
discrimination comes entirely from the lack of liquidity, the fact that
it can only be turned into money by selling it to somebody else;:
that it will not in course of manufacture or transportation or con
sumption or the distribution of goods in any form liquidate itself.
That is the ideal loan, and when a bank gets away from that it is
getting on dangerous ground. It can get away from that by putting
some modest percentage of its capital into real-estate loans or by
taking a note of a railroad corporation or some large industrial cor
poration, but any loan that will not liquidate itself is not ideal, and
if it is taken to a large extent is a dangerous element in the assets of
a bank. •
Senator B ristow . N ow , Mr. Vanderlip, I can see the force of your
argument, if the bank’s business is confined to these deposits due on
demand. But, contrary to the law, as Senator Reed suggests, national
banks have gone into the savings-bank business, and the money which
is deposited in the savings department of these banks is used in the
commercial business, and objection has been made here that to de
prive them of the savings-bank department would be unjust, and that
the provisions of this bill would take out of the commercial business
the deposits in the savings department of the national bank.
Mr. V a n d er lip . Y ou have raised a fair point there, and it is proper
to take out of the commercial deposits deposits that are held on time
and devote them to some other class of business. We have, of course,
great savings banks in New York. Their loans are wholly of the
type of business that I am describing as undesirable business for a
bank.
Senator W e e k s . F o r a com m ercial bank?
Mr. V a n d er lip . For a commercial bank; yes, sir. A savings bank
in New York never invests in commercial paper; it always invests
in real-estate mortgages or the bonds of corporations.
Senator N elson . There is another thing, Senator Bristow. You
seemed to make a distinction a while ago between what you call com
merce and trade and production. Now, we must not overlook the
fact that commerce is the handmaid of production. The moment the
farmer takes his wheat to the elevator and sells it and it is shipped
that moment it enters the field of commerce, so that commerce is the
necessary handmaid and appendage of production. It would not do
a manufacturer any good to manufacture goods and leave them in
the warehouse. He has got to put them into trade, so that production
and commerce must go together, hand in hand.
Senator B ristow . I understand that, Senator, but in a country as
vast as ours is, with undeveloped resources, it seems to me, with my
limited experience and observation and study of the subject, that we
can not shape our financial legislation after that of a country like
England, whose business is commerce and very little production.
BANKING AND CURRENCY.
2057
We have, it seems to me, got to take that into consideration and
give great weight and encouragement to that line of investments
that will result in production. If you do not have production here
you will not have commerce, because we are not situated as England
is. And that is why I have, in the questions I have been asking,
given more consideration to these investment securities than others,
because it seems to me, when the national banks, which are com
mercial banks, which are supposed to deal in commercial paper and
credits that relate to commerce, are permitted to draw from the
normal and natural resources which would go to the banks that
handle this other kind of security, then you have got to give an
opportunity for the national banks to invest in those securities, or
you will discriminate against those securities. It is proposed here
to permit trust companies and State banks, which can invest their
funds in this other kind of securities, to become a part of this system.
And they go into the commercial business. It seems to me that if
we are going to merge all of these banks into this system so that
they are all in commerce, then they ought to be permitted to go into
the other line of investments, or you discriminate against the one
and encourage the other. Do you think, Mr. Vanderlip, consider
ing this from the standpoint of commerce and the handling of com
mercial paper, that a trust company or savings bank ought to be per
mitted to become a member of it?
Mr. V a n d er lip . I think it is extremely desirable to have all banks
doing a commercial business become members. If trust companies
do a commercial business in addition to their trust business they
should, if possible, be induced to become members. There is no
reason why a savings bank should be a member.
Senator O’Gorman. There is no likelihood of a State savings bank
seeking membership?
Mr. V a n d er lip . I should see no reason why they should, at all.
Senator O’Gorman. D o you think it would be a wise policy to
confer the benefits proposed in the new banking system upon the
State banks and trust companies which are denied the national
banks?
Mr. V a n d er lip . The corollary of that proposition is that national
banks will surrender their charters and take out the more liberal
State charters.
Senator O’Gorman. What would you think of enlarging the pres
ent functions of the national banks in order to create some uniform
ity with respect to the functions of the two classes of banks that come
in under this system?
Mr. V a n d er lip . I think that will be necessary if the national
banking system is to be saved.
The C h a ir m a n . I would like to put in there at the end of Mr.
Vanderlip’s remarks an abstract of the powers exercised by each of
the State banks under the 48 States, which will give the committee
access to the precise powers which they enjoy.
Senator O’Gorman. Suppose we should enlarge the power of the
national banks and yet not confer all the powers now enjoyed by
State institutions in order to bring about this uniformity that I speak
of, do you think it would be practicable to have the reserve board
establish by resolution certain restrictions and limitations upon the
' powers now given State institutions under State law ?
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BANKING AND CURBENCY.
Mr. V a n d er lip . It would be perfectly practicable, but the nature
of those restrictions established by the board would determine
whether or not the State banks joined the system. This particular
matter should be covered by specific statute as completely as possible.
Senator O’Gorman. I understand you would have to make it fairly
attractive to the State banks.
Mr. V a n d er lip . If there were any practicable way of separating
the functions of a commercial bank from those of a trust company, it
would be desirable. I see no way in which you can do that. I think
there are pretty sound arguments why those functions should not
be united in the same institutions—not determining reasons wThy they
should not, but there are some reasons why the functions of a trust
company and a commercial bank should not be united. You are,
however, facing the problem of driving your national banks to sur
render their charters and take out State charters where those func
tions are united, and I am inclined to think you will have to liberal
ize the charter of the national banks to approximate the powers of
the State bank or you will lose the national banks from the system.
Senator O’Gorman. Other things being equal, what, in your judg
ment, is the advantage in having a national bank charter now instead
of a State bank charter?
Mr. V a n d er lip . D o you mean now or under a provision of such a
nature ?
Senator O’Gorman. N ow ; ignoring the pending bill.
Mr. V a n d er lip . There is some profit in taking out national-bank
notes, and there is considerable profit in holding the deposits of other
banks. There is some small sentimental reason in the confidence that
the examination gives to a bank holding a national charter. Those
are the principal reasons.
Senator O’Gorman. Then, among other reasons, you think there
some prestige attached to the national charter ?
Mr. V a n d er lip . I think there is in a small place. I do not think
there is in a great city like New York. There was formerly some
profit for banks in Government deposits, and there is now a little,
with the interest rate charged, but not much.
Senator N elso n . There is one thing, if you will allow me, Sena
tor, to call your attention to, in this connection, and that is while
scientifically it may be proper enough, it may be the right thing,
to separate a savings bank and a trust company from a commercial
bank, it is utterly impossible in these small country towns, towns of
1,000 to 10,000 people. A bank there, in order to be successful, and
to accommodate the wants of the people, must be prepared to do
all kinds of that business—commercial business, savings business, and
in some form a trust business—and a bank can not exist without doing
it. There is not enough business in these towns to keep a bank alive
doing just one kind of business. It has got to be done altogether.
You realize that fact, do you not, Mr. Vanderlip?
Mr. V a n d er lip . Perfectly.
Senator O’Gorman. N ow, Mr. Vanderlip, what would you sug
gest, in your judgment, ought to be the modifications in the charter
of the national bank with respect to the increased functions that
might be conferred on national banks?
BANKING AND CURBENCY.
205 9
Mr. V a n d er lip . Senator Reed has already asked me that question,
and I have suggested I would like to consider it carefully and com
municate promptly with the committee my views.
Senator O ’G orm an . I would be very glad to have you do it.
Mr. V a n d er lip . I will do that promptly, after having given it
careful consideration.
Senator O ’G orm an . I think, in the same connection, if you will
give your views as to what powers now enjoyed by State banks and
not conferred on national banks might be curtailed without making
this system unattractive to the State banks, it would be beneficial
to the committee.
Mr. V a n d er lip . Yes; I thing I comprehend the point.
Senator O ’G orm an . Of course, the general idea is, as I have
already suggested, that if these two systems of banks are to come in
under this new system, we must, as far as possible, have uniform
privileges and rights enjoyed by State as well as by national banks.
Mr. V a n d er lip . Yes.
Senator B ristow . We
have asked a number of witnesses to prepare
amendments to the bill which they would recommend and furnish
them to us for our consideration when we take the bill up. Why
Avould it not be well, in connection with these requests, for Mr.
Vanderlip to submit a modified bill as he thinks it ought to be.
Senator O ’G orm an . If you will take the time to do it, it will aid
the committee.
Mr. V a n d er lip . I know of nothing so important for me to do. I
will do it with great pleasure.
Senator N elson . I want to suggest to you, Mr. Vanderlip, about the
number of regional banks. If you do not have one, it seems to me
if you have more than one it ought to be five; it ought to be one for
each of the central reserve cities we now have, and one for New
Orleans and one for San Francisco. That, it seems to me, ought to
be the plan, if you have more than one. I think one is best, as you
do, but it seems to me if you do not have one, then you ought to have
that distribution.
Mr. V a n d er lip . It would be vastly better than 12.
Senator O ’G orm a n . I did not get that last question of yours, Sen
ator Nelson.
Senator N elson . I said if you limited the number of national
banks, reduced it from 12 to a minor number----Senator O ’G orman (in terp o sin g ). Y ou mean regional banks?
Senator N elson . Regional banks. I think the reduction should
be to five, and I put it on this ground: We have three central reserve
cities, New York, Chicago, and St. Louis. They should undoubtedly
be regional bank centers. Now, in addition to that, I think New
Orleans ought to be one place and San Francisco, on the coast, the
other. That is my notion about it.
Senator O ’G o rm an . In your judgment, Mr. Vanderlip, would five
regional banks, under the general features of this system, be pre
ferred to one national discounting reserve bank here in Washington,
with branches throughout the country ?
Mr. V a n d er lip . ND; I would much prefer one.
Senator O ’G orm an . Why?
Mr. V a n d er lip . I think there are profound reasons.
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BANKING AND CURRENCY.
Senator O ’G o rm an . Will you state them, if you have not already
done so?
Mr. V a n d er lip . I have already gone into that pretty fully.
Senator O ’G orm an . Then I will not ask you to state it again.
Senator B ristow . A s I understand, I think, having your question
in mind, Senator O’Gorman, Mr. Vanderlip suggested that one would
be preferable, but he did not understand fully just the kind of Fed
eral reserve and discount bank that you suggested to one or two other
witnesses. Senator O’Gorman suggested on another occasion, as
I remember it, that we have one Federal reserve and rediscount bank,
supervised by this board.
Senator O ’G orm an . By a Government board, with a supervisory
council for the bank.
Mr. V a n d er lip . That brings a new element into the matter. That
makes the Government officials judges of the paper that is being
rediscounted, and I would disapprove of that.
Senator B ristow . H ow is th a t?
Mr. V a n d erlip . I say that brings a new element into the situation,
that makes the Government officials judges of the paper that is to
be rediscounted. In the system that is built up in this bill there
is a board of nine men, three of whom are bankers, directly elected
by bankers, and three of whom are business men, directly elected by
bankers, to pass on the paper that the central reserve banks are to
rediscount. That I regard as a very important feature, that you
shall have bankers pass on this paper. I think there would be grave
objections to having Governmental officials passing on the paper
offered for rediscount. Those objections are on the ground of the
training and the experience of the officials.
Senator B ristow . Well, I can see the force of that suggestion.
But suppose these Government officials are bankers that managed the
central banks; that it is their business to run that bank, and the
branches are conducted by men who are bankers and whose business
it is to pass upon the paper which they discount.
Senator O ’G orm an . And are familiar with the conditions of the
several localities.
Senator B ristow . And must be familiar with the conditions. Do
you not believe that if this board has the responsibility of the
managing of the Federal reserve bank, and comes in relation with
the banks of the country, with which it is doing business, that you
will get better service out of them than if they are simply a board here
supervising at a distance, which they necessarily would, the opera
tions of the 12 banks, and to whom complaints are made and con
troversies are taken up and discussed? They necessarily would not
be familiar, as they should be, with the questions that will come
before them.
Mr. V a n d er lip . Y ou will get better service out of your Federal
reserve board; yes; but the total of service you get out of the Fed
eral reserve board and out of the board of the regional banks, as it
is provided to elect them, by the bankers, six out of nine, at least,
would be greater than the service you would get out of such a board
as you suggest.
Senator B ristow . What part of the service which these gentle
man would render would be more efficient, do jou think—the duties
that they would perform ? There would be, we will say, a branch at
BANKING AND CURRENCY.
2 061
Kansas City, this Federal reserve and discount bank, and probably
one at Wichita, Kans., and one at Omaha, where the reserve banks
are now. The business of these men in charge of these Federal
branches would be to accommodate the banks in the community,
whether they were members or not.
Mr. V a n d er lip . Y ou have very well outlined the objections to
the branch banking system in the earlier questions that you asked.
Could you not apply those same objections to such a proposal as
you now make?
Senator B ristow . N o ; it is not a banking institution, except it
deals with banks and banks only, and it is there to help the banks
when they need help upon their application.
Mr. V a n d er lip . And to be a judge of the credits of those banks
and of the collateral they offer. I think a board selected from among
bankers—made up of practical bankers in part—will render that
service and will execute that judgment better than will a board of
Government officials.
Senator B ristow . Even if those officials were the same bankers?
Mr. V a n d er lip . Yes; even if the officials were the same bankers,
because they will become dissociated from the active work. Of
course, if they were the same bankers, certainly for a time they
would probably perform the functions in the same way, but they
would not be the same bankers. You can be pretty certain of that.
Senator N elson . Let me suggest what I think would be a solution
to the matter suggested by Senator O’Gorman: Have one central
reserve bank, under control of the Government boards, and have a
discount committee; have provision made for a discount committee,
consisting of nine, appointed in the same manner as these managers
of the regional banks, and let that committee pass upon discounts,
subject, as the regional banks are now, to the supervision of the cen
tral board. Could it not be solved in that way?
Mr. V a n d er lip . That seems a very sound and practical sugges
tion, to meet the particular point.
Senator O’Gorman. What would be the difference in the judgment
of those nine men, constituting the so-called discount committee,
sitting here in Washington, and the judgment of seven men, consti
tuting the officers of the Federal reserve board?
Mr. V a n d er lip . I do not think you have understood the sugges
tion as I understood it at least. The suggestion is that this discount
committee is composed of bankers, elected by bankers, but its func
tion is only to pass on the question of credit, and the Federal board
would be constituted as you suggest, and would be the power oper
ating the bank.
Senator N elson . The discount committee would be constituted in
the same number as the managers of the regional banks. That is,
there would be three of the discount committee Government ap
pointees and six would be bank appointees.
Mr. V anderlip. And the duty of that discount committee would
be to pass on the character of the collateral offered, and the Federal
board would then take up the question of loans.
Senator B ristow . N ow , Mr. Vanderlip, I am going to be perfectly
frank with you as you have been with the committee. What I am
trying to get away from is the power which certain great dominating
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BANKING AND CUEEENCY.
interests in this country have to veto security that I think is good
but which interferes with their business and their interests, and I do
not believe there would be any objection to a central bank in the
United States if there was not a belief that I think well-grounded
and wholly justified, with all due respect to your opinion, that there
are certain interests in this country that do control credits and can
veto a legitimate and proper loan, if that loan will interfere with
their interests. I may be mistaken, but I believe that nine-tenths
of those who are studying the question believe a central bank with
branches, that would not interfere with the legitimate conduct of the
banking business we have, but supplement and strengthen it, would
be very desirable; and if it could be gotten away from any possibility
of such control, so that no doubt can rest in the mind of one of sus
picious mind, I think we would all be for it.
Senator N elson . N ow , you see under this plan, Senator Bristow,
of a central institution, the discount committee would pass on the
quality of the paper, but whether the loan should be granted by the
bank and currency issued, would be under the control of this general
board.
Senator H itc h c o c k . Senator Bristow, let me ask you a question.
In referring to the loans that you have in mind there, are you not
forgetting that those loans are generally for the purpose of big enter
prises, and are in the form of a permanent advance on bonds, whereas
the only paper that can be put up with the reserve bank, whether a
regional bank or a central bank, is commercial paper which is liqui
dating?
Senator B ristow . Yes; but you know I have very pronounced ob
jections to the plan that is outlined here in limiting the paper that is
to be given advantages under this system to this commercial paper.
I think that is unjust and discriminatory against other investments.
Senator H itc h c o c k . What I object to is the 90-day paper, which
is specified in this bill.
Senator B ristow . Yes.
Senator H itc h c o c k . You feel and I feel, as we both live in the
West, that we have commercial paper out in our region which I
might say is indigenous, which is characteristic of our region. It
is much longer than 90 days. It is 4, 5, or Gmonths paper——Senator N elson (interposing). Or for a year.
Senator H itc h c o c k . Or it may be for a longer time. But it is to
all intents and purposes commercial paper, by reason of the fact
that it liquidates itself out of the transaction from which it arises—
that is, paper which represents loans to men who have cattle and feed
those cattle during the winter and market them in the spring, and
the funds thus received liquidate the paper.
I think if the bill is so extended as to cover that class of paper it
would be an improvement.
Senator B ristow . That would be a very great improvement. I
admit that. I will not take up the matter of the subtreasuries, be
cause that is Senator Hitchcock’s special notion, and I think a very
good one, and he can present that very much better than I can.
I am very much interested in the statements made by Mr. Fowler
before the committee the other day, and the statement which he sug
gested, if it were practicable, would seem to me to be a very good
one—that is, of-leaving the banking situation just as it is. so far as
BANKING AND CUBBENCY.
2 063
the organization of the banks goes, and permitting a bank to issue
currency.
Senator N elson . On its assets.
Senator B ristow . On its assets, when it is needed. And he illus
trated it, when being interrogated by Senator Nelson. His idea was
in this way, that if a customer came to a bank and wanted to borrow
$10,000, he gave his note for the $10,000. That was a loan which the
bank was perfectly willing to make.
Senator N elson . A good loan.
Senator B ristow . A good loan. He wanted a part of it in cash
and a part of it to leave subject to check. He took $5,000 in currency
and left $5,000 subject to check, and he took a check book to check
against his account, and the currency he took was the bank’s notes
which, according to Mr. Fowler’s system, were secured by a 5 per
cent deposit with the Government—a lien on the assets of the bank
and on its assets, the capital stock and so forth, and which he pro
nounced would be perfectly good. This 5 per cent fund that was
collected was to be a guaranty fund against these notes collected in
the Treasury, and his idea was that only so much currency would be
used as the commerce of the country demanded, and that it would be
automatic—if a man wanted currency he could get it. What would
you think of a system like that ?
Mr. Vanderlip. The last proposition is so perfectly true that I
wish you could all recognize it, that there would be only so much
currency used as is wanted. I have referred to it a number of times,
and I just want to emphasize that point. The most important thing
that we need, however, the thing I referred to when I began this
examination yesterday, is the mobilization of the reserves. Such a
plan as you outline there makes no reference to it. The next thing
is the elasticity of currency—an important thing, but not so impor
tant as mobility of reserves—the amassing of reserves in a single
reservoir. That is what you must get in some form into a bill if it
is to be correct. That expression makes me think that I heard my
self severely criticized in the Senate during recess for having said
in an interview that you must do this or that. Of course you know
when I say you must do a thing, I mean you must do it to make the
bill harmonize with what my views are of correct legislation. I do
not sit here or talk to newspaper reporters, and say that the Senate of
the United States must do this or that. I have a little sense left, and
certainly enough to guard me from such a foolish position.
Senator B ristow . I was interested in the suggestion you made
yesterday, which conveyed the idea to me that we ought to reduce
the amount of national-bank notes that are now out, if this system is
adopted, because any additional notes would make too much currency.
Mr. V a n d er lip . We certainly have currency enough for a normal
period. It is only in the exigencies of a crop-moving period that
we need any more currency. Unless you will reduce the bank-note
currency we now have, you will not be able to provide true and com
plete elasticity by means of your new note issue.
Senator B ristow . Y ou think the new note issue would not be taken
out?
Mr. V a n d er lip . Yes; it would not be taken out, except for the
peak of the load, except for that season where an excess is needed.
2064
BANKING AND CURRENCY.
Senator B ristow . What harm comes—you say you would take it
out for the peak and drop it after the work it does is ended. What
harm is there in stopping there?
Mr. V a n d er lip . One of the harms is that these several reserve
banks ought to have the earnings that would come from such ability
to issue currency. Another of the harms is, I am inclined to believe,
that we have a redundant currency at certain seasons. You might
challenge me to prove that, and I might have some difficulty in
proving it. Certainly if there is a variation of $200,000,000 to
$300,000,000 in our notes, then we are either redundant at one season
or very scant at another. Now, we are going through the cropmoving season without any strain whatever for currency. Appar
ently we have ample currency to go through this crop-moving sea
son. We have had some addition to it by the deposits which the
Secretary of the Treasury has made, but if we had currency enough
to conduct business at this season of the year, we have altogether too
much currency to conduct business next March. We can not get
away from that. There is where the harm conies. That is where you
would fail to get true elasticity unless you took away some notes and
made room for new notes.
Senator H itc h c o c k . If the currency is redundant next month, will
not the inevitable result be the exportation of gold ?
Mr. V a n d er lip . That is certainly the tendency.
Senator H itc h c o c k . Will not that relieve the situation?
Mr. V a n d er lip . It will relieve i t ; yes.
Senator H itc h c o c k . And will not that gold come back to us again,
when the stress on the currency is there?
Mr. V a n d er lip . Yes; except that it does not flow with perfect
freedom. There is harm done to the trade in the exporting and im
porting movement. It would be so much better for trade to have
you retire the notes than to have a movement of the gold, and then
have the difficult conditions which attend the bringing of that gold
back. We can issue a bank note very easily; we can not always im
port gold easily. We can retire that note very easily, and it is ex
pensive to export gold. Expansion and contraction should be pro
vided for in the notes, and not in the expansion and contraction of
the volume of gold.
Senator H itc h c o c k . With the volume of currency depending
wholly on the commercial paper, what would guarantee that against
inflation?
Mr. V a n d er lip . The guaranty of redemption, the fact that the
note does not count in reserves, but will be turned in for redemption
by the bank as soon as it comes in and the certainty that there is a
no more fixed thing, no quantity that you can influence less by your
legislative acts than the amount of money people will carry in their
pockets. You might start with that as a fixed thing, but you really
haven’t anything to do with it.
Senator H itc h c o c k . Y ou have already stated to the committee
these notes will be accepted by 17,000 State banks as reserves.
Mr. V a n d er lip . There is one of the troubles and weaknesses which
I have no suggestion for removing, unless you can bring State banks
into the system.
Senator H itc h c o c k . Some even advocate making them available
for national banks as reserves.
BANKING AND CURRENCY.
2065
Mr. V a n d er lip . I can not agree with that view.
Senator H itc h c o c k . And is there not some danger, in a currency
based on commercial paper, that at certain times the country will
become very venturesome and the demands for loans extensive ?
Mr. V anderlip. I t is not money in the hands of the people that
makes the country more venturesome; it is the ability to obtain credit.
If this bill were drawn so as to be dangerous on the side of the ex
pansion of credit, then I would say, “ Beware.” Now, it is so drawn
that there can be a great expansion of credit, but I do not believe it
will be too great, because I do not believe the bankers will permit
this power to be unwisely exercised any more than at the present
moment. The national banks have 60 or 70 millions in excess re
serves, but they do not loan because they have that excess reserve.
Senator H itc h c o c k . I s it a matter of caution, of timidity, that
now restrains the bank, often, from loaning money when there is
quite an urgent demand? And if you take away that timidity, by
giving a bank a resort it can go to with commercial paper, won’t
you remove the restraint and throw dowTn the bars and permit a
bank to lend money to borrowers to whom it would not lend if watch
ing its reserves?
Mr. V anderlip. Undoubtedly a bank will feel freer if it has a cen
tral reserve bank to go to to rediscount than it does now. You have
to depend on the good judgment and conservativeness of that banker.
If he feels he can rediscount any time, anything he has, and he is a
reckless man, he will loan too much. But you will have as a governor
the power of control of your regional reserve bank board, and of the
Federal board. That is why 1 said that there is not an authority
given to this Federal reserve board which it ought not to have. My
objection is to the constitution of the board and not to the authority.
If the bankers in a locality are getting reckless, if they are loaning
more because they can rediscount than is wise for them to loan,
there ought to be some authority higher up which can put a restraint
on them.
Senator H itc h c o c k . Would you have it in the reserve bank?
Mr. V anderlip. It will be in the reserve bank, and I would have it
all the way up. I can well imagine, with as many as 12 reserve
banks, you might find one with the territory represented getting less
conservative than it should be and you might need a power higher
up to control that.
Senator H itc h c o c k . D o you think there ought to be embedded in
this law any guaranty to the individual bank that it can get dis
counts to any given limit?
Mr. V anderlip. It is impracticable. You have got to leave that
discretionary.
Senator H itc h c o c k . Y ou would allow, then, the Federal reserve
bank the full discretionary power to say to one man from a certain
town, “ We won’t discount any of your paper,” and to another man
across the street, “ We will discount half of your portfolio.”
Mr. V anderlip. Y ou have got to leave that power to the reserve
board, I think. You may say it will treat one banker unfairly. On
the other hand, you might say if a bank knows, under any conditions,
it can get rediscounts, it will act unwisely. Of the two, I will take
the chance of unfairness, because I do not believe there w'ill be any
unfairness. I am a great believer in the fairness and honesty of
2066
BANKING AND CURRENCY.
people in general, and certainly the fairness of people in responsible
positions.
Senator H itc h c o c k . I want to give you an illustration of the un
fairness of persons holding a responsible position. I suppose the char
acter of the men that run the railroads of the country is as high as the
men who run the banks of the country, and yet one of the most out
rageous discriminations grew up in the railroad world, in which the
States and Congress had to take a hand. They were saying to one
shipper, “ We will charge you one rate,” and to another shipper,
“ We will charge you another rate.” They would say to one pas
senger, “ You pay full rates,” and to another passenger, “ You go
free.” The law had to step in for the protection of the men and
compel equal treatment. So should not the law step in and say to
these banks that they shall give equal treatment?
Mr. V a n d er lip . Y ou have provided for the law to step in by cre
ating this Federal reserve board. Of course, back of the law that
you speak of, there first had really to grow up a new body of ethics.
They were new problems. We had gone on a great many years sup
posing when we sold wholesale we sold cheaper, and men’s minds
did not grasp the ethics of that situation, and that is one of the
troubles to-day. We have developed industry and we have gotten
many new elements in our social system. We are developing new
ethics, and that is part of this radicalism we are talking about. We
are developing a new code of ethics that did not exist before our
time, and we ought to have patience with one another about that.
Senator H itc h c o c k . D o you th in k any injury w ould come if
the law provided that the reserve bank should rediscount the notes
o f a bank in any com m unity to an extent, say, o f its capital stock,
p ro v id in g the notes were good?
Mr. V a n d er lip . Eight there—providing the notes are good. Who
is to be the judge?
Senator H itc h c o c k . I w ill say, w ithout th at provision, discount
the notes.
Mr. V a n d er lip . I would certainly think a loan under compulsion,
where you could not scan the credit, would be an impossible thing.
Senator H itch co ck . These banks are all under constant inspection,
and the law provides an inspection o f these regional reserve banks.
Mr. V a n d er lip . N evertheless, you can not trust to inspection.
A n yb od y wdio ran a bank recklessly m igh t g et bad paper in its port
fo lio , w hich could be offered for rediscount.
Senator R eed . Would not that leave a bank in dire straits, in this
sort of condition: It could take, say, $100,000 of its absolutely -worth
less paper and bring it up to the Federal reserve bank, and compel
the Federal reserve board to cash that absolutely worthless paper,
where the bank itself was tottering to its fall?
Mr. V a n d erlip . Oh, yes. There must be the right of discretion by
the loaners of money.
Senator H itch co ck . In the first place, a bank has one tenth of
capital already invested.
Mr. V a n d er lip . Yes.
Senator H itch co ck . It has its reserves impounded to the extent
of nearly one-half. Can you conceive a condition under which it
should not be assured of anything at all as the result of its joining
the enterprise?
BANKING AND CURRENCY.
2067
Mr. V a n d er lip . Practically I can not conceive that there would
ever be a time a properly run bank would not be able to borrow. I
think the reserve banks will be run with wisdom, discretion, and
fairness and any bank will be able to rediscount. They must hold
themselves in such a position so they will have the power to re
discount.
Senator H itc h c o c k . N ow , let me ask you this question, Mr. Van
derlip : Suppose the reserve bank rediscounts half of the portfolio of
the bank. Say it discounts half a million dollars of its portfolio
and it gives it that line of discount. A bank across the street, of
the same size, it gives one-tenth of the portfolio, worth $100,000.
What advantage does this give to the favored bank? Is not it a
very large advantage? Would not it result in enabling it to get
control of the business?
Mr. V a n d er lip . It would be a great advantage for one bank to be
able to discount half of its portfolio while the other was permitted
to discount only one-tenth. There certainly would be just grounds
for complaint. If the two institutions were on all fours, a complaint
to the Federal board would certainly bring action, but I do not be
lieve any board of directors elected to the Federal reserve bank would
discriminate in that way. They would be fair-minded men. That
would be a rank, gross discrimination if the two banks were on all
fours. Nevertheless, I think they ought to have the power to permit
one bank to discount half its portfolio and another bank to be re
stricted to one-tenth if the other bank was being run in a way not
to warrant the discount.
Senator H itc h c o c k . Then you would place no lim it at all on the
amount of discount that might be made for a single bank ?
Mr. V a n d er lip . N o, sir.
Senator H itch co ck . Y ou would leave that discretionary with the
board ?
Mr. V a n d er lip . I think it can well be left to the board.
Senator H itc h c o c k . What is the motive for that? What is the
reason for having any limit to the amount of discount?
Mr. V a n d er lip . If you want to have some limit, I would put that
on for fear there might be inflation. That would be the motive. I
would limit it to twice the capital and surplus—something like that—
which would be a point that no bank ought to reach, and probably
would not.
Senator H itc h c o c k . I am glad to hear you say so. I think there
ought to be some limit.
Mr. V a n d er lip . I think it would be a desirable thing to put a
limit that was large enough.
Senator R eed . Put a limit on the extent of credit, but not upon
the right to refuse to grant the credit?
Mr. V a n d er lip . N o ; I should leave the right to refuse with the
board.
Senator R eed. That is what I say.
Senator O’Gorman. Y ou would feel satisfied that if the power of
the officer of the reserve bank was improperly used that the Federal
reserve board, on appeal, would correct the injustice?
Mr. V anderlip. Yes, sir.
2068
BANKING AND CURRENCY.
Senator O ’G orm an . A n d perhaps rem ove the offending officer o f
the regional bank?
Mr. V anderlip. I should thin k it w ould be very proper.
Senator P o m eren e . There has g o t to be a discretion lodged some
where.
Mr. V anderlip. I think so.
Senator O 'G orm an . I have only one question further to put to you,
Mr. Vanderlip. Yesterday you said, I think, that the plan contained
in this bill, to issue Government notes, is unscientific. I do not
know whether you amplified that viewpoint or not. If you have not,
I should be glad to hear from you further, why it is unscientific.
Mr. V anderlip. The note is really the obligation of the bank. It
is secured by segregation of the bank’s assets, in the form of com
mercial paper. It ought to have almost the same relation to the bank
that a deposit balance of the bank has. It is a demand obligation of
the bank. It is not a Government note; it does not pretend to be
that, although it is issued and bears the name of the Government.
Its whole security lies in the bank, in the segregated assets, in the
reserve held against it, and in the superior lien which it has upon all
the assets. I see no reason why the Government should have any re
lation to that note in the way of a guarantor. The Government will
have an outstanding obligation with no gold cover back of it. Except
for the 5 per cent redemption fund which the bank deposits, the only
resource which the Government has is by turning to the bank, and
the enforcement of the lien on its assets. And it seems to me entirely
improper that the Government should be the maker of this note, or
the guarantor of it. Indeed, I think it improper that it should re
ceive so-called interest for it, as all of the profits of this bank are to
come in the hands of the Government eventually.
Senator O 'G orm an . It is not anticipated under the system planned
that there will be a profit beyond 5 per cent. As Senator Owen has
very properly phrased it on other occasions, it is really to be an
eleemosynary institution, and there is to be no motive to earn any
thing beyond the guaranteed 5 or 6 per cent.
Mr. V anderlip. I can see no more reason for the Government to
guarantee one of these liabilities of a bank, in the form of a note,
than to guarantee a deposit. The note is fully guaranteed, I believe.
Senator O ’G orm an . In other words, you w ould not expect the
G overnm ent, even under th is plan, to take the risk?
Mr. V anderlip. N o. If it is not safe I think the Government
ought not to take a risk, and I think if it is safe it need not take the
risk.
Senator O ’G orm an . A n d you feel i f it is safe, the person dealing
w ith the regional bank, ou gh t to be satisfied w ith it?
Mr. V anderlip. C ertainly.
The C hairman . I think it my duty to remind the committee that
only an hour and a half remains, and there are some gentlemen here
from Iowa whom we promised to hear this afternoon.
Senator H itc h c o c k . T here is one more question I w ould like Lo
ask. I see under section 6 o f this bill when a bank becomes insolvent
and a receiver is appointed, the stock held by it shall be canceled and
the balance, after deducting from the am ount of its cash paid oubscriptions all debts due by such insolvent bank, shall be paid to the
receiver o f the in solven t bank.
BANKING AND CUBEENCY.
2069
Mr. V a n d erlip . That w ould seem to be a p ro p e r p rovision.
Senator H itc h c o c k . S o that the bank would have some security—
the reserve bank would have some security.
Mr. V a n d er lip . Yes; for a forced loan you speak of it would have
to depend on the stock value and the security of whatever reserves
are held.
Senator N elson . And whatever the subscription wTill be.
Mr. V a n d er lip . And whatever the subscription w ill be also.
Senator H itc h c o c k . N ow , I want to ask you -whether you do not
think it better for the reserve bank occasionally to sulfer a possible
loss, as a result of a certain commercial paper turning out to be de
ficient, than to leave the banks absolutely without any assurance that
they will get relief even to the extent of their capital?
Senator N elson . Y ou mean the member banks?
Senator H itc h c o c k . The member banks.
Mr. V a n d erlip . It would probably be safe enough to say that the
reserve bank shall loan to an amount equal to the stock subscription
and the reserves which they hold. I do not consider it at all neces
sary. I do not believe any bank would be afraid it would receive no
consideration at the hands of the board at the Federal reserve bank—
that there would be such discrimination as you indicate there might
possibly exist. I can not conceive that.
Senator H itc h c o c k . Y ou mentioned a moment ago in such a case
the bank might appeal to the Federal board. But what chance do
you think there would be, after a bank had perhaps suffered a loss
and it had gone to the reserve bank for relief, appealing to Wash
ington under those circumstances?
Mr. V a n d erlip . The appeal -would be in the nature of a post
mortem communication.
Senator H itch co ck . Not only that, but the very fact that the bank
had been turned down at the reserve bank would intensify the fear
in the community, and might result in greater loss.
Mr. V a n d erlip . It would not be turned dowTn under those circum
stances if it had any proper collateral.
Senator I I ic h c o c k . Why not sav so in the act?
Mr. V a n d er lip . Because it might not have proper collateral,
and if you leave it discretionary as to whether or not the collateral
is proper, you leave the whole thing discretionary.
Senator H itchcock. I do not know. I think, as I said formerly,
you ought to specify the wdiole thing in the bill and leave as little
as possible to the discretion of the officers.
Mr. V a n d erlip . May I be excused?
The C h a ir m a n . Yes; we are much obliged to you.
Mr. V a n d erlip . I th a n k you.
The C h a ir m a n . Judge French, we will be glad to hear you now.
and we will be glad to have you state to the reporter your business
and your point of view from which you speak.
STATEMENT OF NATHANIEL FRENCH, OF THE FIRM OF FRENCH
& HECHT, MANUFACTURERS, DAVENPORT, IOWA.
Mr. F r e n c h . I reside at Davenport. Iowua; and I am a member of
the firm of French & Hecht, which is engaged in manufacturing.
I am here as a business man who, unfortunately, at times has to
borrow. For that reason, in common with all the business men of
2070
BANKING AND CURRENCY.
the country, I am very much interested in having a banking system
which will be both safe and yet able to accommodate the solvent
business men of the country when increased business needs compel
them or make it desirable for them to borrow money from the banks.
My experience from 1893 to 1896 was that our present system at
that time—owing largely to the uncertainty in regard to the standard
of value, and also to its inelasticity and the rigidity of reserves—
did not take care of the business man. In 1907 I had the same ex
perience. While not a personal sufferer, I saw a great many business
men suffer who had ample means, plenty of collateral, and yet could
not obtain currency from the banks.
The business men of the country sincerely hope that Congress will
succeed in passing some law which will make our currency elastic
and which will mobilize our reserves. We are of the opinion that,
as a practical proposition, we have about the wrorst banking and
currency law that was ever enacted in any country. We have heard
of the Bank of England, which is cursed with an inelastic currency,
but which mobilizes its reserves in such a wonderful manner that the
business man in that country can get accommodations if he is solvent
and has good collateral, even in times of financial stress. In Ger
many there is not only the mobilization of reserves, but there is
elasticity to the currency. In France there is the greatest elasticity
and also mobilization. In this country alone we have neither mobili
zation nor elasticity. This looks wrong to us business men, and we
hope you will bring about better conditions.
Now, as regards this bill, I want to look at it from a plain, busi
ness standpoint. I think that if you enact the bill, even as it stands
now, it will create a great reform; you will have gone a long way in
the right direction. But I do not think the bill as it stands now
could easily be put into successful operation. It would be difficult
to get all the national banks, particularly the country banks, to go
into it. Many of the State banks, perhaps nearly all of them, would
refuse to go into it.
It does not do much good to enact an admirable law if you can not
put it into working operation, and you gentlemen are confronted
with the problem of how to make this law acceptable to the national
banks and also to the State banks which do commercial business.
As a business man I have had occasion to talk with my fellow busi
ness men on this subject and have been impressed by certain objec
tions which seemed to be prominent in the minds of all of them.
One objection is that they are afraid that through the power of
the administration or the President to appoint the Federal reserve
board—the dominant authority over the whole system—it may pos
sibly drift into politics. They do not think it will, but they are
afraid it might. And they also think that the banks which furnish
the capital and the deposits to a large extent should have something
to do with this board of control which will really manage the whole
system. Now, I for one—and I think I represent the average busi
ness man—would not be willing to have the banks have control of
the system. We do not believe the bankers are any better or any
worse than men generally, but we believe it would be entrusting too
much power to people whose sole business is to make money.
For that reason we should like to see the Government control it,
but we naturally want it kept out of politics. We should not like to
BANKING AND CURRENCY.
2 071
see the President have the power to appoint the entire board of con
trol during his administration. The provision in the bill that no
more than two or three, whichever it is, shall belong to one political
party is excellent so far as it goes, but the bill would be greatly im
proved if you provided that two or three of those members should be
chosen by the banks; not directly chosen by a vote, but by making
out a list of men experienced in banking, not at the time actively con
nected with any bank or who would sever their banking connections,
and having the President choose from this list of names.
Senator O ’G o r m a n . Do you not think the President will select
competent and probably experienced men for the board ?
Mr. F r e n c h . I think the President will. The present President I
am sure w ill; I am not sure that every President always will. I think
there is a good deal of scare that is not warranted, perhaps, but still
it is there, and a great many people feel it. I know some people have
named a certain ex-President and said they would be afraid of him.
I would not be, but a great many are.
And then I think, as a measure of justice, it is only fair that if you
tell the banks they must put into the new bank a portion of their
capital and deposits—and I think you have a right to do it as a mat
ter of lawT—:—
Senator N elson (interposing). You mean their‘reserves?
Mr. F r e n c h . Yes; if they must put in their reserves as well as a
certain portion of their capital, they will have the natural feeling,
and I think the business men of the country agree with them, that
they ought to have something to say as to the make up of the board
of control which will dominate the whole system. If we want to get
the banks to enter the new system, we must make it acceptable to
them. By not giving any representation to the banks on the board
of control, we prevent the bill from being acceptable to the banks
and also to many people (whether interested in banks or not) who
fear that some President at some future time might misuse his power
to control the board. This fear may have little basis, but exists in
the minds of many.
Senator O ’G o r m a n . D o I understand you to say there might be a
President who would remain forever?
Mr. F r e n c h . N o ; who would like to remain forever.
The next objection to the act is in regard to the constitution of the
directors of the regional banks. The banks select six of the nine.
This Federal board of control, the dominating influence, selects three,
one of whom has to be the agent of the Government and have certain
large powers. Of the three selected by the banks, denominated direc
tors of class A, there is no provision for arbitrary removal. As to
the three denominated directors of class B. who are to represent
commercial and agricultural interests, there is a very general pro
vision that the board of control may remove them when they think
they do not fairly represent those interests. There is no provision
for accusation or hearing or trial or anything. It is absolutely arbi
trary power.
So you see this board of control, on which the banks are not even
to have a minority representation, can also control the regional bank
through its arbitrary powrer of removal. You may say the board of
control does not appoint the three in class B. but it has the power of
removal, which is something a great deal more powerful than the
S. Doc. 232, 63-1—vol 3----- 10
2072
BANKING AND CURRENCY.
power of appointment. Men, after they are appointed, sometimes
become independent, but men who can be removed by the arbitrary
action of some superior power are apt to be very subservient to that
power.
Senator P om eren e . D o you think the banks would elect somebody
w ho could be subservient?
Mr. F r e n c h . They select the names, and I think these men, when
they found they were subject to decapitation at any moment if they
did not comply with the wishes of the board of control, would be sub
servient at some time or other.
Senator O ’G orm an . Subservient to whom?
Mr. F r e n c h . T h e board o f control.
Senator O ’G orm an . It is to be expected
that that w ould be the
dominating influence in this system. You must have a dominating
influence. On the other hand, the members of the board of control
would be under the influence of the power of the President, and the
people should have confidence that the power would be wisely and
judiciously exercised.
Senator S h a fr o t h . The power o f the board would not likely be
exercised. When they have not the power to reappoint----Mr. F r e n c h (in terp o sin g ). I know, but if they have the pow er o f
rem oval I th in k those men w ould be very lik ely to com ply w ith their
w ishes rather than be removed.
Senator S h a fr o t h . N o t so much so as if they had the power o f
reappointm ent.
Mr. F r e n c h . No ; that would be an even greater power.
Now, another suggestion. The Federal board of control is to ap
point three members of that board. I think it would be sufficient
to appoint one and let him be paid by the Government of the United
States and be absolutely independent. He is the one who is to receive
this collateral to secure the notes.
I am mentioning these things as things I have heard in common
talk.
Now, as regards the country banks, from what little I know about
them, I should judge they feel that 5 per cent is altogether too small
a return upon the capital which they invest in the bank: that they
ought to get at least 6. Then there is a strong feeling that they
ought to get interest on their deposits. In these respects it is not
made, I believe, sufficiently attractive to them.
Senator S h a fr o t h . Suppose they could borrow this amount which
they put in—borrow it back at 2 per cent? Would not that be an
inducement for them to go in, get 5 per cent on it, borrow it back,
and have that to loan out at 2 per cent?
Mr. F r e n c h . They do not figure in that way. I was talking to
a gentleman the other day and he said he hoped the bill would be
passed. I said, “ Will you go into the new system?” He said,
“ No; we would be under certain disadvantages; we can get the
benefit of the rediscounting feature through our correspondents with
out going in ourselves.”
Senator O ’G orm an . Suppose there should be a prohibition in the
act preventing any bank from securing the benefits of the system
through a correspondent. That particular bank, then, I suppose,
would go into the system?
BANKING AND CUKRENCY.
M r. F r e n c h . I th in k lik ely .
m ig h t becom e necessary.
Senator H itc h c o c k . Y ou can
2 073
I th in k p e rh a p s such a p ro v isio n
not make it work. If this imaginary
country bank comes to a city bank for a rediscount, the city bank can
rediscount for it, and then present other commercial paper with the
regional bank, and accommodate its country depositor very easily.
Senator S h a f r o t ii . D o you think a national bank would under
take that if it were a penal offense?
S e n a to r H itc h c o c k . It w o u ld n o t be a p en al offense.
Senator S h a f r o t ii . Y ou could m ake it a penal offense. O f course,
it m igh t be difficult to find it out.
Senator O ’G orm an . That would be altogether too drastic a pro
vision. We might have a provision that no national bank should
attempt to rediscount accommodation paper of that character that
it had received from a bank not in the system.
Mr. F r e n c h . I s not the real solution o f the question to make it an
advantage to the banks to go in?
Senator O ’G o rm an . Surely.
Mr. F r e n c h . I very much fear that if the national banks find th at
after th is law is passed they are at a d isadvantage w ith the State
banks they w ill drop their charters, become State banks, and then
take advantage o f the law by entering the system as a S tate bank.
W ell, from one p oin t o f view that m ay not be so objectionable, but
the transition stage, I am afraid, w ould be bad for the business o f
the country; it w ould be unsettling.
There is another thing in the bill I wish to call your attention to,
and that is this: You have a very wise provision that the reserve
against deposits may be suspended on payment of a progressive tax.
That is a very wise provision, but in the same paragraph you add,
but you shall not suspend the reserve requirement as regards notes.
Now, to an ordinary business man who does not pretend to be a
banker, a reserve that you can not use is worse than useless. The
only country in the world, so far as I know, that ever required a
bank reserve and then prohibited its use, is this country. And it
seems to me that reserve against the notes should be utilized when
made necessary by some great emergency.
In England, where they have not any currency to speak of at all,
where the notes issued by the Bank of England are practically ware
house receipts for so much gold lying in the other division of the
bank, with the exception of $90,000,000 which has been always out
standing and secured by the public debt—in that country when there
is a great need for money, when, despite the admirable mobilization,
they are near a state of panic, the Government says: “ We will sus
pend the provisions of the banking act and allow you to issue un
covered notes,” and it always stops the panic. In Germany they go
on issuing notes, but pay a certain tax ; as the reserve goes down the
tax goes up. As regards the Bank of France, there is no limitation
at all.
Senator H itc h c o c k . I think in France there is a limitation upon
the amount of notes the bank can issue.
Mr. F r e n c h . There has been a limitation, but placed very much
beyond its needs, and every time it has asked for a change that limit
has been pushed further off. It is believed by all the banks, by the
2074
BANKING AND CURRENCY.
French people, and by every writer on the subject, that that limita
tion is a mere matter of form rather than of substance.
Senator H itc h c o c k . Why is it kept?
Mr. F r e n c h . I do not know why they have put it there.
Senator H itc h c o c k . I s it not just kept for emergencies?
Mr. F r e n c h . Why, whenever an emergency comes they change the
limit.
Senator H itc h c o c k . But is it not kept as against an emergency,
so they would have that margin to go upon ?
Mr. F r e n c h . No ; I should not say so, because in ordinary times
they would never issue anywhere near that limit.
Senator H itc h c o c k . That is true, but I understand the change
has come that the growth of the Bank of France has never been met
in an emergency. It is to accommodate the increasing business of the
bank and add in part to the increased reserves which the bank holds.
Mr. F r e n c h . They have always put it ahead in times of prosperity
and made it so much beyond the notes they were issuing that there
could be added enough note issue to take care of the emergency.
Senator S h a f r o t h . Do I understand you to say the national banks
are prohibited from using their reserves?
Mr. F r e n c h . Yes.
Senator S h a fr o t h . I understand the law to be that they can use
them and can cut into them to any extent, except that the comptroller
can notify them to replace them in 30 days.
Mr. F r e n c h . If they obey the lawr they will never cut into the
legal reserve. A bank usually carries a bigger reserve than the
legal reserve. The excess over the legal reserve, of course, they
use to suit themselves. The legal reserve, if they obey the banking
law, they have no right to cut into.
Senator H itch co ck . Don’t you mean that they can not continue
loans after they get down to the legal limit; they can pay deposi
tors, but they can not continue loans.
Mr. F r e n c h . No ; they can not make additional loans. They
have to stop and make that good.
Senator H itc h c o c k . But they can continue paying depositors.
Mr. F r e n c h . They might continue paying depositors. I do not
doubt that part of it; that is discharging a liability.
Senator H itch co ck . And they can continue to take deposits if
they are in a solvent condition, but the reserve might be down to
10 per cent.
Mr. F r e n c h . Oh, it can go still lower than that.
Senator H itch co ck . They could still pay depositors and con
tinue taking deposits.
Mr. F r e n c h . But for an institution performing the functions of
a bank, one of which is to lend money, it seems to me that a reserve
is utterly useless, as regards this function, if you are not allowed to
use any part of it for that purpose.
Senator S h a fr o t h . But you still have the use of it in paying out
to persons who demand it at the counter on their checks.
Mr. F r e n c h . Yes; but that alone would not stop a panic. The
panic usually comes from the fact that solvent business men are
unable to get the money at banks to pay their current bills, whether
it be for labor or for merchandise or for other things. The foreign
systems stop the panic by loans to solvent business men.
BANKING AND CURBENCY.
2075
Senator S h a fr o t h . They can get it if they have it in the bank, b u t
can not borrow it.
Mr. F r e n c h . They can get it until the bank closes its doors. The
system is so bad that in 1907 the banks of the country had to go to
work and devise some way outside of the law to issue money when
they got down to their reserves. They issued what might be called
clearing-house checks.
Senator S h a fr o th . What would you suggest as a remedy?
Mr. F r e n c h . Why, to loan the reserves.
Senator S h a fr o t h . And put no limitation on it?
Mr. F r e n c h . It is under the control of the Federal board o f
control. They would fix the limitations. It would be well to in
crease the tax, as is done in Germany, when the reserve goes down,
and as is required by this bill with respect to the reserve for deposits.
While we are talking on this subject of loaning reserves I wish to
be understood as expressing the opinion that this will often help to
prevent panic§, but not as saying that we will never have commer
cial crises and industrial depressions which grow out of the unwise
actions of business men. We can prevent such a panic as occurred
in 1907—through the breaking down of our banking system—by pro
visions for an elastic note issue, the mobilization of reserves, and their
use in time of need.
There is another thing that occurred to me in reading this act.
After reading it carefully I could not make out what became of these
Federal reserve notes after they had been redeemed, either at the
counter of the bank or at the Treasury of the United States. I
asked a banker what he understood, and told him I would put a case.
Suppose that bank A, a national bank in Davenport, Iowa, has called
upon a regional bank to rediscount its paper to the extent of $100,000, in order to get $100,000 of these new notes, saying, “ We have
here for your inspection the collateral, 60-dav business paper.”
The answer is, “ Yes; we believe that the conditions warrant the
issuing of that much additional money; business demands require
it. You shall have it. Here it is.”
That same day that bank A pays out $50,000 of that money to dif
ferent people who borrow it. On that same day some one who has
come into possession of these notes takes $50,000 of them to the re
gional bank for redemption. The notes are redeemed. What be
comes of these notes? Are they to be canceled or is the bank to pay
them out again?
Senator H itc h c o c k . It is prohibited from paying them out under
heavy penalty.
Mr. F r e n c h . No ; another regional bank is prohibited from pay
ing out notes not its own. I am now asking you----Senator N elson . Here is the point about it. If the notes come
into the bank and are redeemed by the bank they can not go out
again unless there is a demand for them and they are loaned out
again. If a regional bank redeems its notes in gold and retains the
notes they can loan them out again upon proper security.
Mr. F r e n c h . The collateral of $100,000 to secure the notes is still
in existence, held by the bank, to secure $100,000 of notes, the issue
of which was required by business needs. Some one who happened
to want to send gold abroad has presented $50,000 of them at once.
2076
BANKING AND CURRENCY.
TVhat I ask is whether it is necessary for the regional bank to make
application to the board of control, perhaps the next morning, and
say, "The power which you gave us yesterday to issue $100,000 of
these notes has become nugatory through force of circumstances as
to $50,000; $50,000 of these notes have been redeemed by us. We
hold collateral for $100,000 of these notes and wish to reissue the
$50,000 of notes we have redeemed.
Senator S h a fr o t h . But he has already got it, and he has loaned
his money out that he got from the regional reserve bank, and no
demand can be made upon it until the 60-day paper matures and then
it comes in automatically.
Mr. F r e n c h . Y ou understand, then, he would not be required to
redeem that paper; that is, the member bank that has deposited it
for collateral?
Senator S h a f r o t h . Of course he would be required to pay his
paper that he has hypothecated. There is a confusion as between
the redemption feature of the notes and the credit system which he
exercises by reason of going there and hypothecating his collateral.
He may get new notes issued to him, or he may get notes that are
in the bank already, consisting of these reserves or consisting of the
capital stock. For that reason, it seems to me, when they are re
deemed and he gets his gold, the bank holds them there until there
is some kind of demand for them, and when this 60-day paper ma
tures it also pays back, and consequently they have gotten into their
hands, of course, a large amount of money, but they can give it out
again if anybody presents paper.
Mr. F r e n c h . H ow are they going to hold them out? They m ay
come into the regional reserve bank, exhausting its gold. How is
that to get out again?
Senator H itc h c o c k . I do not think there is any doubt of this
proposition that if a note belonging to one regional bank goes to
another, that other bank can either charge it to the Government of
the United States and send it to the Treasury, or it can send it to
the regional reserve bank which issued it. If a note issued by a
regional reserve bank comes in it can be paid out again----Mr. F r e n c h (interposing). By the same bank?
Senator H itc h c o c k . By the same bank; but it is not valid as a
part of its reserves.
Mr. F r e n c h . I understand that, but whether it can be paid out by
the same bank----Senator H itch co ck (interposing). Undoubtedly; the same bank
can either present it to the Government----Mr. F r e n c h (interposing). What is the object, if I may ask the
question, of the provision requiring one regional reserve bank to send
for redemption the notes of another regional reserve bank, irrespec
tive of whether the collateral put up to secure the note is still there
or not? The Federal board of control has decided that business re
quires the expansion of the currency by so much. By mere chance a
large part of this money issued by one regional reserve bank drifts
into another regional reserve bank. Now, that bank is required not
to issue it, but it is sent off by train to the other bank. It becomes
dead from that minute, notwithstanding the decision of the Federal
board of control that that much increase of currency was needed and
notwithstanding the collateral is up to secure it and notwithstanding
BANKING AND CURRENCY.
2077
the gold reserve is up. I t seem s to me they have provided for a lot
o f unnecessary m achinery.
Senator S hafroth. It is done, no doubt, for the purpose o f retir
in g this currency in som e form and thereby g ettin g over the exigency
o f its issue. I do n ot know th at it is a w ise provision.
Mr. F rench. Let me suggest why it was done. That provision
was taken from the rules governing the Suffolk bank, where they de
pended entirely upon constant redemption to keep the notes on a
parity with gold. In this case we have a deposit of commercial paper
and also a gold reserve. And when you say that when a regional
reserve bank gets the note of another reserve bank it must withdraw
it from circulation, you have then come into direct opposition to
the decision of the Federal board, which has decided that the needs
of the country for currency were such that this currency ought to be
outstanding.
Now, you can not say that it is the policy to have each regional
reserve bank in the country redeem all its own notes, because you
will find another provision in the law which says that any regional
reserve bank may at any time decrease its liability on account of its
notes by paying into the Government of the United States or to any
Federal reserve agent lawful money of the United States, recognizing
that when this note is once out it may never be redeemed, and recog
nizing also the principle that, although you do not redeem the
particular note, yet, when the time for contraction has arrived, if
you decrease some part of the currency, whether it be greenbacks,
national-bank notes, or gold coin, and lay that aside, you have ac
complished exactly the same purpose as if you hunted up these notes
and canceled them to the extent of the money laid aside.
Senator S h a fr o t h . B u t w ill not th is provision have a tendency to
cluster that bank currency, or this reserve note, and thereby place
it so th ey can retire that absolutely and let loose these U n ited States
notes w hich have been taken up and w hich you say have been set
aside? I s it not a m eans o f clu sterin g the paper issued under this
b ill------
Mr. F rench (interposing). It would help them to get it, but is
there any object in their doing that?
Senator S hafroth. Som e people think w hen you once issue m oney
it is on ly needed for a short tim e, and thereafter should be retired.
Mr. F rench. W hen you set aside gold coin or greenbacks against
these notes, do th ey not occupy the position o f the gold certificate?
T here is gold set aside for the gold certificate in W ashington; you
m igh t as w ell provide th at every tw o or three m onths it should be
sent on and redeem ed in gold.
Senator H itchcock. Judge, following up this hypothetical case
that you state, suppose a regional reserve bank receives a bundle of
notes that have been issued through another regional reserve bank,
and it sends them to the Treasury of the United States for redemp
tion. They are there redeemed out of the 5 per cent gold fund be
longing to that particular regional bank, and then forwarded to the
regional bank. Now, the regional bank can then issue that again.
Mr. F rench. T h a t is ju st the proposition I started out w ith. I
asked tw o gentlem en and I got opposite answers from the tw o; one
said th ey could not reissue it and the other said th ey could.
2078
BANKING AND CURRENCY.
Senator H itc h c o c k . N ow , if, instead of that process, this first
regional reserve bank sends these notes to the regional reserve bank
through which they were issued, it will get a credit in return on the
books of that bank, or a remittance of gold, and the bank receiving
these notes will then have the option of paying them out again to
those who may come for money.
Mr. F r e n c h . If that is the fact, it will carry out the spirit of the
act. The act will then keep in existence the money until the need for
it has passed by. But unfortunately a great many people under
stand it just the other way. They tell me they are to be canceled
whenever they are redeemed.
Senator H itc h c o c k . But that would not be possible because of the
provision that the Treasury, when it redeems those notes in gold out
of the reserve fund, immediately sends them to the bank through
which they were issued, giving that bank the privilege of retiring
them.
Mr. F r e n c h . It should have it. But, as I said before, people
understand the act differently. It should be made plain. You can
only have such expansion as the board of control desires, and one
regional bank ought to have an option whether it will pay out the
notes of another regional reserve bank or send them in for redemp
tion. The moment the collateral which secures them is paid off. then
the currency should be decreased by the amount of the collateral,
either by retirement of that amount of these notes, if at hand, or
the deposit of a like amount of lawful money with the Government.
Senator H itc h c o c k . Of course, it is true the regional reserve bank
which has received these notes must either pay them out or ship
them for redemption, because it can not count them in its reserve.
Mr. F r e n c h . Why should it not pay them out? But the law does
not permit them to pay them out; it says they must ship them for
redemption.
Senator S h a fr o t h . It will take some little time to send them to
Washington and get United States notes, but it seems to me it is not
any more than right.
Mr. F r e n c h . The point I make is that to the extent that the re
demption does take place you are contracting the currency in viola
tion of the spirit of the act, and you are incurring a needless expense
in doing it.
Senator H itc h c o c k . That contraction is only momentary.
Mr. F r e n c h . It may be only for a day or two, but why have even
temporary contraction when not warranted by needs of business?
Why not give the regional bank the option to pay them out or send
them to the other bank for redemption ?
Senator S h a fr o t h . The national banks which get hold of the na
tional-bank notes of another bank could reissue those to the people,
but they do not do it because they need some money for reserve
money and consequently they send it to the Treasury.
Mr. F r e n c h . T h e y do not h av e to.
Senator S h a fr o t h . N o ; they do not have to except to get more
money.
Mr. F r e n c h . They do it when it will serve their p u rposes. In
the case of the regional reserve notes they have to send the notes in
for redemption.
BANKING AND CURRENCY.
2079
Senator S h a fr o t h . D o you think there ought to be more money
that will act as reserves than we have at the present time ?
Mr. F r e n c h . D o you mean to let all reserves be increased?
Senator S h a fr o t h . No; I do n o t mean th a t. I am referring to
the character of the money t h a t can act as reserves.
Mr. F r e n c h . No; I would have a reserve of nothing but gold.
There is another thing that I have heard often discussed. Busi
ness men think from 1893 to 1896 we suffered, and it was because the
people of this country had not fully made up their minds as to
whether we were to be on a gold or some other standard. Now that
it is decided wTe are on a gold standard, there should not be anything
in this bill that will throw any possible doubt on the standard, but
there should be everything in it that can appropriately be put in to
maintain the standard. Instead of requiring the regional reserve
bank to redeem in gold or lawful money it should be in gold.
Senator S h a fr o t h . D o you not think that would have a tendency
to deplete the gold reserves instead of fostering the gold standard ?
Mr. F r e n c h . No ; I think it w o u ld be the other w ay.
Senator S h a fr o t h . Take, for instance, $100,000,000 issued by the
Government, and they have $100,000,000 of greenbacks payable in
gold and then $100,000,000 of this currency payable in lawful money.
Suppose a man who had $1,000 of this currency goes to the regional
reserve bank and says, “ I want gold,” and the regional bank says,
“ No, we can not give you gold, we will give you lawful money, and we
will send them to Washington. If you want to get gold for that you
can take it down there.” Suppose he takes it to Washington and he
gets $1,000 in gold in Washington, according to the terms of the bill.
So the Government, by this operation, has practically redeemed
$2,000 in currency by $1,000 in gold. The regional bank says, “ If
there is going to be plenty of' gold I will lock this regional money
up.” When they come down to the National Treasury he says, “ I will
lock those United States notes up,” and by the payment of $1,000 in
gold you have practically put out of power and out of the existing
gold reserve $2,000, and is that not an advantage to the gold reserve
instead of a disadvantage?
Mr. F r e n c h . I have not been able to follow you, but I think I can
answer your question.
Senator S h a fr o t h . Let us take it this w*ay, then. Do you not see
that the moment you have 12 places where a man can go and demand
gold it is going to make 12 competing points for gold, each of them
competing against the Treasury of the United States, because the
United States has to have a reserve to redeem these very things that
come in from other banks, and each one of these banks has to have a
gold reserve, and they can not limit it to a certain amount. They
have to have sufficient to protect them, and thus it will take a great
deal more gold under those circumstances than if you make them
redeemable in gold or lawful money.
Mr. F rench . I should think the amount required to supply the
demand for gold would be exactly the same whether you had it scat
tered in 40 places or only had it in one place. I t would be only a
little more inconvenient.
Senator R eed. I would like to ask how the Government of the
United States is going to have a single dollar of gold. It also says
2080
BANKING AND CURRENCY.
that every dollar shall be taken out of the Treasury and put in the
reserve banks, on special deposit.
Senator S h a fr o t h . There ought to be a c e n tra l place.
Senator R eed . I am suggesting if you had your idea in operation
it would involve a somewhat radical change in the other statute.
Senator S h a fr o t h . I t might do that, but it involves a radical
change now. In fact, you have created a gold reserve in Washington
for the redemption of those notes.
Senator N elson . The bill provides for 5 per cent of the capital
and a 33^ per cent reserve should be kept on deposit.
Senator R eed . That is inadequate.
Senator N elson . I think it ought to be 10 per cent.
Senator S h a fr o th . D o you not think the national-bank notes, by
reason of being payable in lawful money, has relieved the national
banks very largely from holding gold?
Mr. F r e n c h . It has not relieved the amount of gold that had to be
held either by the Government or the national banks—one or the
other. One or the other of them has to hold, to maintain the gold
standard, that gold so that there will be a sufficient amount of it, or
you can not maintain it.
Senator S h a fr o t h . Was that not put in the national-bank act for
the very purpose of relieving that strain, and letting a large amount
of money flow, which would ultimately be redeemable in gold, but
which, by reason of the difficulties that exist in getting it there,
would not be the case except with a person who wanted it for foreign
shipment ?
Mr. F r e n c h . I do not think the character of the money you can
ship can affect the demand for gold or the amount necessary to keep
your currency safe. The point I make here is that at the present
time there is.an ample supply here of gold for these reserves. If,
through any cause or other, our currency should ever become redun
dant, the money which would leave this country would be the gold.
I f we require a certain amount to be kept for our reserves in gold, it
is not so likely to leave the country.
Senator N elson . What about these bills? The bill provides they
shall be a promise of the Government and issued by the Government.
Mr. F r e n c h . I would either leave off the promise of the Govern
ment or I would put it on and make them legal tender. I would not
have a halfway thing. I do not believe it is necessary to have any
promise of the Government. I believe they will be strong enough
without it. It can not hurt them. I am not afraid of having the
Government help to maintain the banking system.
Senator S h a fr o t h . What objection is there to making them a legal
tender ?
Mr. F r e n c h . I do not think there is any, as far as I am concerned.
Senator S h a fr o t h . Would it not strengthen the currency to make
them legal tender?
Mr. F r e n c h . Then it would strengthen something that would be
perfectly good. The objection made by some to the Government
making the promise to pay the notes and the objection to making
them legal tender comes from the idea held by these persons that the
Government should not go into the banking business, and that there-
BANKING AND CURRENCY.
2081
fore it ought not to promise to pay the notes or make them legal
tender.
Senator N elson . A n d it ought not to do it?
Mr. F r e n c h . It ought not to do it according to this conception of
those who object to having the Government connected with the bank
ing business. Personally I do not think the banks should be allowed
to manage the whole thing themselves. The Government should be
in control, and, on principle, I see no objection to making the notes
legal tender. I think it would be unwise to have the Government
redeem in the first instance, and the banks should do this.
Senator R eed . I want to say that the statement I made about the
money coming out of the Treasury ought to have been made with a
qualification, and I intended to make it, was the qualification in re
gard to the 5 per cent fund for redemption, which is left there.
Senator N elso n . It is a question there whether it would not take
the $150,000,000 gold in the Treasury that is left there as redemption
fund for the greenbacks.
Senator R eed . The section re a d s :
That all moneys now held in the general fund of the Treasury except the 5
per cent fund for the redemption of outstanding national-bank notes shall, upon
the direction of the Secretary of the Treasury, within 12 months sifter the
passage of this act, be deposited in Federal reserve banks, which banks shall
act as fiscal agents of the United States; and thereafter the revenues of the
Government shall be regularly deposited in such banks and disbursements shall
be made by checks drawn against such deposits.
Senator N elson . I think, Senator Reed, that $150,000,000 under
the act of 1900 is a special fund.
Senator R eed . It is; and any man who wants to can take the green
backs and have them redeemed and get it, and in that way it can be
defeated. Banks could take the gold certificates and take that fund
up, and, as far as I see, there would be practically nothing left ex
cept this 5 per cent fund. However, that is a matter which can be
easily fixed in the bill, and I am calling attention to it because I
think it is a matter that should be considered.
Senator S h a fr o t h . Under the bill as it is, it is redeemable in gold
or lawrful money, which contemplates that these bills, if the banks
are short of gold, will be redeemed in lawful money, and that as they
find their way into other banks or come into the National Treasury
for redemption that only 5 per cent will be necessary to redeem them
all in gold—all that come in.
Senator N elson . That has been the theory we have acted upon,
but it has not been sufficient.
Senator S h a fr o t h . No; it is still 10 per cent.
Senator R eed . To redeem ?
Senator S h a fr o t h . Yes; and the experience with national-bank
notes----Senator R eed (interposing). Ten per cent there and 33 per cent a t
the banks might do it.
Senator S h a fr o t h . Ten per cent there would do it, without any
gold in the banks at all.
Senator N elson . Here is the point: If we require the banks to
keep 10 per cent, we will always have a supply of gold in the
country.
2 082
BANKING AND CURRENCY.
Senator S hafroth. I suppose it is im possible to prevent gold from
g o in g out o f the country i f it is dem anded in a foreign country and
if the dem and tnere is worse than in our own.
Senator R eed. W hen it is taken aw ay it stops the issuance o f paper
to that extent.
Senator N elson. I t w ould put up the rate o f interest at once and
call it back.
(Thereupon, at 4.50 o’clock p. m., the committee adjourned, to
meet at 10 o’clock a. m. to-morrow, Friday, October 10, 1913.)
F R ID A Y , OCTOBER 10, 1913.
Committee
on
B anking and C urrency,
U nited S tates S enate.
IVashing ton, D. C.
The committee assembled at 10.10 o’clock a. m.
. Present: Senators Owen (chairman), Hitchcock, O’Gorman, Reed,
Pomerene, Nelson, Bristow, and Weeks.
T he C hairman . W e w ill hear first, th is m orning, from Mr. D a w
son, o f Iow a.
STATEMENT OF A. F. DAWSON, PRESIDENT FIRST NATIONAL
BANK, DAVENPORT, IOWA.
Senator P omerene. Will you give us some particulars about your
bank, as to the capital stock, deposits, and so forth?
Mr. D awson. The capital stock of the bank of which I am presi
dent is $200,000; its surplus is $200,000, and its deposits are about
two and a half million.
I want to say to the committee at the very start that I did not
come here to discuss this matter from the standpoint of the individual
bank with which I happen to be connected. I think I can say to the
committee at the very beginning, without regard to what this com
mittee does in the way of legislation, that the bank with which I am
connected will become a member of your new system. There are
certain sentimental as well as other reasons wThich make that state
ment possible. The First National Bank of Davenport, Iowa, was
the first national bank in operation in the United States. The bank
which first began operations under the system 50 years ago is the
bank with which I happen to be connected at this time. Having
been the first one to go into the present system, we are going to be
the last one to ever go out of the system, no matter what changes may
take place in the meantime.
I came here to represent, primarily, the small country banker.
Ours is a country bank. But it is not that class of banks that I ex
pect to represent in what I have to say to the committee. I want to
speak for the banks in Iowa, the banks of $25,000 capital, and of
$50,000 capital, and of $100,000 capital.
As soon as it was announced that we were to come to Washington—*
and I cite this only as an evidence of the interest which our people
have taken in this legislation—I was called up by the chairman of
the group organization in the group in which we reside, Mr. Wyman,
BANKING AND CURRENCY.
2 083
the president, stating that they had been considering the advisability
of sending someone here to represent the 118 banks in the group of
the Iowa State Bankers’ Association. So he insisted on sending on
to me my credentials and asking me to represent the banks of that
group before the committee. And the same thing was true with
regard to the Davenport Clearing House. We have in Davenport
eight banks represented in the clearing-house association, with total
deposits of about $30,000,000. Along with the Commercial Club of
Davenport, representing 1,100 of the business men of that city, they
asked me to take a letter showing that I was authorized, along with
Judge French, who spoke yesterday, to speak for the business inter
ests of that city.
It seems to me that the country banker is entitled to very great
consideration in the matter of the formation of the new system. I
regard him as the backbone of the system which we have now. And
I ought to say at the outset that I have great respect and great admi
ration for the system which we have now, and the average national
banker in Iowa and in the Middle West, and I think it is true of the
whole country, the average man who is now connected with a national
bank feels a pride in the system that we have at this time. He appre
ciates that for 50 years it has been serving a very useful purpose in
the country; that it has been of material assistance to the Govern
ment in a great many ways, both at its inception and during the 50
years that it has been in operation.
The bank with which I am connected, at its very inception, in
addition to the purchase of bonds to secure the circulation, sold over
its counter during the Civil War several million of bonds direct to
the investors out in that western community. So that we regard the
national banks as having been more or less of a prominent prop to the
national credit from the time of its establishment down to the pres
ent day.
I had some familiartiy with the act of 1900, the gold-standard act,
under which the national banks became subscribers, practically in
whole, of the issue of 2 per cent bonds called the consols of 1930. I
happened at that time to be associated with the gentleman who wrote
that refunding provision, Senator Allison, of this body. Some of you
who were here at that time may remember that the Secretary of the
Treasury, then a distinguished Illinois gentleman, thought that it
was utterly impossible for the Government of the United States to
float its debt at the 2 per cent rate. That was from 1 to H per cent
less than any of the nations of the world were able to float their obli
gations at that time. And yet the author of the refunding pro
vision was wise enough to see that there was a market for those
bonds at 2 per cent, that the national banks were virtually obliged to
take these new consols of 1930, no matter what rate of interest they
carried.
Senator N elson. Therefore they were really the instrumentality
of saving us from 1 cent to a cent and a half a year interest?
Mr. D awson. Yes, sir. The members of the committee are, per
haps, familiar with the fact that some of the mathematicians of the
Treasury Department at the time of that refunding transaction pre
pared a public document, which was a document of the Treasury De
partment not of Congress, which sets forth in dollars and cents the
2084
BANKING AND CURRENCY.
exact saving to the Federal Government by reason of the refunding
transaction of 1900.
Senator N elson. Mr. Chairman, I wish you would take steps to
get that document for the members of the commitee.
Mr. D awson. Y ou will find that in that document it is made plain
that by that transaction the Government of the United States saved
or made a profit of upward of $17,000,000. Those are some of the
things that are matters of pride to men who are in the national
banking system. They have felt that as they went along they have
not only served the communities well in which they have been located,
but they have had that connection with the Federal Government that
gives them some dignity and some standing.
Senator W eeks. Mr. Dawson, would it not be fair to add, in that
connection, that if the refunding was done on a 1 per cent lower basis
than could otherwise have been the case the Government has been
saving 1 per cent interest on those 2 per cent bonds every year since
that time?
Mr. D awson. All these 13 years.
Senator W eeks. Which means a saving of about $100,000,000.
Mr. D awson. Then there is one other large fact in connection with
the national banking system that should entitle them to the friendly
consideration, it seems to me, of the Congress of the United States,
and that is found in a statement of the report of the Comptroller of
the Currency last year. In examining that report you ought at least
to observe the statement he made, and I put it down so that I might
have it accurate. He said:
The national banks have paid into the Government in taxes more than
$198.000,OCX), or more than thirteen times the amount appropriated by the Gov
ernment for the business of the currency bureau during its entire existence.
In other words, Congress, during the existence of the national
banking system has appropriated $15,000,000 and the national banks
have paid in in taxes $198,000,000, making $183,000,000 and odd of
taxes which the banks have paid to the Federal Government. But I
think there is no difference of opinion among men who have respect
and admiration for this system; there is no difference of opinion
among students of this question that it is a defective system.
Senator R eed. Y ou are not laboring under the impression that this
committee or Congress is inclined to make any war on the national
banks, are you?
Mr. D awson. Not at all. And yet I find among the bankers out
in the country the feeling, after reading some of the provisions of this
bill—I would not say that they are punitive in their character and
any of its provisions—at the same time some of them feel that the
provisions are not as liberal as the banks are fairly entitled to have.
Senator R eed. I thought we were trying to do so, to help save the
banks from the disasters which occasionally fall upon them, instead
of having any desire to punish them, and in that connection, while it
is almost irrelevant to the issue, it strikes me that if both sides ap
proach this question in that spirit, instead of passing denunciatory
resolutions and calling people various names, complimentary or
otherwise, wTe would be much nearer a solution.
Mr. D awson. I agree with you thoroughly in that last statement,
and while men may get together in conventions and do certain things,
BANKING AND CURRENCY.
2085
I think what this committee wants to know is the sober opinion of the
men back at home, and I think I can say to you with perfect frank
ness and with entire truth, that the people of the country are consid
ering this matter in a calm manner and from a nonpartisan stand
point. I think they are approaching it with the hope of a solution,
and that it will be the best solution we can have at this time. I am
sure that is the attitude of most of the bankers out in our country.
Of course, bankers are no different from any other class of men,
but if a man is a successful banker he is at least broad-minded enough
to see and appreciate that his only hope of success lies in the success
of his community. ' I t is along that path that his success lies. He
can not hope for any advantage that is going to accrue to him at the
expense of his community, and the things which will build up and
best serve the community in which he is located is what is going to be
best for him.
This system that we have now, there is general concurrence that it
is a fair-weather system; when times are all right it operates to the
satisfaction of nearly everyone; it handles the business of the country
effectively.
So, as Senator Reed has said. I conceive it to be the duty of this
committee—and in what I have to say I am only endeavoring to con
tribute a few observations in that direction—to create a system that
will not break down in the days of financial stress and of financial
stringency. This one has broken down four times since it was put
into operation. My study of it leads me to believe that the first three
times that it broke down we did not know what was the matter
with us.
Senator Nelson. T o what three times do you refer?
Mr. D awson. First, in 1884.
Senator Nelson. N o ; 1873 was the first panic growing out of the
Jay Cooke failure; that was the first and most unnecessary up to that
time.
Mr. D awson. T he four th at I have in m ind, Senator, are the four
tim es in m ost recent history when the banks were obliged to suspend
specie paym ents. O f course, 1873 cam e before the resum ption act.
T h at w as in 1884, and then again in 1890, in 1893, and in 1907.
T hose first three disturbances or breakdowns o f the system , as you
w ill remember, were com plicated w ith com m ercial and political con
ditions.
Senator N elson. Y es; and econom ic cinditions.
Mr. D awson. S o that the public was not enabled to see clearly
that that breakdown was not the fault of the system. But when
the disturbance of 1907 came along that made it clear to the busi
ness interests generally and to students generally just what the
defects were in the present system. And, as I see it now, there is
practical concurrence as to what the defects are. They all fall, it
seems to me, under two heads, one the lack of elasticity and the
other the reserve requirements, with no opportunity to unify the
reserve.
So it is alon g those tw o lines th at the banks o f the country and the
business m en o f the country are exp ecting relief. A nd at that
p oin t m ay I offer an exp lan ation w hy there lias not appeared before
2086
BANKING AND CURRENCY.
this committee more business men instead of the men appearing
here being practically all bankers?
Those of you who live in the smaller communities, or who have
knowledge of conditions in the smaller communities, know that the
business man in that community regards the banker as the credit
merchant of the community. When he wants credit for the con
duct of his business, he goes to the banker, and when it comes to con
sidering a system whereby the business man can obtain his credit
he has not the time nor the disposition to go into that. He naturally
looks to the banker to provide or to at least look out and see that
a system is in vogue under which the banker can supply the business
man with his needs as he goes along.
There being now a practical concurrence, it seems to me, as to the
defects of the present system, I have great hopes that Congress will
apply the remedy. When we are able to diagnose a case, then the
application of the remedy becomes much more simple.
For many years nobody could agree on what the trouble was with
the present system, bankers or legislators, or anybody else. I remem
ber that for many years it was a common saying in the House of
Representatives that the Committee on Banlring and Currency—
that no two of the members of that committee could agree on any
thing.
But now the time seems to me propitious for the creation of a
system that will measure up to the present needs of business and com
merce throughout the United States. Being in substantial agree
ment upon the fundamentals, upon the fact that what we need in a
system now is one that will introduce this element of elasticity and
one that will provide for the mobilization and the unification of the
reserves of the country; being in agreement upon that point, I think
there is a very strong feeling among the people in my section of the
country that the fundamental purposes of this bill are sound and
good.
Now, there is not such a concurrence in regard to the details of the
manner in which these principles are sought to be applied in this bill.
But as to the fundamentals I believe the people are of the opinion
that those fundamentals in the bill as it now stands are sound, and
that they are the basis for a bill that will handle the business of the
country successfully and efficiently.
Senator R eed. D o you think that is also the opinion of the bankers
of your State? You said that was the opinion of the people. Do you
think that is also the opinion of the bankers?
Mr. D awson. I think it is. I have been in rather close contact with
many of the bankers in my State. I have discussed the subject be
fore group meetings and before State conventions of bankers. They
have passed resolutions time and time again in concurrence as to
what we need at the present time. And I am going to put that sum
mary, with the consent of the committee, into the record.
The C hairman. We will be glad to have it.
Mr. D awson. I do not care to burden you by reading it, although
it is very short. It is my idea of what a currency system ought to be.
Senator B ristow. Y ou say that is your idea ?
Mr. D awson. I t is my idea, and I believe it thoroughly represents
the ideas of the bankers in our section.
The Chairman. I think you had better read it.
BANKING AND CURRENCY.
2087
Mr. D awson. It says, to summarize: What the country stands in
need of is a banking and currency system, embracing these salient
features.
That will give that element of elasticity to the currency which will
respond to the varying needs of business a.t different seasons of the
year, and as carefully safeguarded against inflation as against
stringency.
T he association o f all banks into a n ational system , rather than one
o f scattered units, to obtain u n ity and cooperation in sustaining the
com m ercial and public credit, but w hich should be absolutely secure
ag a in st p olitical dom ination or the control o f concentrated Avealth
and w hich m ust preserve the in d ivid u al independence o f each bank.
Our people are very strong on that point.
The unification and mobilization of bank reserves, so that they can
be concentrated and made available wherever most needed in times
of trouble, and the machinery to strengthen bank reserves or increase
their loaning power when necessary to avert danger.
To these three principal features there should be other additions
to provide an acceptable standard for commercial paper and a wellorganized market for the same, to secure more uniformity in discount
rates in all parts of the country, permission to American banks to do
business in foreign countries, and an agency which can deal effectively
with the course of foreign exchange and the international movements
of gold.
Now, it seems to me that the underlying purpose of this bill goes
directly to those three fundamental necessities of the present situa
tion, and I undertake to say that there is substantial agreement
among all the bankers of our State as to the soundness and as to the
necessity for those three things. Time and again at the State con
vention of the bankers’ association there have been passed resolutions
along those very lines.
The C h a ir m a n . Your statement seems to be very clear, and I
believe really is pretty nearly in accord with the views of the mem
bers of this committee. If it is not. I will be very glad to hear to
that effect from any member of the committee.
Senator H itchcock. It is the most succinct statement I have
heard. I am especially pleased to hear you emphasize what you said
in regard to the maintenance of the independence of the banks.
Mr. D awson. That is vital.
The C hairman. That is the very basis of the system.
Senator H itchcock. I have been afraid that this bill did not pro
vide for that; did not guarantee to the individual bank the things
which it ought to have as a matter of right, but left it too much to
the discretion of men intrusted with power.
Mr. D awson. The integrity of the independent banker, it seems to
me, is vital to the influence and advancement of our country as a
whole. The branch banking system, it seems to me, would do more
to retard the progress of our country out in our section. As it is
now, an independent bank is owned by the people of the community,
the stockholders all live in the community, and the little cashier who
runs that country bank has at heart the welfare and upbuilding of
that community. If it was simply a branch of a great institution
in Chicago or New York, they would simply be skimming these
S. Doc. 232, 63-1— vol 3-----11
2088
BANKING AND CURRENCY.
communities instead of building them up. So that the question of
the integrity and independence is a vital question.
Senator H itchcock. It is the only way to maintain competition
between them. If you do not have competition between them you
do not have facilities which you need.
Mr. D awson. Y ou do not when you do not build up the com
munity.
Senator R eed. Y ou do not retain in the community the wealth
which the community creates.
Mr. D awson. That is true, also. The profits would go to some
concern outside.
Senator N elson. These big banks, Mr. Dawson, do not appreciate
how much those little country banks do in a community. I have
seen poor fellows come in and get money, mortgaging their last cow,
and they could not get it from these big banks.
Mr. D awson. N o ; nor could they obtain it if the man who was
running that bank was a representative or a clerk sent out from New
York to run that bank.
The Chairman. That is really the basis of the American system,
distinguishing it from the system of other nations?
Mr. D awson. Unquestionably; and that must be preserved in any
system in the future, in my opinion.
Senator R eed. I think we all agree to that. I think the most in
teresting question you will have to discuss would be whether this
system does preserve the independence of the individual bankers.
Senator H itchcock. I want to say to Mr. Dawson, as one member
of this committee, that the question that most troubles me is the very
question as to whether the banks’ independence is preserved under
this bill, and I make that suggestion in the hope that when you reach
that topic you will discuss it fully.
Mr. D awson. I will be very glad to. There is practical concur
rence, in my opinion, among the bankers of the West as to the value
of the rediscount machinery which is created in this bill. Of the two
defects—nonelasticity and reserve requirements—the one relating to
reserves is o’f vastty greater importance than the one relating to
elasticity. That is vital in time of stress. They have seen in the
past a condition arise—a condition over which they had no control,
a condition for which they were in no way responsible, the smaller
banks of the West—they have seen a condition arise where this sys
tem of ours would break down and not perform the natural func
tions for which it was created.
Senator Nelson. Their reserves would be tied up?
Mr. D awson. Yes; when they could not get money that belonged
to them.
The C hairman. They had less additional accommodation.
Mr. D awson. Yes, sir; so that I believe this reserve matter is of
vastly greater importance than the element regarding elasticity.
You know how it works now. The banks are all put into a scram
ble the minute any trouble appears. Each one becomes a competitor
of every other bank in its struggle to mass a sufficient amount of re
serves to take care of any trouble which may come to its doors. This
rediscount provision will unquestionably enable the country, as a
whole, to increase the reserves when it is necessary to increase them.
Under the present system, in the days of disturbance and panic banks
BANKING AND CURRENCY.
2089
are not only embarrassed with respect to their reserve requirements,
but they are obliged to slam the door in the face of the borrower at
the time when he needs it the most.
Now, it is well understood that losses growing out of such con
ditions fall with greatest severity upon those who are least able to
bear them. When hard times come it is the men of limited resources
who are hit the hardest.
I think the interest of the general public, the interest of the farmer
and the wage earner, in this legislation is much greater than the
banker’s.
The Chairman. There is no doubt about that.
Mr. D awson. Because the banker can trim his sails to the breeze;
he can adjust his operations to the conditions as they exist.
The Chairman. He can force the sale of collateral and ruin the
borrower, and is obliged to do it at times in order to save himself,
is he not ?
Mr. D awson. That is true; to sacrifice it. But what is the small
business man going to do who is fairly entitled to credit ? If he is
unable to use his credit he goes to the wall. There is no escape for
the wage earner if he is thrown out of a job. Nor is there for the
farmer if there is a tremendous slump in the value of his products,
by reason of a financial panic, such as occurred in 1907. There is
no escape for him.
So this question of reserves is really the vital question. If banks
are enabled to replenish their reserves in time of need—if you please,
if they are permitted to use their reserves in time of need, for the
purpose for which the reserves were created—they can undoubtedly
do much to allay fear and to allay panics. As it is, men get scared,
they are filled with fear; and fear is the stuff of which a panic is
made.
Senator Nelson. Excuse me for breaking in, but I think it becomes
necessary: Is not that one beauty of the system here, that the reserves
put in the reserve bank can be utilized, as it never could under the old
system ?
Mr. D awson. Yes; and now it is scattered all through 25,000 little
banks in the United States.
The Chairman. Y ou regard that as a good feature of this bill?
Mr. D awson. The mobilization feature in this bill?
The Chairman. Yes.
Mr. D awson. Yes; I do. I am going to suggest some changes in
the manner in which you propose to mobilize them.
The Chairman. I hope you do so, when you get to that point.
Mr. D awson. Yes. As it is now, some one, it seems to me, put it
very forcefully: If you had a water system in your town, whereby
each citizen had a cistern of water, only to be used to put a fire out
on his own premises and could not be used to put out a fire on his
neighbors’ premises, and a fire breaks out, his neighbors could render
him no assistance. There is no mechanism in this present system
whereby to induce cooperation and unity in the 25.000 banks.
Senator P omerene. In the present law, you mean?
Mr. D awson. Yes.
Senator H itchcock. Of course, now, you are quoting from the
Aldrich report. Do you approve of the Aldrich report?
2090
BANKING AND CURRENCY.
Mr. D awson. I was not aware I was quoting from that. I have
read that report. You refer to the report of the National Monetary
Commission ?
Senator H itchcock. Yes. That was the illustration used there,
and I wanted to know if you approved of it.
The Chairman. It has been used many times; it is an old simile.
Mr. D awson. I would not want to make a blanket approval of all
the things in that report.
Senator Nelson. I think the president of the National City Bank,
yesterday or the day before, used a term I do not know as" I have
heard before, but it was a very good one. He spoke about “ piping ”
the reserves from one regional reserve bank to another, as I recall it.
I think that was a new phrase, and a very apt and effective one.
Senator S hafroth. Oh, they have been using that a good deal—
“ reservoir.”
Senator Nelson. Oh, no; he said “ piping ” the reserves from one
bank to the other.
Mr. D awson. I recall some one in the House used that phrase in
connection with this bill.
I do not think I shall inflict my individual views on this committee
with regard to the character of the notes you have provided for in
this bill. I do not believe the people of the United States care very
much about the different schools of financial thought with regard to
the bank notes.
Senator Nelson. That is, you mean whether they are the mere
promise of the banks or the mere promise of the Government.
Mr. D awson. Yes.
Senator N elson. Or whether they are legal tender or not.
Mr. D awson. Yes. The main thing that the average citizen of the
United States wants to know when he receives a piece of paper money
is that it is just as good as gold. That is the condition that prevails
to-day. He does not care; he does not look to see whether it is a note
of a national bank, a greenback, a silver certificate, or a gold certifi
cate. He knows one is just as good as the other and can be exchanged
for gold. So that in this new currency you create all that he wants
to know is that it is sound; it has the assets behind it. A true bank
note should embrace these three principles—security, convertability,
and elasticity. That is my conception of the three fundamental prin
ciples of a bank note.
If you provide a note that he feels is sound and upon which he
believes he can get the gold any time he wants it, I do not think he is
going to care much whether it is a bank note or whether it is a Gov
ernment obligation. So far as I myself am concerned, I do not agree
to the principles which underlie the note that is created in this bill.
I can not find anything like it in any of the systems of the world.
I t seems to me like a departure from what has generally been re
garded as a scientific bank note. It is issued with the assets of banks
primarily, along with other security, behind it. Then the Govern
ment steps in and makas it a direct obligation of theirs. It seems
to combine the three principles that divide the bank notes of the
world into the classes where they are now.
Senator H itchcock. After all, is it not only another way of put
ting Government credit behind the paper? The Government credit
is already behind the national-bank notes in the shape of bonds.
BANKING AND CUBKENCY.
2 091
Mr. D awson. The systems of the world are based on one of three
principles, as I understand it. They are the currency principle, the
banking principle, and the bond-secured principle. The banking
principle holds that the total assets of the bank are the proper secur
ity for its nDte issues. The currency principle is that of issuing notes
against a reserve; and, of course, the bond-secured principle is the
one we have with the national-bank note, where long-time bonds,
good bonds, are the basis for the note issues. This new money which
the bill provides combines the banking principle and the currency
principle in that it puts behind it not only the total assets of the
bank, but also puts behind it a gold reserve of 33A per cent, besides
also dollar for dollar of commercial paper. So that it seems to me
that the question of doubt will never arise in the mind of the average
person who takes one of these notes as to its security.
The Chairman. If the bank were to fail, and if the 2 per cent
bonds were to go down to 75, do you think the notes of such a bank
Avould ever reach a discount?
Mr. D awson. I can see where a condition of that sort might
lead to----The Chairman (interposing). Does not our statute at present com
pel the United States to maintain at parity the national-bank notes
and the other forms of notes issued by the Government?
Mr. D awson. That is true.
Senator Nelson. Not the national-bank notes?
The Chairman. Yes; I think so, Senator.
Senator Nelson. Not directly?
Senator S hafroth. It says “ all forms of money.”
The C hairman. Yes; all forms of money.
Mr. D awson. Y ou can trade one for the other and get gold.
The C hairman. What I am calling attention to is that the United
States, in addition to these bonds, is putting its credit behind the
national-bank notes. Therefore, the national-bank note, at present,
has not only the bonds and the credit of the individual bank but also
the credit of the United States, as such, behind it; and for that reason
no citizen need examine a national-bank note to ascertain whether
there is a possibility of a discount on it.
Mr. D awson. I think this new currency will have the same virtue,
only in an added degree, I would say.
The Chairman. I only refer to that to show there was a precedent.
Senator S hafroth. Mr. Dawson, these notes are issued or made
redeemable in gold or lawful money, and I want to see whether you
can subscribe to my view on that.
Mr. D awson. I shall be very glad to have your view.
Senator S hafroth. My view is this, that Avhere a currency of this
kind is redeemable in lawful money, and the lawful money redeem
able at the Treasury in gold, it presents a strain on gold where there
is a run on the gold reserve. In other words, it is like the nationalbank notes in that respect. The national-bank notes are redeemable
in lawful money. A man who holds $1,000 in national-bank notes
can go to the bank and say, “ Give me lawful money for this ” ; and
they can give him a greenback. If it is in these regional banks that are
to act with the Government they take that, if there is an apparent
run, and lock it up in the vault, and say, “ We will stop that run to
2092
BANKING AND CURRENCY.
that extent.” The man then takes the greenback, and takes it down
to the Treasury of the United States, or presents it there, and says,
“ Give me gold for it.” The Treasury says, “ We don’t want this
endless chain going on, and we want this run stopped, and we will
put this away.” By that process the Government has redeemed
$2,000 of notes by $1,000 of gold; whereas if that money is redeem
able in every instance in gold the result will be $1,000 in gold will
redeem only $1,000 in notes. Is not that sound?
Mr. D awson. I am not quite able to see how $1,000 has performed
a double function—a double duty.
Senator S hafroth. The note circulates just like the national-bank
note circulates. Nobody, because he knows he can get gold for it,
hesitates to take it.
Mr. D awson. Certainly not.
Senator S hafroth. And if a man took $1,000 of regional bank
currency to a national bank and said “ I want you to give me gold,
or give me lawful money,” and the bank gives him greenbacks. And
so, being allied with the Government, it does not want this run on the
Treasury, and it will say “ We will lock this up,” that $1,000 they
have taken in and for which they have given you $1,000 in lawful
money. So that $1,000 is locked up there and can not get into cir
culation again, and won’t make a run on the Treasury for gold. The
man takes down to the Treasury of the United States the greenbacks
or United States notes, or lawful money or legal tender, and presents
it to the United States Government, and the United States Govern
ment gives gold for it. The Treasury says “ We will lock that up if
there is a run on us,” and we always have in the Treasury a good
many millions of legal tender on hand and do not issue it, notwith
standing there may be provisions in the law it should be issued.
Mr. D awson. The law requires it to be reissued.
Senator S hafroth. And it means in time of normal conditions.
Thereby you have gotten $2,000 of currency that is ultimately re
deemable in gold and have redeemed it by $1,000 in gold in the
United States Treasury.
Now, why does not that relieve the strain on gold if there is a
run on gold? Of course it does not make any difference if there is
no run on gold.
Mr. Dawson. My own opinion is that any man who has a piece of
paper money is entitled to exchange that for gold whenever he wants
to, and your thought of impounding these notes after they have been
redeemed in gold only emphasizes what has been in my mind in
regard to this particular currency. Your statement of facts pre
supposes that there is a danger of dragging an endless chain through
the Treasury of the United States under such conditions. We all
saw how that worked during Cleveland’s second term.
Senator Nelson. I want to call your attention, Mr. Dawson, how,
at the time of Cleveland’s second term, there was a firm of Jews in
New York—whether they operated on their own account or others I
do not know—who made a bus’ness of going to the Government with
greenbacks and drawing out the gold and shipipng it to Europe.
There was a shipment regularly every week. I recall that very well.
They used those greenbacks to draw out the actual gold, and the
more you have of that in this bill the more you equip that kind of
men, who want to get more for gold when it is at a premium, to call
BANKING AND CURRENCY.
2 093
on the T reasury fo r gold — the more you put in the hands o f those
m en paper th at is payable in gold.
Senator S hafroth. U n less you lock it up.
Mr. D awson. C ertainly. B u t even tu ally the currency o f the
U n ited S tates becomes the currency in these regional banks. T h at
is, th ey are to displace the national-bank notes, and they are to be
issued for seasonal expansion, etc. I f it only displaces the nationalbank notes and supplies th is seasonal deficiency, there w ould be
$1,000,000,000 o f th a t outstanding, not tak in g into account any
natural increase in the necessities as tim e goes on.
Senator P omerene. I w ant to rem ind the com m ittee that every
one o f them is v io la tin g the rule w hich was form ally adopted here
some days ago. A nd, w ith all due respect, it seems to me it is goin g
to be more satisfactory both to the com m ittee as a w hole and to the
w itnesses as w ell should they be perm itted to com plete their state
m ent first and let the exam ination or cross-exam ination come a fter
wards.
Senator S hafroth. I thought he w as through h is statem ent.
Senator R e e d . I have always regarded it as a great impoliteness,
Mr. Chairman, for any other member of the committee to interrogate
the witness. [Laughter.]
Mr. D awson. S o far as I am concerned I am perfectly willing to
be interrupted at any time and answer any questions which the mem
bers of the committee may desire to ask.
The Chairman. That is the rule of the committee, Mr. Dawson.
Had you completed your statement?
Mr. D awson. No, sir.
The Chairman. Then we will permit you to proceed.
Mr. D awson. I have been at both ends of the congressional inter
rogation point, and it does not matter to me when it appears.
So much for the character of the currency provided in this bill.
The fear that is lurking in my mind is that you are creating there
a species of greenbacks by making it a direct obligation of the Gov
ernment, and imposing on the Government the necessity for re
demption in gold, or, at least, giving permission to the note holder
to take it to the Treasury and ask for its redemption in gold; that
you are adding to the system of credit money in the United States
another billion of notes which might at some future time, either in
time of war or even in time of peace when the receipts of the Gov
ernment should happen to be less than its expenditures, embarrass
the Government. My fear is that there will be a billion dollars of
these new notes, which we might call a denatured or modified green
back, if you please. My fear is that there will be a billion dollars
which can be dragged through the Treasury, the same as $346,000,000
were dragged through during the second administration of Cleve
land. So I have not been able to see why it was necessary to super
impose—I think the security which is behind these notes is ample—
why you should superimpose the credit of the Government—why you
should make it a direct obligation of the Government. That is not a
true bank note. A true bank note is an obligation of the bank, based
on the assets of the bank.
If there is any increase in the note issue it should be increased
with due regard to the increase and decrease of business. That
question of elasticity is another question that is one of great im
2094
BANKING AND CURRENCY.
portance. It seems to me that this certainty of elasticity is not quite
sufficiently provided for in this bill. I may be wrong; it may be
in here some place where I have not discovered it, but it ought to
be so clear and so plain no one could misunderstand it, or no two
men might differ in regard to it. We all understand that at certain
seasons of the year there is necessity for an expansion of credit
currency, or at least an expansion of credit. Just how much this
is, men differ about, but substantially it is about $200,000,000. We
want the machinery whereby that additional currency can be obtained
when it is needed; but it is just as important, in my opinion, to have
the machinery so adjusted that when the need of that has passed,
that additional currency will not become a permanent part of the
circulation of the country. I t wants to expand and contract, and
the question of the contraction is just as important as the question of
the expansion.
Now, I assume that the purpose of this bill is to do that very
thing; that is, to create a currency that is based on the business of
the country and which, therefore, expands and contracts with the
business of the country. That is why you base it on short-time
commercial paper. It seems to me there should be no doubt left at
all that the commercial paper that is deposited with the regional
reserve bank, as collateral for those notes—that when this collateral
is paid off, that then the amount of notes or the same amount of
some other sort of money ought to be taken out of the permanent
circulation of the United States.
That can be done, it seems to me, with one provision, and while
it is not in the bill, it may be implied, and that is this: That the
parity should be maintained between the collateral held by the
regional reserve bank and the amount of these notes outstanding
that were issued against that collateral. For instance, suppose the
First National Bank of Davenport should take to the regional
reserve bank $100,000 of its bills receivable and deposit them as
collateral and receive $100,000 of these Government notes provided
in this bill. When those commercial notes are paid, those bills
receivable are paid, and the circulation ought to be reduced by that
amount, unquestionably. So, it seems to me, the principle can be
established in here, without any chance of wavering one way or
the other, if a provision is included whereby the parity will be
maintained between the collateral held by the regional reserve bank
and the amount of notes which they have issued against that col
lateral.
Senator R eed. By parity you mean equality in amount?
Mr. D awson. Yes; one should go up and down with the other.
Senator Nelson. Let me ask you a question for information right
at that point. I want to clear my mind on it. You mean that would
be reached by retiring the note when it is finally presented to the
issuing regional bank for redemption?
Senator W eeks. Where is the watchdog? [Laughter.]
Senator N elson. Well, I wanted this step cleared up as I went
along. [Laughter.]
The Chairman. The witness will proceed.
Senator H itchcock. I move a special watchdog be set over the
member from Minnesota.
BANKING AND CURRENCY.
2095
The Chairman. The members will hereafter observe the rule
which the committee has adopted, not to interrupt the witness.
Senator R eed. There is an obvious difference between an interrupt
tion and a question that is asked for the purpose of elucidating some
point which a witness presents. [Laughter.]
The Chairman. Well, Mr. Dawson, we will proceed.
Mr. D awson. I want to say, Mr. Chairman, so far as the witness
is concerned, I am perfectly willing to be interrupted at any time.
Senator N elson. I will withdraw my question.
Mr. D awson. I say there ought to be in this bill an exact state*
ment of policy with regard to the maintenance of equality in amount
of the collateral and the outstanding notes. The country will nat
urally assume that that is the policy of this bill, and yet there is no
positive statement that it is the case.
One other question with relation to this bill, and one in which the
smaller country bank feels a proportionate interest with the larger
banks, perhaps in a lesser degree, is the one of organization and con
trol. With regard to the manner in which the new system is to be
organized and the control which is to be provided for it, my own
opinion is that some changes could wisely be made. It seems to me it
would be wise to initiate this system with a less number of regional
reserve banks than 12. There are many reasons that commend that to
my mind. I think the system should start out with about 5 and with
power reposed in the Federal reserve board, if you please, to in
crease that number as the system gets into operation.
This is a rather violent change from what we have now, and vio
lent changes in currency or financial matters are not in accord with
the spirit which guides or which controls financial transactions. The
more conservative we can be in anything relating to so complex and
so sensitive a subject as the finances and business of this great Nation
of ours the better it is going to be, especially after we have deter
mined in our own minds the end which it is sought to attain. The
best way, in my opinion, to attain that end is by a most gradual
process. So if I had my way I would start this system with five
reserve banks, with power in the reserve board to increase them as
necessity for it arose. With 12 banks, under the terms of the law,
each bank subscribing 10 per cent of its capital, if all of the national
banks of the United States were to come in, you might have regional
reserve banks which would be smaller in capital than some of its
constituent members, and that, it does not seem to me, would com
port with the dignity of a great Federal bank—for instance, a Fed
eral bank in the city of New York that in itself was smaller in capital
than one of the members of the association.
Senator R e e d . Would that be the case in New York?
Mr. D awson. I have not gone into the exact figures of it. but it
might. Of course, it would depend upon how the regions were ar
ranged. It might occur in Chicago, where one bank has a capital of
over $30,000,000. That is one reason why we should start with a
lesser number. Then if any considerable portion of the banks did
not come into the new system, if 1 out of 5 of the national banks
decline to enter the new system, then it would be impossible to
organize 12 Government banks, each one with a capital of not less
than $5,000,000. Therefore my thought wrould be to start with five,
2096
BANKING AND CURRENCY.
and then extend gradually as the needs of the country develop, and
as we gather experience and knowledge of the workings of the new
system, which is a wide departure from what we have now. So much
for the question of organization.
On the question of control, I was glad that the committee agreed
with me in the fundamentals I laid down at the beginning of the
hearing, that a system which would meet the needs of the people of
the United States ought to be free, on the one hand, from any possible
political control, and on the other from its domination by the con
centrated wealth of the United States. In the question of the
make-up of this central board there is a feeling among the bankers
and many of the business men that there is a possibility of political
considerations entering into it. That, it seems to me, can be obviated.
The question of Government control is one, I think, that is fairly ac
cepted by the banks and the people of the United States. We have
been moving on, in the last few years, and I think there is a consensus
of opinion, !at least among the people, if there is not among certain
classes of bankers, that there is no objection to Government control
of this system. Some complain, and, indeed, attempt to draw a dis
tinction between control and actual management, but Government
supervision is generally accepted by all the people. So that there is
no question in anybody’s mind on that, but they do want, if the Gov
ernment is going to control, to have machinery which will make it
absolutely certain it will be divorced from politics. Politics and
banking do not mix at all, and I speak with some knowledge of the
subject, because I have been in both.
Senator H itchcock. Y ou finally preferred banking?
Mr. D awson. I find it much more comfortable to be in a bank
to-day in Iowa than to be in public life in Washington now, being a
Republican. [Laughter.]
The bill proposes to put on three members of the President’s official
family. I can not see any justification for that. My view is that
these seven men will have in their hands greater financial responsi
bility than any seven men in the world. It will require the undi
vided time and attention of the best men you can obtain in the
United States to master the broad questions that will have to be
handled by that board, to say nothing of the other almost autocratic
powers which they exercise. So that it seems to me a Cabinet officer
sitting as a member of that board must, in the very nature of things,
be, to a large extent, a figurehead. I would except, however, the
Secretary of the Treasury. I believe he should be a member of that
board on account of the intimate connection between the Treasury
Department and the finances of the United States. But I have not
been able to understand why it is necessary to put on that board not
only the Secretary of the Treasury, but the Comptroller of the Cur
rency, who is a subordinate of the Secretary of the Treasury. You
put on one man who is subordinate to the other, and in ordinary
affairs that would simply mean that the superior officer would have
two votes instead of one.
Nor can I see the reason for including the Secretary of Agriculture
on that board, who has his hands full in the problems that are con
fronting him, the problems he has to solve in American agriculture,
the great basic industry of our whole Nation. His advice would be
BANKING AND CURRENCY.
2 097
valuable, in my opinion, but instead of being on that board in an ac
tive executive capacity, if you want his advice, create the machinery
that would enable you to obtain it, or enable him to act with the
board in an advisory capacity. But as I see the duties of this board
in the future, no man who has to perform the multitudinous duties of
a department of the Government, or a Cabinet office, is going to
have time to perform efficiently the services on thi,s board. So I can
not agree i,t is wise to put on either the Secretary of Agriculture or
the Comptroller of the Currency. Of the other four members of
that committee I want to discuss this in a practical way. The bill
proposes to make their terms two, four, six, and eight years. That
makes the terms of the members of this board, five out of seven, coin
cident with the term of a President. Every presidential term that
comes along (and I want to state right here that I have no fear of
anything in that direction under this administration; but no man can
tell what the future holds in store for us), as the bill is drawn now,
that President would have the appointment at the very beginning of
his administration of five of these seven members. There is the
machinery there, if any President sought to use it, whereby he could
easily have control of this board from the very beginning of his
administration.
Senator S hafroth. Four, you mean, do you not?
Mr. D awson. A s it stands now he would appoint three members
of his official family—the Secretary of Agriculture, the Secretary of
the Treasury, and the Comptroller of the Currency.
Senator S hafroth. And one member immediately of the other
board ?
Mr. D awson. Yes; one member. That would be four of the seven,
instead of five of the seven. I think that it should be so arranged,
and I believe that it is the purpose of the framers of this bill, so as to
have that board stand on the same high plane that the Supreme Court
of the United States stands on or that the Interstate Commerce
Commission stands on, and if that is so, would it not be wise to take
out of the hands of the President, whoever he is, as he comes along
down the years—take out of his hands the power, in his first term—to absolutely control the majority of the members of that board?
Senator R eed. The first term? You know, there will not be but
one term.
Mr. D awson. Well, one party will take care of that all right,
[Laughter.]
Senator S hafroth. Where is the watchman? [Laughter.]
Mr. D awson. Then there is no doubt but what it is a source of
great complaint, and it is a question in which there is a principle
involved, whether or not the men, a class of men, if you please, that
are selected to put all of the capital in this institution are to be de
nied any representation at all in its control. That is a pretty big
question; that is a pretty broad question. I should say that if the
Government supplied the capital to this bank, or if the people gen
erally supplied the capital to this bank----Senator B ristow (interposing). Voluntarily.
Mr. D awson. Yes; then the Government should select the men for
the control and management of it. But this bill picks out a limited
class of citizens of the United States, the stockholders in the national
2098
BANKING AND CURRENCY.
banks scattered over the country, and requires them to pay a pro
portion of their capital to make up the capital stock of this bank,
and yet it denies them any representation on the controlling board.
Now, my thought is, and I am sure it is in exact accord with the
thought of the committee, that that board should be made the most
efficient board possible. And I believe it would produce an element
of efficiency in that board, and I believe it would make it stronger,
and I believe it would be better for the commercial interests and the
business interests of the country and the successful operation of this
new system, if the banks select a minority representation on that
board—if they select two members, if you please.
Senator Nelson. Out of seven ?
Mr. D awson. Yes; out of seven. I would not select those men
and permit them to have active connections with any bank, of course.
I would stipulate that these men should sever all active banking con
nections. But by permitting the stockholders to select two members
of this board, a minority representation on this board, it will mini
mize the opportunity for political control of the board and would ob
viate a feeling of injustice that does prevail to a considerable extent
among the men who supply the capital for the institution.
But the real test of this system, gentlemen, is whether the banks
are going to come in. I do not care how perfect a system may be
devised around a committee table or anywhere else, if you can not
put it into operation of course it is useless. So that the principal
question, and the question from which I want to speak, is that prac
tical question of whether the banks—all of the national banks and a
majority of the other banks, if you please—whether they are going
to come into the system as it stands in the bill now before you. We
have in the national-banking system now about T,500 banks, and 7.000
of those banks, as you know, are the country banks. I maintain
that the small bank is the backbone of the national-banking system,
and if you create a system here that is only going to take the banks
in the reserve cities and central reserve cities, then you have de
stroyed the system we have now instead of giving us a greater
system.
Now, it may be well, in order to understand what I have to say,
for me to call attention to the percentage of banks of various size
in the present national-bank system—of these 7,000 country banks.
Banks with a capital of less than $50,000 comprise almost one-third
of the system—and when I say less than $50,000, that means banks
of $25,000 and $40,000 capital. They comprise 32.34 per cent of the
national banks of the United States.
Senator W eeks. In number?
Mr. D awson. In number. The banks of more than $50,000 and
less than $100,000 capital comprise 31.38 per cent. Banks of
$100,000—and out in the county-seat towns of Iowa a great many of
the national banks have $100,000 capital; that is, a strictly country
national bank in the truest sense of that term. The banks of $100,000
and less than $250,000 comprise 27.12 per cent more. Therefore all
the banks of less than $250,000 capital make up almost 91 per cent of
the national banks of the United States, while those of a capital of
$250,000 and up comprise only 9.26 per cent. My conception is that
those little banks must be in the new system if we are to have some-
BANKING AND CURRENCY.
2099
thing as good as, to say nothing of being greater, than the system
we have now.
Now, I have my own idea of what a great national banking and
currency system should be. I expressed it somewhat briefly at the
beginning of my statement. It has always seemed to me a source
of some humiliation as an American to contemplate that here is the
United States possessing the greatest banking power of any nation
in the world and yet helpless to exercise that power. It hurts my
pride to contemplate the fact that we have a foreign trade of $3,000,000,000 a year, going and coming, and yet that trade is not financed
under an American system of banking and currency.
The value of the merchandise exported and imported is not ex
pressed in dollars and cents, as it ought to be; it is expressed in
pounds and pence. I can see no reason why the United States should
not have a system that would enable us to take our proper place
among the financial powers of the world. You have all been engaged
in reading the views of foreign writers on financial subjects, and you
find running through them constantly a spirit of derision and con
tempt for the system as it is in the United States. And it is fairly
well merited, gentlemen, when you stop to consider it from the
broader aspects of the national pnd international sides of it.
Another thing that is rather humiliating to Americans is that in
the panic of 1907, you remember, we were obliged to send abroad for
gold. We imported from Europe a considerable amount of gold to
allay the panic of 1907.
Senator N elson. N early $100,000,000.
Mr. D awson. Nearly $100,000,000. How did we get that gold?
Of course, we had no machinery under our system whereby we could
induce that gold to come here. We had simply to take our securities
to the foreign markets and dump them in the foreign bourses for what
they would bring.
Senator Nelson. I want to correct you, if I may. We obtained that
gold—and I have Mr. Vanderlip’s authority for it—on American bills
of lading for American products—wheat, cotton, etc.—in that in
stance, and not on finance bills. It was obtained strictly on commer
cial bills.
Mr. D awson. Which makes it all the worse, it seems to me, from
the standpoint from which I am speaking. We obtained that $100,000,000 of gold finally from Europe. Most of it came from England,
and the humiliating part was that right here in the Treasury of the
United States at that very moment was twelve times as much gold as
England possesses in her entire system.
Here was the United States, with the greatest gold supply of any
nation in the world, with the greatest banking power of any nation
in the world, and yet sitting helpless among the nations of the world
so far as cutting any figure in international finance is concerned, not
to say our own foreign trade.
So it seems to me what we ought to have here is a system that will
bring together—that will knit together, if you please—not only these
national banks, but all the banks of the United States—bring in the
25,000 banks and associate them together in such a way that the
United States can exercise this great banking power.
In my judgment such a system can never be constructed on compul
sory membership. I do not believe you can ever hope to attain the
2100
BANKING AND CURRENCY.
kind of system that I think the United States ought to have by com
pelling banks to go into it. It seems to me that the broad view would
contemplate a system such that all would delight to go into it, because
the small banker wants to be a part of these great movements. He
would be glad to become a part without destroying his independence
of activity in his own community; he would be delighted, I think, to
become a part of such a system. He would have a better appreciation
of his citizenship.
We started out with a national banking system and 20 years ago
it was the paramount system in the United States; it was the com
manding system. The figures show—it was really only 19 years ago,
in 1894—that there were more national banks in the United States
than there were State banks. I have the figures before me. In 1894
there were 3,770 national banks and 3,705 State banks. In 1912
there were—these figures were taken from the report of the comp
troller and consequently they are for 1912—there were 7,372 national
banks and 17,823 State banks.
Senator Nelson. That included trust companies, did it not? I
think so.
Mr. D awson. Of which there are not a very large number. Here
are the deposits. In 1912 the deposits of the national banks were
$5,825,000,000, while the deposits of the State banks amounted to
$11,198,000,000. Of the banking power between the State and the
national banks—and when I speak of banking power my understand
ing of it is that power represented by the capital, the surplus, the
undivided profits, the circulation, and the deposits of the bank. That
represents banking power, as I understand the term.
Senator Nelson. Y ou include the deposits in that?
Mr. D awson. Capital, surplus, deposits, and circulation; those four
items. The national banks possess $8,500,000,000 of banking power
in the United States and the State banks $14,000,000,000 of banking
power.
Senator B ristow. Have you those comparisons for 1894 also ? You
gave figures for 1894 and 1912 as to the number of banks. Have you
the corresponding figures----Mr. Dawson. On the deposits? No; I have not those, Senator;
but my recollection is—and it is fairly clear—that in the year 1900
the national banks possessed above 50 per cent of the deposits and
the State banks below 50 per cent; that is, that 12 years ago the na
tional banks held more than half the deposits.
Senator W eeks. Mr. Dawson, will you, in looking over your figures,
be sure you are making a proper comparison of deposits in 1912?
The deposits which you have quoted there are the individual deposits
in national banks, and I suspect that the deposits of the State banks
are the total deposits, are they not ?
Mr. Dawson. No ; the comparison is on the same character of
deposits. I wanted to eliminate bank deposits, because I did not
want to bring into this any element of the pyramiding of deposits
that we have under the present system.
Senator N elson. Will you file your tables with your remarks?
Mr. D awtson. Thank you; I will do so.
The parting of the ways came about 18 years ago when the State
banks began to draw away from the national banks, and the nationalbank system became the system of lesser importance.
BANKING AND CURRENCY.
2 101
Senator B ristow. Would it be possible without too much trouble
for you to give the figures for 1894 and make the comparison on the
same basis in the tables you submit?
Mr. D awson. Very little trouble. You want a comparison of the
deposits in those two years and a comparison of banking power in
those two years ?
Senator B ristow. Yes.
Mr. D awson. These are the figures: In 1894 national banks held
$1,742,000,000 of individual deposits, and all other banks $2,973,000,000. Now, what was the reason the State banks drew away from
the national banks? You will find in one of the reports of the Na
tional Monetary Commission a chart showing how they have gone up
and down. I t is a very interesting chart, and it shows that from that
time, in 1894, the State banks have increased more rapidly than the
national banks. Why is that so? It seems to me it is for just one
great reason, and that is that the State banks are enjoying greater
privileges than the national banks are enjoying.
That leads us up to the question whether or not the Congress of
the United States wants to give to the people of the United States a
well-rounded banking system or a system that is only going to serve
one portion of the country? Should we have a system simply to
serve the commerce of the United States, simply to serve the business
of the United States, and let agriculture and labor take the incidental
benefits that result? Or should we have a system, and have the peo
ple of the Nation a right to expect that Congress will create a system,
that will not only take care of business but which will also serve the
needs of the wage earner, the farmer, and all of the people ?
M y conception o f a bank, I confess, m ay not be in accord w ith the
com m ittee’s conception o f a bank. I have not been in the banking
business very lo n g — about three years. On leavin g the H ouse o f
R epresentatives I entered the bank w ithout any previous banking ex
perience. W e had a fine old bank out there. In the spring o f 1911
th a t bank had deposits o f $1,500,000.
Senator N elson. W h at w as the capital?
Mr. D aw son . $200,000 and a surplus o f $200,000. It had been in
operation for 50 years on the same corner in the same city. But it
had grown to be to what seemed to me to be a rich man’s bank. Its
facilities were not being as widely enjoyed by all classes of people as
it seemed they should be.
My conception of a national bank is that it should serve every class
of people—just like the post office does; that it ought to be a place
not only where the business man would come, but where the man who
wanted to deposit his savings would come. They are a class of peo
ple that should be encouraged to visit the national bank. And so
that has been the policy that has been pursued by that particular
bank from that time until this. That is what gives the national
banker an opportunity to make his bank greater—the adoption of
a broad policy of service. The denosits of that bank have increased
almost a million dollars since the spring of 1911.
Senator R eed. H ow much of that is country banks?
Mr. D awson. H ow much o f th at increase?
Senator R eed. Yes.
Mr. D awson. V ery little. W e have m ade no effort to extend our
business in th at direction very greatly, for reasons w hich I shall be
2102
BANKING AND CUBEENCY.
glad to explain in connection with this phase of the subject relating
to privileges of banks.
The State banks have outrun the national banks because they have
enjoyed greater privileges, and it seems to me that in drafting this
bill the fact ought not to be lost sight of that the national bank out
in the average town of Iowa or Missouri is competing with the State
bank. They are in the same block or just around the corner. The
banker has only one object to attain aside from the making of money,
and that is service to the community, and he hopes to make his
money through that service. If he finds he can serve his community
better under a State charter than under a national charter, of course
there is no room for argument as to what he is going to do. So you
must apply the supreme test to this bill: Will the country banker go
into it? He will go into it if you will fairly equalize his privileges
with those of his competitors.
Senator Nelson. Will the committee allow’ me to ask a question at
this point ?
Senator R eed. Certainly.
Senator H itchcock. The present chairman has no objection, but
refers it to the attention of the Senator from Ohio, who is the watch
dog of order.
Senator Nelson. I take it consent is given. [Laughter.] How
would it do to say that the national banks in any given State should
have the same privileges for doing local business as State banks have
in that State? Would not that be a sufficient inducement?
Mr. Dawson. Yes, it would; but that would not square with my
idea of what ought to be done. That would make a Federal law
contingent upon a State law, and I can not subscribe to that.
Senator R eed. And some States have practically no banking law.
Mr. D awson. What would meet my ideas in the matter would be
to ascertain what is the sound practice generally throughout the
country and accord them those privileges that would square with
some banking practices. I think there are some loose banking laws
throughout the United States. We do not want a national law that
is loose anywhere, in any State or Territory of the Union.
Now, let us get down to the actual, practical questions that con
front the cashier in a bank in a town of 3.000 people out in Iowa or
Missouri or Ohio or Colorado or any other State. Let us take a
bank of $50,000 capital—and, as I pointed out, 90 per cent of your
present national-banking system is made up of these smaller banks.
Senator Nelson. I understand there are 2,000 of the $25,000 banks.
Mr. D awtson. I have not the numbers.
Senator Nelson. I wish you would put that in your table.
Mr. D awson. The number of banks of the various capitalizations?
Senator Nelson. Yes; of the $25,000 banks.
Mr. D awson. I find the' exact number of $25,000 national banks is
2,004. The average $25,000 bank consists of one man. so far as the
actual operations of the institution are concerned. The cashier per
forms that service. He is bookkeeper, janitor, and cashier; he is
receiving teller and paying teller, and he performs all the duties of
conducting the bank. It is up to him how much his institution is
going to earn. The men who have subscribed the stock for that little
bank have put their money in it with the expectation of getting some
return upon it. It rests upon the shoulders of the cashier whether
BANKING AND CURKENCY.
2 103
that bank is safe and w hether that bank is profitable. So you must
take into account h is present condition and in w hat respect th is new
b ill w ould curtail his present sources o f revenue.
The first thing that confronts him is the fact that he must sub
scribe one-fifth of his capital stock to this new institution. It should
be remembered that the capital stock in that $25,000 bank—and I
think we should take him into account, because Congress encouraged
him to incorporate. In 1900 Congress reduced the limit to $25,000
as the capital on which a national bank could be organized. Con
gress then adopted the policy of encouraging him and carrying the
privileges of the national system down to more people than it ever
reached before. He is confronted with the fact that he must take
one-fifth of the capital that these farmers and business men in his
community have gotten together there. He must subscribe one-fifth
of that to an institution away off somewhere else. He sees that 10
per cent of his capital at least which has been gathered together for
business in that community must be taken out of that community
and sent to another place, and at a low rate of interest for him, 5
per cent. That is a little disturbing to him, though I think the least
disturbing of anything there is in the bill. I do not think the aver
age country banker would have any objection to subscribing 10 per
cent of his capital stock. I would make it 10 per cent instead of 20,
I think, because if you can get a large percentage of all the banks
to go in at 10 per cent you will have ample capital in your new insti
tution.
Senator O ’G o r m a n . M ay I ask a question there? If there be no
objection, I understand the rule is w aived.
Mr. D a w s o n . The witness is entirely willing to waive the rule at
any time.
Senator O ’G o r m a n . It is an important matter. I do not know who
adopted this rule. I was not here when it was adopted, and I there
fore feel at liberty to disregard it.
Senator P o m e r e n e . This will be no precedent.
Senator O ’G o r m a n . There has been fear expressed from time to
time that if this 12-region feature of the bill were retained in some
of the regions a sufficiently large number of the national banks would
not come in to make up the required capital of $5,000,000.
Mr. D a w s o n . I expressed th at same fear to the com m ittee shortly
before you arrived.
Senator O ’G o r m a n . Very good. Now, what is your view regarding
the possible modification of the bill in that respect by permitting the
reserve board to invite individual subscriptions to the stock from the
citizens residing within those regions after a certain period, if there
be a deficit in the $5,000,000 contributions from the banks ?
Mr. D a w s o n . My opinion. Senator, is that if certain changes are
made in this bill there would be no question that the necessary capi
tal will be subscribed to these regional banks of rediscount. It seems
to me that, without any great change in the fundamentals of this
bill and only some changes in detail it will be made sufficiently at
tractive, not only to the national banks, but to State banks as well,
that they would be pleased to come into it. If they did not, I could
see no reason why you should not go on and take the next step—provide the capital in some other way.
S. Doc. 232. 63-1 —vol 3------ 12
i
210 4
BANKING AND CURRENCY.
Senator O’Gorman. Then, whether we have a system providing
for one bank of reserve and rediscount in Washington, or whether
we have a system of four or five regional banks plus the reserve
board, or whether we attempt to carry out this system which con
templates 12 regional banks, you think that the power might be
confided to the reserve board to invite contributions to the capital
from the people of the country after a.certain period in the event
of the requisite capital not being provided by the national banks?
Mr. D awson. I could see no objection to that. I think if you re
duce this capital stock subscription to 10 per cent----Senator O ’G orman (interposing). To payments of 5 p e r cent each?
Mr. D awson. T o payments of 5 per cent each; and then increase
the dividend rate and, possibly, make it 6 per cent—I think that is
a very small matter, so far as the average bank is concerned, although
he is in the habit of obtaining 6 and 7 per cent on his money—after
you have built the surplus of this new bank up to your required 20
per cent; 6 per cent would then only be 5 per cent on the book value
of the stock.
Senator O ’G orm an . D o I understand you to express the opinion
that if the contribution from the national banks should be reduced
to 10 per cent instead of 20 per cent, and the 10 per cent to come in
in two payments of 5 per cent each, sufficient would be subscribed by
the national banks to make up the required capital in each regional
bank ?
Mr. D awson. W ell, I could not answer that question directly, Sena
tor, because I do not know w hat the regions are to be.
Senator O ’G o rm an . I have reference in this question
to the 12 re
gional banks. Of course, as I see it, this particular element of danger
and uncertainty would be completely eliminated if we had but a
single reserve bank where the contributions from the country would
come. The danger would be more or less minimized if w^e had four
or five regional banks.
Mr. D awson. I advocated that a moment ago.
Senator O’Gorman. But with 12 banks there must necessarily be
some uncertainty as to whether all of them can secure, in the manner
indicated in this bill, the required capital of $5,000,000.
Mr. D awson. I feel greatly honored to find that my views and
yours are almost in accord on this particular subject. I expressed
them to the committee a few moments ago, but I think it was perhaps
during your absence from the table.
Senator Nelson. Will you allow me to interrupt? It seems to me
that there has been a confounding here of the subscription. The sub
scription is 20 per cent, but the payment within the 60 days is not to
be more than 10 per cent. It is only a matter for call; the balance
is----Mr. D awson (interposing). It seems to me this way: Suppose the
bill should go through in its present form, which is not entirely sat
isfactory. Suppose the call should be made for the first 10 per cent
under the provisions of the bill. The very situation arises that the
Senator from New York has just called attention to—enough of the
banks stay out so you can not organize each of these 12 regional
banks. Then, of course, the Federal reserve board would call for the
other 10 at once. They have that power; there is no limitation as
to when they may call for it. So the average manager of the small
BANKING AND CURRENCY.
2105
bank, for whom I am undertaking to speak, sees before him all the
time that he will at once have to take 10 per cent of his capital----Senator R eed (interposing). Do you think they would hesitate to
ante in the first instance if they did not know what the limit was
going to be?
Senator P omerene. Y ou are talking about a subject we do not
know anything about. I insist on the regular order.
Senator R eed. It seems to me that the Senator protests rather
quickly. [Laughter.]
Mr. D awson. The average country banker objects to this in that
way, particularly when it comes to him somewhat in the nature of
an act of violence. He does not relish the idea of the Federal
Government saying to him, “ You must do this; you must take onetenth of your capital out of your community and invest it in this
institution, and you must later take another 10 per cent and invest
that.” So I say the feature of the subscription is somewhat objec
tionable to the smaller banker at this time.
But a subject of more concern than that is the shifting of his
reserves. That means more to him in the way of financial returns
than the difference in interest on his stock subscription to the regional
bank.
As I recall the terms of the bill, the country banker does not have
60 days as the central reserve city banker has. He has to produce
instantly, and he must shift 3 per cent of his total deposits from their
present location over to the regional reserve bank.
Now, it may seem like an anomaly, but it is true nevertheless in
actual banking practice, that those reserves to-day are a part of active
checking accounts, and so it is entirely exact to say that the reserves
of the country national banks are now in the active channels of busi
ness. It seems like a contradiction in terms that a reserve should be
part of the regular currents of everyday business, and yet I shall
endeavor to explain how that is so.
The First National Bank, of Davenport, Iowa, is required to keep
its reserve in either Chicago, St. Louis, New York, or some other
reserve city. Along with the question of reserves, there is the question
of daily exchange. I asked the boys in the bank to figure up how
active our New York and Chicago accounts were. Most of the
financial relations of our portion of Iowa are in the direction of
Chicago, rather than in the direction of St. Louis, although we have
considerable business in that direction also. I found that our Chicago
balance turned over every 2 days in the matter of exchange. In
other words, we were writing a sufficient number of drafts on Chi
cago banks every two days to wipe out our balance there, and that
balance was larger than the reserve which we were required by law
to carry.
Senator H itchcock. What methods do you adopt to restore that
balance? What proportion is in currency?
Mr. D awson. There is no currency; they are items of credit.
Senator H itchcock. N o currency?
Mr. D awson. N o currency at a ll; we never ship currency to
Chicago.
Our New York account shows the activity of the relations be
tween the mid-West and the financial metropolis. Our New York
account turns over once in every three days. We sell enough New
2106
BANKING AXD CURRENCY.
York exchange every three days to wipe out the balances we carry
in New York.
Senator R eed. Y ou would have to have that much money there,
whether you had a reserve or not ?
Mr. Dawson. Very nearly so, unless there would be some change
in the existing practices in the world of banking.
So, when you reduce the reserve requirements of the country banks
from 15 to 12 per cent, I do not think it is fair to say that the 3 per
cent reduction is immediately available, and that he can take it from
where it is and put it in the regional reserve bank without embarrass
ment to him and without disturbing business as it is carried on to-day.
I say the average country banker would not do it. He would not
feel safe in taking that 3 per cent by which you reduce his reserve
requirements----Senator O’Gorman (interposing). Do you think that is a safe re
duction—from 15 to 12—for the country bank reserve ?
Mr. Dawson. With the provisions embodied in this bill, I should
say yes.
Senator O’Gorman. D o you think the country bankers would not
consider it safe to avail themselves of the reduction in the reserve?
Mr. D awson. The country banker possesses some caution and
some conservatism—a considerable amount. I do not think he would
want to reduce his balances, either in New York or in Chicago, until
he saw how this bill was going to operate. He must put this money
up at once. He is not going to change the experience of years over
night. He is going to be cautious and await the developments in the
new system.
So, in my judgment the average country banker in Iowa, if he is
required to send that 3 per cent instantly away to the regional re
serve bank, will have to do one of two things—he will either have to
go out and borrow that money or he will have to contract credits or
call some loans to get it.
Senator S hafroth. Why can he not borrow from the reserve bank
immediately ?
Mr. D awson. I regard that as a very important matter, Senator,
and yet I can not find in this bill where the machinery for rediscount
is going to be ready to be put in operation the minute you call upon
the country banker for that subscription.
Senator H itchcock. H ow soon afterwards do you think it will be
ready for operation, from your study of the bill? You say you think
the machinery for rediscount would not be ready at the time the
country banker is required to shift his reserves, and I agree with you;
but I have been unable to figure out how soon afterwards it would
be ready.
Mr. D awson. I do not know. It seems to me that what should be
done would be to have that machinery of rediscount all ready before
the shifting of reserves began.
Senator R eed. Why not shift it in the form of good notes? Why
not let your bank take down $100,000 of good paper and deposit
that instead of cash?
Mr. D awson. Make it a simultaneous transaction?
Senator R eed. Instead of taking your money down and then put
ting up your note and collateral notes from your bank, and then
borrowing back the money you had taken down with you, why not
BANKING AND CURRENCY.
2107
deposit in the first instance part of your securities with the guaranty
of your bank, and let that stand at once as your contribution and
your rediscount?
Mr. D awson. That would be going straight to your destination
without any of the circumlocution that seems to be in this machinery
as it stands.
Senator R eed. Would that help that difficulty?
Mr. D awson. It seems to me it would, in part, but it would not
provide the gold reserve required by the regional banks.
Senator B ristow. Nevertheless, unless you utilized the money you
now have with your reserve agents, you would have to curtail your
business just to that amount. You would not have to force contrac
tion, but you turn over these securities and the regional bank collects
them, so that you take out of your community that much credit, do
you not ?
Mr. D awson. Well, I would not say you take out that much credit.
You can yet bring the level back through a rediscount.
Senator H itchcock. A reserve bank is required to keep a reserve
of 33^ per cent. If the reserves were paid in commercial paper how
would it affect the gold reserve?
Senator S hafroth. Y ou do not hold any reserve against capital.
You can loan that to the full extent. I am talking about a proposi
tion of turning the reserves into commercial paper. The reserves
count as deposits. Where would the gold reserves come from ?
Mr. D awson. Of course that is essential. That is vital. These
regional reserve banks should have this gold reserve against its note
issues.
Senator Nelson. It would not give them any money; it would
simply gi,ve them commercial paper.
Senator S hafroth. Yes; it would. They would issue this paper,
and if they would issue the paper immediately, it would give them
paper currency.
Senator B ristow. Where would they get the gold ?
Senator R eed. That is easily provided because any bank—I was
not trying to suggest a perfected system, but the idea I was trying
to meet was the one that there would be an interval when the bank
would be obliged to carry that money down, and let it remain idle,
and they get it back at some future time in the way of rediscount.
Now, leaving out for the moment the gold-reserve proposition. We
would, by the suggestion which I made, accomplish by one act that
which is contemplated shall be accomplished under the bill by two
acts.
Senator P omerene. And a delay.
Senator R eed. Involving a necessary delay, because under the pres
ent proposition a bank would send down a million dollars of money
and deposit it with the Federal reserve board, and if it were short of
money it would bring down the necessary million dollars of notes,
and, guaranteeing those notes, deposit them and borrow back the
$1,000,000 it had put in.
Now, if that is to be the ultimate result it might as well, in the first
instance, bring down the notes, and. guaranteeing them, turn them in
and use that as its contribution. Now, of course the 33£ per cent
of gold required on deposits would necessitate that the banks bring
2108
BANKING AND CUKKENCY.
down enough gold, if the plan should be worked out by which the
bank making this transaction should contribute a certain amount of
gold, and that would have to remain in the vaults. Further than
that, after all is said and done, what has been claimed for this system
is that it does enable the banks to use this capital, and if they use it
they might as well do it in one transaction as in two. 1 only made
the suggestion to see whether it would agree with the facts.
Senator Nelson. I think this hardship, so-called, is unduly ac
centuated, for the reason that this bill relieves them of 3 per cent of
their reserves.
Senator S hafkoth. According to this system, only 1 per cent would
have to be put up immediately.
Senator R e e d . I w^ant to say in this connection that the suggestion
which I made first came to me in conversation with Senator Pomerene. If there is any virtue in it the credit should go to him and
not to me.
Senator Nelson. Of course, the reduction which the bill makes of
reserves of country banks from 15 to 12 per cent after the bill gets
in operation would take care of that 3 per cent which they must put
over at once; but, Senator, in my judgment the average country
banker would not feel that he could take 3 per cent out of his balance
that he has now in the channels of trade and business and put it
into a regional reserve bank without some disturbance to the
machinery.
Now, let us see what it would mean to a State. Iowa is a purely
agricultural State, with no city of more than 100,000 people. We
have 340 national banks in Iowa.
Senator H itchcock. Will you permit me to interrupt you there?
Mr. Cannon was scheduled for this morning, and he tells me that he
would like to get back to New York to-night. There will be some
time required for your cross-examination, and I wanted to ask
whether it is important for you to get away to-night ?
Mr. D awson. It is not absolutely essential, although 1 had hoped
to start West this evening at about 6 o’clock. I am almost through,
so far as my general statement is concerned.
Senator H itchcock. Well, we will sit until 1 o’clock, anyway, and
I think you can probably finish your general statement by that time,
and then we can let Mr. Cannon go on immediately following recess.
Mr. D awson. It would be entirely agreeable to me, however, to
give way for Mr. Cannon at this time, if that is the committee’s
pleasure.
Senator H itchcock. Very well, then; we will hear you until you
complete your general statement.
Mr. D awson. As I said, we have in the State of Iowa 340 national
banks. They have a capital of $23,000,000. The national-banking
system is not as powerful out there as we would like to see it. The
10 per cent of capital-stock subscription for us would be $2,300,000.
The deposits in the country national banks of Iowa are $121,000,000,
and 3 per cent of that must go over. That would be $3,630,000. So
that the total would be almost $6,000,000, or $5,930,000, which would
be Iowa’s contribution to the Federal reserve banks the next day
after it went into operation—approximately $6,000,000.
Senator R eed. From all the banks, or from the national banks?
BANKING AND CUEBENCY.
2109
Mr. D aw son . T he national banks o n ly ; I am speaking o f the coun
try national banks.
Then the reserve cities, of which we have four in Iowa, would have
to make their additional contribution of 3 per cent in 60 days. They
have 60 days more in which to gather together their 3 per cent on
the $41,000,000 which they hold, which would be $1,230,000. But the
country bankers in Iowa must produce $6,000,000 at once and put
it into this system and those national bankers in the reserve cities in
Iowa, 60 days thereafter, must produce $1,230,000 more.
Senator R e e d . Are you not mistaken about that? [Reading:]
Every national bank located within a given district shall be required to sub
scribe to the capital stock of the Federal reserve bank of that district a sum
equal to 20 per cent of the capital stock of such national bank, fully paid and
unimpaired, one-fourth of such subscription to be paid in cash and one-fourth
within GO days after said subscription is made. The remainder of the subscrip
tion, or any part thereof, shall become a liability of the member bank, subject
to call and payment thereof whenever necessary to meat the obligations of the
Federal reserve bank under such terms and in accordance with such regula
tions as the board of directors of said Federal reserve bank may prescribe.
Mr. D aw son . T h ey pay in 5 per cent o f the capital at once; but
the paym ents w ith regard to the reserves were stated correctly.
Senator S h a fr o t h . Here is another provision in regard to that
matter:
and for a period of 14 months from the date aforesaid at least three-twelfths,
and thereafter at least five-twelfths, of such reserve shall consist of a credit
balance with the reserve bank of its district—
that gives them 14 months in which to put in this 3 per cent.
The C h a ir m a n . What section is that?
Senator S h a fr o t h . Section 20. [Reading:]
Five-twelfths of such reserve shall consist of money which national banks
may under existing law count as legfll reserve, held actually in the bank’s own
vaults; and for a period of 14 months from the date aforesaid at least threetwelfths, and thereafter five-twelfths, of such reserve shall consist of a credit
balance with the Federal reserve bank of its district.
Mr. D aw son . Certainly; he must at once put 3 per cent with the
Federal reserve, and the remainder of the 12 per cent may for 36
months consist of balances due from national banks in reserve or
central reserve cities.
Senator S h a fr o t h . I t gives them 14 months to get that in the
Federal reserve bank.
Senator B ristow . T h at is the second paym ent.
Senator S h a fr o t h . Five per cent—that is cash—and
then 3 per
cent, and thereafter five-twelfths of such reserve shall consist of a
credit balance with the Federal reserve bank of the district.
Senator N elson . What it means is this, that during 14 months he
must maintain 3 per cent.
Mr. D aw son . Certainly; and then raise it to 5 per cent.
Senator N elson . A n d then, after that, it m ust be 5.
Mr. D aw son . N ow , in my judgment, the country banks in Iowa----Senator S h a fr o t h . He does not have to put it in until a year.
Mr. D aw son . The country national banks in Iowa could not take
$6,000,000 right out of the everyday transactions of their banks and
put it in this regional reserve bank without some disturbance of
credits in that State.
2110
BANKING AND CURRENCY.
Senator O’Gorman. It would be a contraction of credits?
Mr. D awson. Yes.
Senator O’Gorman. Would that not be a continuous contraction
of credit for the year?
Mr. D awson. Gradual.
Senator O’G orman. Diverting it from commercial activities?
Mr. D awson. Yes; it would undoubtedly be some curtailment of
credit.
Senator H itchcock. What would the effect of the curtailment of
credit be on business in Iowa?
Mr. D awson. Of course there is no telling. I t would not hurt us
so much out there. Iowa is practically financially independent of the
rest of the country.
Senator R eed. If you had to divert $6,000,000 in the State of Iowa
from actual business that would mean a contraction of credit of
about $48,000,000?
Mr. D awson. It would mean that----Senator R eed (interposing). Now, if that was done, the only way
you could do it would be to either go closer to the danger line in your
reserves or to begin to gradually make loans as generously as you
had before?
Mr. D awson. Yes.
Senator R eed. There would be a gradual pinching in the financial
condition.
Senator P o m erene . The very thing that a banker would do would
be to go to that bank and borrow it back again.
Senator S hafroth. The reserve banks?
Senator P omerene. Yes.
Senator R eed. I am thinking now of the illustration on that same
occasion of the bank getting ready for a year in advance to make its
contribution.
Senator P omerene. There is not any necessity for the contraction
of the currency to that extent, with the privilege of borrowing it
back.
Senator R eed. Provided, you mean, you could make the loan back
immediately.
Mr. D awson. And provided, also, you had the collateral to get the
loans.
Senator N elson. I want to call your attention, Senators, to the
discrimination here and ask you to turn to the bill on page 36, line 23,
where it says, “ and for a period of 14 months from the date afore
said, at least three-twelfths ” ; that is, the country bank. Now, turn to
the next page, where it says, “ after 60 days from the date aforesaid,
and for a period of one year.” Now, in order to put them on an equal
footing, you ought to have the words “ after 60 days ” in line 23 on
page 36. In one case it reads “ after 60 days from the date of afore
said, and for a period of one year, at least three-eighteenths and per
manently thereafter at least five-eighteenths.” Now, in the other
case, on page 36, it says, “ and for a period of 14 months from the
date aforesaid at least three-twelfths.” In order to make that exactly
fair and equal you ought to have the same wording, “ after 60 days
from the date aforesaid, and for a period of 14 months.”
Mr. D awson. That emphasizes-----
BANKING AND CURRENCY.
2 111
Senator Nelson (in terp o sin g ). I t is clear that there is a discrim i
nation.
Senator H itchcock. Is th at not due to the fact th at the reserve
banks hold deposits in banks and the country banks take those de
p osits out, and for th at reason an additional lim it is given the reserve
banks ? Is that n o t the lo g ic o f the situation ?
Mr. Dawson. That is one viewpoint, and yet, take it from the
viewpoint of the banks the reserve requirements of this bill bear with
greater severity on the country banker than they do upon the reserve
city banker, because he has 60 days. Of course he is going to lose
some of his country-bank deposits.
Senator H itchcock. When the country banker draws upon his re
serves he calls upon the reserve city banker, and the reserve city banks
will have to carry the burden of the reserve city bank as well as the
country bank, and I think there is logic in giving him more time for
that reason.
Mr. D awson. I think so, and that is one reason why you have re
duced his reserve from 25 to 18 per cent, the central reserve city
bank; the bill reduces the reserve from 25 to 18 per cent.
Senator H i t c h c o c k . When does that reduction occur for t h e re
serve city bank?
Mr. D awson. From 25 to 18 per cent?
Senator H itchcock. Yes.
Mr. D awson. When it gets in full operation.
Senator N elson. It has a period of 60 days.
Mr. D awson. From what?
Senator Nelson (reading) :
If a reserve city bank as defined by existing law it shall hold and maintain
for a period of 60 days from the date fixed by the Secretary of the Treasury
as hereinbefore provided, a reserve equal to 20 per cent of the aggregate
amount of its deposits, not including savings deposits hereinafter provided for,
and permanently thereafter 18 per cent.
Senator H i t c h c o c k . Does that mean 60 days after the new system
is in operation?
Senator Nelson. From the date fixed by the Secretary of the
Treasury; from the time the bank goes into operation, I suppose.
Senator H i t c h c o c k . T hen the reserve city bank gets no reduction
in reserves u n til tw o m onths after the new system is in operation ?
Mr. D aw son . From 25 to 20 th e first th in g ; 5 p e r c e n t o f it in
s ta n tly ; a n d 2 more in 60 days.
I want to draw this down one step further. I want to draw it
down to the condition of the little bank itself, and what it is going
to do to it. I have taken a bank of $50,000 capital and $500,000
deposits. That is a bank like the First National Bank of Maquoketa,
Iowa, or the First National Bank of Marengo, Iowa—county seat
town—an average county seat town in the middle western country.
What is the bill going to mean to such a banker? You want him to
go into the system. He must at once subscribe 20 per cent of his
capital and pay 10 per cent of it, one half at once and the other half
in 60 days. Then he must shift to this new bank 3 per cent of his
deposits, so that his initial contribution for the reserve bank would
be $20,000. And eventually, if he were called on for the other stock
subscription, and carried to the regional bank the balance of his 7
211 2
BANKING AND CUERENCY.
per cent of reserves, or even call it 6, then he would have in the
regional bank $40,000. That $20,000 at the start is a pretty large
sum of money on $50,000 capital. In a bank of $50,000 the largest line
of credit he can give to any individual is $5,000. That is the biggest
note he will have in his portfolio, and there will be comparatively
few of them in towns of that size. So that he must produce $20,000
out of this $50,000 bank in order to comply with the initial require
ments.
Senator N e l s o n . But $15,000 comes by way of transfer from his
reserves. It is a shifting of reserves.
Mr. D a w s o n . Y es, sir: and I have felt, Senators-----Senator N e l so n (in terp o sin g ). I t is not a direct contribution; it
is just a s h iftin g o f reserves to that extent from other reserve places
to th is central bank.
Mr. D a w s o n . But my opinion is, Senator—and that opinion is
based on what I know of actual banking transactions in the country—
that at the beginning the country banker would not shift his balances
which he has now, because he feels that the balances which he main
tains now are none too much to take care of his needs for exchange.
At least he could not shift them until he begins to see how this new
.plan works. You are going to change somewhat the currents of
business. He is going to be very slow to take any step which will
endanger his business until he finds out how it works.
Senator N e l s o n . He can sell his exchange on the regional reserve
bank instead of these other banks?
Mr. D a w s o n . I want to discuss that when I reach the point. So a
country bank of $50,000 capital, with half a million dollars of de
posits, will have to put up $20,000. That would not be so serious for
him if you had the machinery for rediscounting ready to put in op
eration as soon as he sent that up there, and it would not be so serious
if he had the class of paper that would be eligible for rediscount un
der this bill. Those are the two things that confront the country
banker. In that connection I desire to say that I have met many
smaller bankers of Iowa, and among them there is a considerable
unanimity of opinion that the banks of $50,000 and $100,000 capital
in Iowa, or any other State for that matter, will not have the kind of
paper that will be eligible to rediscount under the terms of this bill.
Of course, the standard of the paper is not fixed in the bill; that is,
the exact standard. That is to be left to the discretion of the Fed
eral reserve board. The average country banker does not know just
what the standard is going to be, what requirements are going to be
exacted by the reserve board; and, as a matter of fact, in reading the
testimony before this committee I have seen no witness who seemed
to be entirely clear in his mind as to just what the standard that
would be eligible for rediscount by the regional reserve banks
would be.
Senator H itchcock. D o you think that is to be fixed by the Federal
board ?
Mr. D awson. In part, and in part fixed by statute.
Senator H itchcock. Would not the Federal regional reserve banks
pass upon that question ?
Mr. D awson. They may also. That only emphasizes what I was
trying to say, that there is a great deal of doubt in men’s minds as to
how the lines are going to be drawn.
BANKING AND CUERENCY.
211 3
Senator H itchcock. Y ou think it should be expressed more clearly
in the bill ?
Mr. D awson. I think it should be.
Senator R e e d . Y ou say they are not lik ely to have th is class of
paper ?
Mr. D awson. Yes, sir.
Senator R eed. Assuming that, that might be commercial paper, as
a 60 or 90 day note signed by two people, and I think that is just
where we are. I do not think anybody can place that.
Mr. D awson. That is on an actual business transaction ?
Senator R eed. I am leaving that out, because I do not think any
board can go back of a piece of paper that is presented. You have
that class of paper, do you not ?
Senator Nelson. The difficulty which comes, Mr. Dawson, with the
paper of these country banks is not so much the question of time as it
is the quality of the paper; that is, commercial paper in the strict
sense, as understood by some. The bulk of their paper is not commer
cial paper?
Mr. Dawson. N o.
Senator Nelson. It is not paper that they say will liquidate itself ?
That is one of the radical troubles.
Mr. D awson. But I think the committee understands pretty thor
oughly that a great majority of the paper held by the average coun
try bank is paper that matures when the farmer produces his crop.
It matures at a certain time of the year. It may be based on cattle
or other things, but it is only liquidated when the community has
produced agricultural wealth. In other seasons there would be very
little eligible.
Senator R eed. If that kind of paper was excluded from the bene
fits of this bill and certain other paper had all the benefits of the
bill, would that not necessarily result in an additional interest charge
and a discrimination against that class of paper which is longer in
time and which is to be liquidated by the farmer marketing his cat
tle, and things of that sort ?
Mr. D awson. T h at would be my view.
Senator H itchcock. Have you any figures showing what percent
age of the farmers’ paper is actually liquidated and what per cent is
renewed ?
Mr. D awson. N o ; I have no figures on that point.
Senator H itchcock. Why is it that there is not a wider variation
in the amount of loans as reported in the bank reports ?
Mr. D awson. During the other portions of the year the way the
country banker loans out his money is in small notes, which under no
circumstances could he use as collateral with a regional reserve bank.
Then there is an additional embarrassment to the country banker.
There is a question whether or not----Senator P o m e r e n e (interposing). You say under no circumstances
could he use that. Why ?
Mr. D awson. I could conceive of no practical way whereby a
country banker could; we will say he wanted a rediscount of $10^000
or $5,000; say he wanted a rediscount of $5,000. He takes his port
folio and he gathers up notes of $25, $50, $60, or $75, small notes. It
does not seem to me it would be practicable for him to rediscount a
bunch of such small notes as these.
211 4
BANKING AND CURRENCY.
Senator P omerene. There is nothing in the bill preventing it;
nothing saying that that could not be received.
Senator B ristow. It is not a commercial transaction in any sense;
it is simply a personal loan.
Mr. D awson. Then if the bank were to send those small notes to
a bank outside of their own institution they would lose customers by
it. The average man in the little towns does not want his note out
side the hands of the banker from whom he obtains the loan. He
does not want it sent to Chicago. He may want to come in and pay
it. If the man came in and he went to the banker from whom he got
the money and said he wanted to pay the note and the banker said
“ I have your note at the regional reserve bank as collateral,” the
next morning that particular customer would be over at the State
bank doing business and not with the national bank.
I think this 3 per cent of reserve which you propose to shift from
its present place to the regional banks, if you do that a little more
gradually, take 1 per cent in the first three months and the next in
quarterly periods, you would get it all over there in the same period
of time, practically which you have in the bill, but it would be so
gradual as to permit the banks to readjust themselves.
Senator H itchcock. But you would not send it over there by the
time the regional reserve bank had any use for it.
Mr. D awson. But these things are not of the largest concern to
the country banker. They are not the things that are going to keep
him out or put him in. The present every-day question with the
country national banker is the question of the equality of opportunity,
or the equality of privileges with the man with whom he is in direct
competition. That is the vital question with him every day. If he
is to be invited into a system or to remain in a national system he
went in with certain privileges, and the only real privilege he
had under that system is to be taken away from him, and he is to
stand in this new system deprived of any advantage he ever did have,
and denied those additional privileges that he has all these years
had reason to expect from the Congress of the United States, then I
can not see, and no one could see, any excuse for his going into that
system. He will go into the State bank system. The question of the
equality of privilege and equality of opportunity or the equalization
of the privileges of the national banks is a most important proposi
tion, and goes to the section of the bill in relation to the farm loans
and savings department.
Senator B ristow. I am more interested in Mr. Dawson’s analysis
of this bill, probably, than anybody else, or at least as much as any
body else, because he is dealing with the very things which touch my
constituents, and I would like him to be here just as long as he can
stay. If we are to hear Mr. Cannon, I think we may have to ask
Mr. Dawson, if he can, to stay over.
Mr. D awson. I should be very glad to give way at any moment to
Mr. Cannon.
Senator H itchcock. I think you had better proceed.
Mr. D awson. This question of farm loans and the savings-bank
provision is a vital question.
Senator B ristow. That is going to take a good deal of time.
Senator Nelson. Tell us about the farm loans.
BANKING AND CUBEENCY.
2 115
Mr. D awson. The provision of this bill is of no practical benefit
to the national banks in the Middle West, where there are the highest
class of farm-mortgage loans, and where agriculture is in the highest
state of development, and where the loans there are regarded as the
choicest security which a bank can obtain for a loan—a farm mort
gage not to exceed 50 per cent of the value of highly improved farms
of that section of the country. It is the best security any bank can
lay its hands on. It is not the custom to make loans of that character
for 1 year. The country bank will make them for 5 or 10 years.
With the provision in here that they may only be made for 1 year,
no one would ever approach a national bank on the subject of try
ing to negotiate a farm mortgage with that 1-year provision. He
would do business with the State bank.
T here were certain reasons w hen the national banking law was
enacted w hy farm m ortgages should n ot be taken by national banks.
A t that tim e there w as a question as to its security, and there was
a question as to its liq u id ity — its pow er to be converted, the power to
liquidate it. T h e class o f those securities is very much higher now
than it w as then. T he security upon the loan is im proved.
Senator N elson. A n d they can be easily liquidated?
Mr. D awson. There is a fairly well organized market for the
farm mortgage. The great insurance companies are now seeking
first-class mortgages on highly improved real estate. There is a
broader market now.
Senator R eed. A s a practical question, if your bank had a $10,000
mortgage on a good farm in the State of Iowa, running for five
years, and drawing a reasonable rate of interest, would you have any
difficulty in getting that money in one or two days’ time; I mean
the money on that mortgage?
Mr. D awson. Not under ordinary times. I can see, of course, that
in the face of a panic you might not be able to do that.
Senator R eed. In the face of a panic we could not get our money
out of the banks.
Mr. D awson. If the machinery of this bill works as its authors
think it will work, we are going to be panic proof by the rediscount
feature of it. Certainly there is no choicer security than this par
ticular kind of mortgage that you described.
Senator N elson. I have know n runs on banks to be stopped by the
tender o f m ortgages over the counter instead of cash.
Mr. D awson. There is some difference of opinion among men as
to just what the provisions of this bill mean with regard to farm
loans. I have had men who have analyzed it say that the provision
on page 44, speaking of loans on farm iands, and" putting limitations
on them, of which the country banker complains, that that is simply
applied to the commercial departments of any national bank any
where, whereas, in the very next section of the'bill, section 27, relat
ing to the savings department, you gave to that department the power
to loan on real estate, without the limitations. Whether or not the
limitations in the preceding section would apply to that. I am not
sure.
Senator Nelson. Would it not be a better limitation, instead of
limiting it upon the capital, to gauge it by the time deposits?
2116
BANKING AND CTJKRENCY.
Mr. D awson. That would be my solution of it, and I want to make
my suggestion jointly with relation to farm loans and the savings
department. The savings department provision in this bill is very
objectionable to national banks who now have a savings department
and small country banks.
Senator N elson. They are all practically doing a savings-bank
business now?
Mr. D awson. Very nearly, and under the demands of this bill
it would actually compel them to go out of the savings-department
business in a large measure.
Senator R eed. Why? That is what we want to know. Tell us
why, so that we may know how to remedy it, if we agree with you.
Mr. D awson. In the first place—I only refer to that now because
I want to try to get through by 1 o’clock so than Mr. Cannon can go
on. Would it be just as agreeable for me to answer that later on?
Senator R eed. Yes; but do not forget it.
Mr. D awson. Country banks do not like this segregation of capital,
segregation of assets, segregation of cash. It is absurd, and we
come to a $25,000 bank where everything goes into one window, and
everything is done by one man. He would be the subject of derision
in that community if he were compelled to run two banks—segregate
his capital into savings business and commercial business. That
would be the case in a $25,000 bank out in Nebraska and Kansas, and
in Iowa also.
Senator N elson. I t would be.
Mr. D awson. My general suggestion with regard to the savings
department and the farm-loan department is this: The national banks
have been encouraged to open savings departments. A savings de
partment in our bank was started about a year before I went there;
that is, in 1910. I have inquired into the circumstances under which
they started that department in that bank. They wrote the comp
troller and asked him for the regulations respecting the establishment
of a savings department in a national bank. They received a letter
from him, and it was on the basis of that correspondence that they
proceeded to establish their savings department.
Senator R eed. The comptroller gave permission?
Mr. D awson. He did not deny us. I will put the letter into the
record if desired. It is practically the same reason he gave in his last
annual report.
It seems to me that it could be done with perfect safety, to permit a
national bank to accept savings deposits and then loan a percentage
of its savings deposits on first-class farm mortgages.
I know the complaint is made you do not want to confuse invest
ment banking and commercial banking, but there is not a State bank
in the State of Iowa, with 1,300 State banks and 300 national
banks—there is not a bank in that entire State but what is doing in
vestment banking and commercial banking all through one window,
and it is done safely. It is serving the interests of those little com
munities, and their security—the security of the State bank out in
our country—is as good as the national bank. They are just as
well conducted, and they are serving the people in a wider capacity.
Senator R eed. And thoroughly inspected?
Mr. D awson. I think their inspection is not quite as rigid as the
national-bank inspection.
BANKING AND CUBBENCY.
2117
Senator B ristow . In our State I th in k it is better.
Mr. D aw son . That may be so.
Senator R e e d . The State government of Kansas has always been
understood to be superior to any other government.
Senator N elson . Except the government of Minnesota. [Laugh
ter.]
Mr. D aw son . I know the question has been asked this committee
by some of the large bankers, What situation the national banks would
be in if at one window you are paying out demand deposits and at
another window you are enforcing the 60-day rule ? It seemed like a
question that had no answer. But yet it has an answer. There is
a difference between a demand deposit and a time deposit. There is
a difference in the contract between the depositor with the bank.
The man who comes in with a savings deposit—a time deposit, if
you please—says to Mr. Banker, “ I want to leave this here a certain
length of time, a considerable length of time. I will leave it here,
say, three months or seven months,” or he need not specify. Mr.
Banker says, “ Very well. If this is a time deposit, we can afford to
pay you interest on that in consideration of your allowing it to
remain here'. We will pay you 3 per cent interest on it.”
Senator N elso n . And give y o u a certificate.
Mr. D aw son . One or the other. He may be either given a certifi
cate or it may be entered in his pass book. There is a contract be
tween the depositor and a banker on a time deposit. That is not true
betwen the banker and the man who comes in to make a demand
deposit. The business man who comes in and lays down his deposit,
he says to the banker, “ I want you to take care of this for me, but
I expect you to pay it to me the minute I want it. I am not going
to leave it here any specified length of time; you can not count on
that.” Our banker says, “ I can not afford to pay you any interest
on that.” There is not the same contract. Now, if there is a differ
ent contract between the depositor and the banker on those different
classes of accounts, then there should be a way by which they could
be handled differently and with entire justice to all concerned.
Senator N elson . And safety.
Mr. D aw son . And with safety as well. So I can not see why a
country national bank should not be given the privilege under proper
restrictions, of course, to do a commercial business and this invest
ment banking.
Senator N elso n . And, as a matter of fact, are not the bulk of those
deposits in the small country banks time deposits?
Mr. D aw son . They are. I have a letter here from one of the coun
try banks on that very subject which I hope will be of service to
the committee.
Senator H itc h c o c k . What size bank would you limit that to ?
Mr. D aw son . I do not believe I would limit any national bank.
Let it be a national bank up in New York or Chicago, I do not care.
If it is necessary in serving the interests of their community to have
a savings department if they wanted one, I would give them the
same privilege as a bank in the smaller town.
Senator N elso n . I will tell you, Mr. Dawson, what they do. They
organize a loan and trust company as an appendix and work
together.
2118
BANKING AND CURRENCY.
Mr. D aw son . Yes. Within a radius of 50 miles from where I
live and I think I can count 10 or a dozen national banks, in their en
deavor to meet the needs of the community where they are situated,
have been obliged to take out a State charter and run the two banks
together. There are many national banks operating as a savings
bank under the laws of the State of Iowa, with the same stockholders
and the same directors as the national bank.
Senator N elson . Y ou will find, if you want to prove it. a trust
company in the country with small branches in the national banks.
Mr. D aw son . The country banks have been obliged to resort to
that expedient in order to serve the needs of their communities.
Senator R eed . Yes; and do not some trust companies organize to
get hold of the stock and control of the national banks?
Mr. D aw son . I am not familiar with that. Now, that is about all
the notations I have here with respect to my statement, except one
thing, the refunding of the 2 per cent bonds. The country bank is
very vitally interested in that question, of what you are going to do
with the 2 per cent bonds.
Senator N elso n . And for this reason, he has taken out circula
tion more up to his capital than the city bank.
Mr. D aw son . Indeed he has.
Senator R eed . Suppose he may keep that circulation.
Mr. D aw son . I think he would be satisfied with that provision.
Senator R eed . We only propose to retire one-twentieth of it each
year, and suppose that proposition of retirement was put in the alter
native, that the Government could retire it and substitute for it a
certain other kinds of money, in which event they could take up his
bonds; would they then have any objection?
Mr. D aw son . No; I think not.
Senator R eed . All he wants is to be certain he is going to get 100
cents on the dollar for every 2 per cent bond which he paid 100 cents
on the dollar for?
Mr. D aw son . Yes; a n d som e p a id m o re ; b u t p a r is all th e y could
expect.
Senator R eed . And as long as he held the 2 per cent bonds, that he
be allowed to have the circulation privilege?
Mr. D aw son . That is the contract under which he took the 2 per
cent bonds at par.
Senator R eed . And therefore the Government of the United States
ought to make its obligation good, and if it cancels the arrangement,
it ought to put the man back in status quo?
Mr. D aw son . That is all; and that is all the average country
banker asks.
Senator R eed . I think so, too.
Mr. D aw son . The way the bill stands now, the country banker is
in fear if he does not come into the system, then the 2 per cent bonds
will go down to the level they would have without the circulation
privilege. He bought those bonds under a contract, whether implied
or otherwise, wfith the Government that he should have the circula
tion privilege, and if the circulation privilege is taken away and no
provision made for maintaining them at par he is going to suffer a
BANKING AND CURRENCY.
2119
Senator Reed. Suppose we provide that the circulation privilege
should continue as to those banks coming into the system, and not as
to the others. Would that have some tendency to get them in?
Mr. D aw son . I am not quite sure that I caught the question,
Senator.
Senator R eed . Well, I will think that over myself. I t sounds a
little like coercion.
Mr. D aw son . What they are concerned about is what is going to
happen; that is, they are a little bit fearful this system is not going
to be constructed so that it will be to their advantage to come in. If
that should prove to be the case, and they do not care to come into
this new system, then they want to know what is going to become of
the 2 per cent bonds if they do not come in.
Senator H itc h c o c k . Suppose the profits o f the reserve bank sh o u ld
be invested in the 2 per cent bonds from time to time?
Mr. D aw son . That would take care of it in the course of time.
I do not think it is entirely satisfactory with this'provision in the
bill, which says they shall be redeemed at the end of the 20 years,
because they understand the present Congress can not bind a Con
gress 20 years from now.
Senator H itc h c o c k . I mean profits over the dividend which is
provided for on the stock.
Mr. D aw son . In the form of a sinking fund. Now, Mr. Chair
man, that completes, in a general way, the statement I wish to make
in regard to this bill.
Senator B ristow . I wanted to ask you, Mr. Dawson, about sav
ings banks.
Mr. D aw son . I should be very glad to conclude this afternoon if
I could.
Senator B ristow . Y ou have a savings bank department in y o u r
bank?
Mr. D aw son . Yes, sir; established three years ago.
Senator B ristow. What do you do with the money you take in in
your savings-bank department?
Mr. D awson. Y ou mean in the way of investing it?
Senator B ristow . Yes.
Mr. D aw son . It is invested the same as the other demand funds
of the bank.
Senator B ristow . That is, i t is h a n d le d in com m ercial business
th e sam e as any o th e r d ep o sits?
Mr. D awson. To be sure. We have increased somewhat what we
call the secondary reserve of the bank by reason of these deposits.
The secondary reserve of a national bank in actual operation being
the purchase of bonds—State bonds, municipal bonds, and some
other investment bonds—which are held in the vaults of the bank
and which we can convert into cash practically at any time to meet
the demands of depositors. The First National Bank of Davenport
carried $252,000 worth of such bonds, and carries them to-day in its
vaults, while our total deposit liabilities are $2,500,000 —about 10
per cent of our total deposit liability.
Senator B ristow . What per cent o f y o u r deposits are th ro u g h y o u r
savings-bank department ?
S. Doc. 232, 63-1— vol 3----- 13
2120
BANKING AND CURRENCY.
Mr. D aw son . Of th is $2,500,000 of to ta l d eposits, a little o ver
$700,000 is sa v in g s d ep o sits th a t have accu m u lated th e re in th re e
y ears.
Senator B ristow . A savings bank would loan that on investments,
would it not?
Mr. D aw son . Yes, sir.
Senator B ristow . This being a commercial bank, you are presumed
to loan that on commercial paper? You are carrying these bonds.
You are permitted to carry bonds, are you----Mr. D aw son . Under the national banking act? I understand so.
We have never been criticized by the comptroller for that.
Senator B ristow . Why should you not carry real estate mort
gages as well as municipal bonds?
Mr. D aw son . Of course we a re p rev en ted by law from d o in g it
now .
Senator B ristow . Is there any reason why you should not ?
Mr. D aw son . I can see no reason why a first-mortgage farm loan
on an improved Iowa farm would not be just as good, if not superior,
as a security, to a municipal bond or a timber bond or a railroad bond
or any other class of bonds that the bank invests in.
Senator B ristow . Isn’t it just as liquid?
Mr. D aw son . I would not say that it was quite as liquid. I have
found, on making inquiry in the East with a view of locating a
market for first-mortgage real estate loans, that a good many in
vestors in the East have not forgotten an unpleasant experience they
had in the western country a good many years ago. They do not
seem to appreciate the transition that has occurred out there in the
Middle West with regard to values of real estate. It is true that
there is a large market for first-mortgage real estate loans on the
part of the insurance companies, who purchase them in very large
quantities and on the part of the investor. Any Iowa savings bank
or a State bank which loans on real estate, may not only sell the
mortgages to investors, but they also issue a debenture bond on them,
and those are very much prized bv investors. They pay a rate of
5 per cent as against the savings-bank rate of 4 per cent. Of course
a national bank is prohibited from entering the field at all.
Senator B ristow . Have you many savings banks in Iowa ?
Mr. D aw son . A great many. The commercial banks in Iowa are
called savings banks, outside of the national banks. Take the city
of Davenport, a city of 45.000 people; it has upward of $30,000,000
of deposits, a very creditable line of deposits considering the popula
tion of the city. There are two national banks there. There are four
savings banks, which are as large or larger than the national banks.
These savings banks are doing a commercial business, doing a savings
business, and doing a bank business; that is, receiving deposits of
country banks, State and others. Only one of these four has gone
into the country bank field very extensively. That is the German
Savings Bank, which holds the largest deposits of any bank in Iowa.
Senator H itch co ck . Has Davenport any deposits from country
banks?
Mr. D aw son . Oh, yes.
Senator H itc h c o c k . What do they amount to?
Mr. D aw son . I should say about $3,000,000. all told. The eastern
idea of a savings bank, of course, is entirely different from our idea
BANKING AND CUBKENCY.
2121
of a savings bank. This is a stock savings bank, organized under
State laws, permitted to do a commercial business, a savings-bank
business, or any other class of banking; permitted also to exercise the
functions of a trust company, to act in a fiduciary capacity, to act as
administrator, and all that sort of thing.
So that under this liberal State law this German Savings Bank
has grown up in the town of Davenport with the largest deposits of
any town in the State of Iowa. They have upward of $6,000,000 of
bank deposits of banks round about, most of them State banks.
Senator W e e k s . D o you not think, then, it is a m isnom er to c a ll
such a bank a savin gs bank?
Mr. D aw son . It is, from the New England point of view, and I
think it is a misnomer.
Senator W e e k s . Of course, we do not expect other States to be as
progressive as Massachusetts in such matters.
Mr. D aw son . W e have none o f the m utual savings banks in the
W est.
Senator B ristow . N ow , the testimony that has been given here is
to the effect that a savings bank could not possibly desire to become a
member of this system, because the nature of its business is such that
it would be of no use to it. Do you think the savings banks in Iowa
"would want to come into this ?
Mr. D aw son . These four savings banks that I speak of that we
are in direct competition with are all engaged in commercial busi
ness. They handle a very considerable line of commercial accounts
for manufacturers, merchants, etc. Their necessity for rediscount
ing at certain times of the year is identical with ours. When we are
compelled to borrow money to take care of our commercial customers
I have observed from their statements that they are practically in
the same condition. They are usually borrowing when we are, so the
necessity for their rediscounting is practically the same as ours.
That is the way matters run in Iowa as between a national bank and
the so-called savings banks.
Senator P o m erene . W hat is the legal reserve under the Iow a law?
Mr. D aw son . I t varies. I t is 5 per cent on savings deposits, and
from th a t up to 20.
Senator P o m eren e . On com m ercial deposits, you mean?
Mr. D aw son . Y es, sir.
Senator B ristow . H ow do these savin gs banks that are doing that
kind o f business— do they segregate th eir deposits?
Mr. D aw son . N ot at all.
Senator B ristow . H ow do they fix the reserves then ?
Mr. D aw son . The State law specifies—of course, in the actual
transaction of the business of the bank there is a set of books kept
for savings deposits and a set for checking accounts. The law pre
scribes that on the savings accounts they shall carry a reserve of a
certain per cent, 5 per cent. On these other classes of accounts the
law provides a different reserve, so it is a mere matter of mathematics
what the reserve is that they shall have at any time.
Senator B ristow . Mr. Dawson, out there in Iowa, as I understand,
the change in our present system which you want is something which
will make the currency more elastic and mobilize the reserves; those
two matters?
Mr. D aw son . Yes; those are the fundamentals, it seems to me.
212 2
BANKING AND CURRENCY.
Senator B ristow . N ow , if that could be done by the establishment
of a Federal reserve bank, a local bank owned by private subscrip
tion; let it be managed by this Federal board directly; let it have
branches out through the country; make it a bank of issue, a bank of
rediscount, and a bank of reserve, so that these reserves that are
required in the bill will be deposited in this Federal bank. Then
when you wanted to rediscount any paper you could rediscount it;
whew you wanted currency you could get it in a manner similar to
that by which you would obtain it through the regional bank. Would
that perform all the functions which you need out there?
Mr. D aw son . I think it would. I think that would perform the
functions mainly.
Senator B ristow . Would that be more satisfactory to the com
munity—they would not have to put up any stock unless they wanted
to----Mr. D awson (interposing). Yes; but I do not think that disturbs
them much. That is not the main objection to this bill.
Senator B ristow . The main objection as I understood you just
before you finished this morning—what was the main objection?
Mr. D aw son . I started with the foundation that if this system is
to be a success the country banks must go into it. If the country
banks do go into it they should not be penalized; they should not
have taken from them any considerable portion of the earnings which
are now reserved under the national banking act. Then, in addition
to that, that now is the opportune time for the Congress of the
United States to equalize the privileges of the national banks. Those
of you who have been in Congress for many years know that it has
been under discussion; it has been recommended repeatedly by comp
trollers of the currency; it has been recommended repeatedly by
Presidents; that the national law needed some amendment. It is
50 years old, and 50 years have wrought a tremendous change in the
handling of this business, and yet there that old law stands. The
men who are running the national banks feel that their hands have
been tied, and they feel that now is the time for the Congress of the
United States to unshackle them.
Senator H itchcock. The law of England and the law of France
are much older.
Mr. D awson. Yes; but they are hardly comparable to this.
Just before I left I took occasion to write out to a few intelligent
national bankers that I knew well and personally, the banks of
$50,000 and $100,000 capital, men that had given some thought to
this, as I supposed. I asked them how they thought this bill would
affect their banks and their communities. I received one answer that
seemed to cover the ground most thoroughly, and I am going to
take the liberty of reading it to the committee if you care to hear it.
This is from the cashier of the Washington National Bank of Wash
ington, Iowa, a town of perhaps 4,000 or 5,000 people.
This from the Washington National Bank, Washington, Iowa.
October 2, 1913. Capital, $100,000; deposits, $1,000,000.
Mr. A. F. D a w s o n ,
President First National Bank, Davenport, Iowa.
D ear S ir : I have your favor of September 30 requesting by early mail our
views on the pending currency bill as it would affect our bank and our com
munity. While we believe that some currency legislation is needed and that in
BANKING AND CURRENCY.
2123
the main this bill will create more healthy conditions and prevent money strin
gencies such as we have experienced in the past, we feel that if the bill is
passed in its present condition it will do our bank and our community more
harm than good.
We believe in the idea of Government supervision and regional banks, but
do not like the idea of being forced to subscribe from 10 to 20 per cent of the
amount of our capital or else forfeit our charter. In fact, I am free to confess
that if the bill goes throught in its present form it is very likely that we would
be forced, in justice to our stockholders, to forfeit our national charter and
become a State bank, much as we would regret to do so.
Inasmuch as the bill promises that our income from the stock subscribed
will in no case exceed 5 per cent, and also that we would not be allowed any
interest for reserve carried with them, this would in itself cost us from $1,500
to $2,000 a year. The loss of exchange charges on checks would also be an item
of some consequence to us.
The savings feature of the bill would work a great hardship on us and give
the local State banks a big advantage. At present 70 per cent of our deposits
are in time certificates and savings accounts, and in order to hold these we would
be forced to become a State bank.
The farm-loan feature of the bill would have no advantage to us, inasmuch as
none of our farmer customers would consider mortgage loans maturing in one
year.
While the rediscounting feature of the bill may work to the advantage of the
larger banks, it will amount to nothing to us, as we carry practically no paper
which we could rediscount. The majority of our notes are made for a period
of six months and are made by our farmer customers and our merchants, and
they expect to take care of their obligations as they sell their farm produce or
turn their stock of goods, and we could not with safety rediscount such notes
as this without serious trouble to ourselves and loss of customers to the bank.
We are greatly in hopes that the objectionable features of the bill, which can
not help but result in great hardship for small banks like ours, will be elimi
nated, and that a bill will be passed which will be generally acceptable to the
national banks.
I personally am very glad to know that you have been asked to go to Wash
ington and appear before the Banking and Currency Committee of the Senate.
I believe you are in every way the right person to handle this matter for us, and
I feel that you will accomplish great good.
Very truly, yours,
W . F . W il s o n , C a sh ie r.
This from the First National Bank, Brooklyn, Iowa; capital stock,
$50,000:
With our deposits of $450,000 and the capital we would have to invest in the
Federal bank, I figure that we would have a loss of $1,000 a year, as follows:
Our reserve, counting on the reduction to 7 per cent of deposits, would average
$32,000. This now brings us 2-J per cent interest, which we would lose, or $800.
As we are getting an average of 7 per cent on loans, there would be a loss of 2
per cent on the $10,000 capital we put in, or $200. This would make the $1,000
loss right in sight, and there is another loss which many do not take into consid
eration. In drawing out the $32,000 from our reserve banks it would make our
deposits so low that we would have to borrow money to replace it, or lessen our
loans, in order to have sufficient funds to draw drafts on and handle our foreign
checks.
To sum up my views, as the bill now looks to us, I think that there will be an
application for another State bank.
I would say that we might have about $20,000 of rediscount paper in our bills
receivable.
This from the First National Bank, Maquoketa, Iowa; capital,
$50,000; deposits, $650,000:
I think it would be much better for the ordinary country bank if the time
limit of acceptable paper was 6 months instead of 90 days.
It seems to me that the Federal bank should pay 2 per cent interest on the
reserve required to be kept with them—the same rate as banks get now from
reserve agents. If they pay no interest on this fund, it places national banks at
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BANKING AND CURRENCY.
a disadvantage with State banks, and would certainly deter State banks from
becoming members.
I am strongly in favor of allowing country banks to loan a part of their time
deposits on real estate security, but to limit the time to one year would prac
tically prohibit any such loans being made here.
With these exceptions, I am rather favorable to the bill.
Senator R eed . I should like to ask a question right there: If he
does not have 90-day paper and does have 6-months’ paper that he
could use, I understand then how he might want a bill which permits
him to cash 6-months’ paper. But he adds a clause there that they
could not discount this paper. I take it that their customers would
leave them. That is what that clause means. Then he is in a posi
tion where he has nothing and can not get anything. He says:
“ First, I have not any 90-day paper; and, secondly, I have 6-months’
paper, but I would not dare use it: and, third, the clause that permits
the use of real-estate loans is of no value.”
How are you going to help a man situated that way ?
M r. D aw son . It seem s to m e v ery easily.
Senator F e e d . N ow , how? I mean, with reference to this one
feature of getting notes?
Mr. D aw son . H ow are you going to make it attractive to him?
Senator R e e d . Yes; on that one feature. How are you going to
permit him to discount when he has not anything he dare discount?
Mr. D aw son . One reason why he dare not discount it, in my opin
ion, is the present prejudice among his customers against having
notes sent out of town, or out of his bank. With a proper system in
the United States, based on rediscounts, it would only be a question
of time before the views of the people in that regard would change.
That would be a matter of educating his customers. He could not do
it the first day or the first month, but in time the prejudice his cus
tomers have in that particular would be eliminated, in my judgment.
Senator R e e d . I can grasp your idea from that answer.
Mr. D awson . There is this that the committee might take home
with them. I offer this as a possible solution. If there was put into
a regional reserve bank every month a certain volume of paper of
the country banks for rediscount, and if that paper was 6-months’
paper, then some part of it would be maturing every month, would it
not, and would that not be just as liquid as your 30-day paper?
Senator R eed . But it would not be, according to the idea of some
bankers here, of this character, namely, that it would all pay itself
off quickly, if they had to have the money.
Mr. D aw son . N ow , I agree that it would not be wise to issue cur
rency on that class of paper entirely; but would it endanger the
liquidity of the entire mass, or a certain small percentage of it which
was liquidating itself each month, as the months rolled by, say 60
instead of 90 day paper?
Senator R eed . Y ou would advocate or suggest, then, that a certain
percentage of this paper be allowed?
Mr. D aw son . That is the thought I would like to leave with the
committee. I do not recommend it, but it seems to me it is worth
considering.
Senator P om eren e . In that connection I would like to ask you this
question: You are familiar with the country banks in Iowa, gener
ally; do they loan substantially the same amount each month?
BANKING AND CURRENCY.
2125
Mr. D aw son . N o ; they do not. If they did, then they would have
in their own vaults a certain amount which would mature every 90
days; but that is not the way the business of the country is handled?
Senator P o m eren e . That is what I am trying to get. When do
they borrow the most money?
Mr. D aw son . If it is in a country where they are feeding cattle,
and that is a considerable industry in Minnesota and Nebraska.
Senator P om eren e . I am speaking of Iowa.
Mr. D aw son . I am speaking of Iowa also. Most of the cattle loans
are made in the spring or summer, and they are liquidated when the
cattle are sent to market.
Senator B ristow . If they are corn fed, it would be in January or
February.
Mr. D aw son . The cattle would be marketed in the winter.
Senator P o m erene . The farmers borrow for other purposes than
for the buying of cattle, do they not?
Mr. D aw son . Not unless it is a permanent loan. Then they put
that in the form of a real estate mortgage.
Senator P om eren e . D o they not deal in hogs and horses?
Mr. D aw son . Oh, to be sure.
Senator P om eren e . They do not do that at any particular season
of the year ?
Mr. D amtson . It is largely a seasonal business.
Senator P o m eren e . I know, but the seasons for hogs and cattle is
not the same. Hogs are usually marketed within six or eight months
from the time they are pigs.
Mr. D aw son . In Iowa we do not borrow any money to go and buy
pigs. We raise them ourselves out there. We do not have loans based
on the basis of pork on the hoof. We do not buy pigs and then fat
ten them and sell them. We raise them.
Senator R e e d . Mr. Dawson, have you any other suggestions that
you think would make it easier for the country bank to come in—
that is. the country bank of the character you have been describing?
Mr. D aw son . If I were to sum it all up as to my opinion of what
would make this sufficiently attractive for the country banker to make
him wish to remain in the national system, and I believe it would also
be attractive enough to create a desire on the part of the city banks to
come into the system, I would adopt some suggestion that has been
made as to the subscription to the' capital stock, perhaps reduce that
one-half, and make it 6 per cent. The shifting of reserves I would
make a little more gradual, and instead of shifting 3 per cent at the
very start I would move that gradually. As I understand, this
regional bank is not to be run for profit primarily. The country
banker can not understand why this bank should pay the Govern
ment 2 per cent or more' on its deposits and not pay him anything
on his deposits when he is supplying the capital as well. There may
be some good reason why the country banker—who impounds his
reserve over in this bank, and those reserves are used by the regional
banks as a basis for credit—why he should not receive 3 per cent
from the regional bank the same as he is receiving now.
Senator R eed . On that point, because I am so favorably impressed
with your remarks—and I do not say that as flattery—I want to
give you an idea to take home on this question of the capital of this
bank. Everv banker who has come here has talked about the banks
2126
BANKING AND CURRENCY.
furnishing all the capital for these regional banks. Let us see if
they do. One requirement of this bill, in section 16, is that the Gov
ernment of the United States must put every single penny it has,
except the 5 per cent reserve, in this bank and except also the moneys
held as special deposits, all of which, as we know, can be speedily
drained into a bank.
Mr. D aw son . But that is deposits rather than the capital, Senator.
I have endeavored to state that accurateW.
Senator R eed . It deposits it, and immediately after it has deposited
it it begins earning money and the banks get the benefit of it.
Now, the provision of the bill is that before the Government takes
down a single penny from its contribution the banks shall get 5 per
cent, and it may ultimately be 6 per cent, on their capital. The next
proposition is that the Government furnishes the credit and backs up
all of this paper that is to be issued by the banks, and if it does not
furnish its credit it creates and loans the power at least. Now, it
looks to me like a copartnership in which the Government was contrbuting most of the capital and the banks the experience. I hope
it will not result as those copartnerships generally do.
Mr. D aw son . I was only seeking to state the proposition accu
rately. There is no desire in my mind to minimize the benefits that
are to come to the banks from the Government. But it is still afi
accurate statement when I say that the banks supply all the capital
stock of this new bank. The Government supplies deposits; it is
not capital stock. While it is used for the benefit of the system,
still it seems to me I am accurate in my statement.
Senator R eed . Y ou are accurate technically, but I am talking
about this matter, treating this matter as a matter of equity. Now,
•I want to call your attention to another thing. When these banks
are put in operation they are supposed to perform certain very im
portant functions for the various banks coming in. Then I call your
attention to the fact that they constitute and are a method of insur
ance of banks against failure.
Mr. D aw son . That is a great feature.
Senator R eed . And taking all those things into consideration is
there anything wrong in asking the banks to contribute some part
of the insurance?
Mr. D aw son . Not at all.
Senator R eed . So I do not think the banks ought to treat this as
though they were going into their pockets, creating an institution
and running it at their own expense, the Government contributing
nothing, and the Government demanding a share of the profits. I
think you ought to get that out of your head. I do not think you
yourself have that idea very strong.
Mr. D aw son . N o ; I have not. But you take a little banker in the
country who is now deriving from these reserves, we will say, $1,500
income; that is one and a half per cent on his capital stock. You
take that away from him by force, as it were, as he thinks, and he
don’t like it.
Senator R eed . I understand that. At the same time when we talk
about force I want to give you another idea. The national-bank
system has utterly broken down two or three times within a few
years, comparatively speaking. When that happened every national
BANKING AND CURRENCY.
2127
bank was subjected to the forfeiture of its charter because it could
not perform the functions it was required to perform under the law.
But when the Government comes in to aid them in avoiding that
thing the Government ought not to be treated as coercing them be
cause it says you must do this thing now which is necessary now to
avoid danger, but it ought to be treated as a friend, coming in to aid
a system, and I want to say, while I am talking, that the whole atti
tude of every man I have heard express himself on this committee
or in the Senate has been one of trying to avoid these dangers and
assist the banks and at the same time be just to the country, and I
make that remark because there has been so much adverse criticism
of Congress and everybody connected with it.
Mr. D aw son . The public generally throughout the country does
not share that spirit of criticizing. The impression prevails out in
our country that Congress is making an effort, in the best of good
faith, to solve this problem, not in the interest of the bankers, but in
the interest of the transaction—the orderly transaction of the business
of the whole country, because when it does break down, the burden
falls on the people and not on the banks.
Senator R e e d . They come in for part of it. Let me ask you this—
and by asking this I am by no means committing myself to the theory,
but every man who has appeared here, and indeed it must be a patent
fact to all the people, has asserted that if the bill is passed, permitting
State banks and trust companies to come in and retain their powers,
that the national banks would naturally go into one of those organ
izations.
Mr. D aw son . G o a ro u n d a c o rn e r to com e in.
Senator R eed . N ow , the national banks will have a right of circu
lation based upon these 2 per cent bonds, and the bonds are now in
trouble in the market because of conditions we need not go into. If
the Government of the United States was to permit this bank circu
lation to stand unimpaired, at least for the present, and if the Gov
ernment of the United States was to not tax that circulation, would
that not be a strong inducement to national banks to stay in the
system ?
Mr. D aw son . Yes; they would have all that they have now. I can
see no reason why a national bank----Senator R eed (interposing). They would have more than they
have now.
Mr. D aw son . A s I was going to say, they would have in addition
to that this broad discount market which you provide for.
Senator R eed . D o you see any real reason for the retirement of the
national-bank notes?
Mr. D aw son . There is an academic reason.
Senator R eed . Let us consider it from a practical standpoint; I
am not much of an academician.
Mr. D aw son . No ; I am n o t e ith e r. I can see no p ra c tic a l reason
f o r th e ir im m e d ia te re tire m e n t ex cep t t h a t I h av e a feelin g th a t th e
n a tio n a l d e b t o u g h t to be p a id off som e tim e. I w o u ld lik e to see th e
n a tio n a l d e b t p a id off, a n d I w o u ld lik e to see us b egin on i t to
m o rro w .
Senator R eed . H ow does the retirement of this $700,000,000 neces
sarily involve the question of the payment of the debt ?
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BANKING AND CURRENCY.
M r. D aw son . It d ep en d s on how lo n g we are g o in g to re m a in out.
Senator R eed . If you have to have any money to pay the debt
with, would it not be better to retire some of the other bonds?
Mr. D aw son . The others all draw a higher rate of interest; it
would be good business for the Government to retire these.
Senator R eed . I s there any economic reason? I mean is there any
weakness in the banking system of such a character to the substan
tial arising out of these bank notes?
Mr. D aw son . If you can create a system here that will introduce
this element of elasticity; that is, provide that at certain seasons of
the year you can get currency to meet the needs, and when the needs
are over they would be retired—if you could do that, and if you make
the system panic proof by providing a broad rediscount market, so
that in the face of a panic the bank can use the reserves for the pur
poses for which they were created and can replenish those reserves
by the rediscounting of paper in their own portfolios, I can see no
possibility of breakdown for purely financial reasons.
Senator R eed . What would you say to a provision to this effect,
that after the banks had received their 5 per cent interest upon their
stock contributions that a portion of the profits, if there were profits,
should be set aside in a fund held by the Government for the pur
pose of liquidating the deposits of any national bank the doors of
which were closed?
Mr. D aw son . That had failed? That works very well in other
countries. It works very well in Canada—too well up there, in
fact. In Canada as soon as a bank fails the notes of the failed bank
go to a premium.
Senator R eed . We do not want to do that. If every man who
puts his money in a bank knew if the bank closed its doors there
would be a Government officer there to pay his deposits within two
or three days, would that not have a tendency to stop runs upon
banks ?
Mr. D aw son . Yes; I think that would have a tendency to increase
confidence, and it is all based on confidence, after all, gentlemen.
Senator R eed . I s it not, in your opinion, an entirely practical
thing to put some provision of the kind I have indicated in this
bill?
Mr. D aw son . I can see n o o b jection to it, a n d I can see m an y v ir
tu es in it.
Senator R eed . There is one other matter to which I wanted to call
your attention.
Mr. D aw son . Y ou asked a question a moment ago which I did
not quite finish answering. You asked how we could liberalize this,
whether it would be agreeable to the country banks. I started to
give you my opinion as to how it could be made entirely agreeable to
the country banks. My first suggestion was the stock subscriptions,
and then the reserve requirements. The third, which is of still more
importance, is to equalize their privileges with those with whom they
are competing.
Senator P om eren e . These banks, you mean?
Mr. D aw son . Yes, sir.
Senator R eed . Y ou refer to the profits of the national banks?
Mr. D aw son . I refer to their prh ileges and opportunities to serve
their communities.
BANKING AND CURRENCY.
2 129
Senator P o m erene . I wish you would submit to us in concrete form
what your views are along that line as to how that should be done;
what profits should be given the national banks which they do not
now have; what restrictions, if any, should be placed upon the
State banks which may come in?
Mr. D aw son . I would be very glad to do that.
Senator B ristow . I would like, Mr. Dawson, if you will—we have
asked a number of witnesses here to prepare amendments to the
bill—and I would like you, if you will, to prepare amendments cover
ing what you think are necessarily important and let us have a
sample of a bill.
Mr. D aw son . I shall be very glad to do that. I assume these
amendments are to be used by the committee in executive session.
I hardly feel myself competent to draft a bill.
Senator R e e d . I think you are competent, at least, to make sug
gestions.
Mr. D awson . I w o u ld be v e ry g la d to p u t in w ritin g an y su g g es
tio n s t h a t th e com m ittee m ig h t w ish.
Senator R eed . There is another matter I
want to draw your atten
tion to. This morning when you were testifying you stated, as
nearly as I can recollect, that it was desirable for the banks in ordi
nary times to use the reserves which they would place in the reserve
banks; that one of the benefits of this bill was that it would be
possible in ordinary times to use these reserves and make them work.
Of course, at the end of 36 months all the reserves required to be
kept will be in these banks.
Mr. D aw son . In one place or the other.
Senator R eed . N ow , if the banks use those reserves, which, of
course, can only be used by way of discount in ordinary times, then
they have nothing left to draw upon in extraordinary times except
the currency issue, have they?
Mr. D aw son . N o, sir.
Senator R eed . D o you not think it would be very wise if those
reserves were not all used in ordinary times?
Mr. D aw son . I do not quite follow your suggestion. As I under
stand it, under the operations of this bill—and we will say it is in
full operation—5 per cent of the reserves can be carried in the vaults
in cash, 5 per cent of the reserves must be carried in the Federal
reserve bank, and the other 2 per cent can be carried in either one
place or the other. I do not understand that a member bank can
encroach upon that 5 per cent that they have deposited in the Federal
reserve bank at any time any more than we can under present
conditions.
A national bank is not permitted to go below its legal reserve.
That 5 per cent you have put into the Federal reserve bank, it seems
to me, is impounded there. It is taken out of the channels of business.
The member bank will not be permitted to use that. If he redis
counts with the regional reserve bank, it will be on funds above that
amount ; it will be on his balance above 5 per cent.
Senator P om eren e . I s it your understanding that under this bill,
if a bank should have a run upon it, or something of that character,
and the depositors are demanding their money, they could not get this
5 per cent out of the regional reserve bank?
2130
BANKING AND CURRENCY.
Mr. D awson. No; I think they could. That would be an emer
gency.
Senator P g m eren e . They could not loan it or anything of that
kind, but they could use it for the purpose of paying the depositors
just the same as national banks do now?
Mr. D awson. Sure; there is no need of mobilization, if you can
not use them in an emergency.
Senator N elson . D o you not recall Vanderlip said yesterday that
it was well for the regional reserve banks to conserve their reserve
as much as possible and hold them in ordinary times when there was
no demand, even letting them run up to 70 or 80 per cent in order
to have a big fund in case of emergency? Do you not recall that?
M r. D aw son . I d id n o t h e a r th a t.
Senator N elson . Y ou do not agree with that?
Mr. D awson. I think that what you need to get into these regional
reserve banks—all the capital that you need in those banks is suffi
cient to take care of the ordinary emergency that would arise. The
history of the past I think indicates to us how much of an expansion
would be necessary to take care of the ordinary financial disturbance
that comes along. I t seems to me that if the regional banks were in
a position whereby they could extend credit to the amount of
$200,000,000 at any time, that would allay any panic that might be in
its incipient stages. When the country understands that a law is on
the statute books that can cope with any panic which may come along
the panic is not coming along.
Senator N elson . D o you not think it is idle to talk about the point
that this 5 per cent is left in the banks? Your idea is that this 5
per cent should be constantly in use, and your grievance is that this
amount is not in use, and that it is tied up there and does not draw
interest.
Mr. D aw son . N o ; that 5 per cent constitutes the insurance which
the bank has against panics. The 5 per cent is reserve.
Senator N elson . I s not that fund—what other fund outside of the
bills it issues upon commercial paper, what other funds has the
regional bank except its capital and its 5 per cent on the deposits.
Is not that the fund that would really help to maintain this gold
leserve?
M r. D aw son . Yes, sir.
Senator N elson . Then is it not idle to complain because this 5
per cent is idle in the bank? Your idea is that it should be constantly
out in the shape of discount paper?
Mr. D aw son . No ; it is idle in comparison with the function it is
performing. My conception of an act is one that will—if you must
make a change from present conditions to other conditions that are
better, it is better to do that gradually rather than to do it violently.
Senator N elson . D o you now know, Mr. Dawson, that one of the
most faulty things of the present reserve system is first of the reserve
and the necessary payment of interest, the payment of 2 per cent
interest, which has piled up money in the big banks of New York?
They have all that money sent in from the country banks, and the
temptation has been the 2 per cent interest, and the New York banks
could not let that money lie idle, and so they invested it in call loans,
and when a panic comes, as the panic of 1907 did, this kind of loans
were not liquidated.
BANKING AND CURRENCY.
2131
Mr. D awson. I agree with you absolutely on that.
Senator N elso n . The best part of this whole bill is the reserve
system, first in limiting the amount as it does, wiping out the ob
jectionable features of the reserve and stopping the payment of in
terest.
Mr. D awson. There has been some change in actual practice^since
the panic of 1907. I agree with you about the panic of 1907. It
taught a lesson to the bankers out West. It was a sad and costly les
son, but they learned it. Since that panic they are not keeping those
large balances in New York which they used to keep there. They
are keeping those surplus balances in the little banks around about.
Instead of sending them to New York they are keeping them in
Omaha, Kansas City, or St. Louis, or Minneapolis, or St. Paul? or
Denver, or even in the banks in cities of 15,000 or 20,000 population,
and the smallest country banker will carry his balances there. He
gets 2 per cent interest up there.
Senator N elson. D o you not recognize that the reserve system pro
vided for in this bill is much superior to the present system ?
Mr. D awson. I think it is.
Senator N elson. And would prove a great blessing to the country?
Mr. D awson. I think in shifting it to where it is now and where it
is expected to be, that shifting process should be gradual.
Senator N elson. It is gradual.
Mr. D awson. And in writing a law that is going to reduce the in
come of a bank, as it is now, that should be made as gradual as possi
ble, if you are going to take away his income.
Mr. Chairman, Mr. William W. Baldwin, one of my colleagues on
the committee representing the Iowa bankers was compelled to leave
the city early this afternoon, and asked me to read his statement.
The Chairman. Y ou may do so.
Mr. D awson. The statement is as follows:
STATEMENT OF W. W. BALDWIN, OF BURLINGTON, IOWA.
My name is William W. Baldwin; residence, Burlington, Iowa;
occupation, attorney at law and vice president of the Chicago, Bur
lington & Quincy Railroad Co.
I am not a banker nor bank director, nor stockholder in any bank,
and never have been. My interest in this subject is solely as a citizen
in business, who has had some very keen experiences under the exist
ing inefficient and menacing banking system, as demonstrated when
ever its efficiency has been put to real tests.
The people of the country have been led to expect, and they do
expect, the present Congress to provide at least the beginnings of a
better financial system.
There could not be a more opportune time for undertaking this
reform. General business is good, and no such threatening condi
tions confront us as led to the makeshift Vreeland law.
Both Houses of Congress and the President are of the same party,
my party—the Congress by good majorities—and the administration
is pledged and the party is pledged, as strong as words can pledge
men, to provide an adequate currency system.
Best of all, there is a strong healthy sentiment among the people
upon the subject; a process of education has been going on for three
2 132
BANKING AND CfJKBENCY.
years and the minds of the best students and the best bankers have
been interested in the question.
This demand for a reform of the currency is not, according to my
view, a banker’s demand. The bankers can get along without it.
The widespread losses that were part of the experience of 1907 were
not the losses of bankers so much as the losses of their customers.
The banks are prosperous enough now; they are making money
enough; there are no strong financial reasons for them to demand
this legislation that I can see. What is the fundamental difficulty,
and what are the remedies which the reform should seek to provide ?
The fundamental trouble is that while we have a splendid collec
tion of strong money-making banks, managed by shrewd and re
sourceful bankers, their strength, their resources, their reserves, and
their ability to meet conditions of stress and bad weather are scat
tered units, and our power to provide currency to the people in an
emergency is pitiably weak.
In 1907 factories and merchants and railroad companies in Iowa
in numberless cases could not get their own money, which they had
deposited in their own banks, with which to meet their own pay rolls.
We understand the general purpose of this bill, by a safe and sane
process, to be to combine, to unify, to mobilize the credit strength
of all the banks, and to provide machinery through which may be
issued in any time of stress an adequate supply of bank-note cur
rency based upon their credit strength as represented in their assets,
and absolutely secured by ample reserves and redeemable in gold.
Nobody wants a loose law; nobody wants it in the interest of bank
ers primarily. But the misfortune of no law at all would be less
than a law which the banks can not and will not accept. Where
shall we be, in that contingency, with the Vreeland act expiring in
June?
What features proposed may tend to prevent the banks from co
operating to make the system a success?
One is the fear of a political control in the central board.
It seems to me impossible that you will enact a law for combining
thus the entire banking resources of the country, under the control of
a central board or governing power, and not give to the banks which
provide the capital some adequate representation of this governing
board. This is necessary for real efficiency. You will urgently need
the talent and the experience and the self-interest of practical bank
ers to make this thing a success, and a frank avowal of this need
would help to incline the banks to cooperate, it seems to my mind,
and would please the business public which does not look with favor
upon either political or bureaucratic control in business affairs.
In the prosperous city where I live the national banks are not the
principal banks, but are the savings banks, which under State law
exercise banking privileges, except the issuing of currency.
Besides, they act as trustees and loan upon real estate. Taking the
West throughout, especially outside of cities. I have no doubt that the
banks not chartered as national banks are the more important and
more profitable to their owners.
It is going to be a comparatively easy matter for national banks
io refuse to accept your law and slide over into State banks, and then
what will become of your law?
BANKING AND CUBEENCY.
2133
Another cause for distrust has been the fear that this bill will do
injustice to the banks in the matter of their 2 per cent bonds.
Then there is the requirement that the smaller banks tie up too
large a percentage of their capital and are allowed too small a profit
compared to what they can earn as State banks.
As one wishing to see this law, modified and improved, put into
successful operation before next June, I sincerely hope you can con
sent to such changes as will make it to the interest not only of the
small national banks but of State banks as well, to enter the system.
What to yield and how to yield on important measures such as this
are the trials and tests of statesmanship.
Better far make this measure so attractive and workable that all
banks will desire to cooperate than any feature of coercion.
Regarding a proper basis for a paper currency to meet the demands
of business, I heartily indorse the view that a currency issued by the
banks, with proper safeguards and based upon the assets and re
sources and credit of the associated banks, can be made equally safe
and be a sounder and better currency than bond-secured issues.
(The witness filed the following paper, which he read before the
Contemporary Club February 29, 1912:)
C urrency R eform .
When Congress, by the act of May 30, 1908, created the National Monetary
Commission and directed it to “ inquire into and report at the earliest date
practicable what changes are necessary or desirable in the monetary system
of the United States or in the laws relating to banking and currency,” it gave
recognition to the fact that one of the greatest needs of the times is an intelli
gent and comprehensive reform of the banking and currency laws of the Nation.
My own opinion is that, of greater importance to the continued prosperity and
development of the country than either tariff or trust legislation, is the creation
of a monetary system that will measure up to the demands of modern business
and which will automatically adjust itself to the needs of trade and commerce
in its seasons of variation.
There is much that deserves to be said in commendation of the present system
of banking and currency. The banks of the country, both national and State,
are sound, honestly conducted and capably managed, and the almost universal
public confidence in them is well merited. What is true of the integrity and
stability of the banks applies with equal force to the currency. Our consid
eration of the subject, however, does not go to the banks or the currency per se,
but rather to the system.
The national banking system, created in the midst of the Civil War, gave
the country a uniform and stable national currency to take the place of non
descript and worthless State-bank notes, which had resulted in such heavy losses
and infinite vexation to business. It was a source of strength to the Union
in providing a market for large quantities of Government bonds, which were
bought by the banks to secure their note issues. It has been a permanent
prop to the national credit, enabling the Government in 1900 to float its obliga
tions at a rate at least 1 per cent less than any country in the world. In that
year the 3 and 4 per cent bonds were funded into bonds bearing only 2 per cent
interest, and this was possible largely because the national banks were vir
tually compelled to take the new twos as a basis for circulation.
Rut since that system was established almost 50 years ago there has been such
a tremendous advance in business that we have outgrown it, and it is inadequate
to meet the needs of to-day. It is hardly to be expected that the vast and com
plex business of the twentieth century can be handled properly with a credit
organization created about the middle of the nineteenth century. The present
system performs its functions well under normal conditions of trade and com
merce, but it fails completely when any unusual demand is made upon it.
We can not be satisfied with a fair-weather system. Would anyone patronize
a trans-Atlantic liner that could make the trip only in good weather, but which
would be certain to go to the bottom if a storm arose? Is not the United
2134
BANKING AND CURRENCY.
States, which boasts of its commercial enterprise and supremacy, entitled to
the same immunity from financial disturbances and panics that is enjoyed by
all the other great commercial nations of the earth?
What is the matter with the present system? It is not in the soundness of
the currency, because every dollar of it is as good as gold, and this virtue must
be maintained in any change which is contemplated. No man stops to examine
the paper money he receives to see whether he is getting a gold certificate, a
silver certificate, a greenback, or a national-bank note. He knows that one
is as good as the other, and all of them as good as gold. Neither does the
fault lie in the quantity. We have a circulation in the United States of more
than three and one-half billion dollars—more money than that of England and
Germany combined. It is well for a thorough understanding of this question
to recall that this immense stock of money consists, in round numbers, of
$350,000,000 of greenbacks, $740,000,000 of national-bank notes, $1,800,000,000
of gold in the form of coin and gold certificates, and $740,000,000 of silver, also
in the form of coin and silver certificates. Let us keep in mind also that na
tional-bank notes comprise less than one-fifth of the circulating medium, and
that they are the only part of our currency that can be expanded or contracted
to meet the varying needs of business at different seasons of the year. We
should remember also that the business of this great Nation, which amounts
annualy to the staggering total of $450,000,000,000, is largely transacted with
credit instead of money. Only about 5 per cent of it is done with money; the
other 95 per cent with credits in one form or another.
The trouble with the system is in its organization. Nowhere in it is there
any reserve power with which to meet an emergency, and as a result it fails
completely when any unusual demand is made upon it. No less than four
times during the past three decades has the system failed under severe financial
strain. The panic of May, 1884, though of brief duration, was attended by a
suspension of cash payments and the issue of clearing-house loan certificates,
as was also the case in 1890. The panic of 1893 was still more severe, not
only resulting in suspension of cash payments, but currency actually went to a
premium. But in each of these instances the situation was complicated by
abnormal commercial and political conditions which obscured in large measure
the elements of weakness in our credit organization. But the crisis of 1907,
which was wholly financial, rather than industrial or commercial, has enabled
us to measure the shortcomings of the present system, and has directed pub
lic attention to the pressing need for a remedy that will protect the country
from these recurring disturbances, with their enormous losses to every line of
industry.
The country has suffered incalculable losses from these failures of our bank
ing and currency system to perform its natural functions, and these losses fall
with the greatest severity upon the wage earner and the producer. It is axi
omatic that people of limited means suffer more in hard times than those of
large resources. In every one of these instances where there has been a
paralysis of credit operations, with the resulting lack of confidence, business is
halted, commerce retarded, and production curtailed, with the consequent re
duction in employment and wages, and a tremendous shrinkage in values.
The panic of 1907 came upon the country almost without warning. The
underlying conditions of trade and industry were never more sound, and the
country was enjoying a high degree of prosperity. We had harvested an
enormous agricultural crop, factories were busy, labor fully employed at good
wages, and business generally was at high tide. It seems almost incredible
that with such conditions prevailing throughout the Nation one or two inci
dents in a single city could precipitate such widespread disaster and losses.
And yet a gamble in copper stocks and the exposure of the crookedness of one
New York banker created such alarm in that city as to precipitate a run on
the banks which could not be stopped until the banks of the metropolis were
forced to suspend cash payments and resort to the use of clearing-house cer
tificates. It does not speak well for our present system when nation-wide
prosperity can be halted by unrest or alarm in a single locality, and yet it is
wholly within the truth to say that the panic of 1907 would not have occurred
at all if our monetary system had been what it should be.
A careful study of that disastrous experience has resulted in a general agree
ment as to the defects of the present system, which may be summarized thus:
(1)
L a c k o f e l a s t i c i t y i n t h e c u r r e n c y s u p p l y .—It is well understood that at
certain seasons of the year, particularly at crop-moving time, a considerable in
crease in the volume of currency and credit is required. The annual production
BANKING AND CURKENOY.
2135
on the farms exceeds $9,000,000,000, and a large percentage of this is marketed
within a few months. It has been found by experience that an expansion of the
currency approximating $200,000,000 is necessary to meet this annual need under
normal production. A satisfactory system would provide for such expansion
when needed and a reduction when the necessity had passed. What is the pres
ent machinery for meeting this requirement?
With a fixed supply of gold, silver, and greenbacks, the only part of our cur
rency that can be expanded or contracted is the issue of national-bank notes.
These notes being based on United States bonds, it is impossible to increase their
issue by $200,000,000, because the total amount of such bonds with the circula
tion privilege not now owned and used by the banks does not exceed that sum.
Then, again, any increase in the volume of these notes must result from the
individual action of 7,000 national banks, scattered from one end of the country
to the other, with no machinery for concerted action to meet more than a local
situation. Besides, the market price of these bonds is an important factor in
determining the action of banks in increasing or reducing circulation. It is too
much to expect that a bank will purchase bonds to secure circulation if the price
of bonds is such that their money could be more profitably employed in other
channels. Experience has proved that under this plan the measure of the public
need is not always met by the personal profit to each bank in this regard.
It ought to be stated, in passing, that the so-called emergency currency act of
1908 made temporary provision for elasticity of the currency. It permits the
formation of national currency associations which may deposit in the Treasury
securities other than Government bonds and receive currency up to 75 per cent
of their cash value under certain restrictions and conditions. Several such asso
ciations are now in existence, and one of the large vaults in the Treasury is
filled with currency printed under the terms of this act, which can be supplied
on short notice to such associations should an emergency arise. But this is only
a temporary measure, which expires by limitation June 30, 1914.
(2) L a c k o f e f f e c t i v e c o o p e r a t io n a m o n g t h e b a n k s. —We have already seen
how the absence of coordination among the national banks makes it difficult to
secure that unity so necessary to expand or contract the volume of bank notes
so as to maintain efficient credit conditions nationally. And of course the banks
under State laws, which equal the national banks in total capital and greatly
exceed them in number, are practically helpless to render effective aid in this
direction. The banking power of the United States is estimated at over
$21,000,000,000; it is equal to the combined banking power of Great Britain,
France, and Germany. What a powerful factor it would be in any situation
which might arise if all the banks of the United States, both National and State,
were organized in an association which would secure unity and cooperation,
especially in times of stress. United they would be able to cope wtih any emer
gency; divided into scattered units, as they now are, they are helpless and in
effective. There is a total lack of cooperation among banks outside the clearing
house cities, and even these clearing-house associations have never been able to
prevent the suspension of cash payments in times of panic.
As it is now, in time of stress the law of self-preservation puts each indi
vidual bank into a scramble with every other bank in the matter of reserves.
Under the present rigid laws, as soon as alarm is felt each bank immediately
begins to strengthen its reserves. Cash is drawn from every available source
and locked up in the vaults, many times in excess of their needs or require
ments, in order that each may prepare itself to weather the storm. So we
will find that the defects of inelasticity and lack of unity are insignificant in
comparison with the fundamental defect of the present laws relating to bank
reserves. With the business of the country resting so largely on credit trans
actions and bank loans, with bank loans dependent on reserve requirements,
the present laws relating to bank reserves operate to aggravate and intensify
conditions in times of financial stress. The most vital defect in our present
system i s :
(3) T h e r ig id a n d o b s o le t e la w s r e g a r d in g b a n k r e s e r v e s . —Banks are re
quired to hold a cash reserve in proportion to their deposit liabilities. There
is no difference of opinion as to the wisdom of a bank keeping a portion of its
assets in liquid form so that its demand obligations may be met promptly.
Every competent banker will do this, law or no law. Under the present law
national banks in reserve and central reserve cities are required to hold a re
serve equal to 25 per cent of their deposits. National banks in all other places
must carry a reserve of 15 per cent, two-thirds of which may be kept on deposit
-14
S. Doc. 232, 63-1—vol 3
2136
BANKING AND CURRENCY.
in banks of reserve cities. State and savings banks in our State must keep 8
to 20 per cent of reserve.
Tbe reserve mast be held in “ lawful money,” which consists of all forms of
legal-tender money. It is important to keep in mind that the law makes each
individual bank responsible for obtaining and holding fast to its proportion of
lawful money.
The present reserve requirements are defective in at least five important
particulars.
( a ) The cash reserves are scattered among 25.000 widely separated banks,
with no provision whereby they can be mobilized to allay or cope with danger.
When signs of trouble appear each bank strives to amass the cash reserve
necessary for its individual protection. To do this it draws funds standing to
its credit in other banks, thus weakening the reserves of those banks. If con
fidence is being shaken, every banker has visions of a run on his institution by
alarmed depositors, and he becomes a competitor of every other bank in an
eager struggle to secure cash enough to withstand it. A more effective panic
breeder than this could hardly be devised, when if these reserves were properly
controlled and mobilized, as they are in other countries, they could be made
effective to prevent trouble. Concentrated, they would afford protection to a ll;
scattered as they are, they prove useless.
(5) It is impossible to determine by law how large a reserve any bank should
carry. This can only be determined by experience. It varies in different banks
and depends largely upon the character of its deposits. A reserve that might
be ample for a bank at Walcott might be altogether too small for a bank in
Davenport, while a proper reserve for a Davenport bank would be wholly in
adequate for a bank in New York which is subject to heavy withdrawals from
correspondent banks. In other countries the reserve requirements are not
arbitrarily fixed by law, but are determined by the judgment of managers of
banks.
(c) The present law prohibits a bank from using its reserve in time of stress.
The very purpose of a reserve is to provide a resource in times of stringency
and yet the national-bank law—and most of the State laws are patterned after
it—prevents their use for the purposes for which they were created. The in
exorable legal reserve must be maintained, and when the ratio of reserves to
deposits is reached, no more loans can be made. Our reserve law has taught
the public to believe that a bank is in peril if its cash reserve falls below the
legal limit; hence it dare not intrench upon its reserve at any time. In times
of panic inestimable losses would be prevented if the banks had power to make
loans and grant extensions of credit. Under the operation of present reserve
requirements the lending power of the bank is paralyzed, and instead the bank
must curtail credits and compel payment of loans falling due. In the great
commercial countries of Europe when an emergency arises the banks increase
their loans and at the same time pay out their reserves, thus avoiding panics.
Here, as some one has said, “ We slam the door in the face of the borrower just
when he is in the greatest need.”
( d ) There is no provision in the law for replenishing the reserves. When
reserves become depleted in the United States, our banks have been able to
find relief only through the slow, clumsy, and expensive practice of drawing
gold from Europe. This is accomplished by throwing securities into the Euro
pean bourses and selling them for the best cash prices obtainable. In 1907 we
drew $100,000,000 in gold from Europe in this way, most of which came from
England. It is a sad commentary on our system that England could relieve us
from her limited gold reserve, when there was locked up in the Treasury at
Washington seven times as much gold as she possessed.
( e ) They have caused a dangerous concentration of risks in the central reserve
cities, particularly in New York, fi'he operation of the law has resulted in
making New York City banks the depositories of a large part of the reserves
of banks throughout the country. These banks pay 2 per cent interest on such
deposits, and in the spring and summer large sums of idle money from the
interior piles up in New York. In order to pay this interest the New York
banks must loan this money, and this is done largely to stock speculators.
There is nothing else they can do with it. As a result speculation is stimu
lated and prices inflated. When the time comes that the country banks need
their funds to move the crops, the New York banks have difficulty in calling
their loans without bringing on a stock-market panic. We have already seen
that the stability of the whole country is so dependent upon the stability of
New York banks that a flurry there precipitated the panic of 1907.
BANKING AND CURRENCY.
2137
To summarize: What the country stands in need of is a banking and cur
rency system embracing these salient features:
That will give that element of elasticity to the currency which will respond
to the varying needs of business at different seasons of the year, and as care
fully safeguarded against inflation as against stringency.
The association of all banks into a national system, rather than one of scat
tered units, to obtain unity and cooperation in sustaining the commercial and
public credit, but which should be absolutely secure against political domina
tion or the control of concentrated wealth, and which must preserve the indi
vidual independence of each bank.
The unification and mobilization of bank reserves, so that they can be con
centrated and made available wherever most needed in times of trouble, and
the machinery to strengthen bank reserves or increase their loaning power when
necessary to avert danger.
To these three principal features there should be other additions to provide
an acceptable standard for commercial paper and a well-organized market for
the same, to secure more uniformity in discount rates in all parts of the country,
I>ermission to American banks to do business in foreign countries, and an agency
which can deal effectively with the course of foreign exchange and the inter
national movements of gold.
Senator W e e k s . Mr. Chairman, I have here a letter from the
First National Bank of Gardner, Mass., which I would like to have
inserted in the record.
The C h a ir m a n . Without objection, that will be done.
(The letter referred to is as follows:)
[Amasa B. Bryant, president; C. Leslie Bent, vice president; Frederic S. Pope, cashier j
Marcus N. Wripht, assistant cashier.]
F ir st N a tio n a l B a n k ,
G a rd n e r , M a ss., S e p t e m b e r 30, 1913.
Hon. J o h n W. W e e k s ,
W a s h in g to n , D . C.
D ear S i r : I n com m on, I im a g in e, w ith m o st o f th e b a n k e rs in th e c o u n try ,
I a m w a tc h in g w ith g r e a t co n cern th e p ro g re s s o f th e c u rre n c y bill now b e fo re
th e S e n a te .
I notice that great stress is being placed upon the opinions of country bankers
and it is being urged that this measure will surely redound to their advantage.
I can not expect to add anything to what has already been said regarding
the theoretical possibilities of the bill. I would like merely to set forth just
about how it will affect us in this institution. Assuming that the measure
goes through in practically its present form there would be required of us
in the form of subscription to the stock of the new bank and for credit balance
therein approximately $70,000. I can not see why we would not be obliged
to maintain our present reserve accounts with approximately the same balances
as now. The only manner in which this sum—considerable for us—could be
raised would be by a contraction of our loans. For several years we have
found it difficult to supply our local demand and if we are forced to consider
an addition of $70,000 I see but one thing to do, namely, to withdraw from
the national banking system even though such action entails a serious loss on
our Government bonds.
The rediscount feature of the new bill would hardly work in our case because
it is too cumbersome and because the vast majority of our paper is not bills
receivable, hut loans made for the accommodation of our customers. If we are
to retain our business we must keep all such paper in our own hands until
maturity and not sell it to other institutions to provide for our temporary needs.
This view of the currency bill can not be considered a partisan one inasmuch
as three of the four officers of this bank voted for Mr. Wilson at the fall election
and the one who did not is not now in the service of the institution.
I believe that it should be the duty of all banks to enter into any feasible
scheme looking toward the improvement in our currency and banking system
and I trust that the efforts of yourself and others similarly minded will avail
to secure such amendments to the pending measure as will make it advanta
geous to all the national banks of the country.
Yours, very truly,
A. B. B ryant. P r e s i d e n t .
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BANKING AND CURRENCY.
AFTER RECESS.
The C h a ir m a n . Mr. Cannon, we will be glad to hear you now,
and I will be glad to have you state your banking connections so
that our reporter will have them.
STATEMENT OF JAMES G. CANNON, PRESIDENT OF THE FIFTH
NATIONAL BANK, OF NEW YORK, N. Y.
Mr. C a n n o n . I am president of the Fifth National Bank, of New
York.
The C h a ir m a n . What is its capital?
Mr. C a n n o n . Its capital is $5,000,000; surplus, $5,000,000, and un
divided profits about $1,000,000.
The C h a ir m a n . And its deposits?
Mr. C a n n o n . Its deposits are about $30,000,000. It is not one
of the largest institutions in New York, but it is a fairly goodsized one.
The C h a ir m a n . H ow m a n y y e a rs h av e you been in th e b a n k in g
busin ess ?
Mr. C a n n o n . Since I was IT years old.
The C h a ir m a n . Y ou were Comptroller of the Currency at one
time?
Mr. Cannon . N o ; that was my brother.
The C h a ir m a n . That was y o u r b ro th e r?
Mr. C a n n o n . Yes; I have always been in the banking business in
New York.
The C h a ir m a n . You have made a special study of this question
of banking reform, have you not ?
Mr. C a n n o n . I have tried to for many years, and also tried to
make a study of this bill during the past summer.
The C h a ir m a n . Y ou h av e been a le c tu re r on th is su b ject?
Mr. C a n n o n . Oh, yes; I have been at it a good many years.
The C h a ir m a n . We will be glad to have you proceed in your own
way to comment on the bill, and the committee will not interrupt
you until you have concluded.
Mr. C a n n o n . I have only made a few notes. They are not very
numerous, and as I go along I shall be glad to endeavor to answer
any questions the committee may desire to ask.
The C h a ir m a n . The committee has thought it better to wait until
the witness concludes before interrupting with questions, because
otherwise you will not conclude.
Mr. C a n n o n . I see. That is right. I want to say this, Mr. Chair
man and gentlemen: I believe we are nearer solving the big question
of currency reform than we have been for 20 years. I realize how
eas}7, it is to criticize and tear down, and how difficult it is to create,
and I feel that those who have brought this bill forward to its pres
ent state are entitled to be warmly congratulated on what they have
accomplished to date. I do not regard this as a political measure
myself, but as a question entirely above politics, affecting, as it does,
the welfare of the people of the entire country. If it were a political
question, I might not be able to say anything in favor of the bill, as
I am one of those that are not fortunate enough to be numbered
among the majority party, having been for life a consistent old-line
Republican. And I recognize another thing, too, in connection with
BANKING AND CURRENCY.
2139
th is b ill. I recognize th at legislation is more or less a m atter o f com
prom ise, and I hope th a t this b ill, w hich has received such a fine
start, can be adjusted so th at it w ill become a law.
I have gone over the b ill carefu lly, and I w ant to make a few sugestions. I do n ot know w hether they w ill be w orth an yth in g to you,
ut, such as they are, I w ill be glad to g iv e them.
T he Chairman. T he com m ittee w ill be very glad to hear your
su ggestion s and your reasons for them.
Mr. Cannon. T he storm center o f the bill has been the opposition
to the F ederal reserve board. N ow , I am not one o f those w ho oppose
g iv in g authority in b anking m atters to officials named by the P resi
dent and confirmed by the Senate. I believe the P resident o f the
U n ited S tates and the Senate can be trusted to exercise th is power
fo r the country’s w elfare and the country’s good, and th is is the sy s
tem applied to the choice o f all F ederal officers all over the country.
B u t I do feel that the men w ho are to m anage the financial affairs
should be selected w ith a special view to their qualifications, and I
believe it is m ost desirable, in m aking a choice, that there should be
no opportunity for objection and suspicion that it is governed by any
p olitica l equation. I have been some in politics m yself, and hap
pened to be treasurer o f the K epublican national com m ittee during
the first M cK in ley adm inistration, and I speak in th is w ay for that
reason. A ccord in gly, I feel that the provision in th is b ill m aking
certain C abinet officers and the C om ptroller o f the Currency m em
bers o f th is reserve board should be om itted, and th a t the entire
board should be nom inated by the P resident— seven members— and
the nom inations to be subm itted to the confirm ation o f the Senate.
I have no disrespect for Cabinet officers, nor does it detract from
th eir position to say in their position p olitical considerations enter
alw ays. M oreover, I believe they should not be members o f this
board, for the reason that the perform ance o f their duties as Cabinet
officers w ill not perm it them to giv e to the duties o f the reserve board
the necessary tim e and attention for th eir proper perform ance.
G entlem en, it is not g o in g to be any sm all job for any body o f
m en, no m atter who they are, to change our entire banking system
in th is country and organize these regional-reserve banks as you
have laid them out. I t is g o in g to take the very best energy and the
very best brains in at least seven men, w orking n igh t and day, to
pu t such a system as you have outlined here in to the hands o f the
people, w ith ou t any jar, w ith ou t any friction, or w ithout a n yth in g
o f that kind.
T he b ill calls for three m em bers, tw o members o f the Cabinet and
the C om ptroller o f the Currency, as ex officio members. I have been
an ex officio member o f a great m any com m ittees and gave m ig h ty
little tim e to those com m ittees m y seif, and I believe the Secretary
o f the T reasury, the C om ptroller o f the Currency, and the Secretary
o f A gricu ltu re— we m ay not alw ays have as good a Secretary o f
A gricu ltu re as we have now in years to come— can secure all the
in form ation they w ant w ith reference to an yth in g that is to be
done in th is reserve association w ith ou t being members ex officio.
A n d I think the provision w ith respect to the com position o f the
reserve board is d efective in another particular. I w ould like to
see, w here now on ly one o f the m em bers is to be experienced in
f
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banking, there should be provided that three of the members shall
be so experienced, but all to be appointed by the President by and
with the advice and consent of the Senate and subject to your
confirmation.
I merely offer this suggestion, perhaps, to meet some of the criti
cisms directed at this section of the bill. It seems to me that that
might help and do away, perhaps, with some of the objections which
have been made. I may be mistaken, and I may be taking a some
what radical ground myself when I state I am not at all alarmed at
the method to be employed in selecting these seven men, so far as I
am concerned—my own personal view.
Now, for a moment, in regard to the bank-note issues. My posi
tion in the matter of the issue of notes of this character I do not
think can be better stated than in the language I used in an address
on this very subject immediately after the panic of 1907 at Columbia
University. I then made this statement:
I venture the prediction that the people of this country will never permit its
circulating medium to be monopolized by one institution, no matter how good it
may be, but they will always demand a circulating medium issued by the
Government or under careful Government supervision and control.
The proposed Federal notes would appear to have most of the
qualities of our present national bank notes. As I understand it, no
notes could be issued except under regulations of the Federal reserve
bank, the ultimate security back of the notes being a 33^ per cent
reserve in gold and lawful money and short-time commercial paper
selected by the bank and approved by a Government agent, and
further that it is a first lien on all the assets of the issuing bank.
There appears to be a great controversy raging around this section
of the law. In my opinion, it can be met by making these notes
redeemable in gold and guaranteed by the United States Government
in such a manner that the Government could never be embarrassed
when called upon to redeem them. As I said to some of you gentle
men to-day at noon, everybody has a different opinion, and all of
the bankers have a different idea of currency reform. These notes
that come into the hands of the people, whenever you pay them at
the national bank to-day, have the United States of America upon
them. The silver certificate has it. They all have United States of
America on them. I think it will be with very great difficulty, to my
mind, in putting out a lot of these reserve bank notes and having
them acceptable to the people. You pay them out to the darkies in
South Carolina in the cotton fields, or you pay them out in Maine
to the potato diggers up there, and they will look at them for
United States of America, and they will feel the United States of
America is responsible—that is, the Government is responsible for
every dollar of money which they have in their hands which they
receive for their pay.
And I feel this, possibly, might meet the exigency here, because
I believe that they should be guaranteed by the United States Gov
ernment, but in such a manner that the Government would not be
embarrassed and called upon to redeem them.
Senator H itchcock. Y ou mean they should be notes of the reserve
banks ?
Mr. Cannon. Guaranteed by the Government. My bank is across
the street from the subtreasury in New York, and I saw the trouble
BANKING AND CURRENCY.
2141
in Cleveland’s administration, when they presented legal tender for
gold across the street at one window and paid it oat at another, and
that endless chain of getting gold at the Treasury, and the troubles
we had there.
But. it seems to me all the objections could be met here on both
sides if you make them notes of the bank guaranteed by the Govern
ment and fix it in such a way that when the Government is called
upon to redeem them there can be no question of embarrassment to
the United States Government. That would be my idea in regard
to that.
Another thing, a possible thing to do—I do not know whether it
could be—that is, the rate which is to be charged to the Federal
reserve banks applying for these notes should be distinctly named in
the act, the charge being graded according to the length of time the
notes are kept outstanding. Now, I say that for this reason: This
would enable the bank, if it applied to the Federal reserve bank,
and enable the mercantile community, whose notes these notes dis
count, which they put up as an obligation for these, to gauge some
what what it is going to cost them for the circulation they have taken
out. Under the present act it can not be less than one-half of 1 per
cent, but they never would know exactly where they stood as to the
cost of this bank-note issue. I think you would be performing a
service, therefore, to the mercantile community and the customers
of the banks, as well as the banks themselves, if, in some way—I do
not know whether it can be done or not—you could arrange so that
it can know the cost to them if they keep it out for 30 days, 60 days,
90 days, 4 months, or whatever time it was, so that they could gauge
their arrangements to the cost of their money which they are going
to put in goods, merchandise and things of that kind, which those
notes are put up for, or to meet their pay rolls—whatever use it is.
I think it would be a help to the bank and the mercantile community,
who are the borrowers, to gauge the cost to them of these reserve
notes.
This whole section—I have made a considerable study of it—seems
somewhat ambiguous, and I believe it can be rewritten with some
advantage to the act, as I read it, and I have read it very carefully
a great many times. I may be wrong about it, but these are two or
three suggestions I have to make in that connection.
As to the number of regional reserve banks, the act provides for 12.
Some people, I understand, have advocated many more and others
have advocated less. In my opinion it would be very much easier
to adjust the relations between these reserve banks if you start them
with six or seven and increase the number from time to time as seems
desirable, just as you have provided for in the act. You are organiz
ing here an enormous business enterprise, which will require extreme
care in its handling at the outset, so as not to disturb seriously the
business interests of this country. You have got to go forward"with
the utmost care—the utmost thought and extreme care. An expe
rienced business man who starts out on a great enterprise would not
go too rapidly, but would create new branches of his business as
necessity for them developed. And I believe this act would be more
sure of meeting success, from a business standpoint, if you start out
with a less number of reserve banks and add to them as necessity
arises, allowing them to be increased as occasion may justify. My
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reason for having a smaller number is that it is desirable for confi
dence and getting together an adjustment between the managers of
these banks, so that they can be operated along similar lines in all
parts of the country. I have had an analysis made here—I have been
at work on it all summer with a very careful auditor—which you
gentlemen have probably seen and read, showing the capital these
banks of deposit are likely to have and the transfers that are likely
to be made to them, and it is going to be a very serious piece of
business.
Senator Nelson. Have you that statement here?
Mr. Cannon. Yes.
Senator N elson. I wish you would have it incorporated in the
record, Mr. Chairman.
The Chairman. That may be incorporated in the record as an
exhibit.
Mr. Cannon. I will be very glad to do so. It is going to be a
serious business to change the entire banking system of the country
and the entire methods of doing the banking business, and if we
spread out too far, all over the country, the managers of the different
banks can not get together and consult. They are all in the same
business and ought to consult together as to the methods to be pur
sued in handling commercial paper. In fact, this would give an
opportunity for doing a splendid piece of work along banking lines,
and of course there are a great many reasons which I will advance
in connection with it, but I feel, as a business reason, looking at it
from a business standpoint, if you can start out with five or six you
will be apt to be more successful in handling the proposition than if
you get it away out of reach, where it is difficult to get men who are
thoroughly familiar with a great project of this kind to handle it in
accord. Of course, as I say, other people have given other reasons.
That would be one of my reasons for thinking you might be able to
reduce the number, the same as any prudent business man, as I said
a moment ago, starting out a great business all over the country,
would start it gradually and then expand as his business expanded.
Then, as time went on, you would be able to increase the number.
Senator H itchcock. Have you any special reason in mind for sug
gesting five or six rather than three or four ?
Mr. Cannon. N o. Just about half of the number. Three or four
or five or six. My only object is that in starting this thing you want
to make it a success, and you want to do everything in your power to
make it a success. Three or four would answer just as well; but
whatever you do, do it so it will not disturb the business interests of
the country.
In the transfer of the very large amount of funds, which is bound
to be transferred from the reserve cities into these new regional
banks, it should be done with as little friction as possible all the way
through. In New York City (I happen to have my table here, which
I was looking over)----Senator N elson (interposing). Let that go into the record, too.
Mr. Cannon. Yes; I will let that table go in. I was just going to
give the figures. My figures show that the central reserve banks,
when this transfer is made from the money which the banks have
with them to the Federal reserve banks, they will be required pretty
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2143
nearly to borrow $225,000,000 from the Federal reserve banks in
making this transfer.
Senator H itchcock. That is, banks in central reserve cities?
Mr. Cannon. Banks in central reserve cities; yes.
Senator H itchcock. H ow about banks in reserve cities?
Mr. Cannon. Reserve cities? Let me see.
Senator H itchcock. Y ou mean they will have to do that in order
to avoid contracting loans ?
Mr. Cannon. In order to avoid contracting loans; yes. I think
the reserve cities will not be as much. I think the bulk of it will fall
on New York. I have figured out here—my impression is—that New
York alone in making this transfer, at the end of three years (I have
a table here, but I will not bother you to read it, because it is full of
figures), we have now in New York, due to national banks, net, on
June 4, $390,000,000.
Senator Nelson. Of bank deposits?
Mr. Cannon. Of bank deposits; yes. Now, of course, if you trans
fer that to your Federal reserve association, you are obliged to keep
this reserve yourself, and your reserve falls in a certain proportion,
and therefore you will not have to borrow all of it—I beg your pardon,
I was looking at the wrong table. In New York City we had
$262,000,000 on June 4, net deposits. I figure that New York City
would be obliged to borrow from the Federal reserve association at
the end of the three years, if they took down their deposits and trans
ferred them, about $137,000,000. That is, we will be required to
borrow that to take care of the existing deposits to be transferred
over to the Federal reserve association.
Senator H itchcock. Could not you provide to get money by call
ing loans?
Mr. Cannon. It could be done in various ways, but my own
thought is a large amount of it would be reborrowed from the Fed
eral reserve association. Of course, gentlemen, the whole thing is
predicated on something new in American banking. That is, the
banks are allowed to borrow. Heretofore, the banks throughout the
country felt a little adverse to borrowing. They felt it was a kind
of a sin to borrow. The time has come, however, when we are going
to change over. It would depend largely on the bank’s situation,
whether it would call in loans or would borrow; but I assumed it
would not call in anything and had the figures drawn up that way.
I assumed it would borrow direct from the Federal reserve asso
ciation, and I figured that New York would have to borrow $137,000 ,000 .
Senator O’Gorman. I think, Mr. Cannon, that this new departure,
having these regional banks as banks of rediscount, has been likened
to a pawnshop, where a bank can go with its paper and get accom
modation.
Mr. Cannon. Well, of course, that is just a rough way of putting
it, but we might say that. That is a joke more than anything else.
Senator O’Gorman. Y ou do not mean the question was a joke?
Mr. Cannon. N o. W h at we needed for a lon g tim e in our bank
in g business in the w hole country is som e place where w e can run,
w hen our deposits b egin to recede, and there comes along a tim e
for active use fo r m oney. A n d then, on the other handv w hen the
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deposits recede, with no place to take paper and rediscount it, we
have got immediately to call in the loans of the borrower.
Senator H itchcock. What would they pay for rediscount?
Mr. Cannon. I take it for granted the rediscount—of course,
you could not state what the rate "would be, but I take it the rate for
rediscount for paper bearing the indorsement of a New York bank,
rediscounted at the Federal reserve association, would be very much
less in New York than we are charging our customers.
Senator H itchcock. Less than the call-loan rate ?
Mr. Cannon. N o ; it would not be less than the call-loan rate. As
far as the call-loan rate, I venture to state the call-loan market
would disappear; we would not be obliged to keep out so much as we
do now on the call-loan rate.
Senator N elson. And would not that be a blessing, if you did not
have to loan so much on stock collaterals ?
Mr. Cannon. I would like to see the money I have on call loans
on time just now, as far as that is concerned.
Senator B ristow. Mr. Cannon, you say you think the rediscount
rate would be very much less than their paper bears ?
Mr. Cannon. I think it would, because the risk of the Federal
reserve bank, with the indorsement of a strong national bank, would
be Al. It would not only have the obligation of the borrower, but
the indorsement of the bank.
Senator B ristow. T o illustrate, say the paper bore a rate of 5
per cent and you discount it for 3.
Mr. Cannon. I do not know what the rate would be.
Senator B ristow. T o illustrate, say the rate was 3.
Mr. Cannon. I t would be entirely according to the money market.
I would not gauge the rate except according to the money market,
myself. That rate, for prime commercial paper, varies in the market.
That is to say, you will always have certain communities that will get
a lower rate than other communities. You would consider the banks,
in discounting notes. A bank in New York, with a strong capital
and surplus behind it—paper with its indorsement—would be con
sidered prime commercial paper. Of course, the rate of interest
would be fixed by the board of governors.
Senator B ristow. If you could borrow money from the Govern
ment at, say, 3 per cent, and loan it at 5, you would want to do all
the business you could, at that rate, would you not?
Mr. Cannon. Y ou would "want to do all you prudently could.
Senator B ristow. That would be the only limitation?
Mr. Cannon. Y ou see, you do not get any security. The mercan
tile business of the country is done on single-name paper; it is not
done upon security. The merchant who buys goods does not give
an indorsed note, as he used to in the old-fashioned days. It is done
c-n a single-name basis. He buys goods, and, on the 10th of October,
for instance, which is the settlement day for the dry-goods people,
he comes to us and says, “ I would like to borrow $200,000 or
$300,000.” He has nothing to give except his own plain note, with
out a dollar of collateral behind it. We have to take the risk. We
take the risk of loaning this merchant $200,000 or $300,000 on his
own promise to pay. I t is his own note, payable to our order, with
nothing behind it."
BANKING AND CURRENCY.
2 145
Senator H itchcock. Can you do that now, in national banks?
Mr. Cannon. Oh, yes; it is done very largely. The whole busi
ness of the country is done on single-name commercial paper.
Of course in the States—I am not speaking outside of the national
bank—it may be different. The large mercantile interests insist
upon borrowing on single-name commercial paper, and we are
obliged to assume that risk. The small bank does not have the same
risk. We have it, and we are obliged to assume that risk. We have
got to look to the merchant’s responsibility, business capacity, and the
nature of his business; and we take, in the banking business, a very
large risk in handling single-name commercial paper.
Senator B ristow. N ow, Mr. Cannon, do you not think if the
banks of the country can loan money at 5 or 6 per cent, and then dis
count it at a much less rate at the Government bank, and get cur
rency, the tendency will be to hunt for all of the loans you can get,
on which you think you will not lose ?
Mr. Cannon. Oh, no; the prudent banker would not go to that ex
tent at all. I do not think so, sir. No; there is prudence in banking
the same as there is in any other line of business. He could not
afford to do that, because the ultimate result would be the Govern
ment bank would fall back upon your bank, and you would lose in
case that paper was not good.
Senator B ristow. A s I say, it must be well secured by the responsi
bility of the borrower.
Mr. Cannon. I know; but I do not think you would find them
around hunting up all sorts of paper.
Senator S hafroth. D o you think it is contemplated by this act
that notes of merchants shall be taken as rediscount paper ?
Mr. Cannon. I think so.
Senator Shafroth. Commercial paper, as we have had it explained
to us, is a matter in course of expanding.
Mr. Cannon. That is what a merchant does with his money to-day.
Senator Shafroth. Yes; but generally in the form of drafts.
Mr. Cannon. No ; not at all. Never in the form of drafts at all.
All the business of the country is done on single-name paper.
Senator S hafroth. The business of the country is done on single
name paper?
Mr. Cannon. On single-name paper, and the 10th of October is
the great pay day for the dry-goods people of the country.
Senator Shafroth. I t means the transaction in process of execu
tion, and that is the way it has been explained to us here—if I sell
to you 1,000 bushels of wheat and I draw a draft on you, you accept
it and tell me to take it to your bank and it will cash it; that is the
paper which is in the course of the transaction in business. Now
how do you make the note that you get from the merchant as a trans
action in business?
Mr. Cannon. Absolutely. He comes in to us and says, “ I have
got to pay various jobbing people around New York.” Your bill
expressly provides for it. He comes in to me and says, “ I have got
lo pay the jobbers I bought my goods from on the ioth of October
$500,000, and those goods are on my shelves now.” That is business;
he has got the goods. He says, “ I have got to borrow $500,000, and
I want to borrow $250,000 from you, and I am going over to the
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BANKING AND CURRENCY.
Bank of Commerce and borrow $250,000. That money is to be used
in payment of goods on the 10th of October, and I have received
the merchandise.”
Senator Shafroth. H ow is that bank going to determine who
the transaction is with ? The man is going to have a promissory note.
Mr. Cannon. He is going to have a promissory note.
Senator Shafroth. H ow would you distinguish that transaction
from the transaction of a man who goes on the exchange and buys
stock ?
Mr. Cannon. Because we do not loan to that class of men on
single-name paper.
Senator Shafroth. Then the reserve bank will simply have to
take your representation?
Mr. Cannon. The national banks who are members of the reserve
association—the officers of that association, who are conversant with
the business of the neighborhood where that reserve association is
located, will know and can easily find out. I t is a matter of com
mon knowledge in the banking business that it can easily be ascer
tained whether paper they rediscount is all right, and if they find
they have paper of that kind they can turn it back at any time if it
was not properly received.
Senator B ristow. I do not think I would criticize that necessarily,
because I think an enlargement is better than a curtailment. In fact,
in the whole country if the banks relied on drafts drawn there would
not be enough drawn to transact the business of the country.
Mr. Cannon. The business of the country is not done that way.
That is the old-fashioned way, where the merchant came down to
New York and went to the dry-goods district, or to the hardware
district, or somewhere else and bought a bill of goods for $10,000
and turned around and gave his note, and then the dry-goods man
indorsed the note and put it in his bank. That is not the method now.
All good men have credit, and use their credit, and they will borrow
from the banks and pay their bills until they make their collections.
Senator S hafroth. Y ou think the paper he gives will come within
the definition of this bill ?
Mr. Cannon. Oh, I do. I feel that is where the helpfulness in this
bill is going to come in, it seems to me, in handling that matter.
Senator H itchcock. D o you believe that the reserve bank in New
York should be permitted to charge a lower rate on discounts to the
New York banks than other reserve banks charge to their member
banks?
Mr. Cannon. As I was saying at the outset, I think that is a matter
that is to be adjusted. I do not believe you can establish the rate in
any law you work out. I am not speaking especially of New York,
Chicago, St. Louis, or anywhere else, but the flow of money will al
ways affect the Federal reserve banks, and the rate for discounts will
be according to the amount of money which they have on hand. Or,
if money is very tight and they desire to have the loans paid off, they
will put up the rate of discount.
Senator H itchcock. Y ou emphasize the New York banks. Do you
mean by reason of their great resources they should have a lower rate
of discount ?
Mr. Cannon. No ; I am only speaking in a general way.
BANKING AND CURRENCY.
2147
Senator H itc h c o c k . Y ou w ould n ot have any discrim ination be
tw een them ?
Mr. C a n n o n . None whatever between them or the Chicago banks
and any other banks. The ebb and flow of money in and out of the
reserve banks would justify the change of rate. You may have to
raise your rate to bring the money in or lower it in order to put the
money out. You want to use it; you do not want to keep it in. I
suppose that is one of the reasons why in this bill you have provided
that one Federal reserve bank can discount for another, to keep the
equilibrium between the two.
The C h a ir m a n . Y ou think that necessary?
Mr. C a n n o n . Oh, I think so; in fact, I do not see how you can run
it without that, because one would grab all there was in sight and
there would be a scramble----Senator H itch co ck (interposing). Will you describe the process
by which one reserve bank would be able to gather funds to that
extent ?
Mr. C a n n o n . It could simply raise the rate to such an extent that
the banks would not borrow anything from them. The money would
return right in.
Senator H itc h c o c k . It would simply accumulate----Mr. C a n n o n (interposing). Accumulate their resources.
Senator H itc h c o c k . And reduce th e ir p ro fits?
Mr. C a n n o n . Reduce their profits and reduce the amount of bills
discounted on hand.
Senator H itc h c o c k . What would they have to gain by that ?
Mr. C a n n o n . I do not know that they would have anything to
gain by that, but they would simply feel they were not restrained by
anybody else.
At the time of the panic in 1907 a gentleman came in to see me. He
said, “ Now, if you will only lend me $10,000 I will have all my
deposits in the bank in cash.” [Laughter.] He went away very
much discouraged because I would not give him the $10,000 in cash
and enable him to go back up into the country and arrange to have
all his deposits in cash.
Senator H itc h c o c k . In this case, however, the reserve bank has the
reserves of its member banks impounded. It can not withdraw them,
so there is no danger of any run so far as they are concerned. And I
can not see any motive on the part of a reserve bank, with that se
curity on the one side and ability to secure currency on the other, to
accumulate reserves in any manner.
Mr. C a n n o n . It would only be in the question of management. I
am looking at the question of human nature.
Senator H itc h c o c k . A s it is now, the bank in the reserve city is
forced to scramble for money, because they may be withdrawn in
whole or in part, and it has no resources----Mr. C a n n o n (interposing). Outside of this.
Senator H itc h c o c k . And if those are renewed, what possible mo
tive would a reserve bank have to pile up a surplus?
Mr. C a n n o n . I should think only the object of scrambling for
everything, as has been done in the past. That is why I say you want
a balance of power to stop that practice that would arise in various
sections of the country.
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BANKING AND CURRENCY.
Senator B ristow . Mr. Cannon, following up Senator Hitchcock’s
suggestion, the country banks that have their reserves deposited in
this Federal reserve bank can not withdraw them. They can be taken
out of your bank now and put some place else, but this "regional bank
faces an entirely different proposition. They can not take them out;
they can not be withdrawn.
Mr. C a n n o n . Well, th e v keep v ery m uch less, do th e y n o t, u n d e r
th e bill?
Senator B ristow . Yes; but that is a fixed quantity that can not be
taken out.
Mr. C a n n o n . I know, but they are obliged always to keep a fixed
reserve.
The C h a ir m a n . But that is available for your depositors, is it not?
Mr. C a n n o n . Oh, it is available for the depositors, but you have
a fixed reserve. Is not that available for their depositors in the
Federal reserve bank?
Senator H itc h c o c k . We think not; we think a bank is not allowed
to reduce its reserve.
Senator S h a fr o t h . But it can go and deposit paper----Senator H itchcock (interposing). Under the present law a coun
try bank can take out all of its reserve and keep it in its own vaults,
but under this bill it can not take out any more than would leave its
reserve equal to a certain per cent. It is impounded permanently and
inaccessible.
Mr. C a n n o n . I do not read the law so; I may be mistaken about it.
Senator H itc h c o c k . I wish you would just refer to that section
and see if you put any other construction on it.
Mr. C a n n o n . Y ou have to have the utilization of your reserves for
the payment of depositors, either for drawing it out or issuing cur
rency against it.
Senator B ristow . A s I understand, there is 5 per cent left in the
reserve bank, 5 per cent in its own vaults, and 2 per cent optional.
But 5 per cent can not be withdrawn; it is there, and the country
bank can not take it away.
Mr. C a n n o n . I s there not a process for getting currency out on
that in some way?
Senator B ristow . That is to lie with the bank as to whether they
will lend that money, but its reserve can not be disturbed.
The C h a ir m a n . That is not the intention of the draft.
Mr. C a n n o n . I do not read the bill so.
The C h a ir m a n . I do not think anybody would approve that. The
reserves are required to be 12 per cent, 8 per cent to be kept either in
their own vaults or with the Federal reserve bank in that district.
Mr. C a n n o n . That is what I thought; I thought your reserve pro
visions were very good. Of course, that says “ a period of 36 months
from and after the date fixed.” I do not read that clause to mean
that they are not able to draw’ that out.
Senator B ristow . That is to be kept there as a balance.
Mr. C a n n o n . I know, but you can fluctuate your balance up and
down as much as you like.
Senator H itc h c o c k . Yes; you can under the present law.
Mr. C a n n o n . I should say you could here: T do not see where that
specifically states that.
BANKING AND CURRENCY.
2 149
Senator B ristow . If five-twelfths of it is kept there as a balance,
when that is drawn out it is not there.
Mr. C a n n o n . But everybody has to make his reserve good now
adays. If these country banks pay it out over the counter the law
compels them to restrict their loans or call in loans.
Senator N e l s o n . Suppose the bank had it in its own vault; it would
still be of no use. You would have to keep it there.
Senator O ’G orm an . It would be available for the use of depositors
in certain contingencies.
Mr. C a n n o n . Yes.
Senator N elso n . The only difference is that part of the reserve is
kept in the bank’s own vault, and a part in this reserve bank, but
neither can be utilized directly. There must always be that fixed
amount, and whether you take that 5 per cent from the regional bank
and require it all to be put in the particular bank does not make any
difference. It is still, in a sense, idle money. But in the regional
reserve bank it can not be made the basis of any issue; there is the
value of it. It operates there as a part of the capital of the bank.
That and the stock subscription together, those two items, constitute
the capital of the bank.
The C h a ir m a n . The inquiry if the Senator from Kansas was
whether or not this reserve put into the reserve bank was objection
able for any reason. He construes the bill to leave it impounded
there so as to be available for any purpose. Now, it comes under the
rule of section 5191 of the national banking act, which provides that
these reserves may be used for deposits but not for loans, and if it
goes below that for any purpose it is to be made good within a limited
number of days. If that is ambiguous it ought to be corrected.
Senator S h a fr o t h . Section 22 seems to me to clear that u p —
The Federal reserve board may notify any Federal reserve bank whose lawful
reserve may be below the amount required to be kept on hand, to make good
such reserve; and if such bank shall fail for 30 days thereafter so to make good
its lawful reserve, the Federal reserve board may appoint a receiver to wind up
the business of said bank.
Senator N elson . That is covered by the present national-bank
law.
Senator H itc h c o c k . That verifies what I say, that it is impounded
there, and if checks come in against it the reserve bank notifies the
member bank and it must make it good.
Mr. C a n n o n . Does it not have to make it good now? Suppose
they overdraw their account with us and it is down to their re
reserve. We are not reducing their reserve----Senator H itchcock (interposing). As the law is now , a n y bank
can pay out its reserve to its depositors until it gets down to the
last dollar, if it is still solvent. But, under this law, the minute
its reserves, by reason of the payment of checks or drafts, drops
below the legal reserve the reserve bank notifies the member bank
to make it good.
Senator S h a fr o t h . Yes; but these reserves that are put in by the
member bank being, say, $300,000, the bank has a right to lend out
or to in any manner utilize in commerce two-thirds of it. according
to this first paragraph of section 22.
2150
BANKING AND CURKENCY.
Senator H itc h c o c k . There is no question about that. The ques
tion is whether a member bank is bound, under the law, to keep a
certain proportion of its reserve impounded permanently.
Mr. C a n n o n . Not for use, you mean?
Senator H itc h c o c k . Yes.
Mr. C a n n o n . T o pay its depositors?
Senator H itc h c o c k . Yes.
Mr. C a n n o n . I do not read it that way.
Senator H itc h c o c k . The Senator from Colorado has just read
the paragraph which gives the reserve bank the right to order the
member bank to make that reserve good or be dissolved.
Mr. Cannon. That is a quotation from the national banking act
to-day.
Senator H itc h c o c k . That only applies when a bank is insolvent.
Mr. C a n n o n . Oh, no.
Senator N elson . N o ; under the national banking act to-day the
moment the reserves fall below the legal requirement the Comptroller
of the Currency notifies the bank, and it is not allowed to make any
loans----Senator H itch co ck (interposing). That only stops it from mak
ing loans. It does not dissolve the bank. It only stops it from
making loans until the reserve is restored.
Senator N elso n . And if it is not restored in 30 days the bank goes
out.
Senator H itc h c o c k . Not if it is still solvent.
Senator S h a fr o t h . That depends upon whether the Comptroller of
the Currency gives the notice. He can let it run for six months.
Senator H itc h c o c k . This reserve bank is not allowed to let it
run. It must notify the bank and the member bank must make it
good. That verifies what I have said, that the reserve is impounded.
Senator N elson . N o more impounded than it is to-day under our
national banking system.
Mr. C a n n o n . N ow , in regard to these stock subscriptions, this
seems to be a storm center of the discussion. Why could you not
continue this provision just as it is, and add a clause providing that
within three years the member banks would be at liberty to dispose,
if they so desired, of at least 75 per cent of such stock as they held,
the purchasers to be approved by the board of directors, or the execu
tive committee of the Federai reserve bank, before any transfer
could be made? It could be provided that the stock so disposed of
should not have any voting power. The stock should show plainly
on its face that such transfers could only be effected with the ap
proval of the Federal reserve bank.
This would seem to meet the objections raised by many country
banks, as well as the large city banks, that section 19 would cause
them to lock up a large sum of money in unavailable assets. The
passing on stockholders by boards of directors is not an unheard of
thing. The stock of the Federal reserve bank would certainly make
a splendid investment for any individual. I think that would re
move many of the objections to this section, and certainly cause the
bankers to be more contented with their investment.
Now, it may be out of order to make that suggestion, but it oc
curred to me that it might be done. We have in New York a situa*
tion that is somewhat similar. Our clearing-house building in New
BANKING AND CURRENCY.
2151
York was built by a a clearing-house building company. The stock
of that clearing-house building company is owned by the banks who
are members of the association. The building was put up. The
stock carries a fixed rate of interest, and we are not allowed to sell
it to anyone else at all, to any individual or outside person; we can
only turn the stock back into'the clearing-house association, or they
can redeem it from us. There is something akin to that in that
section.
I simply make that suggestion as perhaps meeting some of the
objections that have been made to the stock subscription matter.
Senator W e e k s . Of course, you recognize, Mr. Cannon, the neces
sity of keeping this stock from being accumulated in the hands of
any particular interest?
Mr. C a n n o n . Oh; surely.
Senator W e e k s . One way of doing that would be to require that
the member banks, as a condition of membership, should own a cer
tain percentage of this stock as required in this bill. But if any of
that stock is going to the public in any form, some method of re
stricted' transfers must be provided ivhich would prevent its falling
into the hands of a set of individuals.
Mr. C a n n o n . Yes; it would have no voting power----Senator W eek s (interposing). Do you think it is wise to deny
voting power?
Mr. C a n n o n . Lots of preferred stocks now have no voting power.
Senator W e e k s . Not very many.
Mr. C a n n o n . Quite a good many. Yes; there are quite a good
many preferred stocks without any voting power.
Senator W e e k s . There may be quite a good many; I do not recall
any.
Mr. C a n n o n . A good many industrial preferred stocks. The
thought I suggested was that the purchases would have to be ap
proved by the board of directors or the executive committee of the
Federal reserve bank before the transfer could be made. I simply
throw that out as a suggestion that might, perhaps, be helpful. I do
not know whether it would be at all useful in any way. Now. in the
matter of the retirement of circulation based on the 2 per cent bonds,
I have no remedy for that and I have thought over it a great deal.
The way I feel about it is that the Government can afford to treat
the banks with these 2 per cent bonds very liberally. They came to
the assistance of the Government when this bond issue was put out,
taking them over, and some remedy should be devised to provide
against the great loss which would be entailed on the banks and the
large amount of money which would necessarily be locked up. I con
fess that is a subject for solution, and I presume that your committee
has, in its combined wisdom, some plans devised to protect the Gov
ernment and do some justice to the banking community, which I sup
pose the sponsors for the bill always desired to do.
We need banks in handling Government bonds. We need them as
the years go by. At times they become buyers of Government bonds,
and there ought to be some wav provided whereby this loss which
is hanging over them on account of the 2 per cent bonds could be done
away with.
Senator W e e k s . D o you see anv objection to applying the surplus
earnings of the regional banks to the retirement of the national debt
S. Doc. 232, 63-1— vol 3-----15
2 152
BANKING AND CURRENCY.
and making other provisions which would, in a term of years, entirely
eliminate our national debt?
Mr. C a n n o n . Not a bit. Your earnings are going to be large.
S e n a to r W ee k s . H ow la rg e do you estim a te th e y w ill be?
Mr. C a n n o n . I have the figures here if you will allow me a mo
ment to look them up.
Senator N elson . If we allow them 6 per cent on their stock would
it not be wise to have all the residue of the revenue go to the Federal
Government ?
Mr. C a n n o n . Yes, sir.
Senator N elson . And provide a sinking fund?
Mr. C a n n o n . I w o u ld do th a t. I th in k i t w ould be b e tte r to do
t h a t a n y w a y th a n to a tte m p t to d iv id e th e resid u e in th e w ay you
h av e it in th e b ill, because th e n you a re tr y in g h a rd all th e tim e to
p u sh y o u r e a rn in g s.
The C h a ir m a n . Y ou mean these banks should not be mere money
making banks; they ought to be public-utility banks ?
Mr. C a n n o n . Yes; and at the same time safe.
The C h a ir m a n . Did you answer Senator Weeks’ question?
Mr. C a n n o n . I am looking up the figures; I have them somewhere
here. I had this estimate made of the Federal reserve bank in New
York, running over a period of three years, using 4 per cent for
loans and 3 per cent for investments, taking a very low figure, and
providing for 2 per cent interest on the general fund. I think the
Government should, perhaps, forego that 2 per cent interest if it were
necessary to do so. I also took the tax on notes at one-half of 1 per
cent. On that basis I would figure the gross income the first year to
be $6,123,100, the second year, $6,815,000, and the third year, $6,885,200 gross. I figure the expenses of interest and taxes and the expense
of maintaining the Federal reserve bank in New York at about
$300,000 a year.
Senator P omeree. What do you make the capital stock and proba
ble holdings of depositors ?
Mr. C a n n o n . The capital stock, with 10 per cent paid in the first
year, I figure would be about $19,500,000. The general fund that
New York would be entitled to transfer from the Government de
posits to that general fund in New York—you will apportion it
throughout the country, according to the bill—would be about $75,000,000. The required deposits of subscribing banks would be about
$51,000,000, and then I put an arbitrary note issue or deposit of credit
at $100,000,000. So they would have approximately the first year
about $246,000,000 to use, the second year about $280,000,000, and the
third year about $284,000,000 to use.
Senator W e e k s . What do you mean by the general fund ?
Mr. C a n n o n . The Government deposits. You would put a ll your
Government deposits, Senator, according to this bill, into a pot and
apportion it out.
Senator W e e k s . Are you figuring the reserve bank w ould p a y
interest on that?
Mr. C a n n o n . I am; yes, sir. I figured here in m y expenses
$1,500,000 from New York alone.
Senator W e e k s . Why do y o u do that ?
Mr. C a n n o n . I really do not know why you should.
BANKING AND CURRENCY.
2153
The C h a i r m a n . It would not be necessary if all the surplus went
back to the United States Government.
Mr. Cannon. No; if all the surplus went to the Government it
would not be necessary. On that basis I would figure the net income
for the first year—of course, this is only approximate—at about
$3,823,100, with a dividend at 5 per cent of $995,400. The available
surplus the first year would be $2,827,700. The second year the net
income would be $4,515,000. Deducting the dividend of 5 per cent,
the surplus would be $3,519,600 net. The third year the net income
would be about $4,585,200, and with the dividend out the surplus
would be about $3,589,800 net.
Now if you do not pay the Government interest, the New York
Federal reserve bank alone ought to show a net profit to the Govern
ment, before putting on 6 per cent interest on these certificates, of
pretty close to $5,500,000.
Senator N elson . I s not your table there based on the assumption
that all these funds are out and actively at work ?
Mr. C a n n o n . N o; that is on a proportional amount.
The C h a ir m a n . I sh o u ld lik e to have th a t sta te m e n t go in th e
reco rd .
Mr. C a n n o n . With great pleasure.
(The statement referred to is as follows:)
T e n t a t i v e in c o m e a n d e x p e n s e , F e d e r a l r e s e r v e b a n k o f N e w Y o r k .
First year.
Income:
Investments at 3 per cent....................... ......................................
Total...........................................................................................
Expense:
Interest on general fund, 2 per cent................................
Tax on notes one-half of 1 per cent............................
Salary of Federal reserve agent, proportion of expenses of Federal
reserve board, salaries of clerks, stationery, and sundries, but
no rent..................................................... ...
Second
year.
Third
year.
$4,000,000 $4,000,000 $4,000,000
2,123,100 2,815,000 2,885,200
6,123,100
6,815,000
6,885,200
1,500,000
500.000
1,500,000
500.000
1,500,000
500.000
300.000
300.000
300.000
2,300,000
2,300,000
2,300,000
N et income......................................................
Dividend on stock, 5 per cent......................................
3,823,100
995,400
4,515,000
995,400
4,585,200
995,400
Available for surplus....................................................................
2,827,700
3,519,600
3,589,800
Total................................................................
Mr. Cannon. I think that plan would be about the right thing.
If New York could earn for the Government over and above the 6
per cent interest on these certificates, say, $4,000,000, why, you would
have a very substantial fund, Senator, every year for the retire
ment of the twos and the retirement of the Government debt.
The Chairman. Y ou assume the bank would carry part of these
twos in its own vault and have them so they might be issued as oneyear notes?
Mr. Cannon. That could be done.
The Chairman. Would not that make a quick asset that would
serve for a reserve?
Mr. Cannon. Something of that kind might be done. I have
thought about a great many plans, but I have not given the matter
2154
BANKING AND CURRENCY.
as careful study as I might. I should expect that something should
be done. I think the country banks would appreciate that being
done for them. And we want the banks; the Government wants the
banks. We have to put out Government issues again, and we want
them to stand behind the Government always.
The C h a ir m a n . I think there is perfect unanimity of opinion
about the Government protecting its obligations, as well as the banks
protecting those twos.
Mr. C a n n o n . N ow , in the matter of the savings bank departments,
that has been another storm center. We have now the postal sav
ings bank law, and it seems to me it would be hardly necessary for
this section to appear in the law with reference to savings bank de
partments. While, no doubt, in the minds of the framers of the
act this is put in looking forward to the new savings bank depart
ments which may be established in the national banks, its effect has
been disturbing to the old savings bank departments which thej7 have
had so many years. If this section should remain in the act, should
it not be made to apply only to such departments as may be estab
lished under the act? Then you would have no trouble with the pres
ent savings bank departments I believe that would help very ma
terially in discussing that question. It seems so to me. I \hink the
country bankers would feel very much better about it.
Now, there is one other thing in the act that I want to commend
heartily, and that is with respect to domestic exchange facilities. I
think this method of permitting the Federal reserve banks to handle
the domestic exchange problem is going to solve one of the greatest
banking problems you have in the country to-day. It certainly is
one that a great many bankers have been working on for a great
many years.
I have always been from the start a consistent advocate of taxing
these things out of existence; I thought it was my duty, and I intro
duced in the Cleveland convention of the American Bankers’ Asso
ciation a great many years ago a resolution which made it the duty
of every banker to charge on country checks. I spent six months as
a member of the committee of the New York Clearing House Asso
ciation last year studying this subject, and I want to say, Senator
Weeks, that I think Boston has us all beaten to a frazzle.
I have changed my attitude in regard to this country-check propo
sition. I believe the country check is here to stay; it is a part of the
business of this country. It is a part of its circulating medium to a
certain extent, and the thing to do with it is to collect it as soon as
possible at the least expense to the banks. In this bill, I think, you
provide that, and I think that will be a great boon to the merchants
and manufacturers—in fact, to the whole country—when that thing
is once organized. I think our friends in the country banks do not
quite clearly understand the situation. I understand they feel the
exchange part of their business is very large. Well, the exchange on
checks is not very large. The exchange they get in the country banks
is more on drafts—grain drafts, cotton drafts, and odd things which
naturally would not go into the Federal reserve bank. The Federal
reserve bank would not undertake to collect those things.
Senator W e e k s . When you speak o f exchange, do you mean earn
ings?
BANKING AND CURRENCY.
2155
Mr. C a n n o n . I mean the amount deducted from a check drawn on
a bank. That is where many of us are at sea. I do not believe the
earnings of the country banks themselves, if they took them out from
the aggregate amount of money they received for handling checks,
would be very large.
The C h a ir m a n . Will y o u explain how those cotton drafts are
handled ?
Mr. C a n n o n . Yes. Cotton drafts are handled in the South in a
different way. There they come in, and, as I understand it, the buyer
goes around and buys a lot of cotton. He then goes to the bank, and
often attaches bills of lading to that draft, and asks the bank to ad
vance the money so that he may pay for it on the following day. The
bank sends that draft on to their New York correspondent to collect
for them. The bank in the South makes a vert7substantial charge for
doing that business, and they call that exchange.
The C h a ir m a n . That will n o t be denied by this bill.
Mr. C a n n o n . That will not be denied by this bill at all. In fact,
in this bill you do not deny to the country bank for one minute the
privilege they had of charging the Federal reserve bank if they sent
any items to it. You do not deny that to the member; he has a per
fect right to charge.
Senator H itc h c o c k . Mr. Cannon, I have before me a statement of
a small national bank in the South, with a capital of $100,000, sur
plus of $66,000, and deposits of $618,000. This bank estimates its loss
from exchanges at about $4,300, which has to come out of its earnings
if the terms of this bill are lived up to, and I am sure that its ex
changes are upon checks.
Mr. C a n n o n . They are upon cotton drafts? They are not upon
drafts for merchandise of any character? They are entirely upon
checks ?
Senator H itc h c o c k . I am not able to say. but I believe they are.
Mr. C a n n o n . I wish you would look into that. I have before me a
report of our committee on inland exchange, which we had a lot
of----The C h a ir m a n (interposing). You may put that in th e record.
(The report referred to is as follows:)
R eport
of
the
C o m m it t e e on I n la nd E x c h a n g e to
C o m m it t e e , N ovember 4, 1912.
the
C learin g H ouse
N ew Y o r k . N o v e m b e r lf , 1812.
T o t h e C le a r in g H o u s e C o m m itte e , N e w Y o r k C le a rin g H o u s e A s s o c ia tio n .
G e n t l e m e n : Your subcommittee on inland exchange, appointed in accordance
with the terms of the following resolution:
“ Whereas there were adopted on the 3d day of April, 1899, rules and regula
tions of this association regarding collections outside of the city of New York,
which, with the exception of special interpretations put upon certain clauses
of the same by the clearing house commttee. have never been altered or
amended. In view of the fact that the volume of collections during the past
13 years has increased very largely, and also the fact that since those rules
and regulations were established there have been various methods pursued in
the handling of collections by the different clearing house associations
throughout the country, it would seem as if the time had arrived when a care
ful investigation should again be made of this m atter: Therefore, be it
“ R e s o l v e d , That a special committee of five be appointed by the chairman for
the purpose of making a thorough investigation of the subject of inland exchange
and collections, and the methods pursued by other clearing house associations, and
2156
BANKING AND CURRENCY.
to report to this committee such changes in the rules or regulations of the New
York Clearing House Association as in its judgment may be deemed best;
and be it further
“R e s o l v e d , That this committee be authorized to invite to appear before it
managers of other associations and members of this association for the pur
pose of procuring any necessary information, and that any expenses incurred by
the committee shall be borne by the clearing house association,”
which was adopted by the clearing house committee on April !, 1912, begs to
submit herewith a resume of its activities, which began as soon as practicable
after its appointment, and continued without intermission until quite recently.
Your committee approached this investigation with an entirely unprejudiced
mind and has maintained an attitude of strict impartiality throughout. It has
given careful consideration to the facts it has gathered and feels that it is now
in a position to report its conclusions and the findings upon which these conclu
sions are based.
Under its direction two forms were prepared. A copy of one of these forms
was sent to each bank and trust company member of the New York Clearing
House Association, the purpose being to place the committee in possession of
information with respect to what, if any, changes they felt should be made in
our existing rules and regulations affecting the collection of country checks.
In furtherance of your committee’s desire to receive as many different points
of view as possible on this most important subject, it met frequently at the
clearing house during the spring and summer months for the purpose of discuss
ing it in a frank and unbiased way with the president, or such officer as he
elected to represent him, of each clearing house institution.
The second form prepared under the committee’s supervision was designed for
use in conveying to it certain information for statistical purposes, in respect of
the amount, source of receipt, disposition and cost of collection, as well as time
consumed in collecting foreign items received by each individual institution
during the month of May, 1912. A copy of this form was handed to each
member’s representative at the time he appeared before the committee, with
a careful explanation of its purpose and confidential nature.
The figures compiled from the data contained in these reports
indicate that the gross income of the members of the clearing
house association from collection of exchange during the
year 1911 was_____________________________________________ $2,139, 551. 00
Exchange cost________________________________ $1,176,162. 00
Proportionate share of postage, rent, stationery,
and salaries for 1911________________________
569,461. 78
Estimated loss of interest on interest-bearing ac
counts where immediate credit is given for for
eign checks, based upon figures submitted by
eight of the largest institutions in the clearing
296, 460. 00
house ______________________________________
Net income___________________________________________
97, 467. 22
It should be borne in mind that this net income is the result of handling
a volume of business based on the figures gathered for the year 1911 of approxi
mately $4,859,187,900, and when distributed between the 64 active members
of the clearing house association represents an annual increment of income to
each of only about $1,500.
The figures gathered by your committee for the month of May, 1912, show
a daily average amount of foreign checks received of $16,284,346.
As to the discretionary and charge points, this volume was distributed as
follow s:
Discretionary points___________________________________________ $11, 404, 363
One-tenth points______________________________________________
3, 938,198
One-fourth points_____________________________________________
865, 785
It will be observed from these figures that of our daily volume of out-of-town
business for May, 1912, 71 per cent was on the discretionary points, 24 per
cent was on the one-tenth points, and only 5 per cent was on the one-fourth
points.
The daily average amount of cash items outstanding during the same period
was $68,215,328, indicating that the average time consumed in the collection
of our country checks was 4.19 days.
ft
BA N K IN G AND CURRENCY.
2157
Your committee also procured from tlie members of the clearing house asso
ciation the data with reference to the average daily outstandings of cash
items during the year 1911 which amounted to $67,866,658. Considerable labor
was involved to the banks in providing this information, but as a medium for
comparison with the same figures for May, 1912, which, as previously stated,
totaled $68,215,328, the committee was enabled to confirm its impressions that
the month of May, upon which its principal figures were based, was an excel
lent average month.
The succeeding table shows the average daily amount, the average time con
sumed, and the average cost of collecting checks on the discretionary points,
and also on a number of the other more important nondiscretionary cities of
the United States :
City.
Average
amount.
Average
time.
Days.
Troy.............................
Greater New York.......
Pittsburgh....................
Cleveland.....................
Buffalo........................,
Hartford.......................
St. Paul........................
Donvor.........................
One-fourth’points........
3.514
$4,174,177
3.523
2,874,831
3.243
958,796
4.047
943,321
4.117
889,410
351,282
4.188
3.935
lio;280
3.657
370,781
3.63
134,240
3.885
1,068,025
4.053
847,883
4.739
417,320
3.95
132, 797
4.341
135,622
4.787
109,470
4.143
96,850
79,588
4.178
71,374
2.95
4.705
57; 872
5.31
42,719
5.02
30', 861
4.923
23,615
5.196
25,229
20; 838 ' 6.941
5. 787
19,309
6.47
19;786
34,095
8.928
9.404
50, 745
27; 967
8.937
4.177
7.000
Average cost.
2 banks, $0,340 per M (49 par, 13 not reporting).
4 banks, $0,069 per M (47 par, 13 not reporting).
21 banks, $0.36 per M (28 par, 15 not reporting).
1bank, $0.29 per M (48 par, 15 not reporting).
2 banks, 30.208 per M (47 par, 15 not reporting).
3 banks, $0,156 per M (46 par, 15 not reporting).
5 banks, $0,363 per M (39 par, 20 not reporting).
2 banks, $0.18 per M (46 par, 16 not reporting).
1 bank, $0.01 per M (46 par, 17 not reporting).
No cost (42 par, 22 not reporting).
2 banks, $0,107 per M (40 par, 22 not reporting).
34 banks, $0.54 per M (13 par, 17 not reporting).
24 banks, $0,768 per M (22 par, 18 not reporting).
37 banks, $0,618 per M (9 par, 18 not reporting).
38 banks, $0,788 per M (8 par, 18 not reporting).
20 banks, $0,616 per M (23 par, 21 not reporting).
41 banks, $0,631 per M (6 par, 17 not reporting).
37 banks, $0.60 per M (9 par, 18 not reporting).
15 banks, $0.62 per M (32 par, 17 not reporting).
38 banks, $0.91 per M (6 par, 20 not reporting).
40 banks, $1.14 per M (5 par, 19 not reporting).
39 banks, $1.18 per M (5 par, 20 not reporting).
37 banks, $1.06 per M (6 par, 21 not reporting).
32 banks, $1.16 per M (12 par, 20 not reporting).
39 banks, $1.11 per M (6 par, 19 not reporting).
41 banks, $1.15 per M (4 par, 19 not reporting).
40 banks, $1.36 per M (4 par, 20 not reporting).
39 banks, $0.87 per M (6 par, 19 not reporting).
40 banks, $1.10 per M (4 par, 20 not reporting).
44 banks, $0,609 per M (20 banks not reporting).
44 banks, $1.40 per M (1 par, 19 not reporting).
Subsequent to the appointment of this committee on inland exchange by the
clearing-house committee of the New York Clearing House Association, the
bankers’ associations of New York, New Jersey, Connecticut, and Massachu
setts took similar action. These committees in due course communicated to
your committee their desire to discuss this subject fully with it. Their requests
were gladly granted, and at appointed times your committee has had the pleas
ure of entertaining the representatives of each of these associations.
In view of the foregoing r6sumf> of the scope and detail of the work of your
committee and of the facts thus ascertained, and because your committee is con
vinced that the operation of the present rules and regulations of the New York
Clearing House Association in respect of charges on inland exchange, results in
barely making good to the banks and trust companies making their exchanges
through the clearing house, their actual outlay in handling such business, in
cluding the amounts of exchange charged on or deducted from return remit
tances, without substantial return for the enormous volume of the business thus
undertaken and its risks, your committee feels itself compelled in the interest
of the conservative business methods which are required in good banking,
respectfully to recommend that the main body of the existing rules and regula
tions of the New York Clearing House Association, regarding collections outside
of the city of New York, shall remain unchanged.
In the judgment of your committee, however, within certain restricted terri
tories, and for reasons which are in each instance peculiar to the areas involved,
the rules should be modified with advantage alike to ourselves and to the inland
banks and business interests affected by them.
2 1 58
BANKING AND CURRENCY.
After a careful consideration of all the questions involved, it furthermore
respectfully recommends that all banks and trust companies in the States of
Massachusetts, Rhode Island, Connecticut, New Jersey, and New York, which
w ill engage themselves in writing to the manager of the New York clearing
house, over the signature of the president, cashier, or treasurer to x-emit to
the members of the New YTork Clearing House Association at par. in New York
funds, on the day of receipt, the charge shall in all cases be discretionary with
the collecting bank.
It is not proposed that the foregoing recommendations shall in any way dis
turb the relations now existing between our members and the banks located in
the present discretionary cities.
In the opinion of your committee this proposed modification of the rule re
specting discretionary places so as to include the entire region mentioned,
provided the local banks themselves in any community wish it, rather than
extending the privilege of a few specially designated cities or towns in that ter
ritory, will, if adopted, do much toward relieving the irritation and dissatisfac
tion which have heretofore existed among many near-by banks not situated
in a discretionary city. This proposal affoi’ds opportunity to the banks in each
locality to determine for themselves and for their customers whether or not
they wish to enjoy the benefits and share the burdens of a discretionary oi
free collection point.
All of which is respectfully submitted.
(Signed)
J a m e s G. C a n n o n ,
W a lter E . F r e w ,
J o s e p h T. T a lbert ,
E dward T o w n se n d ,
J o h n W . P la t t e n ,
.
C o m m it t e e o n I n la n d E x c h a n g e .
Senator H itc h c o c k . We had before us the other day a witness
who said that the earnings of small banks in Mississippi in the ex
change of checks amounted to over $600,000 a year, which the banks
of Mississippi would lose.
Mr. C a n n o n . I think that must include drafts.
Senator N elso n . I understood him to include both checks and
drafts. I think, if you will look up his remarks in the record, you
will find that to be so.' And that gentleman Avho appeared with the
Chicago delegation, too; I understood in both cases, they included
checks and drafts.
Senator S h a fr o t h . He said his own losses would be $20,000.
Mr. C a n n o n . It could not possibly be that. They could not possi
bly charge that much on checks drawn upon them. Now, the gentle
man also forgets, I think, that under this act they are going to be able
to secure a very much larger amount of business in their own neigh
borhood than they had before, and a good many other things will
accrue to their interest that they have not thought of probably.
I am very much interested in that statement because all the investi
gations we have made over a period of years I have never seen any
thing like that. What are his deposits?
Senator H itc h c o c k . $618,000.
Mr. C a n n o n . And how large a c ity is it?
Senator H itc h c o c k . It is a small town, the town of Bessemer.
Mr. C a n n o n . From my investigations which I have made over a
period of years, I do not believe that the exchange on checks will be
much. But I think the general good to the country from being able
to have these Federal reserve association act, as you might say, as
clearing houses for this entire matter, will certainly be to the great
good of the mercantile interests and banking interests of the country,
as far as I can see.
i
BANKING AND CURRENCY.
215 9
Senator H itc h c o c k . The population of the town I spoke of is
10,800.
Mr. C a n n o n . I do not believe that could be on checks then. I think
a large amount of that would be on time deposits, which do not draw
checks. Will you kindly have that analyzed as a personal matter
and let me know ?
Senator H itc h c o c k . But other witnesses who came from other
States, I remember, were very positive that the losses to country
banks would be a large proportion of their total earnings if they
lost these collection charges.
Mr. C a n n o n . There is nothing in the act; they can charge just the
same, if they want to. The amendment to the House bill specifically
states that they can charge, if they want to, the Federal reserve bank
for collecting those checks.
Senator H itc h c o c k . Suppose they undertake to charge the Federal
reserve bank. What would they do ?
Mr. C a n n o n . They would stand the charge, I suppose.
Senator H itc h c o c k . They would charge the member bank?
Mr. C a n n o n . No ; they could not do that, because you would have
taken them for nothing. That would be a part of the business of the
bank.
Senator B ristow . H ow much could they charge?
Mr. C a n n o n . How much could who charge?
Senator B ristow . Why, the country bank.
Mr. C a n n o n . That would vary according to the town.
Senator B ristow . How much could i t charge the Federal reserve
bank, if it could charge?
Mr. C a n n o n . It can only, according to the act, make a reasonable
charge; that is, it would be according to whether their exchange is
at a premium or at a discount, what the situation was, and the time
of the year in which the checks were drawn.
Senator H itc h c o c k . These charges made by small country banks,
I understand, are not so much for exchange; they are really such a
charge as a lawyer would make for making such a collection.
Mr. C a n n o n . T h is m u st be on d r a f t s ; it w o u ld n o t be on checks,
because a check is d ra w n a b so lu te ly on a c o u n try b a n k , a n d we send
i t d ire c tly to th e m now , a n d th e y re m it to us, d e d u c tin g 5 cents or
3 cen ts, a n d som e d e d u c t o n ly th e p o stag e.
Senator H itc h c o c k . I s it not a fact that many of them deduct
a tenth of 1 per cent?
Mr. C a n n o n . Yes.
Senator H it c h c o c k . And one-quarter of 1 per cent?
Mr. C a n n o n . I will read you the figures we gathered through
our committee from the New York banks during the month of May,
1912. The daily average amount of these foreign checks we re
ceived then was $16,000,000; on points where no charge was made at
all there was $11,400,000. On quarter points it was only $365,000,
which is very small in proportion.
Senator B ristow . N ow , to get this clearly in my mind, suppose I,
living at Salina, Kans., pay a bill that I may have in Chicago for
$1,000 by sending to my Chicago creditor a check for $1,000----Mr. C a n n o n (interposing). On your local bank?
2160
BANKING AND CURRENCY.
Senator B ristow . On my local bank. That settles my account
with him. I am given credit for that $1,000. Now, that comes back
to the bank where my account is, and is charged to me. What charge
is made on that check in that process?
Mr. C a n n o n . Y ou can not tell. There may not be any charge. It
may be a question of reciprocal balances. I t may be something that
nobody knows except your bank and the Chicago bank.
Senator B ristow . What interest has the local bank in that check?
Mr. C a n n o n . All th e in te re s t he h as is to p a y it a n d ch a rg e it to
y o u r account.
Senator B ristow . S o he gets nothing
Mr. C a n n o n . Well, you draw your
out of that?
check to-day, for instance,
and send it to Chicago, on Salina, Ivans. Now, if you are out there
in Salina, Kans., you may go in there and draw that money and
send it to Chicago and he gets the use of that money a longer time
than he would ordinarily.
Senator B ristow . N ow , the Chicago banker might charge my
creditor for the collection of that check, or he might not.
Mr. C a n n o n . Or he might not.
Senator B ristow . N ow , a man at Plainville, Kans., owes me $100,
we will say, and he sends me a check and I deposit that in my local
bank. Now, the local bank may charge me for the collection of
that----Mr. C a n n o n (interposing). According to your balance in the bank.
If your balance is a good balance, and you only put in these out-oftown checks once in awhile it would not charge you a cent, because
your balance would be ample to cover any exchange charge there
might be.
Senator B ristow . The interchange of these checks is what you call
domestic exchange?
Mr. C a n n o n . Yes, sir; that is it—checks.
Senator B ristow . N ow , in some communities they charge for these
collections, and in others they do not?
Mr. C a n n o n . But gradually extending throughout the country is
the Boston system. As I said a moment ago to Senator Weeks, we
take off our hat to Boston, because they originated the Boston system
of exchanging these checks without charge. Kansas City has a plan
now which is gradually being extended to collections throughout the
country. So these checks pass quickly from the maker of the check
back to their redemption without any charge and they pass as the
circulating medium of the country to a great extent.
Senator B ristow . T o carry this illustration further, suppose my
creditor at Chicago deposited that check with the Chicago bank that
is a member of this national organization. That bank would not
charge him?
Mr. C a n n o n . It would not charge him ; no, sir.
Senator B ristow . Because the Federal reserve bank would not
charge him anything?
Mr. C a n n o n . It would not charge him anything; that is it. And
you can see that the merchantile interests would be greatly benefited
by that all over the country.
Senator W e e k s . Can you see any objection to transferring that
business to the Federal reserve banks, unless it is the possibility’- of
preventing all loss in earnings accruing to the country banks?
BANKING AND CURRENCY.
216 1
Mr. C a n n o n . I can not see any at all. I think it is a n a d v a n ta g e
to the country generally.
Senator W e e k s . What do you enumerate as the advantages?
Mr. C a n n o n . The advantages?
Senator Y e e k s . Yes.
Mr. C a n n o n . I would enumerate the quick returns, the same as
we have in the clearing house to-day. We have this large volume of
business throughout the country, and these entries would be made,
as I look at it—the transfers would be made upon the books of the
Federal reserve banks. I feel that the amount of money that would
be saved to all concerned would be very considerable.
Senator H itc h c o c k . Would it amount to an expansion of credits?
Mr. C a n n o n . No, sir; it would amount to a quick payment.
Senator H itc h c o c k . Let me take an illustration. Suppose Sena
tor Bristow’s check, to which reference has been made, is in the
hands of a Chicago merchant, and that is deposited in the bank to
its credit on that day instead of waiting four or five days. Would
they not receive that much additional credit?
Mr. C a n n o n . N ow it extends credit in more ways than one. What
would happen to the Senator’s check would be that that bank in Chicago
would say that I do not want to send that check out to Salina, Kans.,
and so I will send that to Kiowa. So the bank in Chicago sends that
to Kiowa and gets a credit of $1,000 at Kiowa, and the banker at
Kiowa says “ I will send that to Uncle John Mulvane, at Topeka
and so he sends that to Uncle John, and Uncle John sends it to
Salina to see whether the Senator’s check is good. And there is
where the expansion of credit is now.
Senator W e e k s . Uncle John would not have to do that; he knows
it is good. [Laughter.]
Senator H itc h c o c k . I s that done now ?
Mr. C a n n o n . Yes; it is constantly done now. We do that in our
own bank. We have checks we send to points up in Connecticut,
and the bank in Connecticut sends them to another bank in Albany,
N. Y., and they come back to us from Albany. We had one like that
the other day. Under this scheme everything would be handled di
rectly and quickly and with greater safety to everybody.
Senator B ristow . Tell me why the bank at Chicago w o u ld send it
to Decatur.
Mr. C a n n o n . Because they think probably they may get an ac
count out of Decatur. There are all sorts of by-arrangements. The
bank at Decatur thinks they will send it to Uncle John, because they
want to do something with him. That thing is coming up constantly
in all sorts of ways.
Senator B ristow . In the meantime has the person who deposited
the check originally still got a credit?
Mr. C a n n o n . Oh, yes; but they never know for a long time whether
it has been paid. Those checks go all around, and finally it comes
back to the bank in which it was originally deposited.
Senator W e e k s . A s a matter of fact, if that merchant in New
York, instead of Chicago, deposited Seriator Bristow’s check with
you and you were paying him interest on his deposit, you would not
pay him on that check until it had been collected?
Mr. C a n n o n . We would not now. We would deduct so much
from his interest account. Under this scheme he would not be a
216 2
BANKING AND CUERENCY.
loser, because it would be done very quickly. We do not pay mer
cantile accounts any interest in our house. Many banks do, how
ever.
Senator W e e k s . Many banks pay interest on certain kinds of in
dividual accounts.
Mr. C a n n o n . Yes.
Senator H itc h c o c k . Would it not be a balance that could be
checked against?
Mr. C a n n o n . According to whether the account was good, b ad, or
indifferent, depending upon the depositor.
Senator H itc h c o c k . If the depositor is a man of good credit it
would increase his credit with you?
Mr. C a n n o n . Yes.
Senator H itc h c o c k . He might put out 100 checks of that sort
and his credit would be increased?
Mr. C a n n o n . Yes. I believe this will be very helpful in doing
away with these notes current all over the country, having these
Federal reserve banks acting as clearing houses in this matter. I do
not know that I have been very helpful to you, but such suggestions
as I have had I have been very glad to give to you.
Senator O ’G orm a n . What is your idea, generally, of this pro
posed change in our currency system ?
Mr. C a n n o n . H ow is th a t?
Senator O ’G orm an . What is your idea generally regarding the
proposed changes in our currency system?
Mr. C a n n o n . I think if you can make some of these changes in
your bill, and make it so it will be acceptable to a large number of
people. I think it will be very advantageous to the country, with
these changes incorporated in.
Senator W e e k s . What is the relative importance of the mobiliza
tion of reserves and the elasticity of currency; which do you regard
as the more important?
Mr. C a n n o n . I w o u ld h av e to d iffe re n tia te betw een them . I
th in k th e y a re b o th q u ite im p o rta n t.
Senator W e e k s . England has mobilization
of resources and prac
tically not an elastic currency.
Mr. C a n n o n . Our country is large, scattered over such a tre
mendous district; we do our business in such an entirely different
way from what they do their business over there that f do not be
lieve you can take England as an example.
Senator N elso n . They do their business on bills of exchange in
drafts; we do ours on promissory notes.
Mr. C a n n o n . That is true.
Senator P om eren e . I want to ask you a question right there. In
the earlier part of your statement, in speaking about having these
notes guaranteed by the Government, you used an expression some
thing like this, that you would fix the notes so as not to embarrass
the Government in their redemption. What did you have in mind?
Mr. C a n n o n . T o make those redeemable in gold you must have
some arrangement whereby they could not in any way embarrass the
Government by a great amount of them coming in upon the G o v
ernment, as was the case in Mr. Cleveland’s time.
Senator P om eren e . H ow would you do it ?
BANKING AND CURRENCY.
2 163
Mr. C a n n o n . I am not clear in my own mind about that. It is
a very difficult question. The question is whether they shall be
i-edeeined in Washington----Senator B ristow . Suppose—these notes are not good for reserves,
and of course they will accumulate in New York, just like national
bank notes.
Mr. C a n n o n . Where will they accumulate?
Senator B ristow . In the banks at New York.
Mr. C a n n o n . Outside those who are not members?
Senator B ristow . In the general transaction of business, will not
this money which can not be used for reserves in the banks finally
get back to the place of redemption, just like national bank notes do?
Mr. C a n n o n . That is what the act provides for—prompt redemp
tion of the notes.
Senator B ristow . They will come to the Treasury Department,
large amounts of them, would they not, in the operation of business,
just like the national bank notes do now?
Mr. C a n n o n . I do not believe they would under this act, because,
you see, here we would be members of the Federal reserve bank, and
we would deposit those notes immediately in our own Federal reserve
banks.
Senator N elson . They must be sent to the bank which issues them.
Mr. C a n n o n . Yes. The amended section provides what shall be
done with them. They are to be sent to the bank upon which they
are issued, not to be paid out again.
Senator B ristow . Does it say not to be paid out again?
Senator N elson . I call your attention to line 6 on page 31 of the
bill, where it says:
Whenever Federal reserve notes issued through one Federal reserve bank shall
be received by another Federal reserve bank they shall be returned for redemp
tion to the Federal reserve bank through which they were originally issued, or
shall be charged off against Government deposits and returned to the Treasury
of the United States, or shall be presented to the said Treasury for redemption.
Mr. C a n n o n . That is i t ; yes.
Senator N elson . But the question is, if they are presented to the
issuing bank—that was the question submitted yesterday.
Mr. C a n n o n . Y ou d o not think that is quite clear in the act?
Senator N elso n . If they are presented to the issuing bank for re
demption and the issuing bank redeems them, what becomes of them?
Are thev retired, or can they be put into circulation again ?
Mr. C a n n o n . That is n o t clearly stated here.
Senator N elso n . Ought it not to be clearly stated ?
Mr. C a n n o n . I think it should.
Senator N elson . And inasmuch as they are based upon this asset
currency ought they not to retire the notes, if they come back, after
thev have been redeemed by the bank?
Mr. C a n n o n . I do not see why they should not.
Senator N elson . That is, the bank ought not to have the right to
issue that note again? It has gone its rounds. I t was issued on com
mercial paper with that reserve. I t has performed its functions and
come back and been redeemed. If the bank issued it again without
having additional paper for security, there is no security back of it,
nothing but the redemption fund. Ought it not to be retired ?
Mr. C a n n o n . I should think so.
2164
BANKING AND CURRENCY.
Senator H itchcock. Senator Nelson, the bank has security up for
that loan; it has segregated a certain amount of that loan which is
not yet due.
Senator N elson . I know, but it has paid gold for it.
Senator H itchcock. The accident of its coming back is like the
accident of another deposit made in the bank.
Mr. Cannon. The bank pays a tax upon it until it. comes back.
Senator W e e k s . What have you to say about paying a tax on cir
culation?
Senator N elson . I want to get clear on your opinion as to that
one point. Ought that note to be retired after it has gone the round
and been redeemed?
Mr. C a n n o n . I believe it should.
Senator N elson . Redeemed b y the issu in g b a n k ?
Mr. C a n n o n . Redeemed by the issuing bank and a tax paid on it
until it comes back.
Senator N elson . N ow , ought not the regional reserve banks that
issue this currency provide this gold reserve, this 33£ per cent gold
reserve, instead of the Government ?
Mr. C a n n o n . I think so; generally; yes.
Senator N elson . They ought to provide it?
Mr. C a n n o n . Sure.
Senator N elson . And relieve the Government entirely of the
burden ?
Mr. C a n n o n . T h a t is w h a t I say.
Senator N elson . Would it not be wise to require, instead of 5 per
cent in gold for that reserve, that they should deposit 10 per cent ?
Mr. C a n n o n . Y ou mean for the redemption fund?
Senator N elson . Yes.
Mr. C a n n o n . I do not believe that redemption fund would do; I
would have the whole 33| per cent, too.
Senator N elso n . In the vaults of the Government?
Mr. C a n n o n . No ; 5 per cent in the Government vaults and the
other 28 per cent in the banks.
Senator N elson . Would i t not be better to have 10 per cen t of
t h a t gold reserve?
Mr. C a n n o n . I do not believe so, Senator. Because the history
of the past in redemption of national-bank notes would show that.
I do not know what the average has been.
Senator N e l s o n . D o you not think that redemption ought to be
in gold and not in lawful money?
Mr. C a n n o n . That is what I said.
Senator Shafroth. Y ou say you desire that the Government
should be saved from any run upon its Treasury?
Mr. C a n n o n . Yes.
Senator S hafroth. Does not the system of having the United
States notes redeemable in gold and this currency issued under this
bill redeemable in lawful money have a tendency to relieve this in
this way: If I am a holder of $1,000 of this currency and I take it
to the reserve bank, and the reserve bank says, “ I can not give you
gold, but I can give you lawful money,” and then it says, “ If there
is going to be a run for gold we will just simply hold this and keep
it in the vault.” The man gets his $1,000 in United States notes and
goes to Washington, and he says, “ I want my gold” ; and the Gov-
BANKING AND CURRENCY.
2165
eminent says, “ If there is going to be a run on this thing we will
hold this United States note.” Now, by the process of putting out
$1,000 in gold you have practically retired $2,000 of notes that are
ultimately redeemable in gold, and by reason of one of them being
redeemable in lawful money there has been a redemption of $2,000
of obligations; and does not that save the Government ?
Mr. Cannon. No ; I think you have injured the standard of the
Government.
Senator S hafrotii. The national-bank notes are not redeemable
in gold.
Mr. Cannon. No ; they are not redeemable in gold.
Senator Shafroth. And the person having these notes goes to the
bank and says, “ I want legal tender,’’ and he sends the legal tender to
the United States Government and gets this gold. All the functions
of the parity of the money are complied with. Now, if you have the
other system, you are going to make a great drain on the gold of the
country, and I think that provision allowing the bankers to pay in
lawful money simply narrows the gold reserve it is necessary to
keep in Washington. We have $150,000,000, which supports a cur
rency of $356,000 in United States notes and, on top of that,
$750,000,000 of bank notes, and it is done by $150,000,000, and if you
make those notes so redeemable you would have to keep something
like $250,000,000 in gold in addition to the $150,000,000 now there in
order to redeem $356,000,000 of greenbacks, and that makes a greater
drain and demand upon gold for that purpose. Inasmuch as the
blanket is a little short, it seems to me it would induce much more
criticism.
Mr. Cannon. I think the credit of the country is at stake in this
matter.
Senator S hafroth. One objection made to that was that the for
eign countries would be discouraged, but these notes are not sup
posed to go to foreign countries.
Mr. Cannon. I think in establishing any new system you want to
take great pains to see that we never let down on anything we have
already, and I think it would be a great mistake----Senator S hafroth (interposing). The national-bank notes are not
redeemable in gold?
Mr. Cannon. These notes ought to be. You would get a better
note out of it in that way.
Senator S hafroth. If you have 12 distinct districts in the United
States, each one competing for gold, and you are going to have 12
competing points, and thus it will require a good deal more to redeem
these obligations than if one is payable in lawful money and that law
ful money is redeemable in gold.
Mr. Cannon. That is what I said; I hope you would not have 12.
Senator P omerene. Mr. Cannon, several witnesses have discussed
before us the propriety of giving additional charter powers to the
national banks in order to induce them to come into this scheme, and
also, perhaps, to curtail some of the powers now enjoyed by State
banks which might come in. I would like to have your views on that.
Mr. Cannon. I had not given that point any thought. It is a newthought to me. I have not even heard it mentioned. I should think
that might require considerable thought, because the State banks and
the national banks are so intertwined together that it might be difficult
2166
BANKING AND CURRENCY.
to act. Your idea is to make this more attractive and give the na
tional banks new powers?
Senator P omerene. Yes; and not to discriminate between the two
classes of banks. I can understand why a State bank with certain
powers might desire to come in here and get additional powers, and if
it came in and enjoyed all the powers the national bank would now have
it might discourage the national banks from going into the scheme.
Mr. Cannon. That is important, and it is quite a big thought, and
I would not care to answer the question until I had given it some
consideration.
Senator P omerene. I would be pleased if you would send us the
result of your thought on that matter.
Mr. Cannon. I would be very glad to think it over and communi
cate with you about it.
Senator P omerene. N ow, another matter. There has been con
siderable difference of opinion as to whether or not a sufficient num
ber of banks might come into this scheme to organize the number of
regional banks which may be determined upon. Of course, we under
stand it is to some extent problematical. Would there be any objec
tion to providing, for instance, that these banks should have a given
length of time within which to subscribe, and if a sufficient number
did not come in to organize the requisite number of regional banks,
then to open up the stock books to the public and permit the public to
subscribe ?
Mr. Cannon. I should be a little afraid of that.
Senator P omerene. For what reason?
Mr. Cannon. I think these banks would come in. I would prefer
something of the kind which I outlined and laid before you here. If
the banks felt that by their coming in they were not going to be tied
up, if they were able to sell their stocks to people who were acceptable
as stockholders to the directors in a Federal reserve bank and sell it
for investment where it could be watched; otherwise you would get a
miscellaneous lot of stockholders, and the stock would be thrown upon
the street, and it would see-saw up and down, and like everything else
of that kind, you would have more or less speculation in it all the
time, and it does not strike me as a good thing to do. I would rather
remove in some way the conditions which these banks have in that
matter in coming in and get them to come in and take the stock and
throw it open to the public.
Senator P omerene. The fact is that some banks may object to it,
because in their judgment it ties up a certain amount of their funds?
Mr. Cannon. I think you could work out a plan which will meet
that objection by permitting the sale of that stock at the proper time
to investors, who would not have a vote, and who would not have a
right of transfer, except, as I said, to people who were approved by
the board.
Senator P omerene. Y ou were speaking about the call loans in New
York. What portion of the loans are call loans?
Mr. Cannon. Wre had the annual meeting of the clearing house on
Tuesday. The clearing house sent out just before this meeting to
20 banks, members of the association who have $20,000,000 and over
of deposits.
Senator P omerene. Each bank?
BANKING AND CURRENCY.
2 167
Mr. Cannon. Each bank; and they asked each bank a question as
to how much they were loaning out on call for out-of-town customers,
and how much they were loaning out themselves on call loans. In
round figures these 20 banks were loaning out for their own custom
ers $175,000,000, for theiy out-of-town customers. For themselves
they were loaning $265,000,000. That was out of a total of loans and
discounts of $1,226,000,000 that those banks reported.
Senator P omerene. A little over one-third of the loans are call
loans ?
Mr. Cannon. Yes.
Senator W eeks. I s that right? Were they loans for themselves?
Mr. Cannon. For out-of-town banks.
Senator W eeks. Would they be loaning for themselves $1,200,000, 000 ?
Mr. Cannon. Let me see if those figures are right. They were
loaning for themselves $265,000,000.
Senator W eeks. What was their total loan?
Mr. Cannon. The total amount was $1,226,000,000. I can tell
very quickly whether that total is correct. I think the clearing
house people added into that total what they were loaning to the
out-of-town banks. The total in the New York banks was $1,324,000,000, of which' they were loaning on call $265,000,000. I may
possibly be mistaken in saying that was all money. It may have
been what was loaned out to Wall Street, on what I understood was
call money—$85,000,000 and $1,324,000,000—and they were loaning
for their out-of-town correspondents $175,000,000.
Senator W eeks. Does that include foreign banks?
Mr. Cannon. I think it does; I think it must include foreign
banks as well.
Senator W eeks. Is it not true that the Canadian banks loan in
New York from $25,000,000 to $50,000,000 all the time?
Mr. Cannon. But they loan through bankers.
Senator W eeks. They do not use very many local bankers?
Mr. Cannon. Quite a good many. They lend money to their
bankers, but we do not keep track of it.
Senator W eeks. Y ou are giving the figures here, as I understand
it, for 20 national banks?
Mr. Cannon. Twenty banks which are members of the clearing
house association, who have deposits of $20,000,000.
Senator W eeks. There are some 66 banks in the city?
Mr. Cannon. Yes.
Senator W eeks. And would the other banks have about the same
proportion of call loans?
Mr. Cannon. I do not know. The Fifth Avenue Bank, of which
I am a director, I think has $2,000,000 or $3,000,000. I do not know
what that proportion would be.
Senator W eeks. I s this about the average proportion?
Mr. Cannon. I should think that would be about the average
proportion.
Senator W eeks. N ow, from your experience as a banker, what, in
your judgment, would be the proper discount rates to start with
if this regional bank was organized?
Mr. Cannon. I could not tell you. You are a practical banker.
S. Doc. 232, 63-1—vol 3---- 10
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BANKING AND CUKBENCY.
Senator W eeks. I have not any idea on the subject.
Mr. Cannon. All that I can say—all that I did in my calculations
was to take 4 and 3 per cent. I just took it as a rough calculation.
It would depend upon the state of the money market. It would
depend upon what changes are being made in the banking system;
whether money would be very active or anything of that kind. It
will be very difficult to tell until after the thing was settled down
for a year or so.
Senator W eeks. Have you any preference as between four or six
banks over one?
Mr. Cannon. Of course, I would like to have one bank, but we
can not have it.
Senator W eeks. What makes you say that?
Mr. Cannon. Politically it is impossible ever to have a single
central bank in this country.
Senator W eeks. Y ou think, from the economical standpoint, it
would be better to have one than any additional number ?
Mr. Cannon. Well, I would have to answer that yes and no.
Some ways it would be an advantage and some ways it would not.
Senator W eeks. What would be the disadvantage, from an eco
nomic standpoint, that would arise in having one rather than four?
Mr. Cannon. I think the centralization in one place; I do not
know that you would serve the whole country as well.
Senator W eeks. Are you not going to serve the country through
branches anyway, whether you have 1 or 10?
Mr. Cannon. T o an extent only. The central reserve banks are
going to be of very great service to the country at large.
Senator W eeks. Undoubtedly; each of these Federal banks is go
ing to have numerous branches.
Mr. Cannon. Yes.
Senator W eeks. Would it be any advantage to have branches ex
tend from four rather than from one?
Mr. Cannon. I do not know, Senator Weeks; I would not like to
say on that.
Senator W eeks. If it were possible to provide for 1 bank instead
of 12, you would prefer it?
Mr. Cannon. One instead of 12? Yes.
Senator W eeks. If it were possible to provide one rather than six,
would you prefer it?
Mr. Cannon. I do not know. I should want to consider that very
carefully.
Senator W eeks. Y ou referred to issuing circulation. My recol
lection is that in the early nineties, when people drew money out of
the banks for hoarding purposes, they to a considerable extent asked
for gold or gold certificates, and that in 1907 they asked for circula
tion. without much regard for what it was. Is that your experience?
Mr. Cannon. I think you are right; yes.
Senator W eeks. I s that not due to the fact that in the meantime
we had established a gold standard and people knew that they could
get redeemed whatever circulation they may have in gold ?
Mr. Cannon. The people in the country know we are on a gold
standard.
Senator W eeks. If we issue these notes, in whatever form they may
be, and make provision for their redemption in gold, do you not think
BANKING AND CURRENCY.
2 169
the people would take them without any regard to whether they were
bank notes or some other kind of notes ?
Mr. Cannon. It would make a difference if they had the name of
the United States Government on them.
Senator W eeks. Mr. Cannon, you know that in the panic of 1907
in several places there were large quantities of clearing-house cer
tificates issued ?
Mr. Cannon. Oh, yes.
Senator W eeks. And they went into circulation ?
Mr. Cannon. Yes
Senator W eeks. They were used for pay rolls, and there never was
an instance where anybody refused to take them.
Mr. Cannon. I do not know about that. When they issued those
checks in Chicago they had to call all the employees in and show them
a check and tell them that the checks were perfectly good. When
they issued the checks in Pittsburgh they had to put them in four
different languages to get those fellows to take them.
Senator W eeks. Quite likely.
Mr. Cannon. There was trouble also in Harrisburg. I have here
a picture of the Harrisburg certificate, which says it may be deposited
and will not be paid in cash.
Senator W eeks. I made considerable effort to look into that at one
time, and I could not find any instance where those certificates had
not passed current without any serious question.
Mr. Cannon. The employers had to take a lot of them.
Senator W eeks. Undoubtedly. ,
Mr. C>nnon. They had to get their in<ui together and explain them.
Senator W eeks. Yes.
Mr. Cannon. They had to get their men together and explain the
certificates.
Senator W eeks. Undoubtedly they explained to their employees
what they were doing. But was there anv instance where the em
ployees refused to take them?
Mr. Cannon. I think they had a hard time in a good many cases.
I think you will find in Chicago and in Pittsburgh they had a pretty
hard time with those certificates. I do not believe you could pay out
a note of a regional reserve bank and have it circulate freely among
certain classes without the guaranty of the Government.
Senator W eeks. I do not believe anybody would know or care what
they had if they had a note and felt sure that it could be redeemed
on presentation.
Senator P omerene. This is a case where bankers seem to differ.
Mr. Cannon. Oh, yes; on various points.
Senator W eeks. What do you mean by prime commercial paper?
Mr. Cannon. Notes.
Senator W eeks. The reason I ask that question is that we have got
to define it, and we have got to define it with great definiteness, I
think. Otherwise we are going to have paper purchased as commer
cial paper which really is not commercial paper. I would like your
definition of what you would call prime commercial bills.
Mr. Cannon. I should say, Senator, prime commercial bills would
be notes issued for money either at a bank or other commercial
house, which money is to be used in the handling of legitimate mer-
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BANKING AND CURRENCY.
cantile business. Notes issued in the ordinary course. I do not know
as you could specify the line of business.
Senator W eeks. I do not think you have gotten that definite
enough to be of any use to us. I wish you would think that over and
let us know what your conclusion is.
Mr. Cannon. I will be glad to do that and-give you a definition.
Senator B ristow. Mr. Cannon, wThat do you regard as the defects
in our present system?
Mr. Cannon. I should hate to start in and go through all the
things. I think our currency is not elastic enough. That is only
one thing.
Senator B ristow. What else?
Mr. Cannon. I wTould not want to enumerate them in full. There
are a great number.
Senator B ristow. We have only heard two objections that I re
member—that is, with regard to the inelasticity of the currency and
to the inability to mobilize reserves. Those two terms have been
used, but I have not heard any other objection to it, any other prac
tical objections. There have been some theoretical objections. You
think there are many other defects?
Mr. Cannon. I think I could point out some others to you. I will
be very glad to do so.
Senator B ristow. What I was getting at was what were the defects
that had to be cured, and I had supposed those were the two principal
defects we are seeking to remedy.
Mr. C a n n o n . Those a r e the two, but I think there are a good many
others.
Senator B ristow. Others that this bill seeks to remedy ?
Mr. Cannon. Others that this bill seeks to remedy; yes. I will
be very glad to include them.
Senator B ristow. I am interested to know what they are, because
I have not heard any others, except some theoretical objections to
basing currency on debts, but that is the whole proposition, so that
that could not be suggested as a defect that is to be remedied. You
said that you would prefer a single bank, but it was politically im
possible to get it. What made you say it was politically impossible?
Mr. C a n n o n . I d o n o t t h i n k th e p e o p l e o f th e c o u n t r y w o u l d f a v o r
a s in g le b a n k .
Senator B ristow. Why do they not favor a single bank?
Mr. Cannon. I think they think there would be too much
concentra
tion in the hands of the men who are running the single bank.
Senator B ristow. Y ou think they would believe there would be
too much concentration in the hands of the men who were managing
the single bank. Would that place any greater powrer, to have 1
bank in the hands of this Federal board, than we are placing in it
now, over the 12?
Mr. Cannon. I do not think it would.
Senator B ristow. I s not the objection which the people have to
one central bank, not to the system but to the ownership and control
of the bank ?
Mr. Cannon. I know there is an objection. What is in their own
minds I could not answer.
Senator B ristow. The objection which I have understood—and I
am as much opposed to it as any one; I am one of the people as far
BANKING AND CURRENCY.
217 1
as that is concerned—I am opposed to any central bank that is owned
by the banks, controlled by the banks, and managed by them, because
I think it would result in one set of financiers, or a combination of
a few interests getting control, more than they have now, of the
banking system of the country and the credit business of the country.
Do you not think that is the cause of the prejudice against the central
bank?
Mr. Cannon. I could not answer that. I know a prejudice exists.
I would not want to say whether that was the cause unless I was
pretty clear in my own mind about it.
Senator B ristow. What objection other than the power that would
be centered in the management of this bank do you see against the
central bank?
Mr. Cannon. I do not see any objection further than that, except,
as I said a moment ago, whether one bank could serve the whole
country. The vast area of this country is all I have ever had in my
mind. Of course you could start branches, but whether the one in
stitution could serve the whole country----Senator B ristow. I believe that 1 bank located in one city could
not serve the purposes of this country. I t is a big country, and it
is proposed here to create 12 and then establish branches in the cities.
It is not proposed here that 1 bank shall serve a twelfth of the
country, because, as has been pointed out by witnesses, we have had
before us in the northwest part of the country, with a regional bank
at St. Paul or Minneapolis, it would have to take in. in order to get
the required capital, a territory 600 miles wide and 1,400 miles long.
1 do not believe anybody would suggest that 1 reserve bank serv
ing a territory reaching from St. Paul to the Pacific Ocean would
be enough to serve the region up there without branches. Now, if
the 12 banks are to establish branches, and the purpose of organiz
ing this association is to mobilize the reserves, could not they be
more efficiently mobilized if we had 1 with branches than 12 with
branches ?
Mr. Cannon. I have no doubt it could.
Senator B ristowt. Then, if the same powers that are placed in the
hands of this board over the 12 were given the board in the man
agement of the 1, would it not simplify the mechanical operation of
the institution?
Mr. Cannon. If it could serve the country, if that 1 bank could
serve the country?
Senator B ristow. Yes; by the establishment of these various
branches ?
Mr. Cannon. Yes; if that service could be done. As I said a mo
ment ago, I want to think about that pretty carefully, to see if it
can. Of course, as I stated at the beginning, the act provides for
12, and I thought it should be less than that number, because of the
necessity for not having any disturbance when you are making this
great change.
Senator B ristow. I think we will agree it will be better to have it
that way if it can be done successfully. I was going to suggest the
possibility of the concentration of control under the present system.
I think it is just as easy for the great interests that we are trying to
render as harmless as possible and the monopolization of certain
2172
BANKING AND CURRENCY.
credits—or not just as easy, but I think it is entirely possible—for
them to get control of these regional banks organized as they are.
And the thing which a good many regard as the most desirable fea
ture in this legislation is to break up what they call the Money T rust;
and the bill may fail in that respect, and those influences would con
trol a Federal board. Although they might do it, it is not probable;
but they will control the local boards that control the regional banks.
Do you believe—or have you given that phase any consideration—do
you believe it would be as easy for these interests to get control and
dominate the credits of the country if we had the Federal bank
managed by a Federal board?
Mr. Cannon. I have not given any consideration to that at all.
Senator B ristow. Y ou have not?
Mr. Cannon. No.
Senator B ristow. There is another feature of this I would like to
invite your attention to. A country bank under the present law has
a 15 per cent reserve requirement. I t keeps 6 per cent of it in its
vaults, and has the 9 per cent—we will say 3 per cent in St. Louis,
3 per cent in Chicago, and 3 per cent in New York. In the handling
of its business, it may check out the entire reserve in one city and
increase it in another the same day. It might be convenient for it to
carry, for a day, in the handling of its business, a reserve of 33 per
cent—6 per cent in Chicago, and practically check out its balance at
St. Louis, or the same between Chicago and New York. So that, as
a matter of fact, in the practical operation of its business, it utilizes
these reserves. That is a fact, is it not, and that under this system
that will be impossible?
Mr. Cannon. I do not know. After I heard vour discussion here
1 did not suppose it would be impossible. I thought you were going
to be able to utilize the reserves in the Federal reserve banks.
Senator B ristow. Y ou could not check them out. It could not use
it for transfer from one city to the other, as it does now, to suit its
convenience. They are there, and it can not take them out of that
bank and check them to Chicago, or some other place, where it does
business.
Mr. Cannon. Perhaps I do not get your clear meaning on this
point. Will you repeat that once more? Do you mean to say their
reserves are changed from one city to another?
Senator B ristow. Yes; from day to day. The reserve require
ments, for instance, in one city, varies very greatly, and it can use
its entire reserve on deposit in one city one day if, in the operation
of its business, it becomes convenient to do so, while it increases the
amount of that reserve in another city; and then in another city it
might check out, and so on, if it is a usable fund, where it is divided
up between three or four cities.
Mr. Cannon. Does that reserve which you speak of—is that what
you mean in the items they are sending from one bank to the other?
Are they to be in transit, or to be actually on deposit? In my opin
ion, in the running of a national bank, for instance, they have a lot
of checks coming on New York to-day, and they separate them to
day and charge them off. They are not counted as reserve, notwith
standing the fact they will not reach New York for two or three days.
Senator B ristow. I supposed they were; that is my understanding,
at least.
BANKING AND CURRENCY.
2173
Mr. Cannon. I am not familiar with that practice, at all. I under
stand a reserve must be in a bank before they can count it as reserve.
They can not count items in transit as reserve.
Senator N elson. I do not believe they can.
Senator Shafroth. If they can not, I do not see what advantage
it is to have them shift around in other banks?
Senator B ristow. I think they do.
Mr. C annon. For instance, if a bank in New York City received
to-day a lot of checks on Chicago and St. Louis, you think it could
send them out in the mail to-night, and charge them up to this bank,
and charge them to reserve whether they have arrived or not?
Senator B ristow. Yes; I think so.
Mr. Cannon. If may be possible, Senator; but I do not know.
Senator B ristow. We will clear up that point before we get
through. I understood it was a fact.
Mr. Cannon. 1 would like to know about that.
Senator Nelson. At any rate, Senator Bristow, you claim it was
only a momentary change. They still have to keep it. It is only
while those checks are in transit; that is all.
Senator B ristow. But they use it.
Senator Nelson. They use it for that time.
Senator B ristow. Yes.
Mr. C annon. I do not believe they can count checks in transit as
reserve. I do not understand you can count it as a reserve on any
thing until you get the money back on it. I do not belive the country
bank does that.
Senator N elson. I think you are right.
Mr. Cannon. Because those checks and shifting matters of that
kind are mere matters of detail in the bank, all the time. I do not
believe that is reserve in the bank, Senator. Will you look that up
and let me know? I would not want to answer the question until I
knew about that.
Senator B ristow. N ow, I suppose you are like all these other com
mercial bankers: You do not believe real estate mortgages ought to
be used as the basis for currency ?
Mr. Cannon. Oh, no; I do not think so.
Senator B ristow. Why not?
Mr. Cannon. I do not see how you would turn them into a fund
for redeeming that currency; how you could redeem currency issued
on a real estate mortgage. Of course, you would have to sell it;
there are times when it would pile up on your hands. They are longperiod loans are they not?
Senator B ristow. D o you expect this currency to be redeemed by
the maturing securities that are deposited for it?
Mr. C annon. A good deal of it would be paid off when their notes
are paid off.
Senator B ristow. D o you not expect other notes would be sub
stituted ?
Mr. Cannon. Oh, at times, certainly. But you want to keep your
source pure and clean and have it the very best there is. Of course,
I am not saying anything about real estate mortgages, because I am
a firm believer in real estate mortgages, farm mortgages, and things
of that kind.
2174
BANKING AND CUBEENGY.
Senator B ristow. We will take a bank, speaking about the region
with which I am familiar, at Salina, Kans. As you define it, it
would have some commercial paper—that is, the notes, the onename notes, as a rule ?
Mr. Cannon. Or two-name notes of merchants in Salina, Kans.
Senator B ristow. The merchants in Salina, Kans., do not get
two-name notes.
Mr. Cannon. Well, one-name notes. The merchants in Salina,
Kans., I have been there, and they are a good crowd.
Senator B ristow. The two-name paper is not as good, as a rule,
as the one-name paper?
Mr. Cannon. That is right.
Senator B ristow. Because when you ask for the second name, it
is an indication you are afraid of the first?
Senator Shafroth. And because people have quit going security
on notes?
Mr. Cannon. It is out of fashion in this country to indorse notes
now.
Senator B ristow. And it ought to be.
Mr. Cannon. Yes; that is right.
Senator B ristow. They take the paper of various individuals,
many of them leading farmers there, the people of that community,
and they take it to the Federal bank for discount. It is discounted.
They get some of this money. Now, when that bank collects in and
the pressure is over it takes up these notes. They do not have to take
up those notes with the security that it deposited there.
Mr. Cannon. Oh, not always; no.
Senator B ristow. Then what is the purpose of that security? It
is for the purpose of making the Government securer or the regional
bank securer in the issue of that paper, is it not ?
Mr. Cannon. Yes.
Senator B ristow. If that security is abandoned and the bank is a
commercial bank, why is not a real-estate mortgage, which is better
than those notes, as far as security goes, just as good a basis for that
as anything else?
Mr. Cannon. I do not think there should be anything except a
liquid security behind these notes.
Senator B ristow. The commercial bank has what is called liquid
security. Do you believe that the notes, the circulating medium of
the country, should be based upon commercial business only?
Mr. Cannon. I s not that what you say in the act here ?
Senator B ristow. The act may say that, but that is not what
I say.
Mr. Cannon. Yes.
Senator B ristow. Why should not an investment security have
as much consideration at the hands of the Government in making a
currency law as a commercial security?
Mr. Cannon. Because I suppose it is not liquid, and these are
inclined to be liquid and take care of themselves.
Senator B ristow. But, as a matter of fact, they do not do it. You
are a practical man; you know that the banker at Salina, Kans.,
does not enforce the payment of those notes. I know it mighty well,
when they are due. They may be given for 90 days, but very" often,