The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
2424
B A N K IN G AND C U R R E N C Y .
Senator R eed . If that was done, what would be the effect on
business ?
Mr. B u c h o lz . It would be bad.
Senator R eed . What is your suggestion as to the remedy?
Mr. B u ch o lz . My suggestion is that the Federal reserve banks do
not have any capital stock. I can see no reason why the banks should
contribute to the Federal stock. What is proposed to do with this
stock of the Federal reserve bank? Why should you have one?
That is one thing.
Senator R eed . Of course the richer those banks are the more
money they have in a time of stress to advance. That is one thing.
Mr. B u c h o lz . True enough; but if you have impoverished the
other banking institutions in the meanwhile, you bring on the neces
sity for calling on the Federal reserve bank very much sooner; that
is all.
Senator P o m er en e . Y ou have already in your vaults, I take it, a
good many securities that do not pay you more than 5 per cent a year ?
Mr. B u c h o lz . Not a great many. We have some. We have some
bonds.
Senator P o m er en e . Y ou, I believe, have $1,000,000 capital stock?
Mr. B u ch o lz . Yes.
Senator P o m er en e . And this would require $200,000. Of course,
you do not take that out of your capital stock ?
Mr. B u ch o lz . Y ou pay for that out of your deposits.
Senator P o m e r e n e . And you, as a rule, have a very substantial
sum, at least, invested in securities in the shape of bonds, etc., that
do not pay more than 5 per cent?
Mr. B u c h o lz . True; but we carry those because they are converti
ble if needed.
Senator P o m er en e . N ow you can go to a bank and rediscount?
Mr. B u c h o lz . Yes.
Senator P o m er en e . And y o u can do it under the present sy ste m ;
that is true?
Mr. B u ch o lz . Under the new system, it strikes me, we shall be
come sort of note brokers and commission merchants, and take money
at one rate.
Senator H it c h c o c k . Does your bank frequently rediscount paper
now?
Mr. B u c h o lz . For ourself?
Senator H itc h c o c k . Yes.
Mr. B u c h o lz . Not at all.
Senator H it c h c o c k . Y ou do not rediscount?
Mr. B u c h o lz . N o, sir.
Senator H itc h c o c k . Y ou do not borrow of other banks?
Mr. B u c h o lz . N o, sir; we have not done so for years.
Senator H it c h c o c k . I s that generally true of any other banks of
Omaha?
Mr. B u c h o lz . I think so. Four or five of the larger banks there
have not borrowed any money for quite a number of years—not
since 1907, at least.
Senator R eed . Y ou really think most of the banks in Nebraska
would go out of the banking system ?
Mr. B u ch o lz . If the bill passed in the present fo rm , I am certain
o f it.
B A N K IN G AND C U R R E N C Y .
2425
Senator R eed . What have we got to do to keep you fro m g o in g
away and leaving us?
Mr. B u ch o lz . B y making it attractive to come in.
Senator R eed . H o w ? What is your suggestion?
Mr. B u ch o lz . In the first place, making it so attractive it w o n ’t
be considered as compulsory. A man does not like to be forced to
do a thing.
Senator R eed . Y ou say, “ make it so attractive.” Of course, a
man might say to an ill-favored youth to make himself so attractive
that the ladies would all like him. But that would not help out much
unless you could give him a recipe. I wish you would tell us how
to make it attractive. In all seriousness, what is necessary to make
it so that the banks will want to come in ?
Mr. B ucholz . It all depends upon what you have in mind as to
the purpose of the bill.
Senator R eed . What must be done to the bill so as to make you
feel you will be justified in coming in, having in consideration, of
course, that the bill will have to be just to all other interests in the
country ?
Mr. B ucholz . Well, it must be workable in all its features. I
think there are some----Senator H itchcock (interposing). Specify. You indicated one
objection, that you thought you ought not to be required to subscribe
to the capital stock.
Mr. B u ch o lz . Yes.
Senator H it c h c o c k . I s there anything else?
Mr. B u ch o lz . I think if the Government receives interest on its
Government deposit with that Federal reserve bank the bank should
receive interest on its bonds with the Federal reserve bank. That is
another point.
And then the main point is that some provision should be made to
take up the 2 per cent bonds.
Senator R eed . We are talking about what is necessary to d o to
get you in.
J
Mr. B u c h o lz . That is one of the things.
Senator R eed . Of course if the Government is going to repudiate
its 2 per cent bonds, they can do it just as well with you out as with
you in. th at, it seems to me, is a sort of side proposition. Not that
I am intimating that I am in favor of any such proposition, and I
think I can speak for this committee and say that this committee does
n° m r°p0Se to try to 4° anything like that here.
What have you got in the way of Government bonds?
M r. B u c h o lz . $1,000,000.
Senator R eed . And you have your circulation on that ?
Mr. B u ch o lz . Yes, sir.
S e n a to r R eed . Y ou b u y th ese b o n d s a n d h av e th e c irc u la tio n
p riv ile g e ?
Mr. B u c h o lz . Yes, sir.
Senator R eed . If you are allowed to continue a circulation privi-
^°U
n°^ wan^
keep your bonds?
If w e a re g o in g to h av e a new system , I
.r ; B u ch o lz . N o, sir.
w o u ld lik e to s t a r t new .
i ®e^at°r R eed . Suppose
we do have a new system which provides
t lat there can be other money issued, and yet suppose, as a part of
2426
B A N K IN G AND C U B B E N C Y .
that system, we were to maintain substantially the present system
and build upon it, allowing the national-bank notes to still continue
to exist, issuing to them as we do now. Do you think that we ought,
under those circumstances, compel you all to surrender your bonds?
Mr. B u c h o lz . That w o u ld be an entirely different matter.
Senator R eed . That is what I am speaking about.
Mr. B u c h o lz . If you build upon the present system and extend its
usefulness and ability to serve the public, certainly I should be glad
to continue under it and retain the bonds.
Senator R eed . All that it is proposed to do, with the exception
of the provision for the retirement of one-twentieth of the nationalbank notes each year, is to provide a system by which the bank cm
get additional currency, which is supposed to be obtained only fo. a
short time, on paper that liquidates itself. That, of course, would
not impair the value of your national-bank circulation?
Mr. B u c h o lz . No ; except that the redemption is not in cash, but
that is in 3 per cent bonds.
Senator R eed . I am talking about leaving out the 3 per cent bonds.
You mean the 5 per cent from year to year?
Mr. B u c h o lz . Yes.
Senator R eed . And let you go along as you are now, you would
be satisfied, as far as your bonds were concerned. We have about
$700,000,000 of bonds at about $700,000,000 of circulation.
Now, if we provide that these bonds, when they are redeemed, 5
per cent of them each year, that the Government should take them
at par----Mr. B ucholz (interposing). And p a y cash?
Senator R eed . And pay cash. That would----Mr. B u ch o lz (interposing). That would overcome my objection;
yes, sir.
Senator R eed. That would overcome your objection?
Mr. B u ch o lz . Yes, sir.
Senator R eed . There is nothing insurmountable in all that?
Mr. B ucholz . Not that I see.
Senator H it c h c o c k . Have you any 2 per cent bonds to secure
deposits ?
Mr. B u c h o lz . N o, sir. We have threes to secure deposits, if I air
not mistaken. I think the United States deposits are covered by
3 per cent bonds.
There is just one more point I wish to discuss, and then I am
through. That refers especially to the country banks in Nebraska.
That relationship has been built up from early times. For instance,
31 years ago I was a country banker and so remained for 20 years,
and I lived in a small town, grew along with it, brought together
the local capital that could be obtained, and borrowed from the out
side all we could, so that that meant building up a town and a com
munity. It is an agricultural community. It has been very pros
perous. If the people have surplus money, the banks will reflect
that condition. The paper that is made there, to a large extent,
consists, for instance, of paper given by cattle feeders—steers to be
put in a feeding lot and fed—which will take perhaps four or five
or six months to mature. That is a very important part of Ne
braska’s industry, and such paper as that would not be eligible under
this proposed law.
B A N K IN G AND CU R R E N C Y .
2427
Senator P o m er en e . Take the average country banker, such as you
have out in your agricultural communities. What portion of their
loans would you say were made each month ?
Mr. B u ch o lz . New lo an s?
Senator P o m er en e . Yes; new loans.
Mr. B u ch o lz . Well, a very small per cent at certain seasons, and
a very large per cent at other seasons.
Senator P o m er en e . Can you g iv e us any estimates?
Mr. B u ch o lz . Probably 80 per cent of the loans in the country
bank, normally, are made in the fall of the year.
Senator P o m er en e . During what months of the year?
Mr. B u c h o lz . From September to January.
Senator P o m er en e . That is four months.
Mr. B u ch o lz . Y e s; a n d th e y r u n o v er u n til th e s p rin g m o n th s.
Senator P o m er en e . Yes; I understand. You say 80 per cent of
the loans are made in four months. What portion of that 80 per
cent is made in each of those four months?
Mr. B u c h o lz . I am n o t able to say.
Senator P o m er en e . Of course, it would be distributed along dur
ing all of that time?
Mr. B u c h o lz . Yes.
Senator P o m er en e . That would be gradually maturing?
Mr. B ucholz . It would, depending a good deal on conditions.
Some years a farmer will hold his wheat and will not sell it in
August ; he will sell it perhaps in December, and he may hold it
until March, and borrow the money to hold the wheat.
Senator P o m er en e . All of which would seem to indicate to me, at
least, that the notes held by the bank were constantly maturing.
Mr. B u c h o lz . Certainly, but they are renewed. They renew
them; they are not paid.
Senator P o m er en e . Very well. There would not be any time dur
ing the year, would there, when the bank would not have "a consider
able amount of paper that was maturing in from 90 to 120 days ?
Mr. B u ch o lz . Yes; it would mature right along, but the country
banker knows to a certainty he can get that money at that time.
Senator P o m er en e . That paper then could be used for discount
purposes, or rediscount purposes under the provisions of this bill?
Senator H itc h c o c k . I think not, Senator Pomerene. The defini
tion of commercial paper is paper which grows out of the commer
cial transaction. It liquidates automatically. This paper which Mr.
Bucholz refers to does not liquidate.
Senator P o m er en e . I had in mind that there might be some pos
sible change in the definition of commercial paper here. I was ad
dressing my questions rather to the fact that your paper was matur
ing from month to month.
Mr. B u ch o lz . In my own bank, for instance, our paper is paid
on at the rate of $1,000,000 a month. That has been the record for
three years; that amount actually paid, and we would take care of
ourselves very nicely under this provision.
Senator P o m er en e . I would like to ask you another question.
Have you figured out the advantages and disadvantages of the pro
posed measure, as compared with the present system, so far as they
relate to your own bank ?
2428
B A N K IN G AND C U R R E N C Y .
Mr. B u ch o lz . Yes.
Senator P o m e r e n e . Have you those figures with you ?
Mr. B u c h o lz . No; I left them at home.
Senator P o m e r e n e . I would be very much pleased to have you
furnish them, and have them incorporated in your testimony.
Mr. B ucholz I would be very pleased to do that. Unless you
have some other questions, gentlemen, that is all I have to say.
Senator B ristow . I would like to inquire what defects do you
think we have in our present system that ought to be remedied ?
Mr. B u c h o lz . Well, on the whole, 1 think we have a verv good
system. We have a system where the circulation of the bants that
passes as money. No one questions it, and has never questioned it,
to my knowledge. The only possible criticism I can think of would
be that at certain periods, either by unusual business expansion or
overspeculation we find a rigidity in the volume of money we have
to use, and of course my own idea would be to follow out the natural
consequences of an expansion of the national banking system to the
extent of having a central credit reservoir where temporary addi
tional money might be obtained.
Senator B ristow . What you would like, as E understand it, would
be to have some provision made whereby you could get additional
currency when it is needed ?
Mr. B u c h o lz . Yes.
Senator B ristow . On the assets of your bank ?
Mr. B u c h o lz . Yes.
Senator B ristow . And then when i t was not needed that would
normally retire?
Mr. B u c h o lz . I would fix it so that the retirement-----Senator B ristow (interposing). And you think it would be much
better for the business of your part of the country if a provision of
that kind could be made without breaking up the present banking
provisions that have grown up in the past half century ?
Mr. B u c h o lz . Y ou have explained my idea exactly, I think.
Senator B ristow . Suppose that a provision was made so that vour
bank could go to the subtreasury, that a subtreasury should be
located at Omaha—I believe you have no subtreasury there now—
suppose a subtreasury was established there and during these periods
of stress you could take the assets of your bank there and upon your
own credit, hypothecating your assets, get the credit you needed by
paying a certain tax on it while it was used, and when it was through
this would come back into your bank and be retired and your assets
would be returned to you. Would that relieve you of the embarrass
ment you have now ?
Mr. B u c h o l z . Yes; I think so; and if you extended the present
central reserve cities to five instead of three and confine the privilege
to just the central reserve cities under certain restrictions it would
accomplish the purpose, in my judgment.
Senator B ristow . Suppose we had just one regional bank and we
had a Federal bank which received the Government deposits and
which would be a bank of issue and discount and that bank would
have branches located in the various commercial centers of the
country and you could go to your branch of that bank and get cur
rency upon your assets?
B A N K IN G AND C U R R E N C Y .
2429
Mr. B u ch o lz . I do not like that idea so well. Perhaps that is due
to some prejudice I have had for years against the Government en
gaging in the banking business. My belief is that the Government
should pass the laws, provide what kind of banking business should
be done, and let individuals do the banking business under proper
regulations.
Senator B ristow . But the Government then would be running
only 1 bank instead of 12. The Government now is establishing 12
banks and is going to run 12 banks.
Mr. B u c h o lz . I think the fewer it runs the better it will be for
the country.
Senator B ristow . If this board created here or this board in Wash
ington has 12 banks scattered all over the United States at long dis
tances—suppose we had one bank here in W ashington which they
managed and which performed all the functions that these 12 would
perform, and that was done without requiring the banks to put up
any capital stock, and any bank that kept its reserve there could
get relief whenever it wanted it, as I have stated, do you-not think
that would simplify this very much?
Mr. B u c h o lz . I do. That is in line with the expansion of our
present system, with some additional safeguards.
Senator B ristow . And you think that strengthening the present
system takes care of this apparent defect?
Mr. B u ch o lz . Yes, sir.
Senator B ristow . We have had quite a discussion here in the last
few days in regard to these country checks. The gentlemen who
preceded you, and one or two gentlemen who were here yesterday,
are anxious to have the check system discredited, to a certain extent,
in order to reduce the number of the checks. You say you have been
a country banker and now you are a reserve banker ?
Mr. B u ch o lz . Yes, sir.
Senator B ristow . Let us have your opinion about the method of
banking by country checks, of refusing to give the customers of
country banks the use of country checks. What do you think the
general effect is on the business of the country in a case of that kind ?
Mr. B u c h o lz . I think the general effect is very good.
Senator N elso n . Y ou mean the general effect of having a lot of
checks afloat?
Mr. B u ch o lz . Of using checks----Senator N elson (interposing). Instead of drafts?
Mr. B u ch o lz . Yes. That practically amounts to the same thing,
checks or drafts, because it is not always convenient to get a draft.
Senator R eed . I want to ask this witness one more question. Take
the banks in your town; is the amount of their capital stock any real
index to the size of the bank ?
Senator N elso n . Y ou mean the volume of business they do?
Senator R eed . Yes; the volume of business they do, and the profits
they make.
Senator N elso n . Any real or certain index?
Mr. B u ch o lz . Yes; I believe the capital and surplus would be.
Senator R eed . The capital and surplus?
M r. B u c h o lz . Yes, sir.
2430
B A N K IN G A N D C U R R E N C Y .
Senator R eed . Y ou frequently find a bank, do you not, w ith a
small capital and a large surplus, which is really a bigger bank and
makes more money and handles more business than another bank
with a larger capital and without a surplus.
Mr. B ucholz . That is quite true.
Senator R eed . N ow , if the capital stock of this central bank is to
be contributed by the banks, should it not be based upon capital and
surplus, instead of upon capital alone ?
Mr. B u ch o lz . I think it would be very unjust to base a contribu
tion of capital merely on the capital of the bank contributing.
Senator B ristow . I think this matter of country checks is a very
important matter, and you seem peculiarly fitted to discuss it. Now,
if you will, tell us in what way it has been a good thing for the
country and for the banking business as a whole ?
Mr. B u ch o lz . When I was a country banker, I would tell the
farmers, when they came in to buy some goods, that they ought to
leave their money at the bank, deposit it in the bank, take a check
book and pay their bills in that way.
Senator B ristow . With checks?
Mr. B u ch o lz . With checks. That is about the only thing that ap
pealed to the farmer. He did not have to carry the money in his
pocket and take a certificate and come to the bank every time he
wanted a little money. That has been generally done throughout the
agricultural West. That is a part of the development of that country.
Senator N elso n . But you overlook the point we are after. This
inquiry does not cover that kind of check. That is the other class
of checks. For instance, the merchant in Nebraska, in an interior
town, goes to Chicago and buys a bill of goods there, and instead of
remitting to the wholesale merchant in Chicago by draft he sends
his check on his local bank, and that is the kind of check we refer to.
Mr. B ucholz . Of course, the ideal condition is for a merchant to
go to his bank and buy a bill of exchange payable at the place where
he owes the money. But we do not come to that. We do not ap
proach the ideal condition. For instance, in Omaha some of our
large accounts are 10 blocks away from us. They do not want to
come to the bank and buy a draft. They make out a check and send
it away.
Senator N elson . When that check comes back what do you do
with it? Do you charge for remitting that money?
M r. B u c h o lz . Yes; we make a charge of one-tenth.
Senator N elso n . A merchant in Chicago has a check from one of
vour Omaha merchants upon your bank, the Chicago bank sends it
to you, and you charge for that?
Mr. B u ch o lz . Yes; we do.
Senator N elso n . And does that charge come out of—it comes out
of the bank that sends it to you, primarily?
Mr. B u c h o lz . Primarily, and sometimes u ltim a te ly ; sometimes
they absorb that exchange.
Senator B ristow . That is their business; that is not the Govern
ment’s business.
Mr. B u ch o lz . Not a bit.
Senator B ristow . Not any more than to fix a law which would fix
a limit as to the time for giving a cash discount, if payment is made in
10 days?
B A N K IN G AND CU K REN CY .
2 431
Mr. B u c h o lz . I t has not a thing to do with a Government regu
lation.
Senator B ristow . The Government has not a thing to do with it.
Mr. B u ch o lz . This exchange charge ultimately comes o u t o f the
man who owes the monev. It comes out of him ultimately, anyway,
and it ought to.
Senator B ristow . My office is across the hall in this building. I may
owe somebody in New York. He may have on his letterhead “ Coun
try checks not received,” but I do not want to go down town and buy a
draft, and so I write a check and let him turn it down—it is not con
venient for me to go down town—and if he does not want to do that he
may send it back.
Mr. B u c h o lz . Certainly; that is a matter between you.
Senator B ristow . If we should undertake to make it impossible for
me to write that check we would interfere with a development which
has accommodated itself to the convenience of the entire business
public of the United States?
Mr. B u ch o lz . So much so that 92 per cent of it is done that way.
Senator N elso n . Go a step farther in that direction. This bill
proposed in its original form to have the regional banks clear those
checks as a clearing house; that is, those checks would be taken there
and deposited, coming from a member bank. They are to be de
posited in the regional bank and credited as cash and immediately
charged up to the member bank. What have you to say about that?
Mr. B u ch o lz . The effect of that is to penalize the members of the
Federal reserve bank and put them in competition with other banks.
Senator N elso n . The effect of it is to deprive you of your exchange
fee?
Mr. B u ch o lz . Exactly; and it also puts a penalty on our belong
ing to the Federal reserve bank.
Senator B ristow . That is, if you did not find it convenient to per
mit your customers to pay these accounts by check on your bank the
tendency would be for them to do business with a bank that would
permit them to do business in that way?
Mr. B u c h o lz . Exactly.
Senator N elso n . Suppose a merchant at Fairbury, in your State,
wants to buy a bill of goods in Omaha; he issues a check on his local
bank at Fairbury and sends it to the merchant in Omaha. The mer
chant deposits it with you. How do you collect that?
Mr. B u c h o lz . Our practice is to collect direct.
Senator N elson. D o you charge it to the bank in the first instance?
Mr. B u c h o lz . N o, s i r ; we do not.
Senator N elso n . Y ou collect it direct?
Mr. B u ch o lz . Yes, sir.
Senator N elson . In what way?
Mr. B u ch o lz . We have a transit account that ru n s from $800,000
to $1,200,000. We charge it to the transit account, and we send it
to the bank direct, and the banks remits in Omaha exchange, and we
credit it to the transit account, and thus the transaction is closed.
Senator N elso n . That is, less the exchange?
Mr. B u c h o l z . Y es, sir; and we charge back the exchange to the
man who deposits the check. We do not absorb the exchange.
243 2
B A N K IN G AND C U E B E N C Y .
Senator N elson . And the local banker at Fairbury gets that ex
change fee?
Mr. B ucholz . Yes, sir.
Senator N elson . And it comes out of the merchant who has de
posited it with you?
Mr. B u ch o lz . Yes, sir.
Senator B ristow . Y ou do not absorb that charge?
Mr. B u ch o lz . N o.
Senator B ristow . Many banks do?
Mr. B u ch o lz . Yes; b u t we do n ot.
Senator N elso n . D o you charge even where your customer has a
good account with you?
.M r. B u ch o lz . Absolutely.
Senator N elso n . Y ou charge in every case?
Mr. B u c h o lz . Yes, sir.
Senator B ristow . In my little town in Kansas they never charge,
none of the banks.
Senator N elso n . What profits do you g et out of that kind of busi
ness?
Mr. B u ch o lz . It is a loss to us, as a reserve bank for other bankers.
Senator N elson . In what way is it a loss, if you charge up the fee
to the merchant?
Mr. B ucholz . We are obliged—we give him credit for that, and he
has a balance to check against up to a certain day, and we are out the
use of the money.
Senator N elson . D o you give that merchant the credit on the
check before you collect it?
Mr. B u ch o lz . Yes, sir.
Senator N elson . Immediately?
Mr. B u ch o lz . Immediately, when he brings it in.
Senator N elso n . And you are out the use of it until you g et the
money ?
Mr. B u ch o lz . Yes, sir; the postage and the work and labor in
sending it out.
Senator N elson . The only man who makes a profit out o f that is
the little banker on which the check is issued?
Mr. B u ch o lz . He is the m a n who gets the profit.
Senator N elson . He gets the profit?
Mr. B u ch o lz . Yes, sir.
Senator H itc h c o c k . If that is all, Mr. Bucholz, we w ill excuse
you, and we are obliged to you for appearing before us.
We will hear Senator Thomas now.
STATEMENT OF HON. CHARLES S. THOMAS, A UNITED STATES
SENATOR FROM THE STATE OF COLORADO.
Senator T h o m a s . Gentlemen, I want to call the attention of the
committee as briefly as I can to a phase of the currency problem
that I do not believe has received much consideration so far, but
which seems to me to be one of sufficient importance to justify me
inflicting myself upon your consideration for a few minutes.
I have reference to the matter of the United States bonds drawing
interest, not only those which form the basis of bank circulation, but
B A N K IN G AND CURREN CY .
2 433
all interest-bearing bonds and the manner in which they should be
disposed of in connection with the general scheme of currency legis
lation.
I think I may safely assume at the outset that the payment of the
interest-bearing national debt is very remote, and that is true not
only of our own but of all the nations of the world. We are not
making any provision for it to speak of, and we are living up to our
income. And the consequence, the bonded debt of the Government is,
for all purposes of currency legislation, at least a permanent condi
tion.
Now, one of the most serious objections or criticisms that I have
heard relating to the Glass bill is based upon the effect of that bill
on the values of Government bonds held by the bankers and used by
them to secure circulation, and the loss wThich they must sustain in
the event that provision is destroyed and a different system of cur
rency is adopted without reference to the bonds themselves.
It is true that in 1900, by the act of March 14 of that year, the
Government paid the banks the difference between their face value
and their premiums, up to a certain amount—I forget just now
what—when that bill was amended, and certain changes made in the
national banking act. And it is equally true that now the Gov
ernment does not want and will not inflict any loss upon the banking
fraternity. At the same time there is, in my judgment, a very
deep objection, a popular one, to the substitution of a 2 per cent
for a 3 per cent bond. Whatever may be said concerning it, the
fact remains that it does increase the rate of interest upon a maj ority
of the bonds of the country. And while there may be compensating
advantages, the average man knows that if he exchanges a 2 per
cent note for a 3 per cent note he is paying more interest than he
was before. I confess that is an argument which appeals to me with
a great deal of force, and is aimed at a condition which, if it can be
avoided, ought to be avoided. A good deal of criticism against this
bill, too, has been aimed at the possible effect it will have, the
probable effect, as a great many believe, and the way of contracting
the currency, and necessitating the resort to a reduction of loans, of
discounts, for the purpose of securing sufficient money to meet the
requirements of this measure, and particularly with reference to the
matter of reserves. Now, if those objections can be met by intro
ducing in this bill an amendment which will take care of the bonds,
which will not affect, principally at least, the reduction of the cur
rency, and which at the same time will keep the bonds at par and
reduce the interest upon them, that is certainly something that ought
to adjust itself at least to the serious consideration of this committee.
Senator N elso n . Y ou do not mean reduce the interest on the 2 per
cent bonds ?
Senator T h o m a s . Yes; I mean precisely that.
Senator N elson . Reduce the interest on the 2 per cent bonds ?
Senator T hom as . Yes; even to reduce the interest on 2 per cent
bonds.
These preliminary remarks lead up to the proposition of providing
for an interconvertible bond, which in the hands of any one bank
or citizen or business corporation may be exchanged and reexchanged
at any time at the pleasure of the holder for bond certificates or
2434
B A N K IN G AND CU RREN CY .
Treasury notes, and which at the same time would enable the bonds
themselves to be used for the reserves required to be kept by the
banks.
Now, I am not going to advocate----Senator H itch co ck (interposing). You mean the bonds to be
kept as reserves?
Senator T h o m a s . Giving the bonds the----Senator H itch co ck (interposing). The power o f gold?
Senator T hom as . The power of gold, so far as the reserves of the
national banks are concerned. I think that irrespective of any par
ticular opinion concerning the wisdom or unwisdom----Senator P om erene (interposing). Do you mean the new bonds we
are to issue instead of the twos?
Senator T hom as . Yes; and any new bonds that are proposed to
be issued in place, not only of the twos, but of all other outstanding
bonds. I am coming to that later on.
Senator H itc h c o c k . Y ou would have them payable on demand?
Senator T h o m a s . Yes. I have to say before unfolding the scheme,
that while I have always been a believer, as long as you are going
to have a bond currency, in extending the right to issue currency
upon bonds to all individuals or corporations owning such bonds,
and while I believe, and I think popular opinion justifies it, that the
most popular currency we ever had in this country are the greenbacks
issued by the Government without the interposition of any other
agency whatever, and it has manifested itself by the impossibility of
this retirement, although nearly 50 years have elapsed since the close
of the war.
There is something in a currency which issues directly from the
Government. That brings me to another objection that I have heard,
and about which a good many of my constituents have written me,
and which you have at least heard by way of criticism of the pro
posed currency system in this bill, and that is it is confined to the
banks and is not general in its character. In other words, the bill
proposes to and does lend the credit of the people to the people’s
creditors, instead of lending their credit impartially, both to those
who are in and those who are out of the banking system.
This plan of this proposed change, which, as I say, has already
appealed to me, was called to my attention very early in the session
of this Congress by a pamphlet upon the subject, written by Mr.
William A. Amberg, bf the city of Chicago, which includes a propo
sition of Hugh Hanna, who, a great many of you gentlemen will re
member, was the chairman of the National Monetary Conference at
Indianapolis in 1900. As a result of my reading this proposed
amendment of Mr. Amberg’s and by rereading of it and digesting of
it, I wrote him and asked him to prepare an amendment to the pending
bill embodying his views in proper legislative form, and also giving
the various things which, in his judgment, would accomplish, to
gether with the method of its accomplishment. He has done this so
well and so completely, in my judgment, that I think I am justified
in taking my time and yours in referring to that rather than by at
tempting to explain it all.
Senator N elson . I s i t v e ry lo n g ?
Senator T h o m a s . It is n o t very long.
B A N K IN G AND CUBBEN CY .
2435
Senator N elson . I do n o t think there would be any objection to
reading it.
Senator T h o m a s . I am going to read it. It is not as long as it
appears, because it contains the proposed amendment which I shall
not at present read. Mr. Amberg says that he proposed the original
pamphlet in response to a general invitation for communications to
be prepared and presented concerning the general subject of mone
tary legislation, and in response to this invitation he published last
May a pamphlet entitled “ Outline of a Plan for Funding the Na
tional Debt and for Maintaining an Elastic Reserve Currency,”
which attracted some attention because of its novel treatment of the
subject and for the advantages insured by its adoption, which he
states to be the following:
The saving of millions of dollars in interest.
The means of determining at regular intervals a proper interest rate on
bonds.
An equivalent to the Government of the profit on the circulation privilege in
the form of a low interest on its bonds.
Taking the Government out of the banking business.
Independent of syndicates in the citation of its funds.
An automatic sinking fund.
The maintenance of the gold standard.
I may say that that does not appeal to me at all. It is a matter of
total indifference to me whether the gold standard is maintained or
not. Other advantages which he states are:
The simplicity of the system; the freedom of competition in regard
to Government bond issues; the ultimate increase within certain
limits of available money; its adaptability to expansion in the event
of war; the means of accelerating or retarding the process of fund
ing to the best advantage; and introduction of a short-term gold
bond, bearing a low competitive rate of interest, which is made avail
able for money reserves for banks because exchangeable in that
emergency for correlated legal-tender bond certificates at any sub
treasury on demand.
I think it will be conceded, gentlemen, that if this proposition ac
complishes one part of that which is claimed for it by its sponsors it
is very desirable that it should be incorporated in this measure,
whether as a substitute for section 19 or as suppletory to it is a
matter for further consideration.
Of course this idea of a convertible bond is old. I think a number
of propositions have been made during the past 25 or 30 years for the
convertibility of all interest-bearing bonds into currency and recon
vertibility at the pleasure of the holder.
Senator S h a fr o t h . There was a bond carrying interest with it
which circulated as money during the war.
Senator N elson . They were what we called the “ seven-thirty
notes ” ; they were not bonds.
Senator T h om as . They were not bonds, strictly speaking, but in
their legal sense I presume they were.
Senator N elson . They circulated as money, but they went out o f
circulation and immediately retired?
Senator T h om as . N ow come to a consideration to a proposed
amendment itself, which I will not read.
Senator N elson . Y ou might give us the outline of the plan.
2436
B A N K IN G AND C U E B E N C Y .
Senator T homas . That is given in what I will call attention to.
Authorize the funding of the public debt and the issue of short
term, 10-year renewable term bonds in an amount to fully cover the
principal of the entire debt and the premium on outstanding bonds.
There should be, say, 20 issues of equal amount maturing six months
apart.
Let us assume that the total authorized is $1,500,000,000; this would
make each issue $75,000,000.
Senator H itc h c o c k . H ow do they figure such a large amount as
that ?
Senator T h om as . That is simply to present the plan. I t is some
what larger than the total amount of the interest bearing and the
noninterest-bearing debt, and at the same time it is contemplated
that a possible emergency may arise which will require more.
The interest rate on the bonds, which may vary with each issue
will be discussed later; for the present, it will suffice to state that the
interest rate is to be determined for each issue when made.
With the complete funding of the debts will mature $75,000,000
of bonds every six months, and the interest rate should be fixed on
each renewal issue. The purpose of that is to regulate an arranged
legal rate and to enable the bonds to bear interest at less than 2 per
cent, as I think will be the case.
Senator N elson . Who would take the bonds?
Senator T hom as . Well, anybody would take them; everybody
would take them, and be glad to get them, and the national bank
particularly. [Reading:]
It would not necessarily take 10 years to refund the debt. Refunding can
proceed as rapidly as desired, or as may be found economical. The first issue
would necessarily be for 10 years; other issues after the lapse of every six
months would also be for 10 years, but accelerating issues can be made for
shorter periods, each timed to mature six months earlier than the earliest
maturity of bonds previously issued, as 9^ years, 9 years, 8 | years, etc., from
the date of the first issue.
The renewal of the serial issues begins with the earliest maturity and re
newals will come regularly every six months thereafter, provided all the 20
serial issues are out. If the debt be not entirely funded by the time the earliest
maturity arrives, there will be other “ open ” maturity dates besides the two
provided for emergencies. If the time required for funding could be pre
determined the earliest maturity date could be fixed for the first serial issue, all
subsequent issues expiring six months later than the preceding one. The object
of all this will appear later, when we come to apply an interest rate.
On the back of each bond should be printed a table showing the accrued
interest (according to the interest rate it bears) for each given day in the
year between coupon maturity dates.
We then have a bond representing a specific amount and showing the amount
of accrued interest on any given day.
We now come to the bond certificates; that is, the name given to
the notes that are to be exchanged. [Reading:]
The bond certificates, as stated in the bill, are practically the same as our
present United States notes, and need only an added clause to the effect that
they are exchangeable for the new interest-bearing bonds at par, upon payment
of the accrued interest on the day the exchange is made. These certificates
alone are exchangeable for the bonds. This is an absolute requirement, and
suggests the desirability of exchanging all the various kinds of certificates now
issued, in kind only, as gold for gold certificates and silver for silver certificates
only.
B A N K IN G AND CU RREN CY .
2 437
Senator N elson . Let us see if I understand you, Senator Thomas.
These certificates are, in substance, to be the paper money that is
issued upon those short-time bonds?
Senator T h om as . Precisely.
Senator N elson . I t is to be the paper currency of the country ?
Senator T h o m a s . Exactly.
Senator H itc h c o c k . Let me ask y o u a question.
Senator T h o m a s . Certainly.
Senator H itc h c o c k . I s it proposed that the Government shall issue
$75,000,000----Senator N elson (interposing). Ten-year bonds.
Senator H itc h c o c k . Ten-year bonds?
Senator T h o m a s . Yes.
Senator H itc h c o c k . And offer them to those who now hold Gov
ernment bonds ?
Senator T hom as . Yes.
Senator H itc h c o c k . Then they are exchanged on an even basis
for the present bonds ?
Senator T h o m a s . Yes.
Senator H itc h c o c k . Those who receive these new bonds will draw
what rate of interest, if they hold them ?
Senator T h o m a s . T wo per cent.
Senator H itc h c o c k . T wo per cent. And if at any time they de
sire currency for them they can turn them over to the Treasury and
secure currency to the amount of the face of the bonds, plus the inter
est accrued ?
Senator T h o m a s . Yes. [Reading:]
Each issue of bonds, when ready, is to be delivered to an official of the Treas
ury Department whom I will designate the “ custodian,” whose duties are prac
tically the same as those of the officer who now exchanges gold for gold certifi
cates and vice versa, the only difference being that he is provided with an
interest fund.
He has to give out the bonds for bond certificates only, collecting the accrued
interest shown on the back of the bonds, and when the operation is reversed
and bonds are presented for certificates, he pays the accrued interest.
Senator H itc h c o c k . Well, they deal out bonds as long as anyone
presents them, to the entire issue of bonds, if they are presented ?
Senator T h om as . Yes; in the first instance.
Senator H itc h c o c k . In the first instance; and that goes on for
how many years ?
Senator T hom as . Assuming that there is $1,500,000 of the whole
thing----Senator H itchcock (interposing). Twenty years?
Senator T hom as . The bonds could be reissued every 10 years,
upon interest dates. I think you will find, Senator Hitchcock, that
you are anticipating what Mr. Amberg has outlined in his scheme.
Senator P om eren e . Y ou would expect to retire these national-bank
notes under that scheme, would you?
Senator T h o m a s . Yes; that would come as a matter of course;
and the consideration of that would be the reserve quality of the
bonds. [Reading:]
He is not to part with bonds for any other form of money.
Senator N elson . What is that?
2438
B A N K IN G AND C U RREN CY .
Senator T h o m a s . [Reading:]
He is not to part with bonds for any other form of money.
I am not now talking about the redemption of the bonds, but the
exchange of the bonds, when an exchange is desirerd. [Reading:]
There will always be the same amount of certificates in his possession as
there are bonds outstanding.
I assume that the legal tender character now attaching to greenbacks will
apply to bond certificates which replace them.
As a currency, it is better, because secured by interest-bearing United States
bonds.
They are never to be paid out by the Treasury before the new bonds are in
the hands of the custodian, nor in excess of the amount of bonds so placed.
No additional certificates are required for renewals of bond issues; they are
paid out only for the principal of the debt and premium on certain bonds now
outstanding, and for other items recognized as a part of the national debt, which
includes greenbacks.
Now, I come to the new bonds as bank reserves. [Reading:]
The bonds, being instantly convertible into legal tender bond certificates, are
especially adapted for bank reserves, not only for national banks, but all
other banks, trust companies, and all classes of investors who have idle
money awaiting investment. The sum of all these combined is so large that
the demand for bonds can be met only in part, which will enable the Treasury
to secure a very low interest rate on bonds, virtually a Government “ callloan ” rate. Banks could keep a large part of their money reserve in these
bonds, because they could be converted any day into bond certificates at any
subtreasury, and conservative bankers could therefore increase their present
reserves without loss.
There is no way of determining what the money reserve of all the banks
and trust companies aggregates. It can only be conjectured.
And then he makes the conjecture upon some figures which he
gives, that the amount in reserves is probably, all over the country,
$2,500,000,000; and assuming that to be the amount, the total issue
of the new bonds could be held by the banks alone as a part of their
reserves, because instantly convertible into currency.
Now, these bonds have that quality. They certainly will not fall
in value, and there can be no loss in that way.
Senator H itc h c o c k . Does that mean they would get 2 per cent
interest on the reserves?
Senator T h o m a s . It would virtually mean that, as long as the
bonds require a reserve. The bonds and the money into which they
are convertible are both available as reserves; and the effect of that,
of course, is to release, to the amount of the bonds in reserves, all
this currency and all other currency for circulation.
Senator H itc h c o c k . Of course, as far as the national banks are
concerned, the $700,000,000 would be retired in currency.
Senator T h o m a s . The $700,000,000 would be retired in currency, or •
the same amount would be issued for the bonds. It would be an ex
change. There would certainly be no contribution by the banks of
currency.
Senator B ristow . N ow , Senator Thomas, I should like to see if
I have the correct idea. You proposed to issue these bonds, and they
may be exchanged at any time for what you call a bond certificate?
Senator T hom as . Yes; you may call it anything.
Senator B ristow . I t is a currency which is equivalent to the green
back, or the national-bank notes?
Senator T homas . Yes.
B A N K IN G AND CURREN CY .
2 439
Senator B ristow . And whenever anyone wants c u rre n c y th e y ta k e
thebond to the Government and get it?
Senator T h o m a s . Yes.
Senator B ristow . And if they prefer the bond to the currency,
they take the currency and get the bond?
Senator T hom as . Yes; they are interchangeable, with the ad d ed
element that the bond is available for reserves.
Senator S h a fr o t h . It makes it a somewhat automatic regulation
of the currency.
Senator P o m erene . Well, if I had one of these bond certificates
and took it to the Treasury or a regional reserve bank and got the
currency----Senator T hom as (interposing). You mean the bond, not the cer
tificate. The certificate is currency.
Senator P om eren e . Well, get the certificate—would that end the
matter, so far as the bond is concerned?
Senator T hom as . N o.
Senator P o m erene . Or could it be reissued ?
Senator T h o m a s . No ; it must be reissued if anybody comes and
asks an exchange of the bond for other certificates or greenbacks.
Senator B ristow . While the Government has the bond it does not
cost the Government anything?
Senator T hom as . It does n o t cost the Government anything.
Senator S h a fr o t h . When there is a redundancy of currency, these
bonds could be drawn out.Senator W e e k s . I understand the plan prohibits the redemption
of the bonds or certificates in gold?
Senator T h o m a s . N o, not the bonds; the bonds are to be paid out
only for the certificates and the certificates redeemed in bonds; but
the bonds are gold bonds.
Senator W e e k s . If I had the certificate and wanted gold, I could
go to the Treasury and get the bond and immediately convert that
into gold?
Senator T hom as . Oh, yes.
Senator S h a fr o t h . Well, is the bond payable on demand?
Senator T h o m a s . The bonds are payable every 10 years. I sup
pose the bonds would be the equivalent of gold now. But you could
get gold by as easy a process as you can get gold now under the
national-bank act.
Senator W e e k s . That is simply two processes, exchanging it into
legal tender and exchanging the legal tender for gold?
Senator T hom as . Yes; because you can do that you do not w a n t
to. [Reading:]
The recent circular of a firm making a specialty of Government bonds gives
a table showing high and low prices during certain years of bonds available as
security for national-bank notes. This shows a mean average interest yield on
2 per cent bonds ranging from 1.68 in 1901 to 1.96 per cent in 1912.
This low rate arises from the competition of national banks alone. How much
lower the interest rate might be if they were sought in universal competition,
coupled with facilities for instant conversion into currency, may be imagined.
Regarding the rate of interest which the Government may secure on th.e
new bonds, it is my firm belief that as low as 1.2 or 1.4 per cent may suffice
under this plan. These conclusions rest on the fact that as national banks in
vesting capital in the present bonds to secure circulation (which capital might
be fully loaned at 5 per cent) have a net income derived from circulation
S. Doc. 232, 63-1—vol 3---- 33
2440
B A N K IN G A N D CU BREN CY .
(over and above 5 per cent) after paying taxes on circulation, etc., of only
1.25 to 1.4 per cent, whereas under this plan they could invest a part of the
idle money they are required to keep on hand as a reserve in convertible interest
earning bonds.
That is to say, bonds on deposit as part of the reserves would pay
something more than they are making upon their bonded investment
now. [Reading:]
When the funding is practicaly completed, and we reach the renewal stage,
our experience will have been such that there will be but slight changes in the
interest rate. Just now we can not estimate positively how low an interest
rate will still command a slight premium for the bonds.
To be absolutely on the safe side, let us assume that the first issue of
$75,000,000 10-year bonds bears interest at the rate of 2 per cent. If that proves
too high, considering their desirability, it will manifest itself by the bonds com
manding a premium in the open market, which will be a gold market when our
present United States notes are exchanged, and will remain so unless subsequent
legislation should change the character of our currency, which is not likely.
With open-market quotations at hand, it is easy to determine what lower
rate of interest will suffice to keep them at a little above parity with gold.
He suggests that interest rates be always fixed at a multiple of onefifth of 1 per cent, as 1.6, 1.8, 2, 2.2, 2.4, etc., per cent, because, even
if bonds should be issued in denominations as small as $50. there will
be no fractional cents in the semiannual coupons. Of course that is
for convenience. [Reading:]
So far as the Treasury is concerned, it recognizes no premium or discount in
making exchanges of bonds and certificates, regardless of whatever the “ open
market ” may be. But in order that parity with gold may be maintained, and
also that the certificates may be a real reserve currency ordinarily withheld
from circulation, the interest rate on each series of bonds when issued or
renewed shou’d be such as to command a very slight premium for the bonds.
Bond certificates immediately exchangeable for bonds bearing even a very
low rate of interest will be withheld from general circulation by banks, and
gold and silver and their certificates will be paid out instead. The above ideas
being followed, it is evident that these bonds will never be at a discount.
And there is where it seems to me that the holders of these vast
bond issues should be fundamentally interested in this plan. Tem
porary aberrations in the money market will correct themselves, and
the system will have a steadying influence on the “ value of gold,”
just as an idler pulley has a steadying effect on a leather belt trans
mitting power. [Reading:]
The question as to what the denominations of the bonds should be can be
determined by experience gained from the first issue.
However, to insure perfect equality and no special privilege to any
class, it seems desirable that some bonds as small as $50 shall be
issued. [Reading:]
The custodian’s duties are substantially these:
He must give out bonds for bond certificates only, and bond certificates for
bonds only. The interest, either way, is to be paid in gold or its equivalent;
hence, if he be given a certain amount of the new bonds, he will, whatever the
exchanges may be, have always the same total amount in bonds and bond
certificates. Custodianships may be established in other than subtreasury cities
to give the benefit of quick exchange to smaller geographical divisions.
Of course that was written before the Glass bill wTas passed. [Read
ing:]
An economical feature of the plan is that it saves interest on the bonds while
the certificates are outstanding, and even while the Treasury has possession of
them. If the Treasury receives bond certificates as currency in the regular
B A N K IN G AND CURREN CY .
2 441
course of business it will naturally retain them as banks would, and thus save
interest.
A permanent holding of bond certificates by the Government is automatically
the equivalent of a sinking fund to the extent to which they are so held. They
are simply an “ offset ” to the bonds which are held by the custodian.
As the Government maintains parity with gold on the new bonds by fixin<* the
interest rate on one serial issue every six months, it does not concern itself with
premium on bonds, as it never sells them—unless necessary to replenish the
gold reserve fund as stated in the bill, which would be an unlikely occurrence.
It holds them merely for the purpose of exchange for the only thing which wili
command them, and that is bond certificates. The reason for exchanging bonds
for bond certificates only is to prevent contraction in the currency and to make
the certificates more valuable than any other circulating medium."
And I may say right here, gentlemen, that one of the criticisms
that I have seen made of this bill is that the manner in which re
demptions of the new currency are to be had may operate as another
endless chain—the drawing of gold out of the Treasury. That dan
ger is absolutely eliminated in this system of currency expansion
[Beading:]
It is possible to delay the determination of the interest rate on each of the
serial issues to within 30 days of their several dates. While the bonds are
printed by hand from steel plates, which is a slow process, the date interest
rate, and interest table can be quickly printed from type on ordinary’ printing
presses.
. 4 his gentleman suggests a smaller bond in size. lie says Iread
ing] :
J
.
the bonds would have to be printed for each particular issue, the cer
tificates, which may be of any denomination desired, are general and command
any bond issue, or any particular issue designated by the Secretary of the
Treasury, as deemed advisable. They will last indefinitely, not being subject
to the wear and tear of ordinary currency.
The daily summarized reports of the custodians showing the relative amounts
of bonds and bond certificates on hand would be a better barometer of local and
general currency conditions than are now the clearing-house reports of business
conditions.
He says that bond certificates can be issued of any denomination,
even $1, $2, and $5 bills being practicable. My own idea is that thev
can be larger than that, and that the smaller currency should be en
tirely confined to silver certificates. This gentleman, in the prepara
tion of his bill, prohibits the legal-tender character of these bond
certificates from applying to interest on the public debt and the pay
ment of customs dues. My own idea would be to make them univer
sal legal tender, although he gives a good reason for it.
Senator B ristow . Senator Thomas, let me make this suggestion,
and see what effect it would have. Suppose I have $1,000 that I do
not want to use. I take it down here to a bank and I probably put.
it in a trust company, where it will bear 2 per cent on a monthly
balance or a weekly balance, perhaps 8 per cent, depending on where
I place it. And it stays there and it is loaned out to somebody else.
There are a large number of people who do the same. And that
makes the bank’s balance.
Now, suppose instead of that I go and get a Government bond and
put it away and get 2 per cent. That is as good as anything could
be. I would know that I could get cash for it Avhen I wanted it.
Would not that fact have a tendency to take away all these bank
deposits? And now somebody else goes and borrows this $1,000 of
mine, who needs it, and he pays 4 per cent or 5 per cent on it, as the
2442
B A N K IN G AND CUK REN CY.
case m a y be, and the bank keeps it there for that purpose and deals
in this surplus currency that is in the country—collects it and loans
it out.
Now,, that is a good thing. Somebody can get the money that
otherwise could not. If I go and get one of these bonds and put it
away, that currency would be gone and nobody could get it. I would
get 2 per cent on it, but the other man would not have the opportunity
of borrowirg it.
Senator T hom as . Y ou can do the same thing with gold. You can
do the same thing with any other sort of currency. The fact that you
could do that is, to my mind, one of the best arguments in favor of
the genuineness of the scheme.
Senator B ristow . Well, it is a very important thing to the business
of our country as it is now that we should have banks.
Senator T h o m a s . Certainly.
Senator B ristow . S o that men w ho need money, who have not got
it, who are carrying on business w ith large capital— and the vast
m ajority o f our men are d oin g th at— can borrow it.
Senator T hom as . When that demand comes there will be rapid
exchange of these bonds for currency. It will work automatically.
Senator S h a fr o t h . When money is worth more than 2 per cent
money comes out and the bond goes to the Treasury.
Senator T hom as . Yes. That, if I may be allowed the expression,
is the beauty of the proposition.
Senator B ristow . The banks would have to pay more than 2 p e r
cent, then, to get this currency, instead of its being put into bonds.
Senator T hom as . A s a matter of fact, it would reduce the actual
income on the bonds, because the bonds would go to a premium in
proportion to the demand for that bond currency.
Senator W e e k s . Senator Thomas, what makes you think those
bonds would go to a premium?
Senator T h om as . They are at a premium now. are they n o t? Be
cause they have the quality of basis f o r currency issue.
Senator B ristowt. They were before this bill was introduced.
Senator N elson . They are about 94^. now.
Senator S hafroth. Mr. Yanderlip said they were worth 3.18 in
terest, and therefore they were more valuable than the 3 per cent
bond; and for that reason the national-bank circulation would retire.
Senator T h o m a s . Well, assuming that they are now below par, it is
because of the probable effect of this bill upon them. But with that
quality and requirement they are worth a premium, are they not?
Senator B ristow . Well, they h a v e been; yes.
Senator T h o m a s . I mean with this qualification, and with the
added qualification of being receivable for reserves for bank deposits.
Senator H itc h c o c k . It is proposed to have the Government issue
$75,000,000 of these bonds a year, is it?
Senator T h o m a s . Every six months.
Senator H itc h c o c k . Every six months ?
Senator T h om as . Or so tliat each $75,000,000 will fall due at in
tervals of six months.
Senator H i t c h c o c k . Well, that would be $150,000,000 a year.
Senator T h o m a s . That would fall due every year ?
Senator H i t c h c o c k . In five years, then, we w o u l d retire a l l the
present national-bank currency?
B A N K IN G AND C U RREN CY .
244 3
Senator T h o m a s . Upon the assumption that they were issued every
six months, as well as falling due every six months.
Senator H itc h c o c k . Well, after you had accomplished that, would
they be in the form of bonds, in your opinion, or would they be in
the form of outstanding currency ?
Senator T hom as . Well, my own opinion is that these bonds would
be used for the most part for reserves.
Senator H itc h c o c k . They would be in the form of bonds in the
vaults of the banks?
Senator T h o m a s . They would be in the form of bonds in the vaults
of the banks, and in the vaults of the reserve banks.
Senator H itc h c o c k . The banks would be using those in the place
of gold ?
Senator T h o m a s . In the place of all sorts of reserves.
Senator H itc h c o c k . In the place of all kinds of reserves. What
would become of the gold and other forms of money which the banks
now hold as reserves?
Senator T hom as . It would give them circulation in the banks.
Senator H itc h c o c k . Well, they would not be in the banks i f they
were displaced by those hands.
Senator T h o m a s . Not as reserves; but they would be ip the banks
just the same.
Senator H itc h c o c k . Well, banks do not hold ordinarily more than
their reserves.
Senator T h om as . When I say “ in the banks,” I mean in the busi
ness of the country.
Senator H itc h c o c k . Well, then it is proposed to issue another
$75,000,000----Senator N elson (interposing). Every six months for 10 years.
Senator H itc h c o c k . S o that we would have outstanding, approxi
mately, $1,500,000. Would that be in the form of bonds, or would it
be in the form of currency?
Senator T hom as . Both, and interchangeable.
Senator H itc h c o c k . Well, if it was in the form of currency it
might lead to an inflation.
Senator T h om as . H ow ?
Senator H itc h c o c k . Because
it would provide much more cur
rency than we have at the present time.
Senator T hom as . Well, would that be inflation? Do you not
think that we need more currency?
Senator H itc h c o c k . The testimony here indicates that at certain
seasons of the year it is too little, and at other seasons of the year it
is redundant.
Senator T h o m a s . Yes; and I can understand that the present sys
tem prevents expansion.
Senator N elson . Our bonded debt now is between $900,000,000 and
$ 1 ,000,000,000.
Senator S h a fr o t h . That does not take in the Panama bonds.
Senator N elson . I think it includes all the outstanding bonds now
that are charged against the Government.
Senator T h om as . I have a statement here that I could read on
that subject.
Senator H itc h c o c k . Let me put this case to you, Senator Thomas.
Senator T h o m a s . Certainly.
2444
B A N K IN G AND CU RREN CY .
Senator H itc h c o c k . If the result of this change were to be the
issue of the same amount of currency that we have now----Senator T hom as (interposing). Plus the amount o f the debt of
the United States not represented by any currency at the present
time.
Senator H itch co ck . Yes. That would result in giving us an ex
pansion, if not an inflation of currency, would it not?
Senator T h o m a s . We want an expansion of the currency; and that
is just one of the merits of this proposition.
Senator H itc h c o c k . Well, it is estimated that we want it at
certain seasons of the year, and at other seasons we want it retired.
My point is this: Are you sure it would result in a reduction of the
interest on bonds?
Senator T h om as . I do not think there is any doubt about it; and
that is the reason the six months’ intervals are provided for, so that
the interest could be regulated.
Senator H itc h c o c k . It seems to me that you only accomplish a
reduction of the interest by contracting the currency.
Senator T hom as . I do not see how, if I understand your argument.
Senator H itc h c o c k . Well, by expanding your currency----Senator T hom as (interposing). Well, I understand that one pur
pose of this bill, and one of the demands for it, is that we need more
currency.
Senator H itc h c o c k . Not more currency; we need an elastic cur
rency.
Senator T h o m a s . That means we need more at intervals. This is
a loan for securing that currency and at the same time arranging it
automatically.
Senator W e e k s . Yes; but you might need very much less than we
have now at intervals.
Senator T h o m a s . That does not worry me much. I do not think
this country has been in such a position for 25 years—that we have
more currency than we need.
Senator N elson . The difference would be between bonds outstand
ing now and the national-bank circulation now----Senator W eek s (interposing). Let me finish my statement, please.
I think it is a fair assumption that we have had too much. If
there were not too much, the interior banks would not be dumping
their circulation into New York a great deal of the time, which
circulation is coming back here to the Treasury for redemption
frequently. There are bales of that circulation coming back to the
Treasury for redemption that have never been opened.
Senator S h a fr o th . Because it can not act as a bank reserve. Not
a dollar of it would come back if it could act as bank reserve.
Senator W ee k s . I am not discussing what can be done with it.
But is it not a fact?
Senator T h om as . But a great deal of this goes to New York to
be put into call loans.
Senator W e e k s . Not at all. That money is coming to New York
like a stream of water over a dam, and coming here to the Treasury;
and there are over $44,000,000 of it here now.
Senator T h om as . Then I should think you would have a currency
that had elasticity now, so that you do not need any additional legis
lation.
B A N K IN G AND CU RREN CY .
2445
Senator W e e k s . Well, that is not a question of elasticity. T h e
circulation is put out again.
Senator S h a fr o t h . The reason of that is that we have got too little
money that will act as reserves.
Senator N elson . Y ou see the value of the system is that if you have
$100,000 of these bonds you could go to the Treasury and get the
money and turn the bonds in ; and then when you got through with
using the money you could turn the money in and get back the bonds.
Senator W e e k s . Y ou can do the same under the present system.
Senator T h o m a s . Yes; but ev ery b o d y can n o t d o it.
Senator N elson . This is for everybody; not only the banks, but for
you and me.
Senator W e e k s . Well, I suppose as a practical proposition e v e ry
body would do what the country bank does not. If the country bank
wants to take out more circulation, it sends to its reserve agent and
its reserve agent does it for the country bank.
Senator T h o m a s . It may be that it is generally done through th e
agency of the banks. But this system meets the fundamental objec
tion that the present system is designed for the banks, and not for th e
whole people.
Senator N elso n . The beauty of this system is that whenever y o u r
money is idle you convert it into a 2 per cent bond; and the moment
you want money you convert the bond into currency.
Senator W e e k s . I am not discussing or raising any point about the
fundamental objection of making additional circulation a Govern
ment note, in the first place, and making it a legal tender, in the sec
ond place. That is a matter that, of course, would be involved in this
proposition.
Senator H itc h c o c k . Senator Thomas, there would be no time when
the banks would keep this currency in reserve, because they would
be drawing no interest on the currency. They would keep it in the
form of bonds in order to get the interest. It would count as reserves
just as much in bonds as it would in cash.
Senator T hom as . Yes.
Senator H itc h c o c k . And during that time the Government w o u ld
be paying interest on those bonds.
Senator T hom as . Yes.
Senator H itc h c o c k . N ow , the reserves held at the present time by
national banks are something over $1,000,000,000.
Senator T hom as . Yes.
Senator H itc h c o c k . Then, how can you accomplish a saving o f in
terest, when it would be to the profit of banks to keep these reserves
in the form of bonds, because they would count as cash and draw in
terest at the same time?
Senator T hom as . I do not assume that these bonds would be con
stantly in reserves to the extent which you suppose.
Senator H itc h c o c k . I am putting this case to you: That at the
present time there is a minimum of reserves which the national banks
hold amounting to 1,000 millions of dollars in round numbers. Now,
that is bedrock. The banks do not go beyond that. They do not use
that. They keep that as a standing reserve. They naturally want
interest on it. So they keep it in the form of bonds instead of in the
2446
B A N K IN G A N D C U RREN CY .
form of currency. And if they do so, would not the United States
Government be paying interest on it during all that time?
Senator T h o m a s . Not those bonds deposited with the Govern
ment—with these regional banks. Of course, if it were sent by one
of the banks from Omaha to New York it would draw interest.
Senator H itc h c o c k . It would keep the bonds in its own vault.
Senator T h om as . It would keep th e bonds in its ow n vault.
Senator H itc h c o c k . And they would count as cash there.
Senator T h om as . But the Government now pays interest on the
bond just the same, and pays a good deal more than 2 per cent. And
right there there would be the difference in interest between the 4 |
per cent bond and 4 per cent bond and the 2 per cent bond.
Senator W e e k s . Let us take this as an illustration: Suppose you
went into a bank for $1,000, and you would get that $1,000 in such
denominations as you wanted it in. You take that circulation and
use it in your business. Later somebody pays you $1,000 of that cir
culation. What would you do with it? Hold the debt or hold the
bond?
Senator T h o m a s . If I should answer you truthfully, I would say
I would give it to my creditors, no matter what kind it wTas.
Senator W e e k s . Would not everybody do it?
Senator T h om as . They would if they were in m y position, because
they could not do anything else.
Senator W e e k s . Would any individual receiving such circulation
voluntarily exchange that into a bond paying 1|, or even 2, per cent?
Senator T hom as . Yes; I think so.
Senator W e e k s . Why would not a man take a Massachusetts State
bond paying 3£ or 3f per cent instead ?
Senator S h a fr o t h . A Massachusetts bond can not act as a reserve.
Senator T homas. The convertibility of the bond and the fact that
it can be used for reserve would make it an attractive bond, I think,
even to the individual.
Senator W e e k s . I would not invest in a I f per cent bond when I
could get a 3f per cent bond.
Senator N elso n . Y ou see, the beauty of this system is that it
makes every individual who carries those bonds a sort of movable
bank.
Senator B ristow . Senator Weeks, you say you would invest in
Massachusetts bonds. In the first place, they are in denominations
you can not get very well; and then you can not sell them readily.
You may say to me—I have $1,000 here in the Washington Loan &
Trust Co., which draws 2 per cent—“ Why do you keep that $1,000
there when you could get a Massachusetts bond that draws 3£ per
cent?” I do it because I can get it when I want it.
Senator T h o m a s . Gentlemen, if you will allow me, I think some of
these things are discussed in the paper further on.
Senator N elson . A s I understand you, you say that by and by
they can issue these bonds at rates lower than 2 per cent?
Senator T h om as . Yes; that is the reason six months’ intervals of
maturity have been provided for.
Senator H itch co ck . It is the habit of this committee to jump
right into the middle of a thing before it has been discussed in order.
B A N K IN G AND C U E B E N C Y .
2447
Senator T h o m a s . I am not objecting, but I do not want to detain
the committee. [Reading:]
The clause in the bill relating to customs dues is the same as that which
now appears on the backs of United States notes. It will never be necessary to
make it operative except in the event of a prolonged and costly war.
Gold certificates have a 100 per cent gold reserve. Bond certificates will have
a 100 per cent serial gold bond reserve, which bonds have a $75,000,000 gold
reserve to meet an entire serial issue as it falls due. That is what the amend
ment provides. And there is ample provision for replenishing the gold reserve
if drawn upon to meet the next serial issue at its maturity six months later.
Silver certificates have a 100 per cent reserve in silver dollars. By congres
sional act the Government must maintain parity. The bill directs the Secretary
of the Treasury to issue $1, $2, and $5 silver certificates in lieu of those of the
denominations of $10 or more, which amount to about $22,000,000. That is in
order to make silver bear the burden of the small currency of the country.
When the funding is completed over $320,000,000 of gold certificates of the
denominations of $5 must be provided to meet the requirements of trade for
this denomination.
Bond certificates will not ordinarily serve the purpose, as they will be with
drawn from circulation to command bonds and create a scarcity of small bills,
which are absolutely required. He reaches the conclusion that as these smaller
silver certificates are needed they will never be presented for redemption in
gold to any extent; so that a gold reserve of $25,000,000 is ample, making
$100,000,000 in all, thus releasing $50,000,000 of the present reserve.
He says he realizes that some persons will question the necessity of main
taining any gold reserve, but he looks upon it as a possible necessity; it gives
assurance to the world of the character of our money:
From the standpoint of economy alone it is a good investment. The loss of
interest on $100,000,000 will be more than offset by the lower rate of interest
our bonds will command, because of the maintenance of the fund. A borrower
at a bank soon realizes the fact that the average balance he maintains with it
has a very decided influence on the interest rate demanded.
Senator H itc h c o c k . What is that reserve for? These bonds a re
payable in certificates and the certificates exchangeable for the bonds.
Senator T homas. The reserves are for the bonds.
Senator H itc h c o c k . Y ou mean as against their maturity?
Senator T h o m a s . Yes.
Senator H itc h c o c k . Then it should be a sinking fund, not a re
serve.
Senator T hom as . Well, it is only the amount of one of the issues.
It is not probable that, with these attributes, the redemption of the
bonds will be desired or demanded; but provision should be made,
of course, for raising the money in the event that it should.
Senator W e e k s . If an issue of bonds were presented for payment
you would have reserve enough to pay that, and you would proceed
to replenish your reserve, would you not?
Senator T hom as . Yes; at once. That is provided for. The plan
as outlined limits the bond certificates to the amount of the national
debt, in round numbers about $1,350,000,000, while the full cycle of
20 $75,000,000 issues of bonds maturing six months apart would
amount to $1,500,000,000. This leaves two issues, and consequently
two maturity dates, free for emergencies, which is a very necessary
precaution not only for preliminary war preparations, but also for
many other purposes. It may be necessary to provide for Panama
bonds, not yet issued, to reimburse the general fund. It might be
profitable to have an open maturity date for a shorter time bond
when the interest rate manifests an upward tendency.
2448
B A N K IN G AND CU RREN CY .
He then gives the interest rate of the available paper currency, as
follows:
From bonds not now available as abasis for circulation_______
Premium on 4 per cent bonds at about 10 per cent, say________
National-bank redemption fund, treated as a liability by the
Treasury, s a y ____________________________________________
$213, 000, 000
12, 000, 000
Which is an increase of_______________________________
250, 000, 000
25, 000,000
Another form of presenting the increase is that on March
Interest-bearing debt______________ _________________________
Debt bearing no interest_____________________________________
United States notes of all kinds______________________________
1,
1913:
$905, 706, 610
1, 677, 650
376,400,242
Total____________________________ ___________________ 1,343,844,502
There is a considerable amount of the national debt included in
the above which will never be presented, having been lost or de
stroyed ; for example, fractional currency, $6,854,865. Therefore the
final limit of bond-certificate issues, after adding premium on bonds
now outstanding, can not exceed the sum of $1,350,000,000.
The currency in circulation which would be retired on March 1,
1913, was as follows:
Treasury notes of 1890---------------------------------------------------------United States notes-------------------------------------------------------------National-bank notes--------------------------------------------------------------
$2, 742, 000
346, 681, 016
751,117, 794
Total________________________________________________ 1,100,540,810
Which leaves about $250,000,000 as the increase.
Senator N elso n . This presupposes the retirement of the green
backs, too?
Senator T h o m a s . Oh, certainly. [Reading:]
So that the available increase in the circulating medium will be about
$250,000,000 independent of the release of fifty millions of the gold reserve,
and if the Government deposits its money in the national banks on security
other than these convertible bonds, another one hundred millions can be fairly
relied upon, thus making a total of $400,000,000.
T H E STEADYING EFFECT OF A N ADJUSTABLE INTEREST RATE.
When the premium on bonds goes up in the open market the interest rate
will go down, and when the bonds command no premium the interest rate will
go up. This idea, which is economically sound, is applied every six months
to $75,000,000 of bonds. It will have a steadying effect on the value of bonds
as a whole, and the temporary “ aberrations ” of the money market will affect
them but little. This is another argument for limiting the term of the bonds
to 10 years.
BANK-RESERVE REQUIREMENTS.
The money-reserve requirements of all bonds, trust, and other companies
(though no data is available) I estimate at nearly double the amount of serial
bonds. Would not a big bank having ten or twenty millions of gold certificates
locked up in its vaults which must be kept there idle and earn absolutely
nothing gladly substitute all the bonds they could get that would earn even
as low a rate as their investment of bonds for circulation has yielded them,
say, 1.2 or 1.4 per cent, especially when they could exchange them for legaltender currency (on a gold basis) on an hour’s notice?
Think of the enormous expense of all the engraved plates, the printing, the
signing of bills, the red tape, and the delay, to say nothing of the capital
they have to put into bonds and the trouble of getting circulation money, under
the present system.
B A N K IN G AND C U E E E N C Y .
2 449
Under this system their capital is not touched. Their money reserve is a
fixed per cent of their depositor’s money which they are obliged by law to
keep for their protection in times of emergency. What better emergency money
can you provide than bond certificates?
Consider also the enormous expense the Government will save by dispensing
with the present system and adopting one so absolutely simple.
WAR BONDS.
In case of war the serial issues could be increased, and so long as the
bonds do not approach the full requirements for bank reserves the rate of
interest will be low. It is well to recognize the fact that the nearer the
amount of bonds approaches the total bank-reserve requirements the interest
rates will rise on account of decreasing competition for them in the open
market.
ADDITIONAL CURRENCY REQUIREMENTS.
I disclaim any purpose to limit the paper money of the country to gold,
silver, and bond certificates. These appeal to me because they will all be
operated on the same principle—that of immediate interchange, the last to the
mutual benefit of the banks and the people.
The bond certificate idea is exceedingly simple once we divest ourselves of
our “ habit of thought ” regarding paper money.
Fortunately we have had a long experience with national-bank issues and can
estimate very closely what a currency issuing privilege is worth to the people.
Wre are perfectly willing to give them an equivalent in different form because
w e impose on them the arbitrary requirement of a money reserve for our de
posits. In doing this as herein outlined, the people will get a low interest rate
on the debt and the banks and others who want a like interest on money neces
sarily idle can invest it in convertible bonds.
STATEMENT OF N. F. BANFIELD, VICE PRESIDENT FIRST
NATIONAL BANK, AUSTIN, MINN.
Senator H itchcock . Will you state, please, your banking connec
tions?
Mr. B anfield . I am vice president of the First National Bank of
Austin, Minn.
Senator N elson . What is the capital and surplus?
Mr. B anfield . Capital, $100,000; surplus, $150,000; undivided
profits, $20,000; average deposits $1,100,000; circulation secured by
bonds $100,000.
The bank has been established for 44 years. I have been con
nected with it for 34 years and an officer for 31 years. I wanted to
say just a word about the farm-loan proposition. We are interested in
that. We are in an agricultural and dairying section. At the pres
ent time the farm loans are mostly carried by the insurance compa
nies and the eastern savings banks, and are negotiated mainly
through* the local country banks with those companies, involving
considerable time in the way of preparation of applications, submit
ting them for approval by the trustees of the companies and of the
saving banks, causing delay and uncertainty, and the loss of con
siderable time before a loan can be closed.
Now, there is in this bill a provision for farm loans to the extent
of 25 per cent of the capital and surplus of the banks, limited to one
year. Now, that limitation of time is somewhat like the oyster stew
that was brought to the man who found only one oyster in it. He
complained to the waiter that there were not enough oysters in it to
give it a flavor, and the waiter replied, “That is not put in there to
give it a flavor; that is only put in there to christen it.” That is
2450
B A N K IN G AND CUK REN CY.
about like that one-year period as to the required time for farm
loans. To make that practical and of service to the Northwest sec
tion of the country for which I am speaking particularly, that should
be at least a 5-year period. It makes it practically unavailable to
have it for only 1 year.
Senator N elso n . What proportion of your deposits are time de
posits ?
Mr. B a n fie l d . Our d ep o sits con sist o f $600,000 in tim e d eposits,
u p o n w h ich we p a y in te re st, a n d $500,000 in in d iv id u a l deposits.
Senator W e e k s . I s not the basis we should use in determining the
amount of money which may be loaned on lands the percentage of
time deposits, rather than the capital of the bank?
Mr. B a n fie l d . I was just going to come to that in a moment. I
was going to suggest that this provision is all right as far as it goes
for certain banks—25 per cent of the capital and surplus of the
banks. Then follow that with the words:
P r o v i d e d , That in the cases of banks having time certificates or savings
deposits, or both, in excess of their capital and surplus they shall be allowed
to loan 25 per cent of the amount of their outstanding time certificates and
savings deposits.
On account of that being somewhat fluctuating, I would have that
determined by the amount of those time and savings deposits as
shown in the last published statement to the Comptroller of the Cur
rency as a guide to fix that at a definite amount. I think that would
be practicable.
Now, in our case the present phraseology of this bill would permit
us to loan $62,500 out of our $600,000, or about one-tenth. Now, that
is not enough; we should be allowed to loan one-fourth of the aggregate
amount of our time and savings deposits, which would be $150,000.
Senator P o m er en e . D o you think that would be wise, to extend
that privilege to all commercial banks?
Mr. B a n fie l d . This bill limits it to the banks outside of reserve
centers.
Senator N elson . That means country banks.
Mr. B a n fie l d . Country banks.
Senator N elson . N ow , here is another thing, if the committee
will excuse me. Don’t you find that these farm loans that you take—farm mortgages—are easily discounted and sold—that there is a
market for them ?
Mr. B a n fie l d . I should like very much to answer that question.
I remember distinctly going through the panic of 1893; that is 20
years ago this past summer. I remember it with a great deal of
vividness. We had some farm-mortgage loans that we had as col
lateral that were owned by myself and our president as partners in
a firm that we have to carry on that business, and out of all the paper
that we had we found our mortgages the best and the only thing upon
which we could realize or get any money during that period.
Senator W e e k s . Y ou mean locally?
Mr. B a n fie l d . Locally; well, we could not get any outside.
Senator N elson . Y ou must remember these country banks do not
carry these bonds.
Senator H itch co ck . T o whom did you sell those m ortgages?
Mr. B a n field . We sold those mortgages to clients that we had
scattered throughout the country; some East and some in the West
B A N K IN G AND C U B E E N C Y .
2451
were glad to get them. They were somewhat timid about banks, and
were very glad to be able to get those mortgages in which to put their
money, and if we had only had a larger stock of them our condition
would have been more comfortable.
Senator H itc h c o c k . They took the money out of banks that they
were a little afraid of and put it into these mortgages?
Mr. B a n fie l d . They got the money somewhere. I do not think it
all came from banks; I think it came from hidden places where they
had it.
Senator H itc h c o c k . Y ou sold them at some discount, I presume?
Mr. B a n fie l d . N o, sir; we did not have to do that.
Senator N elson . What interest were those mortgages paying?
Mr. B a n fie l d . I have forgotten now.
Senator N elson . Probably 6 or 7 per cent at that time ?
Mr. B a n fie l d . In 1893, I should say, certainly 6 per cent and pos
sibly 7 per cent; I think very likely 7 per cent at that time. So this
argument we hear at times that farm mortgages tie up your money
in a fixed long-time security does not, to my mind, follow, for this
reason, that we found them the most liquid form of asset we had.
Now, another thing: The present national banking law permits us
to take bonds of almost any description, provided it is named a bond.
Nearly all of those public-utility bonds and many other forms of
bonds that are carried by banks as investments are now secured by
an underlying mortgage, but just because they are called a bond they
go with the department and we can carry any number we want to.
Senator N elson . They are nearly all secured by underlying m o rt
gages or a trustee?
Mr. B a n fie l d . Yes. I claim we should have the same right to
carry our first-class farm mortgages as this bill provides, not to ex
ceed 50 per cent of the actual value of improved farm lands.
Senator N elson . Not on city property?
Mr. B a n fie l d . Not on c ity p r o p e r ty ; I am n o t a sk in g th a t. I do
n o t recom m end th a t, b u t I do reco m m en d lo an s on im p ro v e d fa rm
la n d s n o t to exceed 50 p e r c e n t of th e ir a c tu a l value.
Senator N elso n . And 25 per cent of both time and savings de
posits ?
Mr. B a n fie l d . Yes, sir.
Senator B ristow . Such a privilege as that would have a tendency
to make farm mortgages sought after more than they are now.
Mr. B a n field . It certainly would. I t would bring the country
banks throughout the Northwest—now, I am speaking from actual
knowledge of the desire of the country banks of Wisconsin, Minne
sota, North and South Dakota, and Iowa, and I know they all think
highly of this privilege in this bill, and it would rub off that rough
spot of antagonism to the bill if you will just make those amend
ments I have suggested.
Senator S h a fr o t h . What limit would you fix as to the maturity
of the notes secured by deed of trust ?
Mr. B a n fie l d . Five years; that is our usual time.
Senator B ristow . This one-year proposition is a hypocritical pre
tense.
Mr. B a n fie l d . It is just put in there to christen it.
Now, another matter: While I am talking as a banker, I believe
bankers as a class are patriotic, and when I say I am saying this in
2452
B A N K IN G AND CU RREN CY .
behalf of the farmer, I am telling you the truth, because he can come
in there and sit down next to me and tell me what he needs and I
can fix him up just as quickly as we can make out the papers with
out any delay, without any red tape, and you by amending this bill
as I have indicated will please and accommodate and help a large
class of northwestern farmers who want just that very thing. At
the same time you will provide the banks with an absolutely safe—
and we call it choice—kind of paper, the best kind of paper we can
get.
Senator S h a f r o t h . Will you write out your amendment, interline
it in the bill and forward it to the chairman of this committee, and
label it as suggestions with regard to real estate loans made by you ?
Mr. B a n f i e l d . I s h a l l b e g l a d t o d o so .
While I am here, if I am not trespassing on your time, X want to
speak with regard to this commercial paper that this bill proposes
to take from banks for rediscount. In our section of the country
we are born and bred with an antipathy to rediscounts. It is the last
thing that banks up our way want to do, and we have not done it nor
attempted to do it since 1893, not once. We regard it as a sign of
weakness, as a flag of distress, and would not resort to it except as
a last necessity. But, of course, under this proposed measure, if it
becomes the fashion and is the custom adopted here, I imagine that
the banks will fall into it, although it is something that the conserva
tive bank will hesitate a long time about doing—borrowing money
and indorsing everybody’s note to hire money on to lend to some
body else.
Senator B r is t o w . Don’t you think it will delocalize your business
to a certain extent?
Mr. B a n f i e l d . I do. I think there will be a temptation on the
part of the banks to do a class of business they ought not to do.
I think that if the Government bank makes a low rate, so that there
is a chance for 1 or 2 per cent profit, some of the banks would be led
into doing too much of that, and it is going to be too easy for bor
rowers to get money. That is one of the evils of the present time.
Senator N e l s o n . Don’t you think any bank legislation we enact
ought to provide for assistance to the farmers, giving them credit
as well as the merchants and manufacturers?
Mr. B a n f i e l d . I most certainly do, and that is why I am here say
ing this about those farm loans. They are the backbone of our
country.
Senator N e l s o n . And any system that does not take care of farm
loans is an insufficient and incomplete system ?
Mr. B a n f i e l d . It i s , I believe. I think that is an essential part
of this proposed bill, and I hope, gentlemen, you will see to it that
there is an amendment made along the lines I have indicated.
I thank you.
Senator H i t c h c o c k . We will take an adjournment until to-morrow
at 11 o’clock. That will enable us to hear Mr. Milliken from 11 to
12, and in the afternoon the representatives of the Chamber of Com
merce of the United States.
(Thereupon at 5.45 o’clock p. m. the committee stood adjourned
to meet Thursday, October 16, 1913, at 11 o’clock a. m.)
B A N K IN G AND CU RREN CY .
2453;
THURSDAY, OCTOBER 16, 1913.
C o m m it t e e
on
B
a n k in g
U
and
n it e d
Currency,
S tates S e n a t e ,
Washington, I). G.
The committee assembled at 11 o’clock a. m.
Present: Senators Owen (chairman), O’Gorman, Reed, Pomerene,
Shafroth, Hollis, Nelson, Bristow, and Weeks.
STATEMENT OF It. C. MILLIKEN, MONETARY STATIST, BOND
BUILDING, WASHINGTON, D. C.
The C h a i r m a n . Mr. Milliken, we would like you to address y o u r
self to this bill, and tell us what you think its defects are and
what its advantages are.
M r . M i l l i k e n . Before attempting to discuss any change in o u r
present banking and currency system I beg your indulgence while
I make a few observations. First, let us see what the principal o b
ject of banking is; second, how a bank accomplishes that object; and
third, what constitutes safe banking.
The principal object of banking is to economize capital and that
object is attained by furnishing a mechanism for the exchange of
credits. A bank raises its borrowed capital in three ways, namely,
by issuing notes, by receiving deposits, and by accepting bills. If a
person will lend me $100 for nothing and I lend that $100 to another
person at 6 per cent interest, then in the course of a year I shall gain
$6 by the transaction. Again, if a person will take my promise to
pay and bring it back to me at the end of the year and pay me 6 per
cent interest for it, just as though I had lent him $100, then I shall
gain $6 by that transaction. That is a fair representation of the
operation of banking and of the wTay in which a banking capital is
created by deposits and notes.
Now, it is obvious that those two methods of banking are adapted
to produce precisely the same effects. In each case a banking capital
is created, and each capital is employed in precisely the same way,
namely, in the discounting of bills or making loans. To the parties
who have their bills discounted, it matters not from what source the
capital is raised, the advantage is the same to them, the mode in
which they employ the money is the same, and the effect upon trade
and commerce will be the same. In the case of the bank issuing
notes it increases the amount of money in the country. But the
bank receiving deposits will not have increased the amount of money
one iota, but it will have given increased motion to money, and the
effect upon trade and commerce will be the same. The enormous
increase in deposit banking in this country has virtually supplanted
the necessity for bank notes.
At the present time our bank deposits aggregate $20,000,000,000.
or more than $200 per capita. When a man speaks of his cash
he always includes his bank deposit, because under ordinary occasions
it is equivalent to cash. In 1860 the total bank deposits of New York
were only 15 million, whereas at present they exceed $5,000,000,000.
Let me further illustrate this by directing attention to the national
banking system for 42 years, from 1867 to 1909. I have drawn a
2454
B A N K IN G A N D CU R R E N C Y .
chart showing the principal resources and liabilities of those insti
tutions for that period, which I will insert at this point.
The chart which faces this page represents the principal resources
and liabilities of the national banks for a period of 42 years (18671909) : The top (heavy) line represents total deposits; the next (zig
zag) line represents loans and discounts; the middle (dotted) line
represents capital and surplus; next to the lowest (heavy) line rep
resents lawful money reserve; and the lowest (zig-zag) line repre
sents bank notes.
Senator N elson . I suppose that could go into the record as a
black print, couldn’t it?
The C h air m a n . Yes; I think so.
Senator N elson . We better have that go in with his remarks as
they are printed.
Mr. M il l ik e n . It will be observed that the increase of deposits
during the first period of 30 years (1867-1897) was from 750 million
to $2,000,000,000, whereas such increase during the last period of
12 years (1897-1909) was from 2 to 5 billion, or an average annual
increase of 793 per cent. Some increase is that. The most important
factor of this chart is deposits, while the least important factor is
the circulation of those banks, yet the great cry is for currency re
form. All are crying about curing an insignificant corn on the toe
while a malignant cancer is eating out one of the patient’s most vital
organs.
I maintain that an excessive amount of bank deposits is an
unhealthy condition. There was never a worse or more dangerous
fallacy than that we have gotten into by touting an excessive amount
of bank deposits as a criterion of prosperity. There is no sort of
question but that the people of Kansas, Nebraska, Minnesota, Wis
consin, Indiana, and Oklahoma during the past 10 years have been
as prosperous as the wage earners of New England, yet the savingsbank deposits of those western States are only $63,000,000 as com
pared with $1,373,000,000 for those New England States. Those
western States have 12.5 per cent of our total population as com
pared with 7.6 per cent for New England. While those westerners
have but 1.5 per cent of the savings-bank deposits of the Union
those New Englanders have 33 per cent. Wherein, then, does the dif
ference in their prosperity lie? In the fact that those westerners
are a part and parcel of the prosperity of their section, while the
wage earners of New England have a demand mortgage on the
prosperity of that section. Let us have a few lean years, and they
are bound to come, when those New England wage earners will be
idle and have to use their savings and we will find factories closing
because they can not raise the funds with which to renew their
mortgages. Not only would New England and New England insti
tutions be safer if the wage earners of that section owned the stocks
and bonds of the industrial institutions for which they worked, but
those wage earners would be better remunerated than they are at
present. Such a condition wrould be a guaranty against strikes and
the like.
French statesmanship recognized years ago the danger arising
from excessive savings-bank deposits when it created their Caisse—
their central bank for savings banks—to which every dollar of French
'\
B A N K IN G AND CURREN CY .
2455
savings-bank deposits must be sent for investment. Those French
men eliminated the speculator from the control of their Caisse and
passed a law prohibiting any person, during a single year, from de
positing more than 1,500 francs ($300) in any one or number of
savings banks. French statesmanship encourages the use of savings
banks by wage earners until they have accumulated a corporate unit,
which in France is 1,000 francs ($200), and then it encourages those
toiling masses to become investors and be a part and parcel of French
prosperity, whereas we encourage them to use savings banks as invest
ment institutions.
The next question is, What monetary law should be observed in
order to conduct the business of exchanging credits on safe lines?
What is the line of demarcation between expansion and inflation?
There are two schools of thought on this subject—or some contend
one is a school of thought and the other of guesswork—to be ob
served in doing this business safely. Just as there are two schools of
medical thought in prescribing treatment for debauchery, one pre
scribes temperance, while the other school fattens off of their unfor
tunate patients by prescribing as many different remedies as there
are quacks engaged in the business. One of those monetary schools
teaches that no possible harm will result to humanity if the person
or institution doing a banking business will cover its demand-payable
borrowed capital with liquid assets, while the other teaches that
only a certain portion of such borrowed capital should be covered
with money. No two of the doctors of the latter school are agreed
on the size of the dose to be prescribed. Dr. Monetary Commission
prescribed a 50 per cent dose. Dr. Chicago Bankers’ Conference pre
scribed a 40 per cent dose. Drs. Owen-Glass prescribe a 331 per cent
dose. Dr. Sprague prescribed a 55 per cent dose. Dr. Berry pre
scribed a 20 per cent dose. Dr. National Banking Act prescribed a
25 per cent dose to patients living in some localities and 15 per cent
for those living in other localities. Not one of those doctors has
ever attempted to give a reason for the size of the dose he prescribed,
because his action is not based on reason but guesswork. Some of
those doctors insist that the medicine they prescribe should be pure
and contain nothing but standard gold, while others contend it makes
no difference about the purity of the medicine so long as it bears the
“ pure-food ” label.
The next question for consideration is: What are “ liquid assets ” ?
This is a phrase of quite recent origin, as anyone will observe by
referring to Murray’s English Dictionary. It was first used by the
London Daily News on May 26, 1879. Its next use was by the PallMall Gazette on May 5, 1884, when advocating the organization of a
joint-stock company to take over the “ liquid assets” of the Bank of
Glasgow. “ Liquid assets,” as now used by monetary experts, are assets
which are self-convertible into gold. They include gold, demand
transfers by solvent concerns on solvent concerns for gold, and solvent
commercial paper payable at short and fixed periods. Mr. Geo. M.
Reynolds negatively gave a correct definition of this phrase, which
may be found on page 226 of these hearings. This is what he said:
The man who borrows money on stock-exchange collaterals in New York,
and who wants to realize on them quickly, must depend on the ability of the
borrower to reborrow that money im mediately elsewhere or upon the sale of
2456
B A N K IN G AND CU RREN CY .
the same. Now, if tlie condition is so bad that the banks of the city of New
York are unable to extend accommodations, the result is that there is a very
violent break in the values of securities, and w e are in the m idst of a panic.
Civilized man’s existence depends upon being fed, clothed, and
sheltered, and commercial paper is the credit instrument through
which those articles are financed and brought to his door. Man is
timid about making permanent investments during panicky times,
but he must have raw materials to keep his factory wheels going, and
he does make and will continue to make provision for such materials.
And so it is in every line of business. Provision is made to meet
commercial paper when other things will be passed by; especially
will men defer making permanent investments when times are hard.
Just here I wish to puncture the misstatement made by several of
the witnesses who have appeared before this committee to the effect
that you can always raise gold with our Government bonds. T recall
very distinctly that Mr. Berry made use of that statement. Nothing
could be further from the truth than that statement. You can’t
draw a dollar of gold from the Bank of England with a permanent
investment, but you can draw the last dollar of gold out of that
institution with solvent commercial paper payable at short and fixed
periods. The same thing is true with respect to the other European
central banks, because all those institutions, with the single exception
of the Beichsbank of Germany, are controlled by merchants.
To illustrate to you what safe banking is let me quote from the
testimony of Mr. A. Barton Hepburn, chairman of the board of
directors of the Chase National Bank of New York, before the Glass
investigating committee last January. It may be found on page 6
of those hearings. This is what he said:
Some years ago I called upon the Credit Lyonnais, in Paris, one of the great
banks of the world. The gentleman w ith whom I was in conversation passed
over to me their last bank statement. I glanced it over and remarked:
“ Well, you owe a great deal of money.”
“ W hat is that you s a y ? ”
“ You owe a great deal of money.”
“ W hat do you m ean ?”
“ Your deposits are about $350,000,000.”
“ Oh, yes, we owe depositors: but w e could pay them easily if we had to.”
“ Could you? Plow long would it take you to pay them in case of necessity? ”
“ The element of time would not enter into the matter a t all, except in so far
as it required time to perform the physical labor.”
“ But how; tell me ju st how you would do it? ”
Almost thinking I w as questioning the condition of his bank, he took the
balance sheet and proceeded:
“ Well, we have so much c a sh ; let us deduct that.”
“ Yes.”
“ Then we have so much due from banks. We could value against that and
deduct the same.”
“ Yes.”
“ We have so much exchange, acceptances, etc., which have an immediate
market. We could realize upon and deduct that.”
“ Yes.”
“ Now, w e have reduced our obligations in this manner to something less than
$200,000,000, and w e have very, very much more than that in commercial
paper.”
“ Yes; but how are you going to pay debts w ith commercial paper?”
“ Take it to the Bank of France and get currency for it.”
And he might have said gold, which is the same thing—
“ Could you do th a t? ”
“ Certainly.”
B A N K IN G AND CURREN CY .
2457
“ Is there any law which would compel the Bank of France to discount your
commercial paper without lim it? ”
“ Law—yes; the law of its being; that is w hat the bank w as created for.”
Before commenting on the statement of the Credit Lyonnais let
me direct your attention to the following language on page 24 of
House Report No. 69, filed in the House of Representatives Septem
ber 9, 1913, by Mr. Glass, chairman of the House Banking and Cur
rency Committee. It is this:
There has been a tendency to overestimate the importance of the note-issue
function and to treat it as if it were the chief object to be attained in banking
legislation. The idea may be attributable to the belief that “ emergency cur
rency ” is what is needed in order to relieve panics and stringencies, whereas
w hat is actually needed is fluid resources of some kind, whether notes or not.
In an address last winter in this city, before the Chamber of Com
merce of America, Mr. Glass, in summarizing our monetary ills,
used this language; I quote the first two paragraphs of his address.
He said:
I believe that nearly all students of this subject will agree w ith me in
thinking that the main points to be dealt with in any banking legislation that
may be attempted are:
1. Provision for rediscounts or sale of commercial paper in a way and to an
extent that w ill enable banks to get fluid resources whenever they or their
customers may require.
These are the only two instances in which I have observed the
phrase “ fluid resources ” used. He doubtless used “ fluid ” as syn
onymous with “ liquid.” The two words are synonymous when ap
plied to free-flowing substances, such as water, but never in a mone
tary sense when applied to assets or resources. It is proper to say
you have assets or resources which you can convert or liquidate into
cash, but it would be improper to say you could water them into
cash. [Laughter.]
I make these quotations not only to show that the author of the
House bill does not understand the most important phase of his
report, but that he is laboring under a misconception as to the purpose
of the institutions his bill proposes to create; that is, he labors under
the delusion that if the banks of deposit can have a place where they
may secure “ fluid resources ” for themselves and their customers,
everything will be all right and we will be free from pan
ics. Nothing could be further from the truth. All banks, whether
banks of issue or deposit, must cover their demand-payable
obligations with liquid assets in order to be solvent and prevent in
flation. Is there any wonder, then, that Mr. Glass should not have
made any provision to prevent inflation on the part of the banks of
deposit? The Credit Lyonnais is solvent, per se, and not because
the Bank of France will supply it with “ fluid resources.”
Having shown that in order to do a safe banking business a bank
must cover its demand-payable obligations with liquid assets, and
that the principal item of liquid assets is solvent commercial paper
payable at short and fixed periods, the next question is, What portion
of such demand obligations should be covered with gold and what
portion with such commercial paper? That depends on several
things; first, upon the maturity of the commercial paper; second,
upon the expansion of the bank’s credits; third, upon the manner in
which capital and labor are rewarded, etc. In 1810 the British Par-
2458
B A N K IN G AND CU RREN CY .
liament appointed a committee of 15 monetary experts to investigate
and report the conditions under which the Bank of England could
issue notes or circulation currency, and their report has become fa
mous as the “ Bullion committee law.” That law is as follows:
There can be no possible excess in the issue of Bank of England paper
* * * so long as the discount of m ercantile bills is confined to paper of un
doubted solidity, arising out of real commercial transactions and payable at
short and fixed periods.
This same sound principle was announced six years before (1804)
by a committee of experts appointed by Parliament to ascertain the
state of the bullion of the Bank of Ireland, and report the condi
tions under which it could safely issue notes. Each committee was
composed of 15 experts, only two of whom served on both commit
tees. But the Bank of England committee, known as the bullion
committee, has been generally credited with announcing that sound
philosophy. This committee also reported that the directors of the
Bank of England did not know the other committee had announced
such truth. It must be borne in mind that the Bank of England then
and until the bank act of 1844 enjoyed a monopoly, those in control
being actuated by a banker’s profit. It is no easy thing to induce
business men to adopt a philosophy which may mean loss of profit to
themselves. When those in control of the greatest bank in the world
refuse to adopt a philosophic truth and do business in accordance
therewith, is there any wonder that the nonmonetary experts of
Parliament should go to the other extreme and require the bank to
cover their notes, dollar for dollar, writh gold?—the very thing done
by the bank act. The British public had lost all patience with the
Bank of England after the disastrous panics of 1825 and 1837. For
one-quarter of a century, 1797 to 1825, the notes of the Bank of Eng
land were below par most of the time.
The first instance in which an American Congress has announced
that the world is round, monetarily speaking, was the passage of the
Glass bill recently by the House. But the bill did not repudiate
the “ flat system of geography,” for it adheres to the fixed gold re
serve principle embodied in our present national banking system,
the most dangerous feature of that system. To illustrate my mean
ing, I wish to read you the last four annual statements of the do
mestic bills carried by the Reichsbank of Germany. I would like
to have them put in the record.
(The statement referred to is as follows:)
D o m e s tic b ills h e ld b y th e B a n k o f G e r m a n y D e c . 31, 1909, 1910, 1911, a n d 1912.
Year.
1909............
1910............
1911............
1912............
Less than Percent From 16 to Percent From 31 to Percent From 61 to Percent
age of 60 days to age of 90 days to age of
15 days to age of 30 days to
run.
total.
run.
total.
run.
total.
run.
total.
Pounds.
26,285,420
26,956,920
33,408,350
37,254,415
46.9
46.2
40.3
37.3
Pounds.
9,286,340
9,747,415
13,214,610
18,284,650
Pounds.
16.6 13,485,115
16.7 14,173,070
16.0 20,732,500
18.3 25,186,110
24.1
24.3
25.0
25.2
Pounds.
6,942.990
7,507,675
15,494,735
19,115,640
12.4
12.8
18.7
19.2
It will be observed that on December 31, 1909, the Reichsbank had
46.9 per cent of its bills maturing wdthin 15 days, 16.6 per cent m a -
B A N K IN G AND CU RREN CY .
2459
turing within 16 to 30 days, 24.1 per cent within 31 to 60 days, and
only 12.4 per cent within 61 to 90 days. Whereas four years later
those ratios ran as follows: Thirty-seven and three-tenths per cent,
18.3 per cent, 25.2 per cent, and 19.2 per cent, respectively. There
was a decrease of more than 25 per cent in 15-day bills and an in
crease of more than 50 per cent in 60 to 90 day bills. It would be
ridiculous to have required that bank to carry the same amount of
gold in 1909 that it had in 1912, and yet that is precisely what this
bill proposes. Our present reserve law’ is unsound and unsafe, and
we should discard it. If we should discard that and adopt a true
test of bank solvency, we would soon educate the public on the truth.
I wish to thank the committee for permitting me to propound some
questions to Mr. George M. Reynolds touching the subject of bank
reserves. My questions and his replies will be found on pages 288, 289
of the hearings. I was particularly anxious to be able to propound
those questions to him because he is not only a most intelligent man,
but a philosopher of credit as well and is to-day practicing in his
banking establishment what I am preaching—that is, he is covering
his borrowed capital with liquid assets. Let me quote a few lines of
that colloquy:
Mr. M il l ik e n . Bank A has in gold 10 per cent of its deposits and 45 per cent
o f commercial paper maturing w ithin 15 days, 25 per cent w ithin 16 to 30 days,
15 per cent w ithin 31 to 60 days, and 5 per cent w ithin 61 to 90 days, and no
commercial paper maturing after 90 days.
Bank B has 20 per cent of its deposits in gold, 15 per cent in commercial
paper maturing w ithin 15 days, 15 per cent in 16 to 30 days, 15 per cent w ithin
31 to 60 days, and 35 per cent in 61 to 90 days, and no commercial paper matur
ing after 90 days.
Now, is it not a fact that Bank A is in a better position to meet its obligations
than Bank B even though the latter at the particular time this statem ent is
made has 100 per cent more gold in its vaults than Bank A?
Mr. R ey n olds . I would say yes. If I understand you correctly, your whole
theory or question is as to whether or not a very large percentage of your
liabilities covered by short-time maturing commercial paper, w ith a small cash
or gold reserve, is not better than a somewhat larger gold reserve w ith a very
much sm aller percentage of short-time commercial paper?
Mr. M il l ik e n . Yes.
Mr. R ey n olds . I certainly agree w ith you.
If Congress would repeal our present national-bank reserve re
quirement and adopt this scientific test of solvency, it would teach
the public the truth, whereas the present law teaches them a fallacy.
It would not be revolutionary in any sense of the word, for it would
merely require those banks to state the important factors consti
tuting their solvency without prescribing a fixed amount of any one
of those factors. Let the public read those published bank statements
and they will begin to inquire the reason thereof. In time each bank
will be vieing with each other for the best statement. We must
educate the public on what is sound banking, and this is the very
best way to accomplish it.
I am an advocate of a sound credit system as distinguished from
a banking system. I maintain that there is too much capital and too
many persons engaged in the business of exchanging bank credit for
profit. Let me call your attention to the fact that the 46 banks of
England and Wales have a paid capital and surplus of less than
$400,000,000, or less than twice the paid capital and surplus of the
Texas banks, yet the credit machinery of England alone will finance
2460
B A N K IN G A N D CU R R E N C Y .
something like 50 times as much commerce as does the credit machin
ery of Texas. At least four billions of our foreign commerce is
financed through the English credit machinery. Something like
three-fourths of the foreign commerce of South America and South
Africa, nearly all the foreign commerce of India, a large portion
of the foreign commerce of Asia, and much of the foreign commerce
of Europe is financed through the credit machinery of England.
The commercial credit of England is free and independent of bank
credit, because commerce finances itself in that country.
I shall illustrate this by supposing that we were operating under
the English credit system. Suppose John Wanamaker, of Philadel
phia, should sell a $10,000 bill of merchandise to Woodward, Wight
& Co., of New Orleans. If that was done in England, Wanamaker
would draw a bill of exchange on Woodward, Wight & Co. on, say,
90 or 120 time, and the latter would acept it and return it to Wana
maker. Suppose the day Wanamaker received that bill he should
need $10,000 of granulated sugar, and call up the American Sugar
Refining Co. and place the order, and at the same time say, “ Don’t
draw on me, I will send you Woodward, Wight & Co.’s acceptance,”
giving the date and amount of the same. Of course if the American
Sugar Refinery would trust Wanamaker it would trust him plu&
Woodward, Wight & Co. Suppose the day the sugar refinery re
ceived that bill it should order $10,000 of raw sugar from Woodward,
Wight & Co., and it should write, “ Don’t draw on me, I will send you
your own acceptance to John Wanamaker.” So here would be three
instances in which commerce would finance itself and save three
banker’s profits. It may be said this is theoretical, but I wish to
say that similar transactions are done in England every year for
hundreds and hundreds of millions of dollars. The bill of exchange is
the principal circulating medium in the commerce of England. They
have few bank notes, because the Bank of England can not issue a
note without covering it with gold, dollar for dollar, except for a
small amount to cover an old Government debt. What is best of
all is the fact that the English credit machinery does that enormous
business on the safest basis as well as in the most economic manner.
They have very little gold compared to us. How do they accom
plish it ?
Let me explain the English credit machinery. In the first place
the Bank of England is a real bank of commerce, because it is con
trolled exclusively by merchants, not for profit but as an aid and
adjunct to commerce. And the reason that those bills of exchange
circulate as cash in England is the fact that the Bank of England
stands ever ready to pay the cash on them at all times. If they have
not the gold in their vaults with which to liquidate them when
presented they proceed to find the cash for that purpose. “ It is the
law of its being ” to find gold for the liquidation of sound com
mercial paper, as said to Mr. Hepburn by the officer of the Credit
Lyonnais, when speaking of the Bank of France. That is another
bank of commerce which is controlled exclusively by merchants as an
aid and adjunct to commerce. The fact being thoroughly established
in those countries that those two banks stand ever ready to pay the
cash on those commercial bills causes them to circulate independent
of banks. If the proposed bankers’ controlled regional banks are
B A N K IN G AND CU RREN CY .
2461
created, will we have an independent credit system in this country?
I say no, for two reasons: First, because they will be controlled by
bankers who will be selling credit for profit, and most of them will
not care whether the prospective borrowers desire credit for specula
tive or commercial purposes.
Senator O’G orman. Y ou are speaking now of the officers of the
regional bank?
Mr. M il l ik e n . Yes, sir.
Senator O’G orman. Will not the fact that they are allowed a
return of 6 per cent on the capital invested be a protection against
that abuse?
Mr. M il l ik e n . N o, sir; because those men may use those banks as
“ feeders ” to build up their private banking institutions.
Senator O’Gorman. O f course, you do not say they will; you mean
that possibly they may?
Mr. M il l ik e n . Yes, sir.
Second, because the holders of those bills can not go direct to those
regional banks, as is the case in Europe, but must pay two bankers
profits. It is simply rediculous to talk of having an independent
credit system when the head of the system is controlled by bankers.
In proof of my contention that the Bank of England is a mer
chants’ controlled institution I offer the statements of Walter Bagehot and Hartley Withers published in their monetary books entitled,
respectively, “ Lombard Street and the meaning of money,” which
were read into this record by Senator Shafroth. I also offer the state
ment of the governor and directors of the Bank of England procured
by the Monetary Commission, which was also read into this record
by Senator Shafroth. I ask the privilege of rereading them into this
record at this place:
Senator S h a f r o t h . But I want to read to you a little paragraph from W alter
Bageliot’s book, Lombard Street, which probably clears the matter up more
thoroughly than w e did.
He says:
“ In London no banker has a chance of being a Bank of England director or
would ever think of attempting to be one. I am here speaking of bankers in an
English sense—those who accept deposits subject to check. Not only no private
banker is a director of the Bank of England, but no director of any joint-stock
bank would be allowed to become such. The two situations would be taken
to be incompatible. The m ass of the Bank of England directors are merchants
of experience and drawing a considerable capital in trade, in which they have
been brought up and with which they are well acquainted. The direction of the
Bank of England has for many generations been composed of such men.”
Mr. W ex ler . Yes, sir.
Seantor S h a f r o t h . Mr. Wade, a few moments ago you made the statement
that members of banking houses were in reality members of the governing
board of the Bank of England. I had occasion to look at a book entitled “ The
Meaning of Money,” by Mr. H artley Withers. There he says:
“ When we come to consider the bank’s organization, its most striking features
are the constitution of its court of drectors and its system of government by
rotation, and these are points on which the bank’s critics have fastened with
the keenest energy and determination.
“ The bank court is a committee recruited chiefly from the ranks of the
accepting houses and merchant firms, and its members are nominated by itself,
subject to the purely formal confirmation of the shareholders; and it is an
unwritten law that no banker in the ordinary sense of the word—that is, no
one connected with what we call the check-paying banks—can be a member of it.
“ At first sight this is one of those anomalous absurdities so common in
England and so puzzling to the intelligent foreigner, who can not understand
2462
B A N K IN G AND CU RREN CY .
why we suffer them. A court of directors ruling the Bunk of England, and so
performing most important banking functions, and yet disqualifying for mem
bership anyone with an expert knowledge of banking, is a tempting subject
for an epigram matically minded satirist. But, in fact, this anomaly, like many
of our others, not oidy works excellently w ell in practice, but is, when calmly
considered., clearly based on sound common sense. For in the first place it
would obviously be undesirable that a member of one of the outer ring of banks
should have the insight into the position of his rivals which membership of
the Bank of England court could give him unless all the others were sim ilarly
privileged. B ut if all the other banks were represented on the bank court it
would become a committee of unwieldly dimensions, perhaps reproducing or re
flecting in the bank parlor the rivalries and jealousies that stim ulate the outer
banks to work against one another but are not conducive to their working
together.
“ And the question of proportionate representation would be difficult to settle.
A s it is, the bank court, being free from connection w ith the outer banks, ex
cept by keeping their balances, is able to watch their proceeding w ith a wholly
im partial eye and, on occasion, to make suggestions with salutary effect.”
Senator S h afroth . I hold in m y hand the answer of the governor of the Bank
of England and the interrogations of the monetary commission. Let me show
you what he says here:
“ Q. Is it customary to reelect directors at the expiratipn of their terms?—A.
It is customary for directors to be reelected.
“ Q. Is there any custom restricting the class from which the directors may
be selected?—A. There is no legal restriction as to the class from which direc
tors may be selected, except that they must be ‘ natural-born subjects of Eng
land, or naturalized,’ but in actual practice the selection is confined to those
who are, or have been, members of mercantile or financial houses.
“ Excluding bankers, brokers, bill discounters, or directors of other banks
operating in the United Kingdom.”
As tending to disprove the statements of those noted Englishmen,
I refer you to the testimony of Mr. Festus J. Wade. The members of
this committee who listened to him doubtless recall the intolerance
with which he answered those disagreeing with him. When Senator
Shafroth read from Bagehot’s “ Lombard Street ” the witness poohpoohed that author and demanded that the Senator produce the
statement of the governor of the Bank of England, repeating that his
information was based on the statement of that official to the Mone
tary Commission. The witness kept bantering Senator Shafroth
to produce that testimony, telling him it was in the Monetary Com
mission’s reports and a part of the Congressional Record. Now.
those of you who were present will recall that Senator Shafroth left
the committee chamber and came back with that evidence, the very
evidence the witness demanded and it completely refuted his con
tention. I never saw a witness whose testimony on a point was so
completely destroyed as was the testimony of that witness on that
point.
Let me say that 6 of the 24 directors of the Bank of England are
members of mercantile houses which do an acceptance business. That
is to say, they are members of houses which have a large foreign
trade, and that means that they have foreign credit, so much so that
foreign dealers with other English concerns require that their names
be procured before they will extend credit. They only charge 25
cents per $100 for selling their names and guaranteeing the prompt
payment of those bills, or less than many of our country banks will
charge for collecting checks on which they assume no financial re
sponsibility. To illustrate this further, let me say that as we have
thrown down our tariff barriers it will be necessary for our merchant
princes to go out into the marts of the world and find customers for
B A N K IN G AND CURK EN CY.
2 463
our products. Suppose Marshall Field & Co., of Chicago, go to
South America and Rice Stix & Co., of St. Louis, go to the Orient.
No one firm can cover the whole world, not all at once at any rate. ^
Suppose that Rice, Stix & Co. should need a cargo of hides in their
oriental trade and they should order the same from an Argentine
hide dealer. The Argentine dealer would doubtless require them to
induce Marshall Field & Co. to become the acceptors of that bill,
because he would know the financial standing of the latter, a,s they
would have an extensive trade and credit in South America, but
might know nothing about Rice, Stix & Co. Both of these great
American mercantile houses to-day have extensive credit establish
ments to ascertain the financial standing of those to whom they sell.
So that they could do that acceptance business without incurring any
additional expense whatever. Now, to charge them with being
bankers because they did that credit business would be as reasonable
as if you were to charge a merchant with being a drayman because
he built his warehouses along a railroad sidetrack and thereby elimi
nate the drayman’s expense. Those English merchants charge just
the same for accepting a 30-day bill as they do for a 120-day bill.
So they are not interest gatherers, as is the case with bankers; on
the contrary they are interest payers. Mr. Sol Wexler, of New
Orleans, a most intelligent banker who testified before you, did not
call those great merchants who control the Bank of England bankers.
He does an extensive business with them and knows that some of those
in control of that institution do an acceptance business. Mr. W exler
said that we had no such class in this country, and he might have
also said that we never would have such a class if the proposed bill
passes, because such acceptances would have to pay two bankers
profits before they could be liquidated by the proposed central banks
or regional reserve banks.
I t is preposterous to suppose that bankers would exert themselves
in establishing open money or credit markets and thus lessen the
banking business. “ I t’s the law of their being ” to increase their
business of selling or exchanging credits.
(Thereupon at 11.58 o’clock a. m., the committee took a recess until
1 o’clock p. m.)
AFTER RECESS.
The C h a ir m a n . Mr. Milliken, the committee will be pleased to
have you continue your remarks.
Mr. M il l ik e n . th e fact that the Bank of England is controlled
by the great merchants, the very highest grade of interest payers in
the world, causes those bills to circulate free and independently of
the banks of that country, because the public understand that it is
“ The law of their being” (the merchants in control of the Bank of
England) to find cash for the liquidation of commercial bills, just
as our gold certificates circulate until they wear out without ever being
presented for payment, simply because the holders have confidence
in the good faith and ability of the Government to redeem them in
gold coin on demand. But let the Government refuse to redeem one
of them and that fact be widely known, and the public would de
mand the gold.
2464
B A N K IN G AND CU RREN CY .
Napoleon, after listening to the forceful appeal of Mollien, his
famous minister of finance, for the freedom of the Bank of France
from the Government shackles with which it was then bound, sat
silent and then observed:
The world is old; we should profit by its experience.
ancient practice is often worth more than new theories.
It teaches us that
That is sound advice—something which should be heeded at all
times and on all subjects by all lawmakers; but that advice has a
peculiar application at this time when the American Congress has
assumed the responsible task of attempting to remedy the present
evils of our faulty credit system.
It is necessary, therefore, that we take a retrospect of the “ ancient
practice ” of credits, in order that those of this day and generation
may know how far from the line of safety the present “ practice ” de
viates from “ ancient practice.” It is needless to say that the people
of the United States learned the practice of banking from the people
of western Europe, principally from the mother country, while the
people of western Europe learned it from the merchants of Venice,
who enjoyed the most extensive trade and commerce during the whole
of the Middle Ages.
It is singular, indeed, that the astute and wealthy commer
cial nations of western Europe should have delayed until the latter
half of the nineteenth century the adoption of the philosophy of
credit taught them by the Venetian merchants at least six centuries
before. This is but another of the many evidences of the oftrepeated adage that history in time will surely repeat itself.
There are three necessary prerequisites to the establishment of a
sound and extensive credit system, viz, the possession of ample
wealth, the enjoyment of extensive trade relations, and the main
tenance of commercial honor. In each of these the Venetians easily
excelled the balance of the world during the whole of the medieval
period. During that period they had a virtual monopoly of the
carrying trade of the world. Even as early as 523 A. D. their river
or domestic commerce was extensive and valuable, while in the eighth
century their carrying trade and commercial relations with many
distant regions were established on a tolerably sound footing.
It is said that—
The Chronicle of the Monastery of Cava relates how in 9S7 some large Vene
tian ships stayed at Salerno on their way to Syria, and how not unfrequently
the merchantmen of the Republic foundered in that neighborhood with rich
cargoes.
From the eleventh to the fifteenth century Venetian wealth was the
wonder of the world, and her commerce stood on an unapproach
able eminence which extended throughout civilization. Her argosies
formed the sole channel of communication between the courts of
Germany and Constantinople, and her well equipped and expen
sively guarded caravans furnished the only connecting link between
the Occident and the Orient until the British discovered the Cape of
Good Hope route in 1484.
Hazlitt, in The Venetian Republic, Volume II, page 554, in writ
ing of Venetian credit and charitable institutions for the sixteenth
century, says:
Throughout the Lombard part of the Empire or dominion the same solicitude,
however, w as shown by the establishm ent of hospitals and refuges, and by the
B A N K IN G AND CU RREN CY .
2465
loan of money on easy terms, to alleviate distress, provide for old age, and
a ssist traders and agriculturists. The M o n te d i P ie t a w as a universal in stitu
tion. * * * That at Brescia advanced to any poor person on adequate
security without interest up to s c u d i d i o ro, and if the money w as not
returned within a year the pledge wms sold and any surplus returned to the
borrower, deducting only a s o ld o for the expenses. The M o n te at Verona was
under the management of a committee, which lent on security at 6 per cent to
commercial houses or individuals, * * * but to the poor it lent sums not
exceeding four lire gratuitously.
It must be borne in mind that the period of Venetian history about
which the author writes antedates the organization of the Bank of
Amsterdam, the oldest incorporated bank of western Europe (1609).
The same historian, Volume II, page 621, in writing about the poor
coinage latvs of the Venetians, says:
Of foreign money, in addition to what we have enumerated, there were three
other varieties, which Venice, from a lack of sufficient supply of her own manu
facture, acknowledged and accepted during the earlier centuries. There were
the Arabic dirhem of silver, which conveniently adapted itself to current
requirements, being equal to two Lombard or Frankish d e n a r i ; p e r p e r o ; and
the besant or bysant.
Continuing, the historian says:
All these devices for obviating the inconvenience arising from a scanty cur
rency might, however, have failed to provide any adequate remedy for the evil,
if trade had not been largely conducted on a basis of exchange, and payments in
kind had not long remained in universal vogue. We must acquit the Venetians
of an ignorance of bills and other substitutes for cash, when such facilities were
elsewhere enjoyed in the tw elfth or thirteenth century; and w hile the first ex
plicit reference to such matters is as late as 1405, the passage where it occurs
speaks of it rather as a fam iliar principle than as a novelty in practice, and
so much so that w e have an actual document of 1326 immediately belonging to
Milan, but the counterpart and sample beyond doubt of thousands and hun
dreds of thousands which once existed up and down commercial Europe. It is
in the subjoined terms, and points to a practice of giving six months’ credit, or,
as it is now expressed, of drawing at six m on th s:
“ Pa gate per questa prima letera a di lx Ottobre a Luca de Poro, Lib. XLV.
Sono per la valuta qui da Masca Reno al tempo si pagate e ponete a mio conto,
e che Christo vl guarde. Bonromo de Bonromei de Milano, lx. de’ Marzo, 1325.”
The same author tells us, Volume II, page 643, that:
On the 4th of June, 1160, the Government borrowed of h alf a dozen merchants
the sum of 150,000 silver marks.
This was the first instance in history of a government funding its
debt, and antedates by more than five centuries the organization of
the Bank of England and funding of the first British Government
debt. The bill of exchange was, no doubt, the most popular credit
instrument employed by the great merchants of Venice, because it
was peculiarly adapted to the character of their commercial transac
tions—the world-wide effort in bringing producer and consumer to
gether.
Add to the international reputation which those pioneers in com
merce had acquired for capacity and honor, their vast riches, and we
have fundamental conditions underlying a sound and extensive credit
system. That those great merchants employed that and similar credit
instruments for centuries solely as an aid to their commercial enter
prises, and not for profit, there is little dispute, and so long as they
confined them to real commercial transactions history makes no men
tion of financial crises.
As the use of such credit instruments bv those merchants as an aid
to business antedates the art of printing, it is difficult to designate the
2466
B A N K I N G AND CURRE NCY .
exact period when independent credit or banking institutions were
organized to sell credit for profit.
The date of the first Venetian usury law was 1254. It is reasonable
to assume, therefore, that special credit or banking institutions did
not long exist before the enactment of this law. It was a century
after the enactment/ of this usury law before history gives any
account of serious difficulties arising from the failure of private bank
ing firms. Hazlitt, Volume II, page 646, says:
In 1355, October 15, it was resolved by tbe Pregadi that Ser Marino Baffor
of Santa Maddalena, and Ser Marco Trevisano, bankers, having absconded with
20,000 ducats, be cried, and that whoever shall lead to their conviction, and de
liver them into custody, shall have 550 lire. In 1390 the private bank of Ser
Antonio Contarini failed, and was thus wound up by order of the Council of
Pregadi.
It was among the domestic troubles and embarrassments of the Doge Foscari
that Ihe bank of Andrea Priuli, his father-in-law. suspended about 1440. In
1502, the general inconvenience produced by insolvencies led to the institution
of the P r o v e d i t o r i s o p r a B a n c h i .
From the thirteenth century, the time when it is most probable the
Venetian merchants ceased to do a credit business strictly as an aid
to commerce, until the first half of the last century, is the dark age
of credit.
During those six centuries, no one seemed to know the exact nature
of credit, though every class of credit instrument was in general use.
During that period every civilized country suffered from the effects
of bad legislation and worse banking practices. France was finan
cially ruined on numerous occasions as a result of such practices and
legislation.
But the nineteenth century brought forth a vast army of philoso
phers of credit, and, strange to say, all that philosophy cor
roborated the “ ancient practice” of the Venetian merchants. The
first was the “ Bullion committee law,” which was announced in 1804.
and reannounced in 1810.
The next most philosophic truth respecting credit institutions
was that the merchant is the permanent regulator of the interest rate
(the rate of profit). This truth was announced in 1827 by James W.
Gilbart, F. R. S., who was probably the greatest philosopher of credit
the world ever produced. He spent 50 years in actual banking prac
tice, and mastered every detail of the business. His opinion on bank
ing and bank credits was more highly respected than that of any
person of his age. Fie did more to destroy the monopoly of the Bank
of England and make it a merchants’ controlled institution than any
other person in the United Kingdom. He did not accomplish that
great work by making monetary experts of members of Parliament,
though he appeared before more parliamentary monetary commis
sions during the first half of the last century than any person in the
United Kingdom. On the contrary, he accomplished it by organizing
the first of the London great joint-stock banks. At that time the
Bank of England enjo}7ed a monopoly of the banking business with
in a radius of 65 miles of London. Therefore, Gilbart had to fight in
all the courts of England to establish his philosophic truths. He lost
in the courts, but he so educated the British public that the monopoly
of the Bank of England was destroyed by Parliament.
I wish you would bear with me while I read the most important
truth announced by Gilbart, namely, that the merchant is the perma-
B A N K IN G AND CURRENCY.
2467
nent regulator of the interest rate, the rate of profit on money. This
is what he wrote:
Sir Josiah Child, in his excellent Essay on Trade, accuses the “ new-fashioned
hankers” of “ being the main cause of keeping the interest on money at least
2 per cent higher than otherwise it would b e ; for by allowing their creditors
6 per cent they make moneyed men sit down lazily with so high an interest and
not push into commerce with their money, as they certainly would do were
it at 4 or 3 per cent, as in Holland. This interest also keeps the price of land
at so low as 15 years’ purchase. It also makes money scarce in the country,
seeing that the trade of bankers being only in London it very much drains
the ready money from all other parts of the Kingdom.”
That we may be able to judge of these accusations—
Says Gilbart—
it will be necessary to make some observations upon those circumstances which
influences the rate of interest.
It has been the opinion of most of our political economists that the rate of
interest is regulated by the rate of profit. This sentiment has, however, been
attacked. It has been contended that the rate of interest is not influenced by
(he average rate of profit but by the moneyed capital in the market, compared
with the wants of borrowers—in other words, that the price of money is
influenced by the proportion between the demand and the supply.
This sentiment is undoubtedly right, but it does not overthrow the proposi
tion against which it is advanced. The price of money or of the loan of money
is, no doubt, like the price of any other commodity, regulated at any particular
time by the proportion between the supply and the demand. But does not the
rate of profit regulate the supply and the demand? Will any commercial
man borrow money when he must give a higher interest for it than he can
profit by its use? Or will any man lend money at a very low interest when by
engaging in business he can make a very high profit? It is true that on
particular occasions and under particular circumstances some individuals may
do this, but not permanently and universally. It is obvious, then, that a high
rate of interest in proportion to profits increases the supply of money and
diminishes the demand, and a low rate of interest in proportion to profits
increases the demand for the loan of money and diminishes the supply. The
rate of interest, therefore, is ultimately regulated by the rate of profit.
When we say the price of cotton is regulated by the cost of production, we do
not mean to deny that the market price of cotton is fixed by the proportion
between the demand and the supply. On the contrary, this is admitted; but,
then, it is contended that the supply itself is regulated by the cost of produc
tion. If the market price of cotton were so low as not to furnish the grower
a fair average of profit on the capital employed, then would capital be re
moved after a while from the cultivation of cotton to some other employment?
And if the price of cotton were so high as to furnish more than a fair average
of profit, then after a while more cajfital will find its way into that employ
ment, the supply would be increased, and the price would f a ll; but it is only
by influencing the supply that the cost of production may be the same for a
number of years; the price may be perpetually varying. The price may from
a variety of causes be in a state of constant vibration, but it can not per
manently deviate on one side or the other much beyond the line marked out
by the cost of production.
It is the same with money. It is subject to perpetual fluctuations from the
proportion between the demand and the supply, but it does not deviate far
from the line marked out by the rate of profit, for the rate of profit not
only influences the supply (as with cotton) but also influences the demand.
The above reasoning is founded on the supposition that those who borrow
money borrow it for the purpose of investing it in trade or of making a profit
by its use. But this is not always the case; and is never the case with the
Government of a country, who always borrows for the purpose of spending.
Now, we can form a judgment as to what portion of his profits a merchant is
willing to give for the loan of a sum of money, but we can form no judgment
as to the conduct of a profligate rake who wants money to spend on his follies.
A king or a government is in the same state.
They will borrow money as cheaply as they can; but at all events money
they will have. We can not therefore infer that, because Charles II gave at
2468
B A N K I N G AND CU RBE N CY .
times to the new-fashioned bankers 30 per cent for money, the average rate of
profit exceeded 30 per cent. May not, then, those advances to the king have
had the effect of raising the interest of money and thus justify the accusations
of Sir Josiah Child?
When a number of commercial men borrow money of one another, the perma
nent regulator of the rate of interest is the rate of profit; and the immediate
regulator is the proportion between the demand and the supply. But when a
new party comes in to the market, who has no common interest with them who
does not borrow money to trade with but to spend, the permanent regulator
(the rate of profit) loses its influence, and the sole regulator is then the pro
portion between the demand and the supply. The loans to the king created a
much greater demand for money and the rate of interest consequently rose.
These demands were so great in amount and were so frequently repeated that
the rate of interest became permanently high. Many individuals would no
doubt (as Sir Josiah Child states they did) withdraw their capital from trade
and live upon the interest of their money. And others who were in business
would employ their superfluous capital in lending it at interest rather than in
extending their business. Those commercial men who now wanted to borrow
money must give a higher interest for it than they did before. To enable them
selves to do this they must charge a higher profit on their goods. Thus, then, in
the artificial state of the money market, it appears reasonable to suppose that
the rate of interest may have regulated the rate of profit instead of the rate of
profit regulating the rate of interest, which is the natural state.
Not a single European Parliament has ever adopted that sound
philosophy of Gilbart, namely, that the merchant is the permanent
regulator of the interest rate, yet the majority of those central banks
have become controlled exclusively by great merchants. I main
tain that'the great merchants should control the head of the credit
system or ultimate reserve agent for the following reasons:
1 . Because that is the best safeguard against the monopolization
of credit.
2 . Because that is the only way to have a credit system as dis
tinguished from a banking system.
3. Because that is the only way to establish a credit system of the
greatest efficiency and economy; but, if the banker were to control
that institution, as well as a private banking establishment, then
banking would cease to perform its real mission of economizing
capital and become a millstone around the neck of commerce.
4. Because no credit system is sound unless its note issues are
based on sound commercial paper, and as the merchant is the maker
of that paper it naturally follows he is the best judge of its quality.
5. Because the merchant is the permanent regulator of the inter
est rate (the rate of profit) ; the price he can pay for the loan of
money being regulated by the profit he makes on his goods. But
this rule does not apply to those who borrow for the purpose of
spending, such as a profligate rake or a government; neither does it
apply to the banker, as he is the most potent factor in the supply
and "demand (the immediate regulator of the interest rate), and if
the banker wTere to control the head of the credit system, then the
rate of interest would regulate the rate of profit instead of the rate
of profit regulating the rate of interest, which is the natural state.
6 . Because the merchant is better fitted temperamentally than the
banker to control the head of the credit system, for the reason that
the banker is the greatest demand debtor known to the business
wrorld, while few of the merchant’s obligations are payable on de
mand. Therefore, when the banker needs money he must have it
immediately—to-day, not to-morrow—and when such demand on the
banker becomes urgent it wholly unfits him to take the proper per-
2469
B A N K I N G AND CURRENCY .
spective as to the effect which the granting of such request would
have on future interest rates.
7.
Because notwithstanding the fact that the merchants furnish
the security for most of the paper entered at the counter of the
central bank for discount, yet a vast majority of its discounts are
made through and by bankers, done voluntarily and in the ordinary
course of trade. The very merchants who control those European
central banks do not go directly to them for discounts as a rule.
Instead they patronize the banks selling credit for profit, because
the rate of discount of the central banks is frequently 100 per cent
in excess of the market rate. In proof of this I refer to the following
statement showing the market and Bank of England rate for
money on the last Thursday of each month during 1910:
Date.
Open
market
rate.
Bank
rate.
Per cent. Per cent.
2i
H
3,34
31,4
4,44
21,3
Mar 22
May 23
34
3
4
4
4
3
Date.
July 23.....................................
Aug. 22....................................
Sept. 22....................................
Oct. 24.....................................
Nov. 21....................................
Dec. 20.....................................
Open
market
rate.
Bank
rate.
Per cent. Per cent.
11
11
If, 2
41
51
3
3
3
3
5
5
44
But if the central bank were controlled by bankers, it would be
used as a “ feeder ” to the private banks owned by them, and thus
accentuate the greatest curse known to American corporate manage
ment, viz, the control of one corporation by another doing the same
business. We have but to view the many railroads which have been
wrecked by this pernicious practice, also the many scandals which
have occurred in the control of our life insurance campanies as a
direct result of this practice.
8 . Because if the banker be permitted to control the head of the
credit system there would exist a strong incentive for him to deny
credit to a troublesome though worthy competitor, because if failure
resulted he would profit by the lessening of competition, or if by
getting him in a tight place and buying him out at his own price, he
would profit in that way. No such unworthy motive would actuate
the merchant, as he would be prohibited from engaging in the bank
ing business for profit.
9 . Because credit has exactly the same influence, if affecting values,
as gold—influencing them downward when used for production and
upward when used for speculation and overconsumption—and as 99
times more business is done with credit than with gold, and the mer
chant being selfishly interested in production as well as in a low rate
of interest, it naturally follows he should control one important
credit institution.
10. Because by placing the best merchants in control of the ulti
mate reserve agent, we would not only be following the “ ancient
practice” of the Venetian merchants who introduced the use of
credit instruments into western Europe, but we would be following
the present practice of every country in Europe enjoying a credit
system which is the envy of the balance of the world.
S. Doc. 232, 63-1—vol 3---- 35
2470
B A N K I N G AND CU RRE N CY .
I have here an amendment to this bill—a supplemental amendment.
I will read it now:
[Amendment to S. 2639 by adding sec. 30.]
S ec. 30. This act also authorizes the establishment of a bank of commerce to
be controlled in a decentralized manner by the merchant citizens of the United
States, a portion of the profits of such bank shall be paid into the Treasury of
the United States and held in trust for the capitalization of a rural credit
system. Such bank of commerce shall operate and be governed solely accord
ing to the terms of its charter, which shall read as follow s:
C harter
for th e
B ank
of
Commerce.
A rticle I.
S ection 1. (Name of corporation.) The name of the corporation shall be the
“ Bank of America,” and referred to herein as the bank.
A rticle II.
S ection 1. (Object of the bank.) The object of the bank shall be to provide
credit for the distribution of commerce, and as a means to that end it shall
have power and authority to do a general banking business, and do and perform
any and every act incident and pertaining to such business, except the issuance
of circulating currency, and act as the depositary and fiscal agent of any State
government or any subsidiary thereof, when lawfully chosen as such by any
such State or its subsidiary government, or of the Government of the United
States when not otherwise expressly provided by law.
Paragraph 1. (Bank to maintain gold standard.) The bank shall pay its
obligations in gold of the present standard of weight and fineness, and should
Congress make the bank the sole depository and fiscal agent of the Government
of the United States, then it shall be the further duty of the bank to maintain
an ample supply of gold for the protection of public and private credit.
A rticle III.
S ection 1. (Bank’s executive office.) The bank’s temporary executive office
shall be located by the board of directors at their first meeting, where it shall
remain for three years, and at the expiration of that time the board shall estab
lish a permanent executive office; but branches, agencies, and board meetings
may be established and held in such places as the by-laws may prescribe.
A rticle IV.
S ection 1. (Capital stock.) The amount of the authorized capital of the
bank shall be $100,000,000. divided into one million shares of $100 each, and the
certificates therefor shall be numbered from one to one million, inclusive. The
capital with which the bank may begin business shall be $1,000,000, but the
paid-in capital at the close of its first year’s business shall be not less than
$5,000,000, and the remainder of said capital shall be paid in in cash from time
to time, as the bank’s business may require and in such amounts as the by
laws or the Secretary of the Treasury may prescribe: P r o v i d e d , That the Sec
retary of the Treasury shall not require the paying in of more than $3,000,000
of such capital during any one year. All stock must be of the same class and
dividend-earning ability.
Paragraph 1. (Disposition of profits.) The stockholders shall be paid from
the profits a dividend of 6 per centum per annum, payable annually, semi
annually, or quarterly, as the by-laws may prescribed, which shall be cumula
tive. The remainder of the profits shall be placed to surplus until it equals
20 per centum of the paid capital, and thereafter the bank shall accumulate an
old-age pension fund equal to a dividend of one-half of 1 per centum per annum,
to be paid, as the by-laws may prescribe, to such employees who have been
paid salaries for ten consecutive years of less than $3,000 per annum, and the
balance shall be paid as follows, namely: One half to the stockholders and the
247 1
B A N K I N G AND CURRENCY .
other half into the Treasury of the United States, to be held in trust and
employed in capitalizing a rural-credit system.
Subpar. 1. (Congress may change ratio of profits.) Congress shall have au
thority, decimally after the twentieth year, to change the apportionment of
profits provided in this section.
Par. 2. (Public to own stock.) No corporation shall become a subscriber to
or be one of the original stockholders of the capital stock, and no individual
shall be a subscriber to more than twenty-five shares thereof, except those mer
chant citizens who will qualify as electors, directors, and officers by disposing
of their other banking investments, and no elector or director shall become such
subscriber to an amount in excess of 5 per centum of his mercantile investments.
A rticle V.
S ection 1. (Duration of bank.) The duration of the bank shall be fifty
years from the time it begins business, but Congress shall have authority,
decimally after the twentieth year, to amend this charter.
A rticle YI.
S ection 1. (Corporate powers of bank.) The corporate powers of the bank
shall be exercised as follows, viz: The legislative power shall be exercised by
a board of directors or bank parliament and the bank court, provided that the
bank court shall exercise only such authority as may be delegated to them by
the parliament except in the matter of fixing the discount rates; the executive
or administrative power shall be exercised by a governor and deputy governor
and such officers, managers, and agents as the governor may appoint, provided
he shall make no appointment not authorized by by-law and if the appointee
is to be paid exceeding $2,000 per annum the appointment must be approved
by the bank court; and the inspection power shall be exercised by the censors
and inspectors.
S ec . 2. (Number of directors and votes of each.) Each State and the Dis
trict of Columbia shall be entitled to one director, provided it has six quali
fied electors who have resided therein for a term of two years, and each direc
tor shall be entitled to one vote on the board or bank parliament.
Paragraph 1. (Classification of directors.) The classification of directors,
districts, and territory comprising each shall be as follow s:
FIRST CLASS.
Territory.
Number.
First_________________________________________________Alabama.
Second_____________________________________________ ...Arizona.
Third________________________________________________ Arkansas.
Fourth_______________________________________________ California.
Fifth________________________________________________ Colorado.
Sixth_________________________________________________ Connecticut.
Seventh______________________________________________ Delaware.
Eighth_______________________________________________ District of Columbia.
Ninth________________________________________________ Florida.
Tenth________________________________________________ Georgia.
second class.
Eleventh___
Twelfth----ThirteenthFourteenth..
Fifteenth—
Sixteenth—
Seventeenth.
Eighteenth..
N ineteenthTw entieth..
Idaho.
.Illinois.
.Indiana.
Iowa.
Kansas.
.Kentucky.
.Louisiana.
.Maine.
.Maryland.
.Massachusetts.
2472
B A N K I N G AND CURRENCY .
THIRD
Number.
Twenty-first__
Twenty-secondTwenty-third—
Twenty-fourth—
Twenty-fifth---Twenty-sixth__
Twenty-seventh.
Twenty-eighth—
Twenty-ninth—
Thirtieth______
CLASS.
Territory.
------------------- Michigan.
------------------- Minnesota.
------------------------------------Mississippi.
--------------------------------------Missouri.
------------------- Montana.
------------------------------------Nebraska.
------------------------------------Nevada.
------------------------------------ New Hampshire.
------------------------------------ New Jersey.
------------------------------------ New Mexico.
FOURTH CLASS.
Thirty-first___
Thirty-secondThirty-third__
Thirty-fourth—
Thirty-fifth___
Thirty-sixth__
Thirty-seventh.
Thirty-eighth-.
Thirty-ninth—
Fortieth---------
_New York.
-North Carolina.
-North Dakota.
-Ohio.
.Oklahoma.
-Oregon.
..Pennsylvania.
-Rhode Island.
..South Carolina.
-South Dakota.
F IF T H CLASS.
Forty-first___
Forty-secondForty-third__
Forty-fourth—
Forty-fifth___
Forty-sixth__
Forty-seventh.
Forty-eighth—
Forty-ninth-_.
.Tennessee.
Texas.
.Utah.
-Vermont.
-Virginia.
-Washington.
-West Virginia.
-Wisconsin.
..Wyoming.
Subpar. 1. (Classification of new States.) If new States be created out of
any of the territory mentioned in this paragraph and designated as the fortynine directors’ districts, the first shall become the fiftieth district and be a mem
ber of the fifth class, the next shall become the fifty-first district and be a mem
ber of the first class, and so on, consecutively.
Par. 2. (Terms of office of directors.) The first board of directors shall be
divided into five classes in the order provided in paragraph 1 of this section.
The term of the first class shall expire on the second Tuesday in April next fol
lowing their election; that of the second class one year from that time; that of
the third class two years from that time; that of the fourth class three years
from that tim e; and that of the fifth class four years from that time, and so on,
consecutively, in each and every year thereafter, so that all the directors of
one class shall be elected annually thereafter, provided there be the requisite
number of electors in a district to elect a director. All vacancies occurring on
the hoard of directors shall be filled at a special election to be called by the gov
ernor within ninety and not sooner than sixty days after such vacancy occurs to
fill such unexpired term.
Par. 3. (Qualification of directors.) Each director must be a bona fide resi
dent of his director’s district and a qualified bank elector and remain both dur
ing his term of office.
Par. 4. (Manner of electing directors.) The directors shall be elected by the
ballots of the qualified electors residing in their respective directors’ districts.
Such ballots after being cast must be forwarded to the executive office of the
bank by United States post, inclosed in official envelopes, printed or written
“ Official director’s ballot ” in red ink on the address side thereof.
Subpar. 1. (Ballots and envelopes, how furnished.) It shall be the duty of
the secretary, thirty days before an annual and fifteen days before a special
election for director, to mail one official ballot and envelope to each qualified
elector residing in the district in which such election is to be held.
B A N K I N G AND CUKRENCY.
2473
Subpar. 2. (Inspectors of election.) The secretary shall, on the fourth Tues
day in March of each year, in the presence of the censors, who shall be in
spectors of elections, open and count the official ballots cast for directors at the
elections held two weeks previously.
Subpar. 3. (Candidates for directors.) Each qualified elector who desires
to become a candidate for director of his district must notify the secretary of
such desire four months before an annual and thirty days before a special elec
tion, and the secretary shall inform such candidate of the approximate cost in
postage and printing necessary to place his name before the qualified electors
of his district. If such candidate within fifteen days after the mailing of such
information makes remittance to cover such expense, it shall be the further
duty of the Secretary to cause the name and address of each such candidate,
as well as the style of the mercantile house or houses with which each is con
nected, to be printed on each such ballot sent out by him, and mail one to each
qualified elector of that district. The candidate receiving a plurality of the
votes cast at such election shall be declared elected. If two candidates tie at
any election, then the two receiving the highest number of votes shall be eligible
candidates at a special election therefor.
Par. 5. (Annual election of directors.) The annual election for members of
the board of directors to fill the places of the outgoing class shall be on the
second Tuesday in March of each year, and the newly elected members shall
take charge of their office the second Tuesday in April next following and hold
such office for a term of five years, provided they remain eligible during such
period.
Par. 6. (Compensation of directors.) The members of the board of directors
shall be compensated by salaries fixed by by-law and traveling expenses in
curred in attending board meetings, and as an extra compensation for prompt
attendance at the executive office at noon on Monday immediately preceding the
annual parliamentary session on the second Tuesday in April of each year, and
there remain during business hours until six o’clock postmeridian the follow
ing Wednesday, they shall be paid each $4 per hour spent in traveling by
the quickest route from their homes to such executive office and return, and
at the same rate per hour while actually attending to the duties imposed on
them under this charter from noon on said Monday until said six postmeridian
on the following Wednesday.
Subpar. 1. (Penalties for failure of attendance.) Any director who fails
to attend the annual parliamentary session by noon on said Monday and there
remain, during business hours, until 6 p. m. the following Wednesday shall
receive no salary for the following year nor any portion of the extra compen
sation mentioned in the sixth paragraph of this section. And any director
who shall have been derelict in attendance on such annual parliamentary ses
sions for three out of five years shall be rendered ineligible thereafter from
holding such office.
Par. 7. (Salaries fixed by by-laws.) All salaries exceeding $2,000 shall be
fixed by by-laws.
Par. 8. (Quorum.) A majority of the directors shall constitute a quorum for
the transaction of business.
Par. 9. (Chairman of the board.) The board of directors shall elect one
of their members chairman, who shall preside at the meetings or sessions of
the board and may call the members together in extraordinary session by
giving each member thereof at least fifteen days’ previous notice.
Par. 10. (Nonpolitical control guaranteed.) No director shall hold or become
a candidate for any office under any government or with any political party
while he holds his directorship with the bank.
S ec. 3. (Electors.) Each merchant citizen of the United States who owns
at least twenty-five shares of the bank’s stock and twenty times as much
interest in such mercantile house or houses as is defined in paragraphs one
and two of this section, whose principal estate is invested in such house or
houses and who does not own any stock or interest or hold any office in any
other bank or banking institution stock bond or bill brokerage or bill discounting
establishment is declared to be a bank elector and entitled to cast one vote
by ballot at each election held for director or censor of the district in which
he resides and has resided for at least two years previously except as other
wise herein expressly provided.
Paragraph 1. (Mercantile house defined.)
The term “ mercantile house”
within the meaning of this section is a person, firm, corporation, or association
engaged in the mercantile business which enjoys, continues to enjoy during the
2474
B A N K I N G AND CURRENCY .
term of sucli electorship, and for five years previous to the acquisition of such
electorship privilege has enjoyed good credit, and one-half of whose sales
comprises articles purchased for a consumptive demand and not exceeding
twent 37-five per cent of whose sales are articles of its own manufacture or
production.
Par. 2. (Consumptive demand defined.) The term “ consumptive demand,”
within the meaning of this section, are purchases made to be disposed of in
the ordinary course of trade on which the house expects to realize a mer
chant’s profit in contradistinction to a speculator’s profit.
Par. 3. (Rule for determining ratio of interests.) After the bank has been
in operation ten years the rule for determining that the ratio between an
elector’s mercantile and bank investments is twenty to one. respectively, shall be
according to the average net annual income derived from each class of invest
ments for the five years next preceding; but during the first decade such ratio
shall be determined according to the par values of the two stocks, if the mer
cantile house be incorporated, otherwise by the market or fair cash values of the
two classes of investments.
Par. 4. (Disqualification of electors.) The board of censors may, by a unan
imous vote and when they believe the public interest will be best served thereby,
call a confidence election to disqualify any one or number of electors. Three
months’ notice must be given each elector who is sought to be disqualified, the
reasons therefor set forth in writing and signed by the censors, and a copy
furnished each such elector.
Par. 5. (Confidence election district.) Each director’s district shall con
stitute a separate confidence election district.
Subpar. 1. (Voters at confidence elections.) Each citizen of the United States
(exclusive of the electors, directors, and officers) who is a stockholder of
record of the bank at least two years before such election, and who has been a
resident for the same length of time of the district in which such election is
to be held, shall be entitled to vote his stock at each confidence election held in
his district, each share of such stock being entitled to one vote.
Subpar. 2. (Effect of confidence elections.) If ninety per centum of the stock
of such voters is represented at such election and fifty per centum thereof is
cast to disqualify an elector, it shall have the effect of disqualifying such
elector from voting for a director thereafter or holding that office.
Par. 6. (How to become an elector.) Any merchant citizen desiring to qualify
as a bank elector shall make such desire known in writing to the secretary, on
receipt of which the secretary shall forward a formal electorship blank to such
applicant, to be by him filled out, sworn to. and returned to the secretary in an
envelope which the secretary shall inclose for that purpose in his letter replying
to the request of such applicant, such envelope to have printed on its address
side in red ink the words “ Formal application for electorship.” On receipt of
such formal application properly signed and sworn to the secretary shall turn
it over to the board of censors for verification, and when so verified it shall be
returned to the secretary, who, if he finds the statements contained therein
to be true and entitle the applicant to an electorship in the bank, shall cause
the applicant’s name and address to be recorded in the electorship book, file the
application in the electorship vault, and issue an electorship certificate to the
applicant.
Subpar. 1. (When mandamus proceedings may be invoked.) Should an eli
gible merchant citizen be denied the privilege of an electorship after complying
with all the requirements imposed he shall be entitled to apply to any court of
competent jurisdiction for a writ of mandamus.
Par. 7. (Electors to make affidavits annually.) It shall be the duty of the
secretary and censors annually to prepare questions to be propounded to those
electors of districts in which elections are to be held the following year touch
ing their qualifications as such and cause the same to be signed and sworn to
by them, and when replies thereto are received have them properly filed in the
electorship vault.
Subpar. 1. (Confidential communications.) All information acquired by the
secretary and censors by virtue of their office touching the qualification of
electors shall be kept in confidence and not divulged to anyone except the
Attorney General of the United States and such representative as he may desig
nate to receive the same.
Par. 8. (Sectarian control prohibited.) Not exceeding thirty-four per cent of
the electors of any director’s or censor’s district shall be of the same religious
persuasion or sect. If a greater percentage than that should become qualified,
B A N K IN G AND CURKENCY.
2475
then the ones last qualified shall not be entitled to vote for director or censor
during the period such condition exists.
S ec. 4. (Governor.) The governor shall be a citizen of the United States
who does not own less than two hundred shares of the bank’s stock and who
owns no stock or interest nor holds any office in any other bank or banking insti
tution, stock, bond, bill brokerage, or bill discounting establishment.
Paragraph 1. (Governor’s tenure of office.) The governor shall be elected by
the board of directors on Wednesday next following the second Tuesday in
April of each year which is the multiple of five, and shall hold his office for a
term of five years and until another is elected in bis stead: P r o v i d e d , That the
board of directors may, by a two-thirds vote, remove him from office.
Par. 2. (Duty and authority of governor.) The governor shall be the bank’s
chief executive officer and chargeable with the safe and efficient conduct of its
business, to which end he shall possess power and authority to appoint such
officers, managers, and employees not otherwise herein expressly provided to aid
h im : P r o v i d e d , That every such appointee who is to receive a salary in excess
of $2,000 per annum shall be approved by the bank court: A n d p r o v i d e d f u r
t h e r , That he and his appointees shall be amenable to the by-laws and governed
thereby.
S ec. 5. (Deputy governor.) The deputy governor shall be a citizen of the
United States who owns not less than one hundred shares of the bank’s stock,
and who does not own any stock or interest nor hold any office in any other
bank or banking institution, stock, bond, bill-brokerage, or bill-discounting
establishment.
Paragraph 1. (Deputy governor’s tenure of office.) The deputy governor shall
be elected by the board of directors on Wednesday next following the second
Tuesday in April pf each year which is a multiple of five, and hold such office
for a term of five years and until another is elected in his stead: P r o v i d e d , That
the board of directors may, by a two-thirds vote, remove him from office.
Par. 2. (Duty and authority of deputy governor.) The deputy governor shall
perform the duties imposed by this charter on the governor during his absence
or inability to act and such other duties as may be assigned him by the governor:
P r o v i d e d , That he and his appointees shall be amenable to the by-laws and
governed thereby.
S ec. 6. (Qualification and number of bank court.) The bank court shall con
sist of nine persons who shall be qualified electors and own not less than fifty
shares of the bank’s stock, and who does not own any stock or interest or hold
any office in any other bank or banking institution, stock, bond, bill-brokerage, or
bill-discounting establishment.
Paragraph 1. (Tenure of office of members of bank court.) The members of
the bank court shall be elected by the board of directors annually for a term
of one year: P r o v i d e d , That the board of directors may, by a two-thirds vote,
remove a member thereof from office.
Par. 2. (Duty and authority of bank court.) The bank court shall have
authority to fix the discount rates, the same to lower and raise at their pleasure,
and do and perform such other duties as may be delegated to them by the board
of directors : P r o v i d e d , That a by-law enacted by the bank court shall remain
in force only until the next meeting of the board of directors The bank
court shall, immediately after enacting a by-law, notify each member of the
board of directors thereof.
S ec. 7. (Secretary.) The secretary shall be elected annually by the board of
directors and hold such office for a term of one year and until another is
elected in his stead. The board of directors shall elect an assistant secretary,
who shall perform the duties imposed on the secretary during his absence or
inability to act.
Paragraph 1. (Duty and authority of secretary.) It shall be the duty of the
secretary to attend the meeting of the board of directors and bank court, and
keep true records of what transpires thereat. He shall keep the stock and
electorship books, become the joint custodian with the censors of the electorship
applications and papers and evidence pertaining to the qualification of electors,
and not divulge their contents to any person except the Attorney General of the
United States and such representative as he may designate, perform the duties
imposed on him under paragraph six of section three of this article, direct the
work of the inspectors, and perform such other duties as the by-laws may
prescribe.
2476
B A N K I N G AND CURRENCY .
S ec . 8. (Inspectors.) The board of directors shall elect annually such number
of inspectors as the business of the bank may require, who shall"hold office for
one year and until others are elected in their stead.
Paragraph 1. (Authority and duties of inspectors.) It shall be the duty of the
inspectors to investigate infractions of this charter and the by-laws and report
to the secretary. They shall do and perform such other duties as the by-laws
may prescribe.
S ec . 9. (C e n so rs.) T h e b a n k s h a ll h a v e th r e e c en so rs, w h o s h a ll b e e le cte d
f o u r m o n th s a p a r t fo r a te rm o f one y e a r each , a n d sh a ll be in e lig ib le fo r
re e le c tio n .
1 c e n so r m u s t be, a n d fo r five y e a r s n e x t p re c e d in g h is e le ctio n
h a v e been, a p u b lic c e rtifie d a c c o u n ta n t a n d re s id e n t o f o r m a in ta in a b u sin e ss
office in th e c e n s o r’s d is tr ic t fro m w h ic h h e is elected.
Paragraph I. (Classification of censors.) There shall be two classes of cen
sors, first and second class. Those of the first class shall be elected from cities
with more than one million five hundred thousand inhabitants, wherein reside
at least six electors, and those of the second class shall be elected from cities
having from one hundred thousand to one million five hundred thousand inhab
itants, wherein reside at least six electors. There shall he one of the first and
two of the second class. The electors of such cities shall be entitled to cast one
vote each by ballot at each censor’s election held therein.
Par. 2. (Directors to designate censors’ districts.) The board of directors
shall, at each annual parliamentary session, designate three censors’ districts in
which censors for the following year are to be elected.
Par. 3. (Manner of nominating and electing consors.) Six months before n
censor’s election the secretary shall notify each elector of such district of his
privilege of placing in nomination one eligible candidate for censor. One month
from that time he shall notify each candidate so nominated and ascertain if he
be eligible and will serve if elected. Two months from that time he shall pre
pare ballots containing the name and address of each such candidate, as well
as the style of the firm or corporation with which he is professionally associated,
and mail one of such ballots to each of the qualified electors of such district,
together with an official return envelope printed or written “ Official censor’s
ballot” in red ink on the address side; and three months from that time he
shall, in the presence of the censors, open and count the ballots cast at such
election. Immediately after each censor’s election the secretary shall notify
the censor of his election and the date his term of office begins.
Par. 4. (Censors elected from separate States.) No two censors serving the
bank at the same time shall reside in the same State or within two hundred
miles of one another.
Par. 5. (Authority and duties of censors.) The censors shall have power
and authority to supervise all elections, investigate the qualification of electors,
directors, members of the court and officers, call confidence elections, scrutinize
the loans and discounts of houses in which electors, directors, members of the
court and officers own any stock or interest (and if the censors find such loans
or discounts excessive or unsafe, they shall notify those who made them to
cease granting further credit to them unless the bank’s interests are fully
protected), verify the statements, audit the accounts, and inspect the trans
actions and properties of the bank, and give such publicity to the errors and
acts of those responsible for the control as in their judgment will be beneficial
to the bank and the public interest: P r o v i d e d , They shall not divulge any
information acquired by them concerning the qualification of electors except to
the Attorney General and such representative as he may designate.
A rticle VII.
S ection 1. (Annual bank statements.) The governor shall cause to be ren
dered annually, at such date as the Secretary of the Treasury may designate, a
full and complete statement of the bank, showing: First, the amount of business
transacted by it the previous year; second, the total of its assets and liabili
ties; and, third, the amount of its liquid assets and the ratio which each item
of such assets bears to the bank’s borrowed capital payable on demand; and
in giving the amount and ratio of such liquid assets represented by its com
mercial paper and bills and securities arising out of real commercial trans
actions the statement shall show the amount and ratio thereof maturing, as
follows: Within fifteen days, within sixteen to thirty days, within thirty-one
to sixty days, within sixty-one to ninety days, and beyond ninety days, respec
tively.
B A N K I N G AND CURRENCY.
2477
Paragraph 1. (Other statements.) The bank shall render such other state
ments from time to time as the Secretary of the Treasury may require.
A rticle VIII.
S ection 1. (Duty of Congress.) The Congress shall prescribe penalties for
the violation of this charter and the by-laws enacted thereunder, embezzle
ments, forgeries and embezzlements, and enact appropriate legislation for the
efficient and economic promotion of the bank.
I also have here an index to this charter and an analysis of the
control provided under the charter, which I should like the committee
to hear.
'
Article I gives the name of the bank; Article II treats of its object
and authority; Article I I I treats of its place of business; Article IV
treats of its capital and disposition of profits; Article V treats of
its duration; Article VI treats of its control—the principal feature;
Article V II treats of the statements required; and Article V III treats
of duty of Congress as to its promotion, etc.
I will now give an analysis of the control (Art. V I). The first
subject treated is division of corporate powers. Section 1 divides the
corporate powers of the bank among three separate bodies, viz: The
executive (governor), legislative (directors and court), and inspectors
(censors and inspectors, the censors to inspect principally the electors
and directors, and the inspectors to inspect the officers and those
directly responsible for control). In thus separating the powers
of control I have followed the charters and practices of the banks
of England, France, and Belgium.
The next subject treated is legislative power (directors and bank
court). Sections 2 and 6 (Art. VI) vests the legislative power m a
board of 49 directors, elected severally by the “ great merchants of
the 48 States and the District of Columbia, and a bank court of 9
members elected annually by the directors, the court only to exeicise
such legislative authority as may, from time to time, be delegated
by the directors. Coupled with this legislative authority the di
rectors also elect the governor (the chief executive officer).
Then follows the important feature of a decentralized control.
The principal difference between those three European banks and
the proposed commercial “ Bank of America ” lies in the fact that
their control is centralized, while this is decentralized. That is to
say, they elect their directors collectively, on the national principle,
while the directors of the proposed bank of commerce are elected
severally by States, on the Federal principle, just as are our Senators
and Representatives in Congress. This places the supreme corporate
powers of the bank in the several States. This is the only practical
way in which they could be elected. The “ great merchant electors ”
of Texas know each other at the present time and can intelligently
elect one of their number as a director to represent them on the
board of the bank of commerce. They are made acquainted with
each other through the commercial travelers who make that State,
but the “ great merchants ” of Texas do not know the “ great mer
chants” of Florida, because there is little business intercourse be
tween them and the same commercial travelers do not make both
those States. Therefore, it would be folly to expect the best mer
chants of one State to elect a director from the best merchants of
another State.
2478
B A N K I N G AND CURRENCY .
Decentralization will prevent shirking of responsibility. New
York has amassed her wealth at the expense of the balance of the
country simply because the business men of the other sections have
shirked their responsibility of control. Under the proposed plan
such a thing will be impossible, because if Texas goes without repre
sentation on the board, the merchants from Texas will have no one
to blame but themselves, for no other State could elect a representa
tive to fill such vacancy. The principal objection made by Thomas
H. Benton to the old United States Bank was that—
its board of directors resided in six States, all bordering the North Atlantic
Ocean, while the West and South furnished a large share of its business.
The proposed plan of decentralization is a complete answer to such
objection. If we are to ever have a credit system free from bank
domination, then the merchants of every section must assume the
responsibility naturally resting on them; and if some shirk such
duty we must be able to readily locate the responsibility and know
who is to blame. The merchants* of most other countries have as
sumed this responsibility, and there is no reason why those of this
country will not do likewise, if we only provide a practical means
under which they can act.
Now I come to an important feature of the control by electors or
voting units. Section 3, Article YI, treats of the electors or voting
units of control. The real meat of the proposition is contained in
this section and the several paragraphs under it. Those great mer
chant electors are the very source of control in this, as in those great
European banks of commerce, and that is all those European control
banks are. Now the only way to have a real bank of commerce is to
place the commercial interests in exclusive control, controlling it not
for profit but as an aid and adjunct to commerce. The only way to
do that is to proportion his stock holdings in the bank of commerce to
his mercantile interests. I have placed that at the ratio of twenty to
one—that is, I require a minimum bank interest of $2,500 (exactly
the same as the Bank of England elector) and require a minimum
mercantile interest of $50,000. This makes the great mechants merely
trustees, as the public at large would own the stock as an investment.
If a merchant were permitted to own as much stock in the bank of
commerce as he owns in the mercantile business, then he would be
selfishly interested in having such bank earn dividends, whether that
institution served commerce or speculation. If the merchants who
are to control this institution were permitted to own stock in a bank
ing institution, then he would use the bank of commerce as a “ feeder ”
to his banking interests. While the merchants of England, France,
Belgium, and the Netherlands control their central banks (or banks
of commerce), yet the principal customers of those four institutions
are bankers, because they voluntarily keep their reserves with them
on which they receive no interest. I will now give the number and
financial responsibility of the voting units of those three European
central banks as well as the Owen-Glass plan and “ Bank of
America.”
Now, as to the number of voting units, the Bank of England has
approximately 300.
The Bank of France has exactly 200 .
The Bank of Belgium exactly 528.
B A N K I N G AND CURRENCY.
2479
Proposed Owen-Glass plan approximately 6O5OOO to 250,000.
Then I take an average of a hundred stockholders per national
bank. If all the national banks were to come in, there are 7,400 banks,
or 740,000 stockholders. Divided that by 12 and we have a lis to f
over 00,000 stockholders. If the State banks were to come m, that
would make in each of these regional banks an average of about
250,000 stockholders. The proposed Bank of America, approxi
mately 100 per State on the average (they would only be by States),
there would be about 5,000 in the whole country.
Now I come to the financial responsibility of voting units- In
Bank of England it is $2,500 Bank of England stock and $100,000
and over of mercantile investments. No other banking investments
^ I n t h e iBank of France, the 200 largest stockholders of the Bank
of France who have large investments in commeice. No other bank
investments are permitted.
J .
,
In the Bank of Belgium, it is $2,000 Bank of Belgium stock and
at least $50,000 mercantile investments. No other bank invest
ments are permitted.
.
Under the proposed Owen-Glass plan, the wealth of voting units
range from $10 0 to $10 0 ,000 ,000 , all interested in banking and no
commercial investment required.
Again, under the proposed Bank of America it would be $2,500
Bank of America stock, and at least $50,000 of mercantile interests,
with no other banking investments permitted.
Then as to the stockholders who vote for control and those who do
not so vote:
.
,
In the Bank of England there are approximately 300 voters and
over 18,000 stockholders who exercise no voice in the control.
In the Bank of France 200 voters and over 31,000 stockholders
who exercise no voice in the control.
In the Bank of Belgium 528 voters and over 10,000 stockholders
who exercise no voice in the control, except to recall directors.
In the proposed Owen-Glass plan 60,000 to 250,000 voters who con
trol; no nonvoting stockholders.
Under the proposed Bank of America plan 5,000 voters and ap
proximately 250,000 stockholders who will exercise no voice in con
trol, except to recall directors.
I now take up the incentive of actual electors of governor toward
interest—that is to say, whether they are interest payers or interest
gatherers. In the Bank of England they are interest payers, in the
Bank of France interest payers, Bank of Belgium interest payers,
proposed Owen-Glass plan interest gatherers, proposed Bank of
America interest payers.
And then as to the occupation of governor’s electors:
Bank of England, merchants; Bank of France, merchants; Bank
of Belgium, merchants; proposed Owen-Glass plan, bankers; and
proposed Bank of America, merchants.
As to bank-stock requirement of chief executive officer, who is the
governor:
^
_ ,
Bank of England, $20,000; Bank of France, $20,000; Bank of Bel
gium, $10 ,0 0 0 ; proposed Owen-Glass plan, none; and proposed Bank
of America, $20 ,000 .
2480
B A N K I N G AND CURRENCY .
In the case of the Bank of England the governor of the Bank of
England is elected at the annual meeting of the bank “ Court of
proprietors ” (great merchants) by those “ great merchants.” Some
of those “ great merchants ” do an acceptance business as an aid to
their mercantile business. Six of the 24 directors are members of
those acceptance houses. They are not bankers because they charge
just as much for accepting a bill running 30 days as they do for one
running 12 0 days.
Bank of France: The governor of the Bank of France is selected
by the President of France from three names submitted to him by the
minister of finance. But the minister of finance must choose a per
son owning 100,000 francs of the Bank of France’s stock, worth $431
per $10 0 , or $86 ,000 . The transfer of the stock is controlled by the
200 merchant electors. And they see to it that nobody but a great
merchant will ever get 100,000 francs of the Bank of France’s stock.
So, in the final analysis, it is the great merchants who control. The
200 great merchants of France, the 200 largest stockholders of the
Bank of France, control it, and as they are merchants they will not
permit another class to become large stockholders. It is gradually
working up to that. There is no law making the Bank of France a
merchant control or a bank of commerce, so you can see it makes no
difference who would elect the governor of the Bank of France. It
would be just the same.
Bank of Belgium: The governor is selected by the King of Belgium,
but he must choose the governor from a number of stockholders own
ing at least 50,000 francs of stock. That stock is worth $450 per
$100, which means an investment of $45,000. But the board of direc
tors who are elected by the 528 “ great merchant ” electors will
not permit anyone to acquire that amount of stock who is not fit to be
the governor of the bank. Furthermore, the directors of the Bank
of Belgium, just like the directors of the Bank of England and Bank
of France, constitute the legislative body of those institutions, and the
governors are amenable to the by-laws enacted by them.
The Owen-Glass plan: The chief executive officer of each of those
reserve banks can not own stock in the institution over which they
preside, as that is owned exclusively by member banks. So he may
be a dummy, as is so frequently the case in the control of important
American financial institutions. He will be elected by the nine
directors, six of whom (a majority) will be elected by member banks.
So that he will owe his position to the interest gatherers, while all
those great banks owe their positions to interest payers.
Bank of America: This is to be a bank of commerce, and the only
way to make it a real bank of commerce is to have it controlled exclu
sively by the commercial interests. But we don’t want a dummy at
the head of so important an institution, and the very best guaranty
against dummyism is to require a reasonable stock ownership in the
concern the head is authorized to bind for large sums.
It will be observed from the foregoing that the very source of con
trol of those three European central banks is the great merchant
electors, the most prominent interest payers of those countries.
Bank court: Section 6 treats of the bank court, composed of nine
persons elected annually by the board of directors; each member of
the court must be a qualified elector.
Senator R eed. Does that relate to the European banking system?
B A N K IN G AND CURRENCY.
2481
Mr. M illiken . It relates to the bill that I have prepared as an
amendment to this bill, establishing a bank of commerce, which is
nothing in the world but the Bank of England.
Senator N elson. He has prepared a bill for a bank here, and put it
into the record, and this is to describe how that bank is formed.
Mr. M illiken . This court would correspond with the executive
committee of many American corporations to-day in the matter of
imposing checks on the executive officers and thus prevent too fre
quent meetings of the board of directors, the members of which will
be widely scattered in the several States. The establishment of this
court corresponds also with the practice of the Bank of England.
Its charter provides that the “ court of proprietors ”—300 great mer
chant electors—shall constitute a bank parliament, but it was found
that that body was too numerous to fulfill such function, so that
power was delegated to the board of directors, composed of 24
persons.
Secretary: Section 7 treats of the secretary, the home office rep
resentative of the board of directors, whose duties are clerical.
Censors and inspectors: Sections 8 and 9 treat of the inspectors
and censors, respectively. One class is permanent and the other
temporary inspectors. All are elected by responsible financial bank
ers not directly responsible for the actual management of the bank.
They are elected by the very class who elect the censors for the cen
tral banks of England, France, and Belgium. Professional account
ants, if elected in a practical manner by responsible financial bank
ers not in control, are far superior to Government inspectors, because
their professional reputations will suffer by withholding from the
public important information acquired by them, for their successors
will be rivals who would surely expose them for such conduct. I t is
entirely different with Government examiners, persons who have no
professions but the public service, and as man is naturally inclined
to want to advance his condition in life, and that service offering no
opportunity in that direction, he naturally looks about for some
lucrative bank office to fall into when he gets out of the Government
job. In order to accomplish their purpose they show favoritism to
banks instead of protecting the public interest by exposing error.
No one who has studied the history of our Government-inspected
banks and life insurance companies will deny the truth of this
statement. Our abnormal banking condition is attributable to this
system of paternalism. No country but ours inspects its banks. It
is a species of special privilege which has done more to create public
distrust than any other. It has taught our business men to look with
contempt upon public officials, because many business men have gone
out and corrupted those officials. We can never hope to have a sound
and healthy credit system in this country until we abandon this
species of special privilege.
Argument for this amendment: If this Congress will adopt this
amendment and place the most prominent interest payers in control
of one bank, just as most European countries have done, we will then
be on the road to a sound and healthy credit system, but we will
never reach that condition until that class of our citizenship assume
the responsibility naturally resting on them in this important matter.
An increase in the quantity of gold is not the cause but only the
effect of an advance in prices. I t would have the contrary effect of
2482
B A N K I N G AND CURRENCY .
reducing prices if it were used in production. The price of any com
modity is regulated by the proportion existing between the supply
and the demand for that commodity. Whatever increases the supply
or diminishes the demand will lower the price, and whatever in
creases the demand or diminishes the supply will advance the price.
The seasons and elements are the most potent factors in influencing
the prices of agricultural products. Rain and sunshine coming at
the right time and in proper proportions will produce abundant
crops and consequently cause a decline of prices. For instance, in
1909, with a 12,000,000-bale cotton crop the price advanced to 16
cents, while in 1910, with a 17,000,000-bale crop the price declined to
8 cents, yet the latter year witnessed the greatest production of gold
in the world’s history—$500,000,000. Suppose the cotton-growing
industry had acquired $200 ,000,000 of that year’s gold production,
gone into the market with it and bought up 4,000,000 bales, and that
fact had been known to the spinners. Suppose also that it had been
known to the spinners that the planters intended to take that number
of bales off the market and hold it indefinitely unless they realized 20
cents for it. Such use of that gold by those selfishly interested in
advancing its price would have effected an advance in the price, for
each spinner would have been looking out for the purchase of enough
to have kept his factory wheels busy, and as the available supply
would have been less than the spinning capacity for that year, the
price would undoubtedly have advanced. Whether this would have
advanced the price to 16 cents or more would depend altogether on
the effect which this organized effort on the part of the planters in
spired among the spinners, but that it would have advanced the
price to a considerable extent there can be no question. It will be
observed, therefore, that it depends altogether on the use to which
money is put whether it will effect a rise or a decline in prices.
Money is merely an interpreter of values among traders. But it
must possess an actual value—a value aside from its use as money.
If I offer to buy a horse of a person who knows nothing about any
money except that of this country, and propose to pay him in soldos,
our minds do not meet, because he has no conception of my offer.
Let me tell him a soldo is an ancient Venetian coin containing 51.6
grains of standard gold and still our minds would not meet unless
he knows what standard gold is and how much is contained in our
gold dollar. But when I tell him standard gold is 90 per cent fine
and our gold dollar contains 25.8 grains our minds come together
immediately, because I have reduced our trading thought to a com
mon denominator—standard gold. The unit of value with me would
be 51.6 grains standard gold, while with him it would be 25.8 grains.
Therefore when I speak of a soldo he instinctively thinks of $2 , the
equivalent; and if my offer for his horse be 100 soldos and he is
willing to accept $200 our minds have completely met. But suppose
I haven’t the 100 soldos, then we could use the exact equivalent— 200
gold dollars. Suppose I haven’t the 200 gold dollars, then we could
trade if we could agree on some other equivalent. Suppose I have
200 silver dollars, 200 silver dollar certificates, and 40 $5 greenback
notes with me, and he knows that Congress has enacted a law re
quiring the Secretary of the Treasury to maintain the parity be
tween all our so-called “ moneys,” or written promises of the Gov
ernment to pay money, and that that official had declared that the
B A N K I N G AND CURRENCY.
2483
only way to render that law effective wTas to give each holder of those
“ promises to pay ” the option of choosing the kind of money he wished
them to be redeemed in, then we could agree on any of those Govern
ment credit instruments and thus consummate our trade in Govern
ment credit.
Suppose I had none of those Government credit instruments but
had a $200 certified check on a bank he believed to be solvent, then
we could trade just as if I had possessed the gold. Suppose I had
no bank-credit instrument with me but held a $200 bill of exchange
drawn by the Standard Oil Co. on the Pennsylvania Railroad for
fuel oil, at 90 days’ sight. I suspect we could trade, as he would
doubtless know that any bank in the country would discount it; but
I would have to pay the discount charge, if he were to realize $200
cash for his horse. So, while we have thought in gold, we have
traded in credit.
The Government’s stamp on our gold coins does not make them
money. While that stamp is indisputable evidence as to the quality,
it is only prima facie evidence as the quantity of gold contained
therein. To question the quality would be imputing dishonesty to
the Government, and this the law will not sanction. But we all
know that coins wear when handled, also that some evil-minded per
sons clip them for private gain. Therefore, in order to protect the
public against either of those contingencies, the law properly pro
tects the public by declaring that those stamps shall only be prima
facie evidence as to their weight. Hence, the 25.8 grains of standard
gold in one of our gold dollars constitutes the unit of value.
Ask an advocate of the quantitative theory of money if credit does
not have an influence on prices, and he invariably replies in the
affirmative; but ask him to state the relationship between the influ
ence of gold and credit on prices, and he says he does not know;
and I have never been able to get one of them to approximate the
relationship of those two factors on prices. Hence it is that my
mind fails to follow them. Please let me read you an excerpt from
an address I delivered before the Young Men’s Christian Associa
tion of this city on April 11 last bearing on this subject, which Sen
ator Shafroth did me the honor to have incorporated in the Con
gressional Record on July 24 of this year:
Credit has as much influence on prices as gold. In other words, an expansion
of credit by $100,000,000 has as much influence on prices as an addition of
$100,000,000 to the quantity of gold. It matters not whether the credit instru
ment employed to bring about such expansion be bank notes, deposits, bills of
exchange, promissory notes, or any other evidence of credit, the effect on prices
will be jn-ecisely the same. John Stuart Mill says, “ Money and credit are ex
actly on a par in their effect on prices.” Henry Dunning Macleod, the great
Scotch philosopher of credit, sa y s:
“ It is perfectly acknowledged that credit produces exactly the same effect on
prices as gold. And it has been shown by authentic statistics that in modern
times gold only forms about 1 per cent of the circulating medium of currency;
and to suppose that a variation to the small extent of a fraction of 1 per cent
in the amount of the circulating medium, or measure of value, could produce the
effect so popularly attributed to it is wholly beyond reason.”
Go to a store and buy an overcoat, and you thereby remove that one article
of commerce from the market and, pro tanto, cause an advance in the price of
that article, and the effect is precisely the same whether you pay for it in gold
or obtain it on credit. That credit may be evidenced by your open account with
your merchant, by your promissory note executed in his favor, by a bill drawn
by you on some of your debtors or a person who has agreed to accept it, by your
2484
B A N K I N G AND CURRENCY .
check on your bank or a bank note. The effect will be the same whether you
use one or the other of those credit instruments or pay for that overcoat in
gold. The cause for the advance in the price was your consumption of that
article. Any credit system, therefore, which facilitates the production of com
merce or restrains overconsumption is a good system, and any credit system
which does not afford ample facilities for the production of commerce or which
fails to restrain overconsumption is a bad system.
In conclusion, let me say that as credit is on a par with gold in influencing
prices—influencing them downward when used for production and upward when
used for overconsumption; as the production of commerce is an absolute neces
sity to civilized man’s existence and overconsumption an evil which should be
restrained; as credit has about'ninety-nine times greater influence than gold in
affecting prices—does it not follow, then, that we should have one credit institu
tion in this country whose sole mission it is to facilitate the one and restrain
the other of those conditions? Without such an institution commerce will not
only suffer for lack of ample facilities, but panics will continue periodically to
wipe us off the financial map.
Senator R e e d . Mr. Chairman, I move we now hear from the cham
ber of commerce.
The C h a ir m a n . The committee will hear from the United States
Chamber of Commerce. We will be glad to arrange the hearing of
any particular members of your committee you would prefer.
Mr. S immons. If you will permit me, I will just make a general
statement and then suspend in favor of Mr. Fisher, who has come
here at considerable inconvenience and has an engagement in New
York this evening and desires to get away.
STATEMENT OF W. D. SIMMONS, OF ST. LOUIS, CHAIRMAN OF THE
BANKING AND COMMERCE COMMITTEE OF THE CHAMBER OF
COMMERCE OF THE UNITED STATES OF AMERICA.
Senator N elson. Where do you live?
Mr. S immons. St. Louis, sir.
Senator N elson. Are you a banker?
Mr. S immons. N o, sir; I am a business man, and I am a director in
a bank.
Senator R eed . Y ou are of the Simmons Hardware Co.?
Mr. S immons. Yes, sir. At the last annual meeting of the National
Chamber, as it is generally called, there was a resolution to the
effect that our present banking and currency laws were entirely
inadequate for the present needs, and the board of directors was re
quested to take such vigorous action as would, in their judgment,
contribute most effectively to a solution of the problem.
When the Owen-Glass bill was first introduced, the committee on
banking and currency of the National Chamber was instructed to
come to Washington and discuss that bill and make recommendations
to the board of directors. A report was made, and the board of
directors instructed that it be made the subject of a referendum to
the constituent members all over the United States. That referen
dum has just been completed and, in accordance with the directions
of the board of directors, we are here to report to you the result of it.
It was submitted to the constituent members’ inspection, first, as
regards the report as a whole and then in seven sections in regard to
certain specific details concerning which it was thought wise to have
separate action by the constituent members.
Senator R eed . Was any argument sent out along with this refer
endum vote?
B A N K I N G AN D CURRENCY.
2485
Mr. S immons. Practically no argument, Senator Peed, because it
is the custom of the chamber, when submitting to a referendum vote,
if arguments are submitted, to submit exhaustive arguments on both
sides, so as to have all sides shown.
Senator R eed. Is there any argument in here.
Mr. S immons . N o, sir.
Senator R eed. Y ou simply sent the bill out?
Mr. S immons. Just as it is there, practically no argument, except
the recommendations of the committee and the reasons why.
Senator R eed. Y ou sent the recommendations of the committee------
The C hairman . This book was sent to each chamber?
Mr. S immons. Yes; this book was sent to each chamber, m this
form, and the recommendations of the committee put in that form,
and the reasons stated in a very few words,.practically without argu
ment, unless those words are so considered.
Senator R eed. What I am trying to get at is whether you sent this
bill out and said, “ Now, we would like you to let us know what you
think of the bill, after examination,” or whether you sent the bill out
with suggestions as to defects, imperfections, etc., in it.
Mr. S immons. That is what I was about to explain, Senator Reed.
It was done in these seven sections: First, in regard to the commit
tee’s report as a whole, and then dividing up that report in these
seven sections, so that the constituent members might either report
as a whole, or might vote, as some did, on the separate sections.
Senator N elson. Y ou proceeded on the theory, then, that we would
legislate by counting heads and not noses?
Mr. S immons. I do not catch the significance of that.
Senator N elson. I say you proceeded on the theory that we would
legislate by counting heads and not noses.
Senator S fiafroth. N o ; but their recommendations should be
based upon that.
The C h air m a n . This organization, Senator, represents an organ
ization of the various chambers of commerce of the United States,
some three hundred and odd.
Mr. S immons. Four hundred and over, now.
The C hairman . Some four hundred and odd. They appointed a
special committee to study this question of banking and currency,
and that committee discharged its duty and then submitted the result
of its work to the various organizations through this book and they
voted upon it, having this book before them as their guide, as the
recommendations of their committee.
Senator N elson. Those chambers of commerce voted?
Mr. S immons. Yes.
Senator N elson. I know how that is done; four or five get to
gether and pass most any kind of a resolution.
Mr. S immons. The vote in regard to the committee’s report as a
whole was 303 in favor and 17 against.
Senator S hafrotii. In favor of what, now?
Mr. S immons. In favor of the approval of the report as a whole.
Under the heading of section A, which was in favor of our suggestion
to increase the number of members of the Federal reserve board by
having the original seven elect two others, subject to the approval
of the President, and the compensation of the governor and vice
S. Doc. 232, 63-1—vol 3----- 36
2486
B A N K I N G A N D CUKRENCY.
governor of the board to be fixed by the board itself, that was voted
upon favorably by 346 to 70.
Senator R eed. N ow, on what page do I find the statement you
sent out along with your report on that?
Mr. S immons. This is the statement right here, sir. It started
right there—oh, in regard to that particular point?
Senator R eed. Yes.
Mr. S immons. That is on page 7.
The C hairman . H ow was that vote?
Mr. S immons. That vote was 346 to 70.
The C hairman . H ow was the vote on the next one?
Mr. S immons. On the next, B, which was in favor of a Federal
reserve council, the president and vice president to sit in Washing
ton and their salaries to be paid by the banks, the vote was 303 to 82.
Under D, which was in favor of the recommendation creating the
new system of Federal reserve banks by beginning with the present
central reserve cities and then having the Federal reserve board in
crease the number gradually as their judgment dictated, that was
voted upon favorably by 343 to 73.
The C hairman . And on D?
Mr. S immons. On D there were three divisions, A, B, and C, and
the votes were somewhat different. On A, which was a restriction
of the issue of Federal reserve notes—that is, that there be no re
striction—the vote was 397 to 17.
B, that there be no interest charged on the Federal reserve notes,
the vote was 378 to 17.
C, that it be unlawful for any Federal reserve bank to pay out any
notes but its own, the vote was 397 to 17.
The Chairman . E, now.
Mr. S immons. E, in favor of the report that the Federal reserve
notes should not be obligations of the Government, but should be
guaranteed by the Government, the vote wras 367 to 48.
The C hairman . F?
Mr. S immons. F, in favor of the Federal reserve banks mutually
guaranteeing the reserve notes, the vote was 378 to 38.
The C hairman . G?
Mr. S immons. G, in favor of the recommendation that the reserve
requirements be modified and reduced, the vote was 390 to 23.
Now, Mr. Chairman, if it is agreeable to you I will let Mr. Fisher
make his statement so that he may catch his train.
The C hairman . Have you a list of the chambers of commerce re
ferred to in here?
Mr. S immons. I am not quite sure we have it here, but we have
such a list.
The C hairman . I think that ought to go in the record, so we will
know who it is that is doing this voting.
Mr. S immons. Yes, sir.
The C hairman . Mr. Fisher, we will hear from you now.
B A N K I N G AND CUBBENCY .
2487
STATEMENT OF EDMUND D. FISHER, DEPUTY COMPTROLLER OF
THE CITY OF NEW YORK AND MEMBER OF THE COMMITTEE
REPRESENTING THE CHAMBER OF COMMERCE OF THE UNITED
STATES.
The C hairman . Will you give your name, residence, and the
official position you hold.
Mr. F isher . My name is Edmund D. Fisher, deputy comptroller
of the city of New York and a member of the currency committee
of the United States Chamber of Commerce.
I might state, Mr. Chairman, that the members of this committee
were called here this morning by telegram received by them yester
day, and that there are, so far as I kqpw, no formal statements pre
pared ; and we ask as a matter of courtesy that you will send us for
revision a copy of what we may say here.
The C hairman . A Copy o f y o u r r e m a r k s w ill be s e n t to y o u f o r
y o u r re v isio n .
Mr. F isher . I presume my function here, as a member of this
committee, would be, perhaps, to answer any questions in relation to
the subject matter of this report, in the first instance; and in th«
second instance, and speaking personally, the one thought that occurs
to me that might possibly be of service in the considerations of this
committee is in relation to short-time notes.
Under the direction of Comptroller Prendergast it is my imme
diate function to sell what we call the revenue bonds and the revenue
bills of the city of New York. Inasmuch as there has been a good
deal of testimony before this committee in favor of handling the
Government bond problem by, in part, converting the 2 per cent
bonds into one-year notes, it has occurred to me that our experience
in New York might have some bearing on the question.
We originate the short-time notes first, and then fund them into
bonds. Your problem is the reverse problem, but I think the prin
ciples of operation are practically the same.
As I said before, I have no prepared statement, and consequently I
will not guarantee my figures as being accurate, but the principles
are correct.
Senator W eeks. May I ask you a question right there? You say
you originate the short-times notes first?
Mr. F isher . I mean to say we issue them, and after a sufficient
number, say $50,000,000, have been accumulated, we have a bond sale
and fund those notes.
Senator W eeks. Y ou would issue the short-time notes, then, even
if there were a suitable market for the sale of long-time bonds ?
Mr. F isher. Not necessarily. That is apart from this broad ques
tion. I want to try to show to you how a central bank, organized
under the direction of this Federal reserve board which you are
planning for, may help to safeguard the gold of the country through
the operation of the short-time principle. I propose to give you a
specific illustration showing how the city of New York, in selling at
certain periods these short-time notes, may help the country.
For instance, in 1011—in the spring of 1911—money in New York
and throughout the country was fairlv tight. If I recall rightly, the
2488
B A N K I N G AND CURRENCY.
rate at which I had to borrow in New York Cit}r on either the revenue
bond type or the corporate stock note type was then 5 per cent. Of
course, we had the option of borrowing this money in the local mar
ket in New York or Philadelphia or Chicago, wherever these notes
might be placed, or, under the forms that we have developed, in Paris
or London or Berlin, or any of the large money centers of Europe.
There had been exported at that time $5,000,000 of gold, and the
banks who were commenting upon the situation estimated that there
would be an export movement of gold, aggregating, if I recall rightly,
about $15,000,000.
Now, having in our work, necessarily, through this large volume
of business, the broad attitude as well as the local attitude in mind,
it seemed wise to borrow the money in Europe, particularly as the
exchange rate was very high. So we effected an arrangement aggre
gating £2 ,000 ,000—$10 ,000 ,000—at an exchange rate which approxi
mated, when the transaction was initiated, about the gold export rate,
we will say, for the sake of argument, 4.8775.
Now, the very act of effecting this arrangement in Europe com
pelled the city to sell exchange. In doing that, naturally, there was
a tendency to depress it from 4.8775, for example, down to 4.8725.
As we sold it the price was reduced and it automatically tended to
withdraw gold from the export market, with the result that almost
within 24 hours that export of gold ceased, and there was not a dollar
over the five million exported, and we believe that, understanding the
situation, the continuity of that export movement of the extra ten was
partly stopped by the sale of those short-time instruments abroad.
In similar fashion any number of Federal reserve banks, acting
.in unity and in an endeavor to protect the gold reserves of the coun
try, had a popular instrument—I do not want to argue necessarily
that a 3 per cent short-time note would be a popular instrument ; I
think the rate, perhaps, might be too low, but I am not going to
discuss that point—but if they had a short-time Government note
that could be sold at such a time and there was a demand for it
abroad, it would offset, if we may use that term, the export move
ment almost inevitably. Now, as to the rate. It is quite evident
that there might be conditions arise where the Federal reserve bank
would be willing to sell a 3 per cent one-year note perhaps with a
maturity of three months and on a basis a little more favorable than
3 per cent. It is to be presumed that they would not always be able
to effect their transactions upon the expressed rate of the instrument
itself. Inasmuch as they were drawing higher rates in restricting
the country’s credits, presumably getting a profit on that basis, they
might, at times, sell these notes at 3£ or 31 or 3f, although there
would be a technical loss, apparently, on the particular transaction,
but no loss, broadly, even perhaps from the standpoint of the profits
of the bank, and ultimately a very great gain to the country as a
whole.
So I believe the plan that was suggested some time ago by Mr.
Warberg, that a portion of those Government bonds be taken and
converted as a basis for currency, a basis for financing any such
short-time notes, is a proper and sound principle.
Senator N elson. I t would not help the exports of gold unless you
got a market for those notes abroad?
B A N K I N G AND CURRENCY .
2489
Mr. F isher . Exactly.
Senator N elson. What assurance have you that we would have
such a market?
Mr. F isher . N o assurance, any more than we had an assurance in
New York City at that particular time that gold was being exported
or that we could sell the notes. You must remember that the average
rate abroad, looking back over a period of 40 years or more, has been
lower than the average rate in this country. We hope there will not
be that difference after you have passed this bill in modified form, but
it is quite likely that the differences between the rates will be very
much slighter and that the necessity for foreign borrowing will be
very much less than at the present time.
Senator S hafrotii. In the case of your $10,000,000 you would ship
over in bonds and get cash for, why would that be reflected imme
diately any more than the $600,000,000 of the balance of trade that
we have in favor of this country?
Mr. F isher. For this reason, that when the transaction was ini
tiated exchange was at the gold export point. In order to get that
sterling abroad in this country in dollar form we had to sell exchange
through the exchange houses.
Senator N elson. At a premium?
Mr. F isher. At the expressed rate, but when you sell exchange for
a $10 ,000,000 loan you begin to protect the market, because there is
only so much exchange available. If we did not sell exchange, the
usual transaction would be this: That we would send the bills abroad
and arrange for a countervailing shipment of gold to this side, but it is
not done that way, as a rule, unless the trend of exchange is definitely
in favor of the shipment of gold. In this case we were shipping gold
to Europe, and that transaction ultimately impelled a shipment of
gold to us, and one offset the other, and it was made vital in the
selling of exchange to so protect the market for exchange and make
it much lower than the gold export point, and during the following
months there did not happen to be in this particular case any further
exports of gold. Such a transaction, I will admit, may very easily
be lost in the great aggregate of transactions; but happening to be
involved in the matter personally, and happening to hear all the
trend of thought on the subject, and realizing that we might help
the country as well as get money at a low^er rate, I initiated the
transaction with what, to me at the time, was a very startling result,
the immediate cessation of the gold export and the breaking of the
exchange rate.
Senator W eeks. Have you done that more than once?
Mr. F isher. Oh, yes. The city of New York borrows an aggregate
of $20 ,000,000 a month, so that you can see we are a very vital factor
in the exchange market when we borrow that abroad.
Senator W eeks. What has been the average rate?
Mr. F isher. I should say about 4 per cent.
Senator W eeks. Are the securities actually shipped or held in
New York?
Mr. F isher . They are shipped in the aggregate, although in some
cases, owing to the tax laws abroad, there is a request to have them
domiciled in the portfolios of some of the trust companies, but
2490
B A N K I N G AND CURRENCY .
finally, to all intents and purposes, they are foreign transactions.
They have a memorandum abroad if they have not the actual bills.
In general, we know they are sent abroad because they bear the stamps
of the foreign purchasers when they come back to us for cancellation.
Senator W e e k s . And y o u pay the expense o f shipping?
Mr. F i s h e b . N o.
Now, to come back and try to finish the discussion of this shorttime note principle. There have been suggestions that these bonds
be cut in half; that they be half short-time notes and half bonds in
the initiation of this plan. Upon that point it is suggested that no
body knows the financing ability of the Federal reserve bank, and I
should suggest two elements of flexibility. People have been arguing
for flexibility in currency; I would argue for flexibility in plan. For
instance, if the recommendation is made to cut the bonds in half and
have one-half notes, I should say that not more than one-half the
bonds be converted into notes and not less than 15 per cent, so that
the banks will be able to absorb the business, letting them take it on
gradually. Furthermore, if a 20 -year limitation is made, I think it
would be entirely unsound, to the extent that you might have difficulty
in developing the principles of your plan, for the reason that they
would run to 21, 22, or 23 years. I should say to the extent that your
plan works slowly, putting the flexibility in at the beginning, to that
extent you might not need flexibility at the other end. You need to
introduce two principles of flexibility in the volume of those you wish
to absorb, either in one way or another, and flexibility on the other
end in the time of the ultimate applications of the principles laid
down. I think those two points are very vital.
Senator W e e k s . Will you make a definite draft of your idea, not
only as to the refunding of the 2 per cent bonds but the handling of
the bonds in which they are refunded until maturity, and submit
that to the committee?
Mr. F i s h e r . What you want is a definite section contemplating the
philosophy that I have outlined, in the including of both elements
of flexibility?
Senator S h a f r o t h . Not the reason but the language itself, just
as it ought to go into a law.
Mr. F i s h e r . Y o u h a v e n o o b j e c t i o n t o a n a r g u m e n t ?
Senator S h a f r o t h . Not at all.
Mr. F i s h e r . That is all I care to volunteer to the committee, but
if any suggestions occur to you in regard to questions concerning the
work of the Chamber of Commerce of the United States in relation
to these points we have recommended I shall be very glad to answer
your questions, if I can.
Senator N e l s o n . In order to save us the time reading this pam
phlet, is there any one of you gentlemen who can state what the
points are? I will not have time to read these things afterwards;
I would like to get them on the spot.
Mr. F is h e r . Y ou want a recommendation on the underlying phi
losophy.
. . .
.
Senator N elson . I would like to know what it is you desire to
have in the bill and your ground for it.
Mr. F is h e r . I th in k I w ill s t a r t w ith th e first item on p a g e 5. 1
w ill g iv e y o u th e su g g estio n s o f th e com m ittee, a n d I w ill tr y to
B A N K I N G AND CURRENCY .
2491
specify the principles of the philosophy underlying the suggestion,
if that is satisfactory to you ?
Senator N elso n . Yes; that is satisfactory to me.
Mr. F is h e r . The bill provides for a board of seven, of whom at
least one shall have had banking experience. This element of bank
ing experience can be strengthened without weakening the element
of public control. We therefore suggest that the Federal reserve
board be increased to nine; that the original seven shall choose two
additional members, subject to the approval of the President; and
that the board thus constituted shall elect the governor and the vice
governor of the Federal reserve board.
My conception of that is, perhaps, somewhat colored by the dis
cussions which have taken place; but I felt this, that in the first place
we desired to accept the general principle of Government control
that has been discussed here, and I need not go over it; and that the
element of three administrative officers out of the seven developed
lack of continuity in management. We have had some experience in
New York City with the lack of cotinuity in management, and I sup
pose it cost the city $5,000,000 a year. I came into office four years
ago, and I go out of office at the end of this j^ear. It took me a year
to digest and analyze all the principles involved in this broad ques
tion of financing the city. I had to start in the second day and bor
row $5,000,000. I lost 7 pounds during the first week, but gained it
all back during the second week. The point is this, it seems to me,
that what you want is continuity in management.
Senator N elso n . It has been suggested here, and with a good deal
of force, that instead of having three Government officials we only
have one Government official, the Secretary of the Treasury.
Mr. F is h e r . I would agree to that.
Senator N elso n . Eliminate two, for there would be no occasion for
these extra two if that plan was adopted.
Mr. F is h e r . There has been a great deal of talk about what we call
the political quality of the board. You have had experience with
bipartisan boards. I think it has been a definite mistake to try to
make this a bipartisan board. I would rather have President Wilson
appoint all Democrats, if necessary, than to be compelled—I mean
from the standpoint of quality—to search over the country for the
sake of balancing one party against another party. That is not what
you w ant; you want quality.
Senator N elson . If we drop two of those officials the board would
be composed of seven?
Mr. F is h e r . Yes.
Senator N elson . And you would have six to which you could apply
your principle of continuity, so there would be no occasion to increase
the board by two ?
Mr. F is h e r . The President, under the proposed law, appoints four.
The C h a ir m a n . He w o u ld a p p o in t six, u n d e r y o u r su g g estio n ?
Mr. F is h e r . Then you a d o p t o u r su g g estio n in its essentials?
The C h a ir m a n . Yes ; but we do not make it a board of nine.
Mr. F is h e r . That is immaterial. You minimize the so-called polit
ical quality.
Senator N elson . Is that a good solution ?
2492
B A N K I N G AN D C U B E E N C Y .
Mr. F is h e r . That is an excellent solution, and I think that my con
freres would accept that.
In the next item we suggest the organization of a Federal reserve
council, elected by and representing the directors of the Federal re
serve banks and serving in an advisory capacity.
This council should meet at stated periods in conference with the
Federal reserve board. The president and vice president should re
side in Washington, and sit at the meetings of the board, but without
vote. The compensation of the officers and members of the council
should be fixed and paid by the Federal reserve banks. You see the
idea is not to destroy the philosophy of the bill.
This recommendation of the report has been partially adopted.
The reprint of the bill provided for a Federal advisory council, to
consist of as many members as there are Federal reserve banks, each
Federal reserve bank by its board of directors annually selecting one
member. The meetings of said advisory council shall be held at
Washington at least four times a year and oftener if called by the
Federal reserve board. The council may select its own officers and
adopt its own methods of procedure and a majority of its members
shall constitute a quorum for the transaction of business.
The council shall have power, first to meet and confer directly
with the Federal reserve board on general business conditions; sec
ond, to make oral or written reports concerning matters within the
jurisdiction of said board; third, to call for complete information and
to make recommendations in regard to discount rates, rediscount busi
ness, note issues, reserve conditions in the various districts, the pur
chase and sale of gold securities by reserve banks, open market opera
tions by said banks, and the general affairs of the reserve banking
system.
These changes do not provide that the president and vice president
of the council should reside in Washington and sit at the meetings of
the board, but specify that the members shall receive no compensation
for services, contrary to the recommendation of the report that com
pensation should be fixed and paid by the Federal reserve banks
which would make residence in Washington possible.
Senator R eed . This bill gives to the banks a control of the regional
banks directly and in the first instance. If there are 12 banks, there
will be 60 representatives of the banks upon the boards of those 1 2
banks, in constant touch with the central board, familiar, as a matter
of first instance, with the business with which they are concerned, free
at any moment to approach the central board and confer personally
or by letter. Why is not that a sufficient board or council to satisfy
anybody ?
Mr. F is h e r . Because 60 men on various boards throughout the
country have not, inherently in their position, the consolidated ability
to express their judgment, and consequently, without in the slightest
degree destroying the philosophy of this bill. If you have a Govern
ment board of seven men, with two officers, such a council as suggested
wfill give that consolidated voice where it is most needed, in the most
efficient manner, and without delaj^.
Senator R eed . Let us see. How will these two men sitting there
get that consolidated voice; from whom will they get it ?
B A N K I N G AND CURRENCY .
2493
Mr. F is h e r . I should say that it would not express itself as a rep
resentative vote or representative voice; it would be an expression of
judgment.
Senator R eed . Of two men?
Mr. F is h e r . Of two men, and, in the last analysis, representing
the banking fraternity.
Senator R eed . Yes; representing the banking fraternity and out
side of this system?
Mr. F is h e r . Yes; b u t th e b an k s o f th e c o u n try w o u ld h av e a check
on tho se m en.
Senator R eed . H o w ?
Mr. F is h e r . By th e ir recall.
Senator R eed . The banks can recall them?
Mr. F is h e r . C e r t a in ly ; through the medium of the Federal reserve
banks they could recall them.
Senator R eed . Let us spend a moment on that. We create a system
of 1 2 banks—and I take 12 as the number merely because that is
named in the bill. The banks elect 72 men to directly represent them;
they are elected from each district. Those 72 men are familiar with
affairs in the country at large.
Mr. F is h e r . I should say that they are more particularly intimate
with their particular districts.
Senator R eed . Very well; but each of the six is particularly posted
with reference to his district; he knows the facts, knows the condi
tions of the crop; he knows the conditions of the money demand
and supply. He is in constant touch with 12 men who are impartial,
and whose business it is to manage the entire sytem. They have an
absolutely unselfish interest. If the central board is composed of
intelligent men who understand the system, understand banking, are
in direct touch with the sources of information all over the country,
are they not from the very best and highest source, and they are
in a position to receive the opinions and suggestions of all these
men who directly represent the banks, and nobody else?
Now, I want to know if that is not a better representation of the
banks than they can possibly have by sending down here two men
who may have been picked by some banking organization which is
generally under the control of these big men ?
Mr. F isi -ie r . I will again say no; that it is not a consolidated repre
sentation. They will express themselves in letters as to different
points, but I believe that the two men whom we must also put in the
catagory of the men of the same class you have stated would be
disinterested and work for the benefit of the country.
Senator R eed . They can not be disinterested if they represent the
banks.
Mr. F is h e r . D o you believe that two more men, simply because
they happen to be chosen by the Federal reserve boards, will have the
quality of disinterestedness?
Senator R eed . T wo more men? No.
Mr. F is h e r . Or have the same quality of judgment?
Senator R eed . But you gentlemen propose to have them selected
by the Federal reserve board, as I understand you.
Mr. F is h e r . The proposition is this, that the directors of each
one of these Federal reserve banks will choose one man, and all
2494
B A N K I N G AN D CURRENCY .
(hose men will constitute a Federal advisory council; and, in the
second step, this Federal advisory council will choose two men to
represent them, and those two men will sit, without vote, with the
seven proposed in this bill for what they are wmrth. If they are
worth nothing they will do no harm----Senator R e e d . I do not follow your conclusion. I have known of
a great many occasions where people were not worth anything and
they did harm.
Mr. F is h e r . The precedent o f this suggestion is in the German
experience. They have there the imperial control, but they have in
that imperial control the voice of the banking and business interests
o f the country, and that voice never has been at discord with the
imperial control. They work in harmony, and that is the best
possible illustration o f the success o f the principle suggested.
Senator R eed . The whole system over there, of course, is entirely
different from this.
Mr. F is h e r . We have to search somewhere for ideas, however.
Senator R eed . But you can not take one part of the system and
fit it on to another, and necessarily draw a conclusion as to its value.
I want to direct your attention to a fact that, it seems to me, the
advocates of this suggestion overlook, and that is that these banks
do have the right of direct appeal to their representatives, to the
central board, the right to advise the central board, and the central
board has the right to listen, and will undoubtedly listen, to great
financiers and, I hope, to small financiers.
Mr. F is h e r . I will simply say in addition that this is intended to
furnish a definite basis for making that direct appeal forceful.
Senator N elson . Would it not result in one of two things: Either
these representatives of the regional bank on this council must have
the advice and accord with the wishes of their boards of directors,
or else they go there as mere individuals, representing their in
dividual views? I mean these members of the advisory council.
Now, which would it be? Would you have them go there as the
representatives of the boards of directors, taking their opinion be
fore they act, or would you have them go there and express simply
their personal views?
Mr. F is h e r . If there develops a definite opinion throughout the
country in relation to a definite policy, that w’ould of course express
itself in a definite form in the minds of those two men. The truth
of the matter is, however, and you all know it to be true, that banking
recessions or accessions, the ebb and flow of banking, run along
such definite and fixed lines that almost every banker in the country
that has thought about it at all knows in advance almost what is
going to happen. We talk about this discount rate. I have been
told one week in advance what was going to be the policy of the
Bank of England, and yet I do not believe that a single member of
that board “ leaked,” as we call it, or in advance intimated to the
public what he was going to do. It simply means this: That they
inevitably had to advance or had to charge the discount rate; it was
necessary. They knew it; every banker in the country knew it that
was watching the broad aspects of commercial and business relations.
There is not going to be, gentlemen, this conflict between politicians
and bankers. You know your principle is sound and, in my opinion,
it is going to work harmoniously, but you want to get as high a
B A N K I N G AND CUKRENCY.
2 495
basis of intelligent judgment as you can. TVe believe that by having
two men there, without a vote, but to advise and express their judg
ment—even their own judgment, if you will, but rather tne con
solidated judgment of the banking world will give a better result
in the aggregate than the method proposed.
.
Senator H eed . Let me call your attention to this. The capital that
is furnished by these banks as their contributions to the capital stock
is, in the last analysis, furnished by the depositors.
Mr. F is h e r . Yes.
Senator R eed . They are the people of the country, speaking
broadly. I am not, in what I say, trying to put myself m a position
of antagonism to the banks----.
Mr. F is h e r . I understand; you want to bring out the facts and
the truth, as far as you can get at it.
.
Senator R eed . The Government then comes m and furnishes a
very large part of the money that constitutes the assets of these
banks, or, more properly speaking, the money that they have the
use of, and then proposes to lend to this system its power to issue
currency. The banks are put in control of the 12 regional banks.
They are not content then to let the Government manage the general
system on behalf of the bankers, on behalf of the borrowers, on behalf
of the farmers, but they want a special representative. Can you tell
me any more reason why the bankers should be specially and par
ticularly and directly represented up there than the Farmers’ Al
liance ?
Mr. F is h e r . Representation in the sense that we recommend it is
not control. We stand for Government control. TVe have not sug
gested that the bankers have even a minority representation on this
board of seven. We merely say that it may be desirable to give them
the ability to speak in a concrete and definite way in the meetings
of that board. It does not take one iota from the control. And if
their judgment is good, and if it is accepted, it is accepted with
the knowledge and consent of the seven Government representatives.
Senator R eed . But you do not answer my question. Why should
not the farmers of the country have representation on that board in
an advisory capacity? Why should not the merchants of the coun
try have direct representation on that board in an advisory capacity ?
Mr. F is h e r . They have it because the very fabric of your bill pro
vides that three of these members shall represent those very interests.
Senator R eed . Oh, I am not talking about th a t; I am talking about
the central board.
Mr. F is h e r . We are not arguing for bank representation on the
central board; merely a voice.
Senator R eed. Y ou are asking for a voice. You and I are talking
about the same thing; don’t let us get into a tangle about terms. ^ If
the bankers should have representation in the shape of an advisor
upon this central board, appointed by the Government, why should
not the great business interests, and the small business interests, have
this same kind of advisor to represent them? Why should not the
farmers have the same kind of advisor to represent them ? And why
might we not extend that indefinitely ?
Mr. F isher . Again I say that these two men represent not only the
banking interests, but the commercial interests and the farming in-
2496
B A N K I N G AND C U E R E N C Y .
terests, because they are chosen by a series of composite boards that
are manufactured by this bill to represent all those interests.
Senator R eed . Y ou know perfectly well, and I know perfectly well,
and every banker that has been on the stand that has been asked
about it has frankly said the banks will pick the six members from
the boards of directors of the regional banks. They do not make any
question about that, and we need not haggle about it now. It is
going to be bank representation; it is bank representation----Mr. F is h e r . In th e firs t in stan ce.
Senator R eed . Perhaps broadly so. Now, the bankers having that
representation already in the regional bank, the Government board
being here to represent everybody, if the United States Government
and all the people need to have the advice of bankers especially, why
not have some advice for great borrowers, and small borrowers, for
farmers, and for other classes of people? I can not see why they do
not need it just as much as the banks do.
Mr. F is h e r . D o they need it at all ?
Senator R eed . I think it is a piece of absolutely unnecessary ma
chinery, because I hold that this board, if it is properly constituted,
will hear from all these original banks, will listen to financiers, to
borrowers, and to people generally who have advice to give. I t will
not close its ears and cease to think, but any citizen that has a proper
case to represent can go there and represent it. And I think it would
be highly improper, if you want my opinion—and this is one ques
tion I am ready to vote on—to put a banker on that committee and let
him sit in the councils of that board as an advocate who may speak
behind closed doors.
Mr. F is h e r . I will agree with you in the general statement that
the board could hear the farmers and the merchants of the country,
but, on the other hand, I do not agree with you that it will necessarily
hear them.
Senator R eed . Oh, yes; any proper board w ill.
Senator B ristow . N ow , let me ask you this: Suppose the bankers
were not required to subscribe to this capital stock, that any citizen
could subscribe to the capital stock to keep this bank going----Mr. F is h e r . Mr. Chairman. I want to make the reservation, of
course, at this point that what I am saying in this ejaculatory manner
is purely personal and does not represent the views of the gentlemen
of the committee. I have to use my own judgment in answering these
questions.
Senator W e e k s . May I suggest, Mr. Chairman, that Mr. Fisher
has to catch the 3 o’clock train?
Mr. F is h e r . I have already missed that train and shall have to be
an hour late. I am perfectly willing, under the circumstances, to
take the 4 o’clock train rather than the 3 o’clock if I can be of service.
Senator B ristow . A s I was saying, if the bankers were not re
quired to subscribe to this stock—if it were purely voluntary with
them or any other citizen that wanted to subscribe—then, of course,
you would make no claim for representation ?
Mr. F is h e r . It is not a claim for representation; it is an attempt
to help the quality of management. I am not in sympathy with
the idea of representation particularly. All our discussions in the
past few months on this question, where intelligent men have got
together, has not been in favor of representation. When you appoint
249 7
B A N K I N G AND CUBBENCY.
a man to the Supreme Court he has divorced himself from the bar;
he may be a lawyer, but he represents the country irf that court. And
the banker does not expect to have a man on that board who will _
listen to what this bank says and what that bank says; he goes there
in a judicial capacity, and I think you want to drop the idea and the
bankers want to drop the idea of representation. The bill you have
before you frankly says “ One man of trained banking experience.”
If you will alter the complexion of the bill, we may withdraw this
suggestion, but we have to take the bill as we find it. I do not want
to see a board of whom only one man has trained banking experience.
Senator R eed . Although I disagreed with you a moment ago, I am
going to agree with you on that proposition.
Mr. F is h e r . We are a rg u in g on th is b ill; n o t an y o th e r bill.
Senator B ristow . But I am inquiring about a different proposi
tion and I want your views on it. Suppose we amend this bill—which
I hope we shall do very materially—and that there is no compulsory
subscription required of the banks; suppose we leave it voluntary as
to whether they subscribe or not, and that anybody may subscribe-----Mr. F isher . Then I will answer you flatly that what I am arguing
for, and what, I think, my confreres are arguing for, is quality of
judgment, which has nothing to do with the principle of stock sub
scription.
Senator B ristow . Now, this bank or banks created in that way
would perform functions similar to these, and in that event you would
not insist that we ought to have this advisory council ?
Mr. F is h e r . Under the terms of this bill as it stands?
Senator B ristow . That would not be the terms of this bill.
Mr. F is h e r . Y ou mean if you put these men or some other men on
that board----Senator B ristow . Oh, th is b a n k w o u ld be g o v ern ed b y a b o a rd ,
y e s; b u t no b a n k e r w o u ld be com pelled, in o rd e r to m a in ta in his
c h a rte r, to subscribe to it.
Mr. F is h e r . But you retain the principle of one trained banker in
the bill.
Senator B ristow . Oh, I do not care much for that.
Mr. F isher . I t makes a difference in my answer.
I can not answer
unless you ch an g e th e com plexion o f th e b ill.
Senator B ristow . Leave i t as i t is.
Mr. F is h e r . Then I say have the advisory council, most certainly.
The C h a ir m a n . And you argue that that would be along the line
of the central auschuss of the Reichsbank ?
Mr. F is h e r . Yes; which experience has shown to be eminently
satisfactory.
Senator N elson . Would it not be simpler—I am putting a hypo
thetical case, not to intimate that it expresses my views—instead of
having this cumbrous advisory council and the board of seven to
have two practical bankers not owners of bank stock or interested in
banks at the time, but with practical banking experience, on the
board?
Mr. F is h e r . I think personally that if the bill provided that at
least three trained bankers----Senator N elso n . N o ; two.
Mr. F is h e r . I am giving you my answer; I am not accepting your
idea. I would say this, that if the bill provided for at least three
2498
B A N K I N G A N D CURRE NCY .
trained bankers, the advisory council would be much less necessary
under the terms of the bill.
Senator N elso n . Why would not two be enough ?
Mr. F is h e r . They might both be sick in bed.
Senator N elso n . Would it not be better to have these two out
siders ?
Mr. F is h e r . N o well-managed organization to-day can be handled
successfully with only two officers. I think, by the way, Mr. Chair
man, that is something you ought to contemplate in your amendments.
You have not provided, for instance, for a deputy for your Federal
reserve agents in case of illness or absence.
Senator N elso n . That would be provided by rules and regulations,
I think.
Mr. F is h e r . And I am inclined to think that a chairman and vice
chairman are hardly sufficient. There ought to be provision for a
substitute in case of emergency. No well-managed bank to-day of
any size can successfully handle its business with only two executives,
because if one is away on vacation or, as he properly might be, per
haps, in this case, in Europe studying banking conditions, the entire
responsibility on one man might be entirely too great. I think that
three, or at least two, with a provision for deputization of power, is
quite essential wherever officers of chairmen are provided for.
Senator N elso n . Would it not strike you as simpler to have a board
of seven, five appointed by the Government and two appointed by the
Government, but from a list furnished by the banks of practical
bankers, but not stockholders or officers in banks at the time ? Would
not that be a solution ? I am putting a hypothetical case.
Mr. F is h e r . No; I think that as this is, after all, a banking enter
prise, two is rather a small number for me to argue for.
Senator N elson . Why three?
Mr. F is h e r . For the very reason I have stated, that with one man
away there would only be one man left. If you have three, then
with one man away you have two left. Understand, I am not worry
ing over the question of management. I am not worrying as to
whom President Wilson is going to appoint. I think it will be satis
factory. We are discussing this thing from the standpoint of all
time, and two men in any capacity is too small a number from the
standpoint of practical business experience. Now, for the third
point. In the creation of a system of Federal reserve banks a begin
ning should be made with the present central reserve cities, additions
to be made by the Federal reserve board gradually as, in their judg
ment, conditions warrant them. Meanwhile the facilities required
by other centers could, in our judgment, be adequately supplied by
branches.
Senator N elso n . That means you would start with three regional
banks?
Mr. F is h e r . The philosophy underlying that suggestion is this,
that the credit fabric of the country, the loan fabric, has now been
built up upon the principle of central reserve cities and reserve cities.
Our thought was, although it is not fully expressed here, that a
Federal reserve bank, in the first instance, in every central reserve
city, with a branch in every reserve city, would be a scientific and
accurate basis of starting in this enterprise. That would mean that
there would be no shifting of reserves where they are now segre-
B A N K I N G AND CUBBENCY .
2499
gated. It would be handled by rediscount in the centers where they
now repose. I am inclined to think that is a very sound statement to
make.
Senator N elson . There is a good deal o f p h ilo so p h y in it.
Mr. F is h e r . If you take twelve, an arbitrary number—and I want to
state, gentlemen, that an arbitrary number is senseless. Why twelve?
Why thirteen? Why nine? Why eleven? I see no philosophy in
any arbitrary number. You want to draw a bill based on principles.
For that reason we suggest one in every reserve city. Of course,
when this suggestion was first made your reserve requirements were
more along the old lines. You have since changed them. Our
recommendations here in some cases have been carried out.
Senator N elson . Your theory is this, that if you made the regional
banks in the three reserve cities—New York, Chicago, and St.
Louis—and limited it to that----Mr. F is h e r . A t th e s ta rt.
Senator N elson . At the start, it would work less friction and less
jarring to the reserves of the country? It would be more like these
banks stepping into the shoes of the old system.
Mr. F is h e r . It would not break down a single dollar of credit by
diversion to the other sections, because your bill provides for redis
counts of $216,000,000—I do not recall the exact amount, but some
where between $210,000,000 and $220,000,000. Now, if you take the
bill as it stands and arbitrarily make 12 different centers there will
have to be support drawn in a general sort of way from certain sec
tions, and the money will be diverted to sections where it can not
profitably be used.
Senator N elson . And a good deal of it w ill come from these three
central reserve points?
Mr. F is h e r . Yes. Understand, I am not here arguing in support
of any selfish principle, and I am sure our committee is not.
Senator W e e k s . Mr. Fisher, it seems to me to be a very practical
suggestion, because there would be less disturbance perhaps than
under any other that could be made. But I do not see anything scien
tific about it, because in order to become a central reserve city all the
banks in a reserve city have to do is to keep 25 per cent of their de
posits in reserve. In order to become a reserve city it has to be a cer
tain size----M r. F is h e r . Y ou u n d e r s ta n d , s in c e t h is s u g g e s t io n w a s m a d e , y o u
h a v e ta k e n a w a y th e v it a li t y o f th e c e n tr a l r e se r v e 6 ity a n d th e
r e s e r v e - c ity id e a la r g e ly .
Senator W e e k s . There is nothing left.
Mr. F is h e r . And, consequently, this suggestion has force only in
that the reserves in these sections are now supporting certain credit
fabrics.
Senator W ee k s . We may say, then, as I have said, that it is a prac
tical suggestion rather than one involving a principle.
Mr. F is h e r . The principle has been taken away, because you have
changed the reserve requirements, but it was based on a principle
when it was first suggested. It is now a practical suggestion rather
than a continuing principle, if you will note the distinction.
Fourth, at the end of paragraph 1 “Acceptances authorized by
this a c t” are placed in the list with lawful money, national-bank
2500
B A N K I N G AND CURRENCY .
notes, Federal reserve notes, and checks and drafts upon solvent
banks as funds which must be accepted on deposit by Federal reserve
banks. This suggestion, gentlemen, I think, has no force now since
the bill was amended by the House committee. We need not consume
any time on that point.
Fifth, substitute for lines 21 to 24, after the word “ securities,” the
following:
but it shall include obligations issued by the United States, or by any State,
county, or municipality in the United States, and maturing in not more than
six months.
I want to call your attention, gentlemen, to the fact that this sug
gestion is fundamentally sound, and that the plan developed in this
bill is fundamentally unsound; that is to say, particularly if you
throw the burden on these Federal reserve banks, looking out for
these 2 per cent bonds, it seems to me you do not want to bring into
competition State bonds and municipal bonds and county bonds. But
1 think you can very happily for temporary purposes buy the shorttime obligations of States and cities. You know you have had a
great deal of argument here before you from time to time on the
subject of fluid and fixed credit ; and if there is any philosophy in
those arguments it certainly is all directed against this principle in
the bill, and if you do include it as a principle in the bill it should
only be for capital purposes.
Senator N elson . Y ou are violating by putting a part of the re
sources of the bank or investing it in fixed securities what I call the
principle of natural elasticity. Elasticity, as I understand it, is to
be based on the commercial wants of the country—on what trade,
traffic, and commerce need. You want part of it diverted to buy these
securities?
Mr. F is h e r . No; I say take fixed securities out and accept our sug
gestion of taking the fluid type.
Senator N elson . All those securities are, in a sense, fluid.
Mr. F is h e r . What I mean is this: Suppose the city of Philadel
phia has taxes due on the 1st of July, and experience shows they col
lect 80 per cent of those taxes. They issue on the 1st of April a shorttime instrument due the 1st of July to be paid by those taxes. That
would be an absolutely gilt-edged investment, a type of investment
that could be sold abroad, that would be bought abroad, and would
in a measure help these Federal reserve banks in safeguarding market
relations between Europe and this country so far as the gold question
is concerned. I see no reason why strictly fluid city securities, or
even State securities, which are to be paid out of taxes should not
have just as good standing as the other type of fluid instrument. It
has got to come from the people.
Senator N elson . If you adopt that principle you would have our
currency measured not only by the commercial wants of the country,
but you would have our currency measured by the amount of these
municipal notes issued, and you would get an artificial elasticity.
You would measure it not only by what commerce needs in the shape
of notes and bills of exchange and acceptances, but in addition to that
you would inject into it this matter of municipal bonds, and you
would absolutely destroy the scientific principle of elastic currency.
B A N K I N G AND CURRENCY .
2501
Mr. F is h e r . I want you to consider in that connection this feature,
that the better type of these short-time instruments are very popular
in Europe.
Senator N elson . I do not care about popularity; here is the prin
ciple. Our currency under this system would fluctuate by the munic
ipal wants of these cities according to the volume of municipal notes
they issued.
Mr. F is h e r . If you will let me finish what I was going to say:
These short-time instruments are growing popular in Europe, and
would be a character of investment—and I am making a distinction
now between a currency basis and an investment basis—which could
be sold in Europe. It would be a very easy instrument through
which these Federal reserve banks could control the gold reserves.
I have shown you, as an example, how the city of New York has been
able to protect the gold reserves of this country by selling these in
struments—
Senator N elson . But you are all the time assuming that for this
volume of municipal notes there would always be a market in Europe.
Mr. F is h e r . I am suggesting further—and you remember I stated
it in the beginning—that the principle of the investment of capital,
which is an entirely different thing from the use of deposits, should
be considered. You agree with me that this should be stricken out,
as it stands?
Senator N elson . We do not want municipal bonds in there. We
do not want that the basis of our new currency.
Mr. F is h e r . But you should consider, however, if you are going
to have anything of this nature in your bill, this short-time-note prin
ciple, because it has a bearing on the subject entirely separate and
apart from the currency question----Senator W e e k s . Mr. Fisher, would your recommendation be that
the reserve banks should be authorized to purchase public bonds hav
ing not longer than nine months to run ?
Mr. F is h e r . I told you what is really the scientific handling of
this question. Of course, the warrants of small municipalities are
easily handled by the local banks. The large cities, of which there
are not very many, have a volume of issues that do go outside of their
particular environments. Now, if this is to be treated properly. I
believe that for capital purposes these Federal reserve banks could
take the type of notes that would be issued in anticipation of definite
revenues; and there should be in contemplation the history of ex
perience. In other words, if the preceding year the taxes received
were paid at the rate of 80 per cent, no issues should be taken that
were not justified by the experience of the preceding year.
Senator W e e k s . Y ou know we have a law in Massachusetts which
authorizes municipalities to borrow in anticipation of taxes. Taxes
are collected the 1st of November, and those obligations are always
paid.
Mr. F is h e r . Always paid except those against arrearages.
Senator W e e k s . That is a very small percentage, and even now a
considerable amount of foreign money is invested in those short-time
notes.
Mr. F is h e r . N ow , i f you w ill lim it it to c a p ita l p u rp o ses a n d n o t
ta k e in d ep o sit m oney, i t w ill m ak e an ex cellen t in v estm en t, because
i t is so m e th in g t h a t m ig h t be sold a b ro a d , w hen you could n o t sell a
S. Doc. 232, 63-1—vol 3------37
2502
B A N K I N G AND CURRENCY .
short-time Government bond. That is a suggestion. It is at least
worth considering.
And I think our suggestion has a sound basis. I fully recognize
what our friend here says about the question of the commercial as
against municipal credit; but these are strictly fluid credits; they are
always promptly paid, as you know from your experiences, and I be
lieve for capital purposes it would be a very desirable and a very use
ful type of investment.
Senator N elson . I do not want to interrupt you, but it is merely to
clear up my ideas.
Mr. F is h e r . I agree w ith your fundamental principle, and conse
quently I would say that these short-time notes should be used only
for capital purposes and should have some carefully drawn instrument
w h ich sh o u ld p ro v id e f o r the quality of the revenue bonds taken.
Senator W e e k s . I suggest that you draw up for us what you have
in mind.
Senator N elson . Your modification of it. You understand my
view of an elastic currency—we call it an asset currency—that k,
based upon the commercial wants of the country; and it should fluc
tuate, ebb and flow with the commerce of the country.
Mr. F is h e r . Yes.
Senator N elson . N ow , I do not look upon these bonds as a part of
the commerce of the country in that sense.
Mr. F is h e r . Neither do I.
Senator N elso n . And that is why I make the suggestion.
Mr. F is h e r . And I agree with you that there should not be any
principle developed by which State or municipal issues should become
the basis of a broad expansion of currency; and I think that my con
ferees will agree with me that that should be a capital investment.
Prof. Johnson, how do you feel about it; am I right?
Prof. J o h n so n . Thoroughly.
Mr. F is h e r . I think we have now come to item No. 6.
Senator N elson . If you will be kind enough to state what section
that refers to as you go on, it will be easier for us to follow you.
Mr. F ish e r (reading). “ It seems to the committee that such a lim
itation ”—the bill provided originally that there should be a limita
tion of $500,000,000 for the currency issues. That having been
changed. I will omit making any reference to it.
So I will go next to item No. 7. [Reading:]
An issue of Federal reserve notes is hereby authorized. The said notes shall
bear on their face the guaranty of the United States and shall be issued at the
discretion of the Federal reserve board, and solely for the purpose of supplying
currency to Federal reserve banks, as hereinafter set forth. They shall be
receivable for all taxes, customs, and other public dues, and shall be redeemable
in gold on demand at any Federal reserve bank.
Now, of course, this refers to what some regard as a very sore
point in this bill. Our committee suggests——
Senator N elson (interposing). Under section 17, the United States
is not technically a guarantor of these notes. It is the principal
debtor.
Mr. F is iie r . The suggestion is fundamentally this, that instead o f
these notes being called the obligations of the United States, which
seems to our committee an extremely indefinite thing, and rot sup
ported by any means by which the obligation is made definite, that
B A N K I N G AND CURKENCY.
2503
a fiat and definite guaranty will serve the purpose of developing the
philosophy of the bill, which I take to be, that in the initiation of
this enterprise the developing of Federal reserve banks with indi
vidual issues, there is to be a solidarity to all the issues, so that there
will be no discrimination between New York and New Orleans, or
Chicago or St. Louis.
We believe the principle of guaranty will be justified, so far as
the Government is concerned, by the excess earning power which the
bill plans to give to the Government.
Now, that will give the unity to the issues. I t will be economically
sound, because you can not have any fiat issues under a guaranty of
some other people’s notes, whereas at some time, at some distant
future time, it might be possible that other types of obligations will
come into competition with this bank obligation. I need not discuss
the economic basis of the obligation. But if you do adopt it, I have
no doubt you will have all the security you will need, under a prin
ciple that is economically sound and eminently practical.
Senator B ristow . Why should th e Government guarantee the note
of the bank?
Mr. F is h e r . Why should they be Government obligations, as pro
vided in the bill?
Senator N elso n . Well, is there any practical effect—not legal ef
fect ? Take the bill as an entirety; it provides that the regional bank
shall keep a 33^ per cent reserve.
Mr. F is h e r . Yes.
Senator N elso n . And they are required to redeem the notes them
selves ?
Mr. F is h e r . Yes.
Senator N elson . Practically, in one sense, although the phrase
ology is not such, it amounts to this, that the Government—the prin
cipal debtor, in effect, is the regional bank and the Government is
the secondary debtor?
Mr. F is h e r . We have another recommendation in that connection,
which is simply this, that all the Federal reserve banks be mutually
responsible for all these notes. That will make even less necessary
the principle of Government obligation or guaranty.
Senator R eed . Well, you are rather inclined to the view, I take it,
that when this currency is issued it ought to be a currency that is
backed by the assets of all these banks ?
Mr. F is h e r . Yes, sir.
Senator R eed . And then ought to have, in legal effect, the guar
anty of the United States Government on top of everything else?
M r. F is h e r . T h a t is w h a t w e a rg u e fo r.
Senator R eed . S o that it would be a currency
as stable as the Gov
ernment itself?
Mr. F is h e r . Yes. I am not expressing any individual view. I do
not think it is necessary.
Senator R eed . That is the opinion of this board ?
Mr. F is h e r . That is the opinion of this committee.
Senator R eed . That is a question which we have had some discus
sion about.
Mr. F is h e r . But there is a very important difference----Senator B ristow (interposing). That is what I want you to clear
up. I do not think you differ from the others who have appeared.
2504
B A N K I N G AND CURRENCY .
Explain the difference, will you, please, between an obligation of the
Government and a guaranty of the Government.
Mr. F is h e r . A guaranty, in the last analysis, implies the possibilty
of a loss. In working this thing out properly there should be a segre
gation of the earning power of these various Federal reserve banks to
establish a fund to meet such losses, and the Government, in effect,
will be the trustee of that fund—will be its disbursing agent—and
will provide for these losses.
But in order to make their action potent and effective it has got
to take some form; and we believe that the flat guaranty, the same
as the flat guaranty of a surety company, where it gets premiums as
a consideration, is a business proposition, as against putting in, in a
broad, indefinite fashion, the words, “ These are the obligations of
the United States.”
Senator H o llis . Well, instead o f the certificate or note bearing
the statement, “ This is an obligation o f the United States Govern
ment,” you would have it bear the words, “ This note is guaranteed
by the United States Government,” would you?
Mr. F is h e r . I would say this, in substance, “ In consideration of
the surplus earning power of the Federal reserve banks, which, under
section so-and-so, subdivision so-and-so, is segregated for this pur
pose, the Government hereby guarantees, under the audit of the
Secretary of the Treasury, this note.”
Senator N elso n . Y ou need not put in any consideration, as would
be the case in a contract ?
Mr. F is h e r . It w o u ld be lo g ic a l; th a t is all.
Senator B ristow . The surplus earnings are to go to the Govern
ment—or the Government could put a tax on them ?
Mr. F is h e r . There are many ways o f handling it.
Senator B ristow . And that could be a sinking fund, and the
Government, by virtue of having this fund collected from this busi
ness, could guarantee that these notes would be paid?
Mr. F is h e r . Certainly, in a businesslike way. And they are
watching their job, too, so that they will not have any losses.
Senator B ristow . Yes.
Senator N elson . Would you want these notes payable on demand
in gold?
Mr. F is h e r . At the banks.
Senator N elson . At the banks?
Mr. F is h e r . Not at the Treasury. Only when there is loss is the
Government interested in the thing. When there is loss, provide for
it specifically, either from the fund or in some other way.
Senator N elso n . Will you tell me where this bill provides for the
regional banks getting gold to redeem them?
Mr. F is h e r . This b ill?
Senator N elson . Yes; this Glass-Owen bill. Is there any direct
provision in this bill which enables the banks to get the gold in the
first instance, the 33^ per cent gold?
Mr. F is h e r . Well, that is an automatic proposition.
Senator N elso n . H ow do you mean, an automatic proposition?
Mr. F is h e r . The development of a number of regional reserve
banks and establishing deposits will throw the gold-----
B A N K IN G AND CURRENCY.
2505
Senator N e l s o n (interposing). There is nothing in this bill re
quiring these stock subscriptions or this 5 per cent deposit to be made
in gold.
Mr. F is h e r . But you can get the gold the next day.
Senator N e lso n . Where would the regional reserve banks get the
supply of gold?
Mr. F is h e r . Oh, you can get the gold the next day— the collec
tion of other items.
Senator N e l s o n . What items?
Mr. F is h e r . It might be well to amend your bill to make it “ law
ful money” ; but mechanically it would be awkward to ship lawful
money to Washington or New York or Chicago. A certified check,
in ordinary banking practice, would bring you gold in the ordinary
course of business.
Senator N e l s o n . But we will say that all these stock subscriptions
and the 5 per cent fund can be paid in national-bank notes, for
example, what then ?
Mr. F is h e r . I think if you make it “ lawful money ” that you will
safeguard what you have in mind.
Senator N e l s o n . That is lawful money. They could be paid i n
either silver, gold, or greenbacks—all three.
Mr. F is h e r . Yes.
Senator N e l s o n . Suppose the b a n k s in their subscriptions and in
their 5 per cent reserves—suppose they dumped in nothing but green
backs—or silver, if you please ?
Mr. F i s h e r . Yes.
Senator N e l s o n . What then? That would leave the bank to start
without any gold, and it would throw the whole gold redemption
onto the Government, if you leave the bill as it is, would it not?
Mr. F is h e r . A s a matter of business practice, I should suppose,
unless there is some plan to the contrary, the Federal reserve bank
would be inclined to change that to gold.
Senator N e l s o n . Would it not be better, in order to give these
regional banks a gold redemption fund to start on, to require at least
a part of this stock subscription and a part of the 5 per cent deposit
to be paid in gold coin ?
Mr. F i s h e r . I believe that a percentage, based on the relative
amounts of money in the country, so much gold and so much green
backs, and so much silver certificates^ if you will, will be about as far
as you can go. In other words limit the proportion relative to the
poportion now existing in the currency of the country.
Senator N e l s o n . N o w , my recollection is that the last bank state
ments—and the chairman, who is well up in figures, will correct
me if I am wrong—showed that our national banks have over
$700,000,000 in gold coin in their vaults?
Mr. F i s h e r . Yes.
Senator N e l s o n . That is my impression. I think I am not far out
of the way, am I, Mr. Chairman ?
The C h a ir m a n . That is substantially right.
Senator N e l s o n . Yes; I think a little over that. So that they
could provide an ample reserve from that stock, could they not?
2506
B A N K I N G AND CURRENCY .
Mr. F is h e r . Yes. I think that the words “ lawful money,” how
ever, would be logical, and that the trend of experience would give
the proportionate amount of relative items that would be appropriate.
Senator N elson . Yes.
Mr. F is h e r . If you compel them to give gold, flatly, you would be
compelling them to alter the normal, natural relations of their pres
ent reserves.
Senator N elson . But would you not throw the whole burden on the
Government in that case? Suppose we had a condition as we had
during the last two years of Cleveland’s last term, where it should
pay the brokers and people of New York to ship gold to Europe; they
would get those national-bank notes and go to the Treasury and snake
out the gold and ship it to Europe and you would be throwing the
whole burden of gold redemption on the Federal Government, would
you not?
Mr. F is h e r . It seems to me that what you call the burden on the
Government to the extent that it is a burden, would be in favor of
this semi-Government bank, and consequently no harm would be
done. In the last analysis, it is more desirable to have the protec
tion of the Government’s gold supply in the hands of these banks
than in the hands of the Government, because they have commercial
means of protecting those supplies.
Senator N elson . Yes.
Mr. F is h e r . And so I have no special horror of that condition
that you suggest; for even if these Federal reserve banks did go and
exchange their greenbacks for some of that gold it would do no
particular harm, because it would be merely a change of place of the
deposit of that money.
Senator N elson . Yes.
Mr. F is h e r . Of course, no one knows just exactly what the expe
rience would be if “ lawful money ” were used. And if you want
to be severely scientific I suppose if you compelled it to be paid in
“ lawful money,” as I said before, in the proportion in which the
banks now have money, it would be about as good a result as you
could expect.
Senator N elson . N ow , a part of the object of this bill, and I think
a most worthy object, is to confer power on this system to do what I
call the foreign exchange business, which is now done through the
large foreign banks. In other wrorcls, to control the shipment of im
ports and exports with our American banking system. Now, if we
base our money—get it out of line with the money of Europe, with
the Bank of England, and make our money redeemable in the alter
native, in gold or in national-bank notes, we are not in a position to
compete with London and the London market in the matter of for
eign exchange, it seems to me. You are putting us out of skew, to
use a vulgar expression, with the banking system abroad.
Mr. F is h e r . We have got to effect our ultimate exchange with
international money; that is true.
Senator N elson . Yes.
Mr. F is h e r . But you always have the protection of peremptory
mandate. The Bank of France, if it wants to—and there is no law
that I know of that covers the situation—pays out silver, and they
naturally discriminate between the demand of their local people and
the demand of international trade. We, in our experience, naturally,
B A N K I N G AND CURRENCY.
2507
would have to accept and comply with the demands of international
trade. But I presume that if it came to a crisis we would be per
emptory in our relations with our own people. In other words, we
would give them some of these notes that you criticize.
Senator N elson. N ow, let me give you a concrete case-—and this
is a real case. A wholesale grocer in Minnesota, in importing coffee
from South America, has to do it in this way: He has to buy a letter
of credit on a bank or an accepting house in London, and then he
has to issue his draft, draw on that bank or accepting house in order
to get his coffee, and pays for it in that way. Now, that is the system
we are acting under now.
Mr. F isher . Our merchants are paying two charges for their ex
change.
Senator N elson. Yes. Now, we ought, to get away from that sys
tem, ought we not?
Mr. F isher . Your bill provides, in broad terms, to get away
from it.
Senator N elson. N ow, can we get away from it and accomplish
what you set out to do, unless we make our monetary system in
harmony with the Bank of England notes, redeemable in gold ?
Mr. F isher . N ow, I will refer to----Senator N elson (interposing). Well, I will not ask you any
further----Mr. F isher . Well, it seems to me that we have got to accept for
the time being, the fact that our currency is somewhat heterogeneous.
But with the establishment of these Federal reserve banks, and with
the full knowledge that we have $1,000,000,000 of gold deposited with
the Government at the present time; and without any antagonism,
gentlemen, on your part, I believe that those gold certificates will
gradually drift Into these Federal reserve banks, and that the notes of
the Federal reserve banks will gradually take their place—that you
have got a potential and very positive force which will increase the
relative amount of gold in banking circles of the country. With
all this, I think there is nothing ahead that is particularly dangerous.
Senator N elson. D o you think that, dollar for dollar these new
notes of the regional banks will take the place, without any “ ifs ” or
“ ands ” of the gold certificates ?
Mr. F isher . Gradually; and if you will advocate the principle
which is advocated by some, that these Federal reserve banks are to
hold the reserve money of the banks of the country, you would have
a very much greater reserve of gold, than you will under this bill.
I am not prepared to argue for that principle; but it is being thought
of; and it will give you a larger store of gold in the center than you
can possibly have under the bill.
Senator R eed. If these notes issued under this system are meant
to meet'the needs of commerce----Mr. F isher (interposing). Domestic commerce.
Senator R eed. Yes. That, of course, involves the idea of expand
ing and contracting, as the demands of commerce are greater or less.
Now, it has been argued here by nearly every witness that there was
no danger in the amount issued, or but little danger, because they
would be speedily turned into the banks and redeemed.
Mr. F isher . If properly developed.
2508
B A N K I N G AN D CURRENCY .
S e n a to r R e e d . N o w , i f you w ere to p e rm it those notes to be used
as b a n k reserv es t h a t w o u ld te n d to d e te r th e re d e m p tio n a n d d e stru c
tio n o f th em a n d th e re tire m e n t o f th em , w o u ld it n o t ?
Mr. F isher . Yes. But that is a different question. The time might
come when through the relative lessening of the amount of gold
in the Federal reserve banks the broad results of an international
purpose of developing great stores of gold in the centers might justify
the substitution of these notes for gold. It is not a question to-day,
but the time may come. In Germany, the notes of the German Bank
are held in the reserves of the banks. That throws a larger store of
gold to the center. Truly, the redemption proper is much more slow,
and in some cases the bills may never be presented. But it gives us a
more potent gold power which may offset that inflation to which
you refer. I am not arguing for i t ; but I want you to consider the
point.
Senator R e e d . What I am trying to get your views upon—because
you have had a good deal of practical experience—is this: When a
man brings a promissory note or bill of exchange to a bank and that
bank deposits it with the Federal reserve bank and gets currency for
it, of course that is currency based upon credits.
Now, if you substitute as a redemption fund credit money, it
seems to me that we 'would be in a position of redeeming credits with
credits, and therefore we Avould destroy the idea of an ultimate
redemption in something that the wrnrld calls money.
M r. F i s h e r . T h e m o re p r o m p t th e c le a rin g a n d th e m ore p ro m p t
th e re d e m p tio n th e less th e in fla tio n an d th e m ore a c c u ra tely th e
co m m o d ities ex ch an g e them selves,
Senator R e e d . Therefore ought we not to insist that the reserve,
whether it be a 33-§ per cent reserve or a 20 per cent reserve or a 75
per cent reserve—whatever it is—should be an actual reserve in gold?
Mr. F i s h e r . Yes.
Senator R e e d . I thought I had misunderstood you.
Mr. F i s h e r . Not at all. I merely want to call your attention to
the fact that the time may come when it is desirable to get into the
center for international purposes some of the gold now reposing in
the reserves of our national banks and our State banks and trust
companies.
Senator R e e d . What do you mean by “ into the center ?
Mr. F i s h e r . Into the Federal reserve banks. And to the extent
that there are Federal reserve notes outstanding there will be a trend
of gold to the center, and it will be a greater trend if some of these
notes were held for reserve purposes. But it would mean this: That
the aggregate reserves of the country would be relatively less. We
have very much higher reserves here than in Germany or in France
or England, and the time may come when we may have to be more
on a parity of reserves, and that would be an easy way, and in some
respects the best way—to reduce the reserves without reducing the
percentages.
Senator R e e d . N o w , it is a little aside from what you have been
talking about, but it is kindred to the theme we are speaking of.
Do you not believe that the very fact that the Federal Government
has in its vaults a billion and nearly one hundred million dollars of
B A N K I N G AND CURRENCY.
2509
gold, and in addition to that $150,000,000 more of gold stored away,
is a great element of strength in our present financial system?
Mr. F is h e r . In 1908, when I was invited to appear before the
then House Committee on Banking and Currency, I argued on the
plan that was then suggested—that the Government always should
have behind all banking its own store of gold.
Senator H e e d . Y ou would like to see that maintained ?
Mr. F is h e r . And it will be maintained under this bill to the extent
that the certificates of that gold are held for reserve purposes.
Senator R e e d . Yes.
,
Mr. F is h e r . It will be lessened to the extent that you can substi
tute in the hands of the people Federal reserve notes for gold certifi
cates now locked up in safe-depoit vaults and in stockings all over the
country.
Senator R eed . Yes.
Mr. F is h e r . In other words, if the gold, as you say, in the national
banks is about $700,000,000----Senator N elson . A little over.
Mr. F is h e r . I t is probable that there will be a gradual trend, by
which $300,000,000 more gold will come to the banking system under
the Federal reserve banks.
The C h a ir m a n . There is a little over $900,000,000 of gold in all
the banks, and a little less than $600,000,000 in the national banks.
Senator N elson. I was referring to the national banks, Mr. Chair
man. I am mistaken. You say a little less than $600,000,000?
The C h a ir m a n . Yes; in the national banks.
Senator N elson . Yes.
Senator R eed . Y ou are a little aw ay from the thought I had, Mr.
Fisher. If it is a good thing to have this store of gold, whether it is
represented by gold certificates or however it may be represented—if
it is a good thing to have that great store of gold, which you and I
seem to agree upon----Mr. F is h e r (interposing). Well, Germany has that principle, if
you remember.
Senator R eed . Well, if that is true, I wanted to ask you if, under
our present bank-currency system and greenback system, this gold
that is now in the Treasury is not accumulated there by virtue of the
fact that the greenbacks and the bank notes circulate generally among
the people, performing the functions of money, but at the Treasury
of the United States—at the custom house—they are not receivable
as a full legal tender, and therefore gold flows in?
Mr. F is h e r . I think that is one source of the gold supply. And
the second and greatest is that nobody wants gold.
Senator R eed . Very well; they do not ju s t now.
IVTi* F ish e r ISTo.
Senator R eed . That is about the only way we get it. Would it not
be the part of unwisdom to retire those two forms of currency without
substituting some other method by which we would gather this
gold in?
_ .
Mr. F is h e r . If I recall rightly, in the recommendation of our com
mittee, to which we are coming, there was the thought—although we
did not say so in so many words—that it might be possible, as an
added use of the earning power of the Government, as an outgrowth
2 510
B A N K I N G AND CURRENCY .
of this system, to give the Government the privilege of buying up
its own obligations.
Now, that expression “ own obligations ” is a broad term. It may
mean notes, it may mean bonds. And if I recall the discussion on
that point, it was broadly regarded as unsound to develop any
principle in banking in this country that did not ultimately contem
plate—perhaps not immediately, but ultimately contemplate—the
retirement of the greenbacks, on the ground, perhaps, not so much
that they are any particular danger to-day; they have been absorbed
in the credit relations; and any effect that has come from increased
prices has been lost sight of for many years; but it has been recog
nized that, if you have the principle of Government issues based on
them, in one year you may have- a larger amount than in another
year; and just as soon as you increase such issues, just so soon do you
inflate prices. That is an automatic result. You know it was the
case in war times, and it may be the case at any time in the future
while you have an issue based on debt. So that all economists and
practically all bankers, although they recognize there is no particular
danger to-day with the greenbacks, also recognize that fundamentally
it would be a very desirable thing to get rid of them.
Senator R eed . Well, if you think the issuance of money based upon
debt works inflation and governs prices, then it seems to me that this
bill ought to be scanned with some care, because we propose to
issue money here based upon debt.
Mr. F is h e r . What k in d s o f deb ts?
Senator R eed . Debts of individuals indorsed by banks and rein
dorsed by the Government.
Mr. F is h e r . When payable?
Senator R eed . At various times.
Mr. F is h e r . Not to exceed?
Senator R eed . Well, let us say 90 days; and there is no reason
in the world why they should not be immediately renewed and kept
out upon new paper, so that the volume would be constantly greater.
Mr. F is h e r . Well, in this state of the wisdom of the banking
world, or of the legislative world, it would be absolutely impossible
to make a scientific relation between commodity prices and banking
practice—I will agree that we can not do that, but we understand
the general trends.
Now, there is a vast difference between a note based upon a debt
which grows out of the sale of commodities, which is manufactured
to exchange those commodities, which clears itself and is paid, and
the commodities consumed, and a debt of a Government for war sup
plies, or any other kind of supplies which may be paid, never, or from
1 to 20 years hence.
Senator R eed . I know.
Mr. F is h e r . There is a vast difference in solidity.
Senator R eed . There is a difference in the two systems, and a very
radical one, if you assume, first, that the Government issues its cur
rency to pay its running expenses and makes no provision for the
speedy retirement of that currency; and then you issue another cur
rency based upon obligations that all mature within 90 days, and
thereby the currency is retired.
But we must take into consideration that as far as this bill is con
cerned if $1,000,000,000 of money was issued on 90-day paper to-day,
B A N K I N G AND CURRENCY .
2511
there is no reason why as that 90-day paper matures other paper can
not be substituted for it—a continual flow of paper coming in to take
the place of that which is paid off; and thus the currency be kept—
$1,000,000,000 in excess of what it was before the operations began.
Mr. F is h e r . The truth is, just what you say is entirely the prac
tice of the last 15 years, and during that period you ha\e seen puces
g# up in'this country 40 per cent. One of the chief elements, m my
judgment, for prices having gone up in such a fashion has been the
development of credit on collateral loans, on single-name paper, we
build factories and other enterprises. And, strictly speaking, we
can not get any nearer to a correct relation between money and prices
than prompt clearing, and everything you can develop m this bill to
effect prompt clearing will bring you nearer to that relation. 1 think
credit currency is absolutely sound, but you can not do any more
in this form than to provide the trend.
Senator R eed. Can not that be worked out to a great extent by
using this term “ automatic ” ?
Mr. F is h e r . I do not think you can possibly, scientifically, develop
the absolute correct relations between the loan made upon fixed and
upon fluid credit. We understand the philosophy of it, and within
the last year there has been a great deal of thought and attention
paid to that subject. I agreed to write two suggestions for two
amendments; but I would not agree, and I do not believe any man in
the world would agree, to write any amendment that would segre
gate scientifically and correctly the relations between fixed and fluid
credit
Senator R eed . Would it be your idea if a certain currency has been
out a certain length of time, it should begin to bear some kind of
interest charge which would compel its retirement ?
.
Mr. F isher . This bill provides that currency shall not be issued
by any other bank than the one that originally issued it. In other
words, it will come back for redemption. Now, we have two definite
experiences. If I remember rightly, at the very most Canadian cur
rency does not remain out more than 30 days. I think the Scotch
experience, perhaps, because of being a smaller country, is that it
remains out a shorter time. I do not remember the exact figures. I
do not think you need worry about inflation under the bill, because
you provide prompt redemption. Other than that, it is based on fluid
credit. Of course, going into the broad question, you have developed
scientifically that collateral loans should always be against time
deposits that can not be spent. Fluid loans should be the only basis
for currency issues, and should be the only basis for demand deposits;
and if you carry those ideas out into the realm of the savings bank,
into the realm of the trust company, of the State and National
banks, you are developing the principle—if you could give the proper
relations that would help. You have done something in this bill
that I think will cause added confusion between the prices of fixed
and fluid credits, and that is putting the savings bank section in the
commercial bank section. Unless there is an absolute segregation,
and an absolutely scientific management, you have provided a means
by which you can do a broad business upon a lower reserve basis and
upon a fixed form of credit.
.
.
S e n a to r R eed . Y ou th in k th e r e is so m e d a n g e r o f in f la tio n u n le s s
it is safeguarded?
2512
B A N K IN G AN D CURRE NCY .
Mr. F is h e r . Unless the segregation between the sav in g s and com
mercial banking is properly safeguarded.
The C h a ir m a n . There are one or two questions I would like to
ask you, Mr. Fisher. It has been suggested, with regard to the 2 per
cent bonds, that a certain volume of those bonds might be annually
retired upon the plan which I shall explain to you—that is, that the
2 per cent bonds held as a basis of note issue might be taken over in a
certain fixeck amount. We will say, for the purpose of convenience,
10 per cent of the outstanding volume, amounting to some $70,000,000,
to be taken over annually. Then, when those twos would be taken over
by the United States, the United States would, in that event, assume
the redemption of the national-bank notes issued against those par
ticular bonds now held by the Comptroller of the Currency. The
United States, in redeeming those national-bank notes, which now
rest upon the 2 per cent bonds, would issue its own Treasury notes,
payable in gold, at the Treasury in Washington, and place in the
reserve division of the Treasury those $70,000,000 of twos, but in the
form of threes, with a right in the Treasury Department or the Federal
reserve board to issue them either as bonds maturing in 20 years
or as annual notes renewable during a period of 20 years at the 3
per cent rate. In that way it would provide a basis of obtaining
gold, if necessary, to redeem such notes, and to issue those notes in
small denominations so that they would be readily absorbed as till
change, and therefore prevent, by that arrangement, the rapid de
livery of these notes for redemption.
Along with that suggestion, as a part of it, it was proposed that a
like amount of gold should be put in the Treasury reserve by taking
the gold from the current funds of the Treasury and putting them
into the reserve division and issuing, in lieu thereof, a like amount of
Treasury gold notes. The effect of that would be, in one such trans
action, $70,000,000 of bonds and $70,000,000 of gold going to the re
serve division, and against it $140,000,000 in Treasury notes pay
able in gold at the Treasury in small denominations.
Is that too complicated a proposal for you easily to follow ?
Mr. F is h e r . The proposition for the Government to redeem its
bonds with short-time obligations is good. The currency provision
I do not like at all. It would simply be an added confusion to our
currency system.
The C h a ir m a n . The purpose being eventually to retire----Mr. F is h e r . I would let the currency be handled by the banks.
You might better let the short-time notes go into the banks and let
the banks finance the $70,000,000. Let the Government retire and
finance, perhaps, the sale of 3 per cent bonds, but it seems to me the
issue and financing of short-time notes should be done by the banks
and not by the Government. I would not confuse the two prin
ciples.
The C h a ir m a n . The proposal was to retire the national-bank notes,
and this was the method by which to retire the national-bank notes
instead of the 2 per cent bonds alone. There would be in lieu of that
50 per cent of bonds and 50 per cent of gold.
Mr. F is h e r . It seems to me the retirement of the national-bank
notes can be effected by the Federal reserve bank. You have the
germ there of a good idea, but the currency function should be
handled by the banks and the other end of it by the Government—
B A N K I N G AND CURRENCY .
2513
that is to say, pay off the long-time bonds by short-time notes. But
I would not let the redemption gold reserve of the currency function
unify itself with the general principles ot your bill, and I think it
will be very much more satisfactory because, potentially, as you
give it, there is an element of inflation there.
...
The C hairman . The note issue would be identical; there would be
no inflation whatever. The notes issued would be notes to take the
place of the national-bank notes on the one side and to take the place
of the gold on the other.
,,,
.
,,
„ ,
Mr. F is h e r . That probably could be done if there were no col
lateral bank plan developed at the same time, but I do not think tie
two together would be desirable.
., „
,
The C h a ir m a n . The purpose was to provide for the 2 per cent
bonds in a way that would be satisfactory to the banks of the country,
who have been a little apprehensive that they would suffer a loss.
Mr. F ish e r . I believe the plan, however, to let the Federal reserve
bank retire a certain percentage each year by the issue of bonds or
currency either, maximum and minimum, as I have suggested, would
be a much better plan and the whole fabric of our currency would
be much stronger.
The C hairman . Mr. Simmons, who have you now?
Mr. S immons. If you will permit me, I will continue with that.
STATEMENT OF W. D. SIMMONS— Continued.
Mr. S immons. I will not attempt to follow Mr. Fisher’s lead in the
scientific discussion, but from the standpoint of a business man, with
the exception that we utilize, as business men, the semices ot Mr.
Fisher and a number of men in conference with us to give an ex
planation to us of certain points; and, as a result of those conferences,
W6 have formed our conclusions and made a repoit to the business
men of the country.
, ,
„ J
,
Mr. Fisher stopped at No. 8. I t speaks there of a tax upon notes,
and the point I wanted to make is that our conclusion was that the
taxing of notes put a tax upon certain elements of the business
interests of the country, because they have occasion to use notes and
as compared to those who only have occasion to use checks. And 1
was a discrimination which we thought ought to be avoided, because
we saw nothing in it but discrimination. Inflation is next. Inflation
could be without any issue of notes at all. It could occur, m tact,
where no notes are called for or desired. That covers 8 and 9.
As to No. 10, the mutual guaranty of the notes, that was covered
by Mr. Fisher.
, , , ,
,
No. 12, the statements of the Federal reserve bank has been covered
in your recent draft of the bill.
.
No. 13, the authorization of the Federal reserve banks to make
deposits in and discounts for any other Federal reserve bank. We
distinguish there between authorization and requirement. I t seemed
to us that unless your requirements were very thoroughly protected,
perhaps as has been proposed since, it was very much better anc
safer to trust to the judgment and patriotism of the Federal iesei\e
banks and their directors, as a whole, than to leave there a require
ment with a possibility of the use of it as has been suggested might
occur.
2514
B A N K I N G AND CUKRENCY.
Senator N elson . Mr. Simmons, Mr. Yanderlip suggested that un
less you had such a compulsory process the system would not work at
all. You must have it so arranged that you can pipe the reserves
from one regional bank into the other, and you could not do that
unless you had the compulsory system.
Mr. S im m o n s . I say unless it was safeguarded, as has been sug
gested, by a nonpartisan element and the requirement of unanimous
consent.
No. 14, the automatic continuance of the banking system. It
seemed to us there was a danger to the business interests of the
country to have no provision for the automatic continuance of the
existence and authority of banks to do business in case there should
be some delay in forming some substituted plan when these charters
expire. There have been such things as deadlocks and things of that
kind, and it seemed to us that some provision should be made here
so it would be automatic and have the business of the country con
tinue, rather than have the whole business of the country thrown in
a turmoil.
Senator N elson . This does not interfere with the automatic b u si
ness you refer to, except in the bond provision providing for the
gradual retirement of the circulating notes and in the change of the
reserve provision of the existing law. This system of pyramiding
reserves, the bill provides for a gradual change from one system to
the other within three years, beginning with 3 per cent during the
first year and culminating at the end of the third year with 5 per
cent. Otherwise it does not interfere with the existing system of the
national banks.
Mr. S im m o n s . But their charters would practically all expire at
the same time.
Senator N elson . Oh, no; their charters continue. They would ex
pire if they did not come into the system, but if they come into the
system they would continue under their charters as they are.
Mr. S im m o n s . Indefinitely?
Senator N elson . No ; those charters are only for 20 years in each
case.
Mr. S im m o n s . That is the point, and that is the reason we thought
if at the end of those 20 years there was not some substitute legisla
tion the banks should be allowed to continue.
Senator N elson . We do not change that system; there are a great
many banks that have renewed their charters. They renewed after
the 20 years. Some have had two renewals and lots of them have had
one.
Senator R eed . And, Senator, there has never been a renewal denied
in case the bank was sound.
Senator N elson . I do not recall any renewals being denied where
a bank was sound. They were always given as a matter of course.
And, for instance, if the bank joins this system its charter is for 20
years and, assuming it has run for 10 years and has 10 years more to
run, it would run under that. And at the end of the 10 years, unless
we change the law and this bill does not change that part of it, as
a matter of course they could get a renewal if in a sound condition.
I think there are only two changes, and they are in the matter of re
serves and in the matter of gradual retiring of the circulation, which
B A N K I N G AND CURRENCY .
2515
is squinted at in one section with reference to the bonds. Outside of
that they are left intact.
The C h a ir m a n . The intention of this bill was to limit the life o f
those reserve banks to 20 years, and I understand Mr. Simmons’s
suggestion relates to putting in an automatic provision, in this con
nection, with regard to the life of the Federal reserve banks and not
the ordinary national banks.
Senator N elson . N o ; he referred to national banks. You referred
to national banks, didn’t you ?
Mr. S im m o n s . If I did, I beg your pardon; I did not intend to
refer to national banks. Our one point is, as we understand this law,
to provide that the Federal reserve banks should automatically con
tinue at the end of 20 years if, at the end of that time, there is no
provision made, or there is no substitute provided. Unless there is
some provision made for that, they should automatically continue
the same as directors continue until their successors are elected.
Senator N elson . The same as in the case o f the national-bank act.
I thought you referred to national banks.
The C h a ir m a n . I t would require affirmative action, of course, at
the end of the 20 years.
Senator N elson . I think the bill ought to provide as the nationalbank law does for renewal under proper conditions. Otherwise, the
system would be at the mercy of Congress.
The C h a ir m a n . The intention was to make it at the mercy of Con
gress, instead of having Congress, possibly, at the mercy of the
system.
Senator R eed . There ought to be a phrase put in there providing,
in the event of no other legislation, that the system might continue.
Mr. S im m o n s . That is our whole point.
Senator R eed . We w ill consider that.
Senator N elson . Y ou are right. In case the system is retained,
then there can be a renewal, if the bank is sound.
Mr. S im m o n s . N o. 15 has been covered by Mr. Fisher, except it
refers to the use of some of these profits to liquidate the existing de
mand obligations of the United States. The situation as we see it
from a business standpoint is that those notes, as they come out, with
lawful money as a reserve against them, are practically the obligation
of the maker, the United States, backed by security—good commer
cial paper—and then against them for their protection, a reserve—
the obligations of the same maker, without any backing. Our idea is
that the existence of the greenbacks is what makes that necessary, and
it would be wise, so far as possible, or, as soon as possible, to get rid
of that which makes that obligation.
Senator N elson . Y ou would avoid that by making the new notes
redeemable in gold?
Mr. S im m o n s . Yes.
Senator N elson . Don’t make war on the greenbacks. The green
backs and the soldiers are what saved this country, and I want you
to remember the soldiers carried the greenbacks in their pockets
while they carried the muskets on their shoulders. It was not the
capitalists who saved the country; it was the people of the country
who were willing to take that currency and the people of the conn-
2516
B A N K I N G AND CURRENCY .
try who shouldered the muskets. Don’t make war on the green
backs.
Mr. S im m o n s . I am not making war on the greenbacks, but I am
suggesting taking a rather anomalous situation out of the way.
Senator R eed . Senator, you never came around and growled be
cause you took those greenbacks at 35 cents on the dollar, did you ?
Senator N elso n . Oh, no; we took the greenbacks and were glad
to get them
Mr. S im m o n s . The only other section that requires attention is
the one with regard to the use of the words “ Secretary of the Treas
ury,” and his position. It seemed to us that the provisions relative to
the Secretary of the Treasury were, in some cases, the way this bill
came to us—some of those instances have since been changed—were
rather conflicting in respect to his relation to the board of which he
was a member. In some cases he was practically in a position to
supersede the action and authority of the board of which he was a
member. It seemed to us wise to suggest that it be made entirely
clear. If the Federal reserve board principle is to obtain—and we
are ready to grant it is perhaps the best one—then it would seem to
us the Federal reserve board should be and have entire control and
should not be superseded by one member of that board. The other
points, I think, have all been covered in your recently drafted bill.
Senator B ristow . I was not present during the statement of Mr.
Fisher. I was called out and did not get to ask a question I wanted
in regard to the character of the Government’s guaranty of these
notes—that the Government stood as a guarantor, and, by virtue of
the Government’s standing as such indorser of those bank notes of
these banks, it should receive the profits from and above the 5 per
cent—60 per cent of it—and, presumably, those profits to the Govern
ment would create a fund which would justify it and make it safe
in standing for this security for the ultimate redemption of these
notes. Is that an idea that reflects the opinions of your committee ?
Mr. S im m o n s . Yes. I t reflects the conclusion we came to under
existing conditions. I think the opinion of our committee generally,
and I think the general consensus of the business opinion of the
country, is that it -would be well to have these notes a bank issue,
and then, if you want that Government protection, it can be; but there
is something to go back of that, something where the Government
supervises and guarantees the holder of that note, perhaps, but does
not get into the shape of a maker, and the compensation being that
it shall have the profits of this fund to make it entirely safe.
Senator B ristow . That is a sound business principle, is it not?
Do you not think it makes it entirely so ?
Mr. S im m o n s . It appears so to us; yes.
Senator B ristow . N ow , what would you think, in order to give
this bank and national banking system of the country greater
stability, of having a similar provision in regard to the deposits of
the bank. Let the Government levy a tax of some kind on the
operations of the bank, to create a fund which would guarantee
losses by depositors in case the national bank failed.
Mr. S im m o n s . I would think the general consensus of opinion is
against anything in the shape of the Government guaranteeing de
posits, based upon experiences that have been had.
Senator B ristow . What experiences do you refer to?
B A N K I N G AND CURRENCY .
2517
Mr. S im m o n s . I think the experience they had in Oklahoma, which
I think your chairman can tell more about than I can. I am not
stating except what I believe is the general opinion on that point.
Senator B ristow . I mean where there has been some condition of
failure in Oklahoma. But suppose the Government did not stand
sponsor, but that it created a fund by taxing the banks and that
fund was in the nature of a sinking fund out of which any of these
depositors would be paid, similar, we will say, to the Kansas law,
it simply administered an insurance department of the banking de
partment. As I understand, there are private insurance companies
now created to guarantee against the loss of bank deposits. Such
companies are in operation now, as well as State companies that
have been organized. In the State of Kansas there is a company
that is supervised by the banking department—that refers to the
State banks—and another company is organized which insures the
deposits of national banks. It is a private insurance company for
that purpose.
Why would it not be just as practicable for the Government to
create a fund, which fund, so created under the supervision of the
Government, should be pledged to the payment of depositors for
losses upon the same principle we are creating a fund to incure the
payment of any of these notes that might fail.
Mr. S im m o n s . I am not authorized to speak for the National
Chamber, because that point did not come up, but I think I under
stand the general attitude of the business interests toward that
proposition, and that it would be unwise because it would practi
cally put a premium on lack of care in the use and loaning of the
deposits, the idea being it would not make any difference and would
help most the man who regarded the thing; least, with the least care
in his work and the least care in his credit, without himself taking
the risk.
Senator B ristow . Have you ever examined the operation of the
Kansas law ?
Mr. S im m o n s . Not sufficiently to sp eak with thorough knowledge
of i t ; no, sir.
Senator P o m er en e . What is your judgment of that, Senator?
Senator B ristow . The actual operations of the law have been en
tirely satisfactory. A depositor can not lose anything in a Kansas
State bank. It is a voluntary fund; it is entirely voluntary as to
whether a bank comes in.
Mr. S im m o n s . It is not as to the depositor ?
Senator B ristow . No; it is not as to the depositor.
Mr. S im m o n s . He is the citizen, and he pays the bill; he loses his
share.
Senator B ristow . N o; the citizen does not pay the bill. It is like
insurance exactly.
Senator P om eren e . H ow many bank failures have .you had since
that time?
Senator B ristow . One.
Senator P o m erene . Within what period?
Senator B ristow . Four years. And the depositors receive imme
diately a certificate for the amount of the deposit, which bears G per
cent and it at once goes to a premium.
Mr. S im m o n s . That is not an insurance company.
2518
B A N K I N G AND CURRENCY .
Senator B ristow . It is by insurance. It is a mutual insurance com
pany organized by the State and supervised by the banking depart
ment. It simply provides that any bank which desires to insure its
depositors can subscribe to this fund and pay its assessments, and that
goes into a fund that is kept in the State treasury. If a failure occurs
of any of the banks, the banking department of the State pays the
depositors, takes possession of the failed bank and closes up its
affairs, and then the receipts from the winding up of the bank’s
affairs go into this fund which has been drawn upon.
Senator N elso n . That is practically the Canadian system .
Senator B ristow . It works just as Mr. Dawson said the Canadian
system worked. The depositors of the failed bank really get more
money, because their certificates at once go to a premium.
Senator N elson . They get certificates that draw 6 per cent interest.
Senator B ristow . Ours is exactly the same. The national banks
have organized a mutual insurance company which they supervise,
and it is not supervised by the State. They have had no failures.
Mr. S im m o n s . Who is it in that case that decides who shall
come in?
Senator B ristow . It is wide open to anybody that will comply with
the conditions.
Mr. S im m o n s . I t is n o t w id e open to any b o d y , b u t th e y m ake
co n d itio n s.
Senator B ristoav. The State makes conditions also. Nobody can
come in except a bank that has a proper standing.
Senator P o m erene . With your experience in Kansas, it w o u ld
hardly be fair to say that banking insurance placed a preium on
bad banking.
Senator B ristoav. N o . That is the argument of people who do
not knoAv anything about it.
Senator N elso n . The real opposition is it places the big banks
that are such good institutions on a level with the others that are
not so good—with the small institutions. They haA-e as big a shoAv
to get deposits under that system as wre have, and that is where the
opposition comes from.
Senator K eed. Mr. Simmons, are you directly interested in the
banking system yourself?
Mr. S im m o n s . I am a director in a bank; yes, sir.
S e n a to r R e e d . Y o u r p r in c ip a l b u s in e s s is r u n n in g th e g r e a t h a r d
w a r e b u sin e ss w it h w h ic h y o u a re c o n n e c te d ?
Mr. S im m o n s . Yes, sir; entirely.
Senator R eed . And I think you have one of the largest wholesale
hardware businesses in the country. N oav, your banking business is
a sort of an incident?
Mr. S im m o n s . A very decided incident.
Senator R eed . As a business man, you recognize the fact that you
are constantly interfered with in your business by the uncertainty as
to whether a bank can let you have all the money you want, even
when there is absolute solvency ?
Mr. S im m o n s . The uncertainty as to whether they are going to
continue to be for some time to come.
Senator R eed . And you fear these financial panics and depressions
that come. Do you think, under all the circumstances and in vieAV
B A N K IN G AND CURRENCY .
2519
of the conditions, that every line of business, including the banks, can
afford to make some sacrifice in order to get a stable system ?
Mr. S im m o n s . Well, I think they already have; it is a question of
what you mean by sacrifice.
Senator R eed . That a bank can ever afford to sacrifice it profits ?
Mr. S im m o n s . Yes; I do; undoubtedly; a financial sacrifice.
Senator R eed . And that they could all get together and cooperate
to work out a system and not be, as I fear some people have been,
fighting a system; I do not mean you bankers.
Mr. S im m o n s . Perhaps I can answer you by calling your attention
to the pending clause of the report of our committee, recommending
that we recognize here a definite effort to do a constructive thing and
to supply this country with the kind of currency system. The atti
tude of the committee was to see to what extent they could be helped
to do that; not to find fault, but to see what we could do to add
strength to that.
Senator N elso n . Y ou have a very able report, and I want to con
gratulate you on the points you have made and to the sound basis on
which you have argued. I think you have been very helpful to us
here in making your suggestions.
Mr. S im m o n s . Y ou are very kind to say that. Senator.
Senator R eed . I agree with that remark.
Mr. S im m o n s . If it is agreeable to the committee, Mr. Wheeler, the
president of the Chamber of Commerce of the United States, will
address you now. He can give you a pretty clear idea of the purpose
of the chamber in taking up this matter.
The C h a ir m a n . We will be very glad to hear Mr. Wheeler.
STATEMENT OF HARRY A. WHEELER, VICE PRESIDENT OF
THE UNION TRUST CO., CHICAGO, ILL., AND PRESIDENT OF THE
CHAMBER OF COMMERCE OF THE UNITED STATES.
Senator R eed . Will you give your name and your business connec
tions.
Mr. W h e e l e r . Harry A. Wheeler, banker; vice president of the
Union Trust Co., Chicago, 111., and president of the Chamber of
Commerce of the United States.
Mr. Chairman and gentlemen, this matter has been so clearly stated,
it seems to me, by Mr. Fisher and Mr. Simmons relative to the points
covered by our committee on banking and currency, and submitted
for the vote of the chambers of commerce of the United States, that
if I should go over that matter it would be a waste of your time and
simply a repetition. I would like to put into the record, however, a
statement of how we came to ask for this hearing on behalf of the
chambers; how they are tied together, and how the vote was taken;
for Senator Nelson, voicing the idea that chambers of commerce have
always acted through a few men who voice the sentiments of all the
members, holds the impression that we fear some of the rest of you
gentlemen hold that this vote was taken in a desultory sort of way
without the idea of getting the sense of the organizations and there
fore would represent merely the sentiment of the few men who might
have received the report and read it and voting “ aye ” or “ no.”
2520
B A N K I N G AND CURRENCY.
Now, the chamber of commerce----Senator N elson. I am disabused of that idea. I think our experi
ence here in Congress, of getting resolutions of chambers of commerce
and other organizations which do not mean very much may have
given us that impression, but after hearing what you gentlemen have
had to say to-day I am satisfied that that does not apply to your
case, because you seem to be working on bedrock all the time.
Mr. W h e e l e r . I thank you, Senator.
The Chamber of Commerce of the United States was formed only
18 months ago. It was an organization to bring together as a united
body all of the national trade organizations and the chambers of com
merce and boards of trade of the country. And a chamber of com
merce in a city of 1.000 inhabitants is made just as welcome as a
member, and it is made just as possible for them to become a member
as the Chamber of Commerce of the city of New York, or of the city
of San Francisco, or of Boston, or of any other of the larger cities, or of
the American Bankers’ Association, or of the National Wholesale Dry
Goods Association. That democracy has been written into the organ
ization, and its board of directors, which comprises 25 men chosen
from definite geographical divisions in every part of the country,
have had conferred upon them no power to commit the chamber to
any policy or any piece of legislation, and that it may be fully de
cided whether the matters submitted to the chamber are of a national
character, and proper to be submitted to the various bodies for their
opinion, and if it is so determined, then such a referendum as this
must be prepared and submitted to all the organizations affiliated
with the chamber.
Senator Reed asked whether there was argument. If you gentle
men had the time I would like to have you see the manner in which
this is put up, with the report of the committee, its relation to the
bill then being considered, and the marginal notes with the sugges
tions that were made, and with marginal notes relative to the amend
ments that had been suggested. There is not one single syllable in
that urging any member of the chamber of commerce to support any
one of those provisions, but they are placed exactly before them in a
business way in order to endeavor to ascertain what is their mind
and what is their opinion in regard to that matter.
Now, gentlemen, when this referendum was issued there were 380
organizations represented in this body, and it represented 200,000
business firms and business men in the constituent membership of
these organizations. If I were to say to you that the vote which
has been taken and recorded to you by Mr. Simmons was the vote
of the business men of this country, I would deserve your censure
and condemnation, because it is not. You know as I do how hard
it is to get business men to take economic questions and study them
and record an intelligent opinion upon them. This went out to the
various organizations and associations and was voted upon by more
than one-third of the organizations and by 41 per cent of the full
voting strength of the chamber. The voting strength is made up
so that the Chamber of Commerce of the city of Boston, for in
stance, has 10 votes and the Chamber of Commerce of Phoeniz,
Ariz., 1 vote. The maximum number of votes that any organization
may cast in regard to any question or piece of legislation upon which
a referendum is submitted is 10 and the lowest, of course, is 1. So
that an organization of thousands of members can not record more
B A N K I N G AND CUBKENCY.
2 521
than 10 votes and never by any combination can dominate the vote
of the whole, and 41 per cent of all the votes that could have been
cast upon this question was cast by the associations.
Senator, it was my good fortune during the 45 days that this ques
tion was pending before the business associations of this country to
visit a good many cities, working with them in connection with what
I regard as one of the most fundamental principles of our business
life, to get our business men interested in something besides trading
their own goods for other people’s goods or their own goods for
profit; that they shall interest themselves in a sane way in finding
out what is going on, what is their relation to it, how it affects their
business, and get them to form a clear opinion and to express an opin
ion where it may be of value.
' In that the Chamber of Commerce of the United States from its
beginning has wished to say to the executive and legislative branches
of this Government in Washington we are not coming to you and
asking that you pass legislation for us; we are not pressing bills for
your consideration; we are asking that you help us to help you if
you want the business opinion of this country upon measures that
are before you. We will give it, as we have tried to do in this case, an
absolutely impartial and unbiased opinion upon various points, pre
senting the matters of these organizations, not asking that they sup
port the measures as we proposed them, but that they give us their
advice and help and suggestions.
I never have seen business men more keenly interested in any sub
ject than the people have been in this matter.
The boards of directors of various organizations have called their
organizations together, and when that was impossible they have
sent out extracts from this report and asked that these arguments
and extracts and explanations be read and the vote recorded, and
during the last 45 days, Mr. Chairman, I have sat in conventions of
business men who have asked me to come in and talk to them about
these seven provisions, and they have recorded their vote upon them.
You will know from Mr. Simmons’s report that it is not a unani
mous vote. There were some 90 votes against the one which received
the greatest number of negative votes and I believe some 390 votes
in favor of the provision which received the greatest number of
affirmative votes. So that there was thought in this matter, and in
presenting it to you as we do to-day we present it as the sober and
deliberate action, favoring these recommendations for amendment
or the suggestions for your consideration. They come from 140 of
the largest commercial organizations in this country, in 28 States of
this country, and comprising a membership of more than 150,000
business men.
And if you have time to read the letters that have come from those
organizations which did not vote and find how conscientiously they
considered their relation to this subject you would be still more im
pressed. I am only going to give you one. One organization having
had its committee at work upon this proposition, brought it before
its executive board for consideration and said, 4‘ We can not approve
all of the amendments suggested by the committee of the Chamber of
Commerce of the United States. We can not vote against your bill,
because in so doing it would tacitly approve the bill as now written.
Neither can we vote for your bill, and because we can not do either
2 522
B A N K I N G AND CURRENCY.
one we dare not vote at all.” They have been conscientious in the
matter and tried to look at it in a fair way. I do not believe in that
standpoint. I do not believe that is a good thing, but these organi
zations have, so far as possible, endeavored to form their conclusions
soberly and honestly, and I give them to you for what they are worth.
As this organization grows it will endeavor, whenever it comes be
fore a committee of the Senate or House, to bring to you the honest
and unbiased and unprejudiced opinion of the members of these
various organizations.
I am very much obliged to you, gentlemen.
The C h a i r m a n . The committee very highly appreciates the pains
you have taken to carefully examine this bill and criticize it and
suggest amendments to it, and nothing could be higher evidence of
the opinion you have given than the form in which you have pre
sented it to your own members.
Senator S h a fr o t h . We expect to utilize this very much.
Senator B ristow . Of course, this does not purport to reflect so
much the views of these men as to what legislation we ought to have
and what amendments ought to be made to this bill?
Mr. W h e e l e r . That is right, Senator.
Senator B ristow . N ow , some of us believe that a central Federal
bank would be better than 12 Federal banks organized as these are
proposed to be organized. Now, as to the choice between a central
Federal bank providing for the performance of certain functions in
our financial system or 12 banks organized as these are, we would
not have, the judgment of these gentlemen as to that, but only an
amendment which they feel ought to be made to this specific bill?
Mr. W h e e l e r . That is right. Our committee on banking and cur
rency when it came to Washington to study this bill and endeavored
to formulate a report felt that your effort in Washington was one
directed toward constructive legislation; that you had certain prin
ciples which you believed should be worked into the bill, and we were
ready to try to support you in legislation on those principles.
We therefore put to our constituent members no question that was
not related to the bill itself. We did not argue that a central bank
was better than 3 or 12.
Since we came to look at this as a business proposition, knowing,
as business men do, the difficulty of establishing a great working
machine with a large number of branches thrown out, we felt, when
in the wisdom of the Federal reserve board of this association there
should be a gradual development of the regional associations in
stead of endeavoring to establish a great number at once and thereby
making confusion, that possibly that could be avoided and yet not
destroy any of the principles that underlie this bill, beginning with
the natural centers and increasing as the demand came or as the
Federal reserve board saw fit to increase them. That is the nearest
we came to that point.
Senator B ristow . Would we infer properly from that that in your
opinion if this Federal reserve board should start with one Federal
reserve bank, extend branches of it or establish others of a similar
character until it gradually absorbed the entire functions which are
contemplated, would be safer and create less possible disturbance of
the normal operations of our business affairs than to undertake to
create the whole thing at once in one general enactment ?
B A N K I N G AND CURRENCY .
2 523
Mr. W h e e l e r . Not from the Chamber of Commerce of the United
States, because it has expressed no voice upon that. Personally, if
you are going to adhere to the provisions of the bill relative to the
number of regional associations, and you want convenience as well
as safety, I believe that more than one regional bank started at the
beginning is desirable rather than detrimental.
Senator B ristow . H ow many would you suggest?
Mr. W h e e l e r . I hold with my own committee that with per
fectly natural conditions certain three centers might be chosen, and
then you may have within six months nine more. That develop
ment would be the natural and logical development under the de
velopment of the Federal reserve board.
Senator N elson . Your suggestion is that we start with three in
the central reserve districts.
Senator B ristow . That strik e s me as an in te re s tin g su ggestion.
I would like your own opinion on this phase of the subject. We
are creating here by this bill a Federal reserve board that sits here
in Washington and supervises these banks at a distance without any
personal contract with them. Under your suggestion there would be
three. These three banks that are in active operation as banks are
presided over by boards of directors and superior to them stands
this Federal board. Would it not be better, from a business point
of view, safer, and tend to efficiency to have that board itself in the
active management of the bank, so that with its experience in con
tact with the operations of the banking business it would have a
judgment based not only upon its theoretical knowledge but on the
actual experience of the men who are to decide, ultimately?
Senator N elson . Y ou mean one single bank?
Senator B ristow . Well, yes; if those men were in charge of a
bank, would they not be better equipped to pass wisely upon the
questions that would come naturally before them?
Mr. W h eeler . Y ou ask this as m y personal opinion?
Senator B ristow . Certainly.
Mr. W h e e l e r . I think if it were possible to secure it from Con
gress and with the consent of the country, that the highest efficiency
would come through greater centralization, but I am also equally
convinced that it is not practical at the present time to do it.
Senator B ristow . That suggestion has been made to us heretofore.
Please tell me why you think it is not practical.
Mr. W h e e l e r . I think that the same reason that brought into
disrepute the bill put out by the Monetary Commission—the fear of
control which would always be present—would probably have the
effect of making your central bank distasteful to a large number of
the people of the country.
Senator B ristow . Have you taken into consideration the wide dif
ference between the Monetary Commission’s plan and the one sug
gested ?
Mr. W h e e l e r . I think, Senator, that you have a very admirable
adaptation in the present plan. It is in a sense a broadening of the
scope of the other, and in another sense it is a contracting of that
scope through the elimination of a very large amount of machinery
that might have been very difficult or expensive to operate. Person
ally I have no fault to find with the provision of the bill creating, as
it does, a given number, or even if you make it an indeterminate num-
2524
B A N K I N G AND CURRENCY .
ber, in the discretion of your Federal reserve board or regional asso
ciations that shall be linked together definitely by a board that shall
have control of the issue and shall really have control in large meas
ure of the actual direction of the banking functions of the country.
Senator B ristow . Y ou think that board, situated, as it will be, at
a distance, in Washington, as a governing board, and not actively in
touch with the operations of the banking business, will be more
capable of passing wisely upon the questions that grow out of the
operations than if they were m active touch with the situation?
Mr. W h e e l e r . In so far as they are required to do it in their g e n
eral supervision. If you gentlemen can, in your wisdom, work into
the bill some advisory capacity that is real and not fanciful, that has
responsibilities and that is responsive to the country itself, then I say
yes, they can do so.
Senator Reed raised the question of the relationship of the two
members of an advisory council. May I suggest, Senator, that their
relationship, to my mind, is like this: They are elected by an advisory
council, one member of the council being chosen by each regional
bank, by the vote of the directors of that bank, representing three
banks, three representing the commercial and industrial and agricul
tural interests of the country, and three appointed by the Federal
reserve board. You have, therefore, a board of directors of your re
gional association elected a member of the advisory council or board
of the regional association, really being representative of the three
elements that constitute our national life.
I believe that you can safely say that an advisory council elected
as suggested is really representation more than the bankers, although
I grant you that six of the nine board of directors of the regional
bank are elected under certain provisions of your bill by the member
banks; but they are so safely guarded that your Federal reserve board
has the right to change that representation, and therefore your ad
visory council, in my judgment, with either 5 or 7 or 12 or 20, would
really be representative of the several sections of our life rather than
only the banking elements of our life. If the council was then
elected, and out of their number best qualified to serve them in an
advisory capacity with the Federal reserve board at Washington,
charged with no other task than to keep informed relative to the
financial and the agricultural and commercial conditions in their re
gional districts, and had that as their sole task, I believe you add dis
tinct strength, because your Federal reserve board is charged with the
task of guiding and supervising all the affairs of the regional banks
and practically protecting all of the functions of those banks, and
they have a task which is a big one for seven to perform, and these
two men will bring live-wire information to the seven relative to the
districts and their condition.
Senator B ristow . As I understand you, you would prefer to have
these three regional banks governed as the provision is made in this
bill rather than to have one central bank governed by a board se
lected similar to this Government board ?
Mr. W h e e l e r . Again, personally, I can only reiterate what I said
before. From the point of my efficiency, if it seemed possible, there
are advantages in a central bank, as there are always advantages in
centralization. But, next to that—which does not seem to me practi
cable—I believe this plan is good.
B A N K I N G AN D CURRENCY .
S e n a to r B ristow . B u t p lease leav e o u t th e p ro p o sitio n
w h e th e r it is p ra c tic a b le o r n o t------
2525
as to
Senator N elson. Will you allow me to put in this remark right
here in connection with this, that in answering the Senator you
must bear in mind that the Aldrich bill, so called, was controlled by
the bankers, and this plan is to give the absolute control to the
Government.
Senator B ristow. That is exactly the point. This proposition is
that the Government shall controi a United States bank, and the
bankers shall not appoint any of the officers that shall control it.
They need not subscribe to the stock unless they want to.
Mr. W heeler. Senator, I think the difference very largely is
this: Under the so-called Aldrich plan, which was a control by the
banks, as you say, your central bank had full banking functions, but
had attached to it a very large amount of a very cumbersome ma
chinery—more district associations than you gentlemen have reserve
associations in this bill, and tacked on to this a large number of local
banks that were feeders into these others.
Senator B ristow. If you will pardon me, I would rather have
this than the Aldrich system, but I am very much against this.
Senator P omerene. I thought you favored the Aldrich system.
Senator B ristow. I should not vote for it under any considera
tion. But I am trying to get at another thing. 1 want to know if
you believe that a central bank, controlled by the Government, by a
board appointed for that purpose, operated by that board, perform
ing all the functions that are intended to be performed by this system,
providing means for the mobilization of reserves, a bank of issue, a
bank of Government deposit, a bank of rediscount—if you think it
would be more efficient than three regional banks governed as sug
gested in this bill?
Mr. W heeler. I do not.
Senator B ristow. Why do you not?
Mr. W heeler. The only advantage we can get from a central
bank, governed and controlled as you would have it in relation to
this same sort of movement, would be a possibly greater mobiliza
tion of reserves. The power of issue lies with the Federal reserve
board, as you have it here in your bill, and the supervision likewise,
and with a central bank you must have branches, and many of them
probably, to serve, as you will in this case have to have branches
of your regional association. And I believe that for convenience
sake where you have tied up your regional association through such
a number as you here propose—and I depart from some of the testi
mony that has doubtless been given by many in my own profession
relative to the power that you may give to cause reserves to be
transferred. I believe they should be in some wise safeguarded, but
the permissive power to require certain functions to be performed
must be given to your central body, whether it be a Federal reserve
board, as planned in this bill, or the board of directors of a central
bank such as you may suggest. And I believe that for the con
venience of the country it will ultimately work out better, as ex
perience is gathered and as we may make certain amendments, in the
operation of these regoinal banks and in the control of the Federal
reserve board, to have them located at various parts of the country
instead of absolutely centralized at one point.
2526
B A N K I N G AND CURRENCY .
Senator B ristow . N ow , suppose that instead of having these di
rectors of the regional banks selected as they are we have them all
appointed by the President and confirmed by the Senate, so that the
regional banks are controlled and governed by a Federal board.
Senator P om eren e . I do not believe I understood your question.
Do you mean that all of the members of the regional board be ap
pointed by the President?
Senator B ristow . Yes; that is just what I mean.
Mr. W h e e l e r . Senator, I think, that if you were to do that you
would either be compelled to work into this bill some provisions that
would absolutely compel the banks of the country to join in this
movement, or you would drive them away from it. If you compel
subscription to the capital stock of a body that has to do not only
with that capital but with the reserves and without any voice or con
trol whatsoever in the matter except such as may be delegated to it
by an appointive power from a distant point, I think it would be
an injustice to the men who contribute the capital, and I think they
would not feel very much like joining into a regional association plan
of that kind.
Senator B ristow . Y ou think it is more unjust, if I understand
you correctly, for the Government to appoint the managers of the
regional banks than it is for the Government to appoint the board
which supervises the action of the managers of the regional banks?
Mr. W h eeler . I think the central board, which is in the control
and appointing power of the Government, is the supervisory power
of the functions of all the banking of the country and the power
of issue, and the Government in this bill to stand back of the notes
that are issued, and if it stands back of them as responsible it has the
right to name the men who shall control that issue and who shall
supervise—and wisely supervise, we in business believe—the banking
operations and functions of the country.
Senator B ristow . Y ou distinguish, then, between this supervisory
board here at Washington, that you do not care to have a member on,
but that you want to be in intimate relations with—you distinguish
between that board and a board that is to actively manage these
banks ?
Mr. W h e e l e r . Yes; I do.
Senator B ristow . N ow , there are some of us that believe that the
same interest that would control Mr. Aldrich’s central bank would
control these regional reserve banks—some of us have not any doubt
about it—that this provision is simply a very adroit way to avoid the
unpopularity of Mr. Aldrich’s plan and still not lose the essential
substance of it.
Mr. W h eeler . Well, you have safeguarded yourselves in this way.
Out of the board of nine, six are elected under certain conditions—
and, I think, very ingenious conditions. And I do not agree with
you that they are likely to work to central control by the member
banks. Let us not forget that three of the nine are appointed by the
Federal reserve board and that three of the nine may be removed by
the Federal reserve board if they should not be representative of the
interests that are supposed to be covered by the provisions of that
bill.
Senator B ristow . Suppose that we here, in our judgment—I am
not saying that many members of the committee would favor it—
B A N K I N G AND C U E E E N C Y .
2 527
make six of them appointed by the Government direct, or seven, and
let the bankers elect two; in other words, have the same proportion
of the management of these regional banks that you want on the
Federal board here.
Mr. W h e e l e r . Again, personally, Senator—because these are only
personal opinions, and they have nothing to do with the referendum—•
I like the present plan better.
Senator B ristow . That is what I have been trying to get at. I
have an impression that the great interests which are so much inter
ested in this legislation are willing to accept a Federal board pro
vided they can have a close relation to it, but with supervision in a
general way; but they would strenuously object to having the re
gional boards have direct personal control, even if they did not have
to subscribe the stock.
Mr. W h e e l e r . Admitting now there should be another method of
stock subscription?
Senator B ristow . Yes; what would you think of that?
Mr. W h e e l e r . I think if you leave the banks out of it altogether
they have no voice. Make it optional for them to come in or not.
You choose your method of control as you please. Not speaking for
the banks, but from a common-sense viewpoint, I should judge they
would not be interested when they were not parties to the transac
tion, in any sense of the word.
Senator B ristow . D o you think that kind of system would succeed
in this country; that kind of Federal bank, based on popular sub
scription ?
Mr. W h e e l e r . I am not competent to answer that question.
Senator B ristow . I s it not quite similar to the French system?
Mr. W h e e l e r . They have a widely scattered stock holding; so
have the others; so has the Bank of England, but not absolutely open
to the general public in point of controlling power. If you are
going to give your shareholder in your American bank, who holds
one share, voting power, then naturally you would confer upon him
something they do not have among those who hold stock in the Bank
of England. You democratize it; I do not know that you benefit
the selection, by any means, of the directorate.
Senator B ristow . What is the capital of your trust company ?
Mr. W h e e l e r . $2,000,000.
Senator B ristow . And its deposits?
M r. W h eeler . T h e d ep o sits a re $22,000,000.
Senator B ristow . Y ou are the vice president?
Mr. W h e e l e r . Yes.
Senator B ristow . Who is the president?
Mr. W h e e l e r . Mr. Frederick H. Kawson.
Senator N elson . Are you affiliated with a national bank?
Mr. W h e e l e r . Senator, I am not.
Senator N elson . I do not mean you personally, but the trust
com
pany?
Mr. W h e e l e r . We are not.
Senator N elso n . N o national bank is a stockholder or has any
interest?
Mr. W h eeler . Not in the slightest degree.
Senator N elson . There are some trust companies that are only
annexes of national banks. Yours is not one of them?
2528
B A N K I N G AN D CURRE NCY .
Mr. W h e e l e r . Happily, ours was organized in 1869, and has stood
on its own legs since that time, and has no other affiliation.
Senator N elso n . There is one point more I should like to call
your attention to. As I understood it, your opinion and the opinion
of your delegation is this, that inasmuch as we are now starting on a
new experiment, the issuing of what I call asset currency, a currency
lhat we have never had since the old system of State banks before
the war, you feel—and I understand it is the force of your referen
dum—that that currency should be guaranteed, although it is a cur
rency of the banks; that it should be guaranteed by the Federal Gov
ernment ?
Mr. W h e e l e r . That is the recommendation of the referendum.
Senator N elson . That is as I understand it. That is all.
Senator W e e k s . Mr. Wheeler, if the Senate passed the bill as it
came to it from the House, would your trust company come in under
the bill and become a member of the association ?
Mr. W h e e l e r . I do not think it could, Senator, because the bill as
I read it now in the last copy that I have is so clouded with respect
to the relation of the State bank and trust company to the other
scheme that I doubt if it could come in without some changes in the
present bill.
Senator W e e k s . If the bill were changed to conform to the recom
mendations made by the chambers of commerce, do you think that
that would change the conditions so that you would come in ?
Mr. W h e e l e r . That would not change it, Senator.
Senator W e e k s . Then you do not think your trust company would
become a member of the association under any circumstances that are
likely to prevail?
Mr. W h e e l e r . Quite to the contrary, I think they would, but I
think the necessity would be to clear up certain phases of the bill
which are now rather indistinct in our minds relative to the savingsbank section. There are provisions there relative to liabilities. As
I understand it, the bill was drawn with the idea that it should
apply to the national bank, and not any very great care was used in
phrasing the bill to make it possible to apply it jointly to the Na
tional and State banks.
Senator W e e k s . Y ou have not discussed that, of course, in any
form, because you are here to discuss the report which the chamber
of commerce has made; but I suggest to you that you in some way
communicate to the committee your views on that particular point,
because that is something we have to consider, or should consider,
before we finally report the bill.
Senator S h a fr o t h . We should like very much to get your trust
company in.
Mr. W h e e l e r . I think if you can make this attractive enough so
that the State banks and trust companies will be desirous of affilia
tion, it will greatly strengthen the whole thing.
Senator W e e k s . We want to make it attractive enough, and we
want to know what we have to do to do that.
Mr. W h e e l e r . Senator Weeks, you received from Mr. Hulbert, of
the Merchants’ Loan & Trust Co., certain suggestions from the State
banks of Chicago.
The C h a ir m a n . Yes. Do you happen to have a copy of th a t?
B A N K IN G AND CURRENCY .
2529
Mr. W h e e l e r . I have a copy at the hotel, and should be glad to
send it to you.
The C h a i r m a n . 1 should be glad if you would. I had a copy and
lost it.
Mr. W h e e l e r . Those we subscribe to; and while I was present at
the meeting which considered Mr. Hulbert’s suggestions the bankers
present distinctly stated that in making these suggestions they did
not say that the bill with those suggestions incorporated would be
one that would invite them in. They asked the Senate committee to
give consideration to them to clarify the provisions of the bill so as
to make possible their coming in, whereas now they feel they could
not.
Senator W e e k s . I want to bring up just one point which you have
discussed during the questions which Senator Bristow asked you,
and that is about the question of local credit. You are in close touch
with the depositors and the borrowers of your trust company. You
have talked with them about their needs, and you try to respond by
loaning to them when they need it. Do you think a board here in
Washington is going to be competent—it does not make any difference
how wise the men are—to determine that a customer of yours does
not need the accommodation, or that you should not lend him the
money, even if you needed to make a rediscount by so doing?
Mr. W h e e l e r . I do not think, Senator, that any Federal reserve
board at Washington can properly sense the needs of the customer of
an individual member bank.
Senator W e e k s . Let me put that proposition of mine in a little
different form? Don’t you think this law ought to be such that a
member bank may, within certain limitations as to amount, be able
to go to the reserve bank and get rediscounts—assuming, of course,
that it is paper that comes within the provisions of the law—without
any veto from anyone?
Mr. W h e e l e r . I th in k t h a t w o u ld a d d g re a tly to th e a ttra c tiv e n ess
o f th e m easu re a n d its w o rk in g basis, b u t you have, as I u n d e rsta n d ,
in y o u r reserve asso ciatio n th e p o w er o f d isc rim in a tio n w ith respect
to p a p e r, o r you in te n d to h av e it.
Senator W e e k s . I have not very much confidence in the power of
a board in Washington to discriminate as to the paper of your cus
tomers in Chicago.
Mr. W h e e l e r . What about the board of the regional reserve as
sociation?
Senator W e e k s . Well, I have not very much confidence in that
even. I would rather have your judgment. I want to have this law
finally framed so that your customer needing money may go to you,
and, if you agree that he does need it, you may make a loan, even
though you have not the money to lend and need to make a redis
count by so doing, and that you can get your rediscount as a matter
of right, not as a matter of say so of some board—up to some limit,
of course. I do not think w^e ought to provide for rediscounting an
amount greater than the capital of the bank—perhaps some such limit
as that—but, up to some such limitation, I think the banks should
have the right to go to the reserve bank and get accommodations with
out any veto from anyone. If we do that we are going to have a
national system and we are going to accommodate the business in
terests of the country, as those interests are determined by the local
2530
B A N K I N G AND CURRENCY .
banker and by the local borrower and not by a board in Washington
or anywhere else. If we are going to provide that a board shall deter
mine those things, in my judgment we are going to have all kinds of
confusion and dissatisfaction.
Senator N elson. Senator Weeks, let me call your attention to one
thing that occurs to me----Senator W eeks. I intended to have Mr. Wheeler express an opin
ion. I was doing the talking when I intended to have him doing the
talking.
Senator N elson. I was waiting for his answer.
Senator W eeks. I wanted to know, Mr. Wheeler, if you agreed to
that proposition.
Mr. W heeler. I am in agreement for anything in this bill that
will make flexible the operation of the bill with respect to the mem
ber banks.
Senator W eeks. And that will accommodate the business interests
of the country with certainty?
Mr. W heeler. Yes. There is, however, just one question that I
think deserves consideration in connection with that statement. If
you make it a matter of right up to a certain limitation to demand
the rediscounting privilege of the paper that comes under the class,
you do not then give any consideration to the ability of the regional
bank to meet those demands which may at some time grow excessive.
And I think therein the supervisory power—the veto power—is good.
You strengthen in that case rather than weaken your system, for the
safety of the whole fabric must lie upon the ability of these regional
banks to do the things they are asked to do and that they could not
be forced to do by making it the right of a member bank—something
that we are not in a position to do with respect to funds available for
the purpose.
Senator W eeks. Why, Mr. Wheeler, if we had no reserve board at
all, if member banks were allowed to go to the member banks and
rediscount every dollar of paper they had in their portfolios, in my
judgment that paper would be redeemed and taken care of, and you
never would hear of any disturbance at all, without any supervision
whatever. I do not mean to say I am in favor of removing all
supervision and restriction, but I think there is no question that
would be the result.
Senator N elson. Senator Weeks, here is one thing that occurred to
me in this connection. These regional banks practically have two
kinds of discounts—one is a discount for the purpose of obtaining
currency and the other is an ordinary discount where they seek to
borrow money. Now, ought there not to be a brake on the discount
for obtaining circulation in order to prevent inflation?
Senator W eeks. I should like to discuss that with you sometime,
but I do not think we ought to interrupt Mr. Wheeler’s statement in
order to do so now.
Senator N elson. Can you not see there are two kinds of discount
there—one for the purpose of circulation and the other for the pur
pose of obtaining a loan ?
Senator W eeks. I can see that the borrower might use the discount
for two different purposes, but, as far as the effect is concerned, it
would be of the same character.
Senator N elson. Probably.
B A N K I N G AND CUBBENCY .
2 531
Senator P omerene. Would you advise the rediscounting of certain
classes of paper which you would not permit to be used for purposes
of issue of currency ?
Senator W eeks. Probably; I should be glad to talk with you about
that matter.
Senator P omerene. I should be glad to talk with you about that.
Senator N elson. That is the point I referred to—the discounting
of paper for other purposes and securing currency.
Senator P eed. Mr. Wheeler, I want to discuss with you for a
moment the question of this advisory board, and see whether, after
all, there is any necessity for it. You do not doubt for a minute, do
you, that the central board of control will be in reasonably close
touch all the time with the 12 regional banks, if it is a competent
and proper board?
Mr. W heeler. Reasonably close; yes.
Senator R eed. It has a direct representative on the board of
directors of that regional bank, and the bank in interest has the
president of the bank—for, of course, they will elect him. So that
each of these 12 regional banks would be in a position to directly
correspond with and make their wishes known to a central board
through two agents, one of which is the president of the bank, selected
by the men the bankers have selected—that is, by the six directors—
the other will be the chairman of the board of directors selected by
the Government. Now, there are pretty direct sources of information
and advice, and they, in a way, represent different interests, do they
not?
Mr. W heeler. Yes.
Senator R eed. N ow, do you think, if you constituted yourself this
central board, and you had those two sources of information, to
gether with daily reports as to the transactions of the bank, you
would have much difficulty in getting all the advice you needed from
both sides of the question, and sound advice?
Mr. W heeler. I think, Senator, if you impose upon the directors
of the Federal reserve board the necessity for securing this informa
tion, it is going to be a slower process than if you had two men sitting
with them who were supposed to have the information and to have
nothing else to do but to get it and keep it available. And it seems
to me a matter not of multiplying methods, but really of concentrat
ing to a point that would make available to the seven members of
the board, without the necessity of correspondence or of communica
tion, except to verify, as they may wish to verify, with their own
agent in that regional association, the information they desire relative
to the needs of that district.
Senator R eed. N owt, these two men sitting in Washington would
have to get their information somewhere?
Mr. W heeler. Yes; just exactly the same, but they would have
solely the business of getting it, and not the business of following the
affairs of the banking system of the country, whereas the seven men
are responsible for some very heavy operations.
Senator R eed. Don’t you know, when you boil the criticism down,
that there is not much in it, particularly when you take into con
sideration the fact that these banks would effect any kind of organi
zation they want for the purpose of having a representative here in
2532
B A N K I N G AND CURRENCY .
Washington who can go down to the board every clay and talk with
the board and the board always be willing to listen to him, as long
as he comes in a proper way? Don’t you know that is the way this
will work out ?
Mr. W heeler. It may, if the authorized source inclusive in the
machinery----Senator R eed. I would not have anjr objection at all to allowing
the banks to have two agents in Washington; but I do object to have
them sitting with this board.
Mr. W heeler. Well, they are powerless, unless they do.
Senator R eed. Well, certainly they are powerless, except to give
the board information. Now, if you mean to put them on this board
for the purpose of controlling this board let us be frank about it
and say that.
Mr. W heeler. That is ridiculous. Whether the president of the
United States is the present incumbent, or any other, this Nation
will always trust him to appoint men in that important capacity that
could not be controlled by two men elected by a dozen representatives
of the Federal reserve or regional association.
Senator R eed. N ow, it is ridiculous that they should control.
Therefore, all that is left is that they should advise. Is not that
true ?
Mr. W heeler. That is just what we ask from them.
Senator R eed. D o you doubt for a minute—and is it not ridiculous
to assume; I will adopt your adjective—that any Federal reserve
board would refuse to listen to any man who substantially repre
sented the banking interests who came there with a proper sug
gestion ?
Mr. W heeler. I thoroughly believe that your Federal reserve board
will do just that thing. But rather than have to wait until some
man may come, as chance may send him, or as a crying need in his
region may demand that he go, if you can have instead a continuous
representation there on the ground, in communication with those
who have the information at their hand and can give it to them, I
think it is an advantage to the Federal reserve board to have this
representation present at all times rather than have it come spas
modically.
Senator R eed. Well, I think the suggestion would not be urged
with such pertinacity and in such a serious way unless there was
in the back of somebody’s head the thought that those bankers
would have a potential influence—I do not mean an improper in
fluence; but I do think, since we are talking about it, that a Federal
reserve board properly organized, with its machinery and its em
ployees, will be every day—and I will go further and say every
hour of the day—in actual touch with the 12 regional banks and
know exactly what is going on. If it does not, I do not want to see
the system established.
Mr. W heeler. Senator, might I suggest this to your mind? You
assume that these men would be bankers; and I think you are abso
lutely right; and they would be, in a sense in the empioy of the re
serve associations, as they would be elected by those" who were
elected by the regional boards of directors. But when it comes to
the question of residence in Washington and having authority to
sit there, and have their cause strongly advocated before that board.
B A N K I N G AN D CU E B E N C Y .
253 3
please do not forget that the bankers have absolutely eliminated
from their recommendations the idea of the advisory council, and
have asked you for another thing in connection with the Federal
reserve board. The Council at Chicago which was held a few weeks
ago distinctly said “ No ” to the advisory council, and had it been
one of those propositions that the banks of the country were inter
ested in putting two men on that board, without vote, in order that
they might be watchers, they certainly would not have seen fit to
forego that as one of their recommendations.
But the suggestion does not, as I understand it, come out of the
banking fraternity. I think the first suggestion that was made for the
advisory council was made by the committee of the Chamber of Com
merce of the United States, and I think that Senator Owen, the
chairman, talked with the members of our committee back in July
on that question. At any rate it was worked into the bill after that
conference had been held here in Washington. Now, it is not a
banker’s proposal, Senator, as I understand it. It is a proposition
that comes from the commercial interests of the country.
Senator R eed. Well, if it came from the bankers, I would not
turn it down on that account.
Mr. W heeler. We are not all bad.
Senator R eed. N o. I say there are two very ridiculous things
going on. One is the gentleman who indulges in writing a letter
denouncing all bankers as wicked, and the other the bankers getting
together and denouncing Congress as a lot of socialists, and between
the two I think I have the most sympathy with the fellow who
writes the letter, because he has got the most sense; but not much
with either.
Now, suppose that, instead of adopting your suggestion, this com
mittee should conclude to recommend taking the Cabinet officers out
of this board, leaving the Secretary of the Treasury, and should
conclude to require, say, three practical bankers to be appointed, and
that they should recommend that the bill should provide for good
salaries, and that the permanency of this board as to its membership
should be largely assured, do you not think that would go a long
wTay toward satisfying the demands that you people make along that
line ?
Mr. W heeler. I think that you would have reduced the necessity;
but the utility of the advisor}'' council from an advisory standpoint
still remains.
Senator R eed. Well, I will not argue that point. I think there are
objections, but I am very much obliged to you.
Mr. W heeler. Mr. Chairman, will you please accept my thanks
again for your courtesy in hearing me?
The C hairman . The committee very greatly appreciates you gen
tlemen having been here.
Gentlemen, it is now 10 minutes after 5 o’clock.
Senator R eed. There is a gentleman here from my State—but I
believe he has gone.
The C hairman . Then, suppose we adjourn until 10 o’clock to
morrow ?
Senator B ristow. Would it not be better to make it 10.30, Mr.
Chairman ?
S. Doc. 232, 63-1—vol 3-----39
2 534
B A N K I N G AND CU B E E N C Y .
Senator N elso n . Yes; half past 10 would be better. Who are to
be heard to-morrow?
The C h a ir m a n . Prof. Jenks, of Columbia University. Mr. Gil
bert was to follow him, but he says he can not get here at that time.
Senator N elso n . I want to hear somebody on the foreign-exchange
question.
The C h a ir m a n . That is Prof. Gilbert.
The following additional statement of Mr. George H. Shibley
was filed with the committee:
Mr. Chairman and gentlemen of the committee, when I was before you on
October 7 and had closed my statement, a request was made of me by one of
your number that I incorporate my ideas in a bill, and I have done so, suggest
ing amendments to the House bill. Herewith I present the copy to the com
mittee. and will ask that it be published in the record, together with a brief
summerization of the main points.
My proposal is for legal-tender notes, whereas the House bill proposes a
paper currency that would be inferior to gold money in legal-tender qualities,
and therefore the banks and individuals would hold gold and thus keep it from
being placed in the Nation’s gold reserve.
I propose a single gold reserve in connection with 12 banks of issue. At
the start the gold reserve would amount to more than $1,250,000,000—all of
the gold at present in the United States Treasury—which is more than six
times the amount of England’s central gold reserve and one and one-half times
more than the French central gold reserve, the largest in the world to-day.
An added power for the Federal reserve board that I propose is that the
law shall transfer to it the $750,000,000 of United States bonds, now held by
the Treasurer of the United States as security for the bank-note circulation,
this change to be brought about by the retirement of the bank notes, followed
by the purchase of the bonds by the Federal reserve board through the issuance
of Federal reserve notes. The proposal is to reissue the bonds to the Federal
reserve board as 3 per cent’s, to be used as needed to retire paper currency to
prevent inflation. Paper currency will have to be retired somewhat in propor
tion as the national bank reserves are lessened; probably $350,000,000 of paper
currency will have to be retired as rapidly as the bank reserves are lessened
if stability in the purchasing power of money is to be maintained; and then
there is the immense output of gold from the mines. This volume of gold
from the mines is such that doubtless something like $100,000,000 of paper
currency should be retired yearly during the dull season of the year until such
time as the mint price for gold is reduced throughout the gold-standard world.
These needed provisions for retirement of paper currency can be met by placing
within the control of the Federal reserve board the .large volume of United
States bonds, as I have suggested.
To meet the unusual demands for money within our country, the only thing •
needed'is authority to provide an elastic volume of legal-tender paper currency,
the same as is supplied in each of the leading European countries except
England.
To provide for the prompt retirement of the paper currency that may be
issued in times of threatened bank failures, I have proposed a plan for the
resale of commercial paper by the Federal reserve banks to such of the
member banks as may have more money on hand than is needed.
The success of the proposed system would in nowise be dependent upon the
cooperation of the national banks or the State banks or trust companies.
Immediate and continued success would be assured, and both the banks and
the people should heartily approve the system. All are vitally interested in
the establishment of a system that will promote prosperity, as the proposed
system unquestionably would, for it is constructed upou the principles in
successful operation in Europe for 40 years. No untried ideas are suggested;
whereas the present bill is in many of its details in direct opposition to the
successful experiences in Europe, as I have explained in my statement of
October 6 and 7.
B A N K IN G AND CURRENCY.
2 535
[ T h e p a r t s to be e l i m in a t e d f r o m t h e H o u s e bill a r e in b ra ck e ts , a n d t h e p a r t s
to be a d d e d a r e in italics. C o m m e n t s a r e in p a r e n t h e s e s .]
A m endm ents P roposed
by
M r. George H. S hibley to H. It. 7837, S ixty -third
Congress , F irst S essio n .
AN ACT To provide for the establishment of Federal reserve banks, to furnish an elastic
currency, to afford means of rediscounting commercial paper, to establish a more
effective supervision of banking in the United States, and for other purposes.
B e it en a cted b y th e S e n a te a n d H o u se of R e p r e s e n ta tiv e s of th e U n ited
S t a t e s o f A m e r i c a i n C o n g r e s s a s s e m b l e d . That the short title of this act shall
be the “ Federal Reserve Act.”
FEDERAL RESERVE [DISTRICTS]
B a tiks.
S ec. 2. That within ninety days after the passage of this act. or as soon there
after as practicable, the Secretary of the Treasury, the Secretary of Agriculture,
and the Comptroller of the Currency, acting as “ The reserve bank organization
committee,” shall designate from among the reserve and central reserve cities
now authorized by law a number of such cities to be known as Federal reserve
cities, and shall divide the continental United States into districts, each district
to contain one of such Federal reserve cities: P r o v i d e d , That the districts shall
be apportioned with due regard to the convenience and customary course of
business of the community and shall not necessarily coincide with the area of
such State or States as may be wholly or in part included in any given district.
The districts thus created may be readjusted and new districts may from time
to time be created by the Federal reserve board hereinafter established, acting
upon a joint application made by not less than ten member banks desiring to
be organized into a new district. The districts thus constituted shall be known
as Federal reserve districts and shall be designated by number according to the
pleasure of the organization committee, and no Federal reserve district shall be
abolished, nor the location of a Federal reserve bank changed, except upon the
application of tliree-fourtlis of the member banks of such district.
The organization committee shall, in accordance with regulations to be estab
lished by itself, proceed to organize in each of the reserve cities designated as
hereinbefore specified a Federal reserve bank. Each such Federal reserve
bank shall include in its title the name of the city in which it is situated, as
“ Federal Reserve Bank of Chicago,” and so forth. The total number of reserve
cities designated by the organization committee shall be not less than twelve,
and the organization committee shall be authorized to employ counsel and
expert aid, to take testimony, to send for persons and papers, to administer
oaths, and to make such investigations as may be deemed necessary by the said
committee for the purpose of determining the reserve cities to be designated and
organizing the reserve districts hereinbefore provided.
[Every national bank located within a given district shall be required to
subscribe to the capital stock of the Federal reserve bank of that district a sum
equal to twenty per centum of the capital stock of such national bank fully paid
in and unimpaired, one-fourth of such subscription to be paid in cash and onefourth within sixty days after said subscription is made. The remainder of
the subscription or any part thereof shall become a liability of the member
bank, subject to call and payment thereof whenever necessary to meet the obli
gations of the Federal reserve bank under such terms and in accordance with
such regulations as the board of directors of said Federal reserve bank may
prescribe: P r o v i d e d , That no Federal reserve bank shall commence business
with a paid-up and unimpaired capital less in amount than $5,000,000.] The
organization committee shall have power to appoint such assistants and incur
such expenses in carrying out the provisions of this act as it shall deem neces
sary, and such expenses shall be payable by the Treasurer of the United States
upon voucher approved by the Secretary of the Treasury, and the sum of
$100,000, or so much thereof as may be necessary, is hereby appropriated, out
of any moneys in the Treasury not otherwise appropriated, for the payment o f
such expenses.
POWERS AND DUTIES OF FEDERAL RESERVE BANKS.
S e c . 3. T h e p o t v e r s a n d d u t i e s o f e a c h F e d e r a l r e s e r v e b a n k s h a l l b e :
(a )
T o e s ta b lis h an d m a in ta in t h r o u g h o u t t h e N a tio n a n im p r o v e d s y s t e m
f o r t h e t r a n s f e r o f m o n e y a n d c r e d it, to b e k n o w n as t h e F e d e r a l r e s e r v e s y s -
2 536
B A N K I N G AND CURRE NCY .
te rn, t o c o n s i s t o f t w e l v e o r m o r e F e d e r a l r e s e r v e b a n k s , a l s o a s u p e r v i s o r y
b o a rd , a n d a s m a n y o f th e p r i v a te ly o w n e d b a n k s a s c a r e to jo in , ea ch o f s a id
p r i v a t e l y o w n e d b a n k s to d e p o s it w i t h th e F e d e r a l r e s e r v e b a n k in i t s d i s tr ic t
su fficien t r e s e r v e s to s e t t l e th e d a i l y b a la n ces.
(b ) T h rou gh th e m ec h a n ism h e re in a fte r p ro v id e d each F e d e ra l r e se r v e ba n k
sh a ll con trol th e in te r e s t r a te fo r m o n e y icith in th e d is tr ic t w h e r e th e sa id ban k
i s l o c a t e d , t h e r a t e o f d i s c o u n t to b e s u b j e c t t o t h e s u p e r v i s o r y p o w e r o f t h e
F e d e r a l r e s e r v e b o a rd p r o v id e d f o r in th is act, a n d th e a im sh a ll be to p r o m o te
s t a b i l i t y i n t h e p u r c h a s i n g p o w e r o f t h e s t a n d a r d o f v a l u e , t h u s t o a i d in t h e
d e v e l o p m e n t o f t h e i n d u s t r i a l s y s t e m a n d o f p r o s p e r i t y a n d d e a l j u s t l y a s betiveen th e in d u stria l grou ps.
( c ) I n c o n n e c t i o n w i t h t h e o f fic ia l r a t e t h e F e d e r a l r e s e r v e b a n k s h a l l a t
a ll tim e s ( 1 ) o ffer to s u p p l y m o n e y to th e n a tio n a l a n d su ch o t h e r b a n k s a s
c o m p ly w i t h th e r e q u ir e m e n ts o f th is a ct, th e cash to be d i s t r i b u te d b y r e d i s
c o u n t i n g s h o r t - t i m e b u s i n e s s p a p e r a s h e r e i n a f t e r p r o v i d e d , a n d (2) b e i n
a p o s i t i o n t o r e d u c e t h e v o l u m e o f m o n e y i n c i r c u l a t i o n (a) b y r e t a i n i n g t h e
cash re c e iv e d fr o m th e p a y m e n t of th e sh o r t-tim e bu sin ess p a p er, (b ) b y re
s e l l i n g b u s i n e s s p a p e r s h o u l d o f f e r s f o r i t b e m a d e , a n d (c ) s h o u l d o c c a s i o n
r e q u ir e to r e t ir e f r o m t im e to t i m e s o m e o f th e e x i s ti n g c u r r e n c y o r i t s s u b
stitu tes.
[Two additional sources of change in the volume of money in circula
tion will be the inflow and the outflow of gold from our shores.]
( d ) T h e n a tio n a l b oard o f th e F e d e ra l re s e r v e s y s te m sh a ll be p la c e d in con
tr o l o f th e g o ld in th e U n ite d S t a t e s T r e a s u r y , s u b je c t to th e e x is tin g o b lig a tio n
w i t h th e h o ld ers o f g o ld certifica tes, a n d th e re sh a ll be m a in ta in e d a g o ld
r e s e r v e f o r th e e n t i r e N a tio n , so t h a t d e m a n d s f o r g o ld f r o m a b r o a d w i l l n o t
a ffec t th e v o lu m e o f m o n e y in c irc u la tio n in th e U n ite d S ta te s , a n d t h a t th e
g o ld s t a n d a r d o f p r ic e s w i l l a s s u r e d l y be m a i n t a in e d , r e s u l t i n g in a f ix e d p a r
o f e x c h a n g e ivith th e o th e r c o u n tries u sin g th e sa m e sta n d a rd .
(e ) I n c o n n e c tio n w ith th e p a p e r c u r r e n c y , w h ic h s h a ll be leg a l te n d e r , th e r e
sh a ll be back of e v e r y d o lla r iss u e d an equ al a m o u n t of go ld o r an equ al a m o u n t
o f c o m m ercia l p aper, as h e re in a fte r p ro v id e d for, or bonds of th e U n ited S ta te s
o r o f a S t a t e o r o f a m u n i c i p a li t y o f th is U nion, a n d e v e r y d o lla r o f p a p e r c u r
r e n c y i n c i r c u la t i o n f r o m w h a t e v e r s o u r c e s h a ll be r e d e e m a b l e in g o ld a t th e
m a i n o f fic e s o f t h e F e d e r a l r e s e r v e b o a r d u p o n d e m a n d , a t p a r .
i f ) B r a n c h e s w ith in th e d is tr ic t sh a ll be e s ta b lis h e d w h e r e v e r th e b o a rd o f
d ir e c to r s s h a ll d e e m best, s u b j e c t to a r ig h t in th e F e d e r a l r e s e r v e b o a r d to
fin a lly decide.
( g ) W ith th e c o n s e n t o f th e F e d e r a l r e s e r v e b o a rd , to o p e n a n d m a i n t a in
b a n k in g a cco u n ts in fo re ig n c o u n tries a n d esta b lish ag en cies in such co u n
t r i e s w h e r e s o e v e r i t m a y d e e m b e s t f o r th e p u r p o s e o f p u r c h a s in g , se llin g , a n d
c o lle c tin g f o r e ig n b ills o f e x c h a n g e , a n d to b u y a n d se ll iv ith o r w i t h o u t i t s
in d o r s e m e n t, th ro u g h su ch c o r re s p o n d e n ts o r a g en cies, p r im e fo re ig n bills o f
ex ch a n g e a risin g ou t of bu sin ess tra n sa c tio n s w h ic h bea r th e n a m e s of tw o or
m o r e re sp o n sib le p a r tie s o r a re se c u re d on th e p r o p e r t y sold.
(Compare page
27 of House caucus bill.)
( h ) To a c cep t p a y m e n ts fo r th e F e d e ra l G o v e rn m e n t w ith o u t charge, and,
w i t h o u t ch a rg e , to m a k e p a y m e n t s f o r th e s a id G o v e r n m e n t to th e e x t e n t o f
i t s c r e d i t b a l a n c e , a n d a s f a r a s m a y b e r e q u e s t e d b y t h e s a i d G o v e r n m e n t to
ta k e o v e r fo r safe-k eep in g or m a n a g e m e n t, fre e of charge, se cu rities an d v a lu
a b le s b e lo n g in g to i t o r p la c e d u n d e r i t s m a n a g e m e n t.
(From Swiss law.)
(i) T h e s a i d b a n k s h a l l b e c o m e a b o d y c o r p o r a t e , a n d , i n t h e n a m e d e s i g
n a t e d in t h e o r g a n i z a t i o n c e r t i f i c a t e s , s h a l l h a v e p o w e r t o p e r f o r m a l l t h e a c t s
n e c e s s a r y a n d p r o p e r to c a r r y o u t th e p u r p o s e s o f th is act, a n d s h a ll h a v e su c
cessio n fo r a p e rio d o f t w e n t y y e a r s f r o m its o rg a n iz a tio n u n less so n cr d iss o lv e d
b y a ct o f Congress.
O') T h e F e d e r a l r e s e r v e b o a r d a n d t h e b o a r d s o f d i r e c t o r s o f t h e F e d e r a l
r e s e r v e b a n k sh a ll n o t in v e s t fu n d s in re a l e s ta te e x c e p t w i t h th e c o n se n t o f
C ongress.
ONE GOLD RESERVE.
S e c . 4- T h a t a s r a p i d l y a s g o l d c e r t i f i c a t e s s h a l l b e p a i d i n t o t h e F e d e r a l
r e s e r v e s y s te m , a n d p a id in to th e U n ite d S ta te s T r e a s u r y a n d th e su b tr e a su r ie s,
t h e y s h a ll be r e tir e d , a n d in t h e ir p la c e s h a ll be is s u e d a lik e a m o u n t o f legalte n d e r n o te s p r o v id e d f o r in th is a ct.
(See page 1846 of Hearings.)
B A N K I N G AND C UE RE NCY.
2537
As r a p i d l y a s t h e T r e a s u r y n o t e s a n d t h e U n i t e d S t a t e s n o t e s n o w o u t s t a n d i n g
s h a ll he p a id in to th e F e d e r a l r e s e r v e s y s t e m a n d p a id in to th e U n ite d S t a t e s
T r e a s u r y a n d s u h t r e a s u r i e s t h e y s h a l l he r e t i r e d , a n d i n t h e i r p l a c e s h a l l he
is s u e d a lik e a m o u n t o f th e le g a l-te n d e r n o te s c a lle d f o r in th is a ct.
W h e n e v e r g o ld h ars o r g o ld co in s a re te n d e r e d to a F e d e r a l r e s e r v e h a n k a t
i t s m a i n of fi c e i t s h a l l f o r t h w i t h p u r c h a s e i t a t t h e r a t e o f $ 1 8 . 6 0 p e r t r o y o u n c e ,
n i n e - t e n t h s f in e , a n d i v h e n p u r e a t $ 2 0 . 6 6 § p e r o u n c e .
The purchase m on ey
s h a l l he t h e l e g a l - t e n d e r n o t e s p r o v i d e d f o r i n t h i s a c t , a n d a l l o f t h e g o l d r e
c e i v e d h y e a c h F e d e r a l r e s e r v e h a n k s h a l l he h e l d b y t h e n a t i o n a l h o a r d .
(See
Hearings, page 1825, last paragraph.)
As r a p i d l y a s g o l d c o i n s s h a l l he r e c e i v e d
in th e U n ited S ta te s T r e a s u r y a n d
s u h tr e a s u r ie s t h e y s h a ll he t r a n s f e r r e d to th e F e d e r a l r e s e r v e h a n k s in e x c h a n g e
f o r th e le g a l-te n d e r n o te s ca lled f o r in th is a c t u n less th e G o v e r n m e n t sh a ll
c h o o s e to r e t a i n th e m .
(See page 1825 of Hearings.)
ADDITIONAL POWER IN THE FEDERAL RESERVE BOARD.
S e c . 5. T h a t t h e c i r c u l a t i n g n o t e s o f t h e n a t i o n a l h a n k s s h a l l he r e t i r e d u n d e r
r e g u l a t i o n s t o he p r o v i d e d h y t h e F e d e r a l r e s e r v e h o a r d h e r e i n a f t e r p r o v i d e d .
T h e sa id h oard sh a ll o ffer to p u r c h a s e a t p a r a n d w i t h a c c r u e d in te r e s t th e
U n ited S ta te s bonds on d ep o sit w ith th e T r e a s u r e r o f th e U n ite d S ta te s as se
c u r i t y f o r th e s a i d c ir c u la tin g n o te s, p a y m e n t to he in l e g a l- te n d e r n o te s i s s u e d
u n d e r a u t h o r i t y o f th is act.
T h e b o n d s p u r c h a s e d s h a ll he c a n c e le d , a n d in
t h e i r p l a c e s h a l l he i s s u e d t o t h e F e d e r a l r e s e r v e h o a r d a n e q u a l a m o u n t o f
th r e e p e r c e n t U n ite d S t a t e s b o n d s, to he h e ld b y th e s a id h o a rd f o r f u t u r e use.
T h e b o n d s s h a ll he m a d e p a y a b l e a t su ch t i m e s a s th e F e d e r a l r e s e r v e h o a rd
sh all s p e c ify : P ro v id e d , T h a t th e tim e sh all n ot e x cee d t w e n ty y e a r s fro m th e
d a te o f sa le hy th e sa id hoard.
T h e s e b o n d s s h a ll he e x e m p t f r o m F e d e r a l,
S t a t e , a n d m u n i c i p a l t a x a t i o n , b o t h a s t o i n c o m e a n d p r i n c i p a l , a n d s h a l l he
u s e d h y th e F e d e r a l r e s e r v e h o a rd to r e t ir e p a p e r c u r r e n c y w h e n e v e r r e q u ir e d
f o r p r o m o t i n g s t a b i l i t y i n t h e p u r c h a s i n g p o w e r o f m o n e y , a n d m a y he u s e d t o
m a in ta in th e go ld re serve.
(On tlie proposed basis of maintaining stability in
the purchasing power of money probably $350,000,000 of paper currency will
have to be retired to prevent inflation from the reduction in the volume of the
national-bank reserves. To prevent inflation from gold from the mines it may
be that each year $100,000,000 of paper currency may have to he retired until
an international agreement is reached to reduce the mint price for gold; pages
1773-1781 of Hearings. The total volume of paper currency in circulation be
fore the retirement of any of it as above suggested would be $2,355,000,000,
with a gold reserve amounting to more than 50 per cent.)
I f at a n y tim e
fo r gold fro m th e
th a t a re coin in g
la w hy redu cin g
$ 2 0 0 , 0 0 0 , 0 0 0 o f p a p e r c u r r e n c y s h a l l he r e t i r e d t o m a k e p l a c e
m in es, th e P r e s id e n t sh a ll in v ite th e G o v e r n m e n ts o f th e e a r th
g o ld to u n ite in a n a g r e e m e n t t h a t e a c h ivill a m e n d its m i n t
t o a n a g r e e d f i g u r e t h e p r i c e a t w h i c h g o l d s h a l l he c o i n e d .
(See pages 1775-1782 of Hearings; also memorial by Mr. Shibley dated May 12,
1913, pages 7, 18, published by Senate Committee on Banking and Currency.)
[FEDERAL RESERVE BANKS.]
B o a rd s of D irecto rs of F ed era l R e se rv e B an ks.
S ec. [4] 6. [The national banks in each Federal reserve district uniting to
form the Federal reserve bank therein, hereinbefore provided for, shall under
their seals, make an organization certificate, which shall specifically state the
name of such Federal reserve bank so organized, the territorial extent of the
district over which the operations of said Federal reserve bank are to be car
ried on, the city and State in which said bank is to be located, the amount of
capital stock and the number of shares into which the same is divided, the
names and places of doing business of each of the makers of said certificate
and the number of shares held by each of them, and the fact that the certificate
is made to enable such banks to avail themselves of the advantages of this act.
The said organization certificate shall be acknowledged before a judge of some
2538
B A N K I N G AND CURRENCY .
court of record or notary public; and shall be, together with the acknowledg
ment thereof, authenticated by the seal of such court, or notary, transmitted
to the Comptroller of the Currency, who shall file, record, and carefully pre
serve the same in his office. Upon the filing of such certificate with the Comp
troller of the Currency, as aforesaid, the said Federal reserve bank so formed
shall become a body corporate, and as such, and in the name designated in such
organization certificate, shall have power to perform all those acts and to enjoy
all those privileges and to exercise all those powers described in section fiftyone hundred and thirty-six. Revised Statutes, save in so far as the same shall
be limited by the provisions of this act. The Federal reserve bank so incorpo
rated shall have succession for a period of twenty years from its organization,
unless sooner dissolved by act of Congress.] (See sec. 3, par. i.)
Every Federal reserve bank shall be conducted under the oversight and con
trol of a board of directors, whose powers shall be the same as those conferred
upon the boards of directors of national banking associations under existing law,
not inconsistent with the provisions of this act. Such board of directors shall
be constituted and elected as hereinafter specified and shall consist of nine
members, holding office for three years, and divided into three classes, desig
nated as classes A, B, and C.
Class A shall consist of three members, who shall be chosen by and be rep
resentative of the [stock-holding] m e m b e r banks.
Class B shall consist of three members, who shall be representative of the
[general 1 public interests of the reserve district e x c e p t t h e b a n k er s .
Class C shall consist of three members, who shall be [designated by the
Federal reserve boardl r e p r e s e n t a t i v e o f th e p u b lic i n t e r e s t s o f t h e r e s e r v e
d is tr ic t e x c e p t t h e b a n k er s .
Dirctors of class A shall be chosen in the following manner:
It shall be the duty of the chairman of the board of directors of the Federal
reserve bank of the district in which each such bank is situated to classify the
member banks of the said district into three general groups or divisions. Each
such group shall contain as nearly as may be one-third of the aggregate number
of said member banks of the. said district and shall consist as nearly as may be
of banks of similar capitalization. The said groups shall be designated by
number at the pleasure of the chairman of the board of directors of the Fed
eral reserve bank.
At a regularly called directors’ meeting of each member bank in the Federal
reserve district aforesaid the board of directors of such member bank shall
elect by ballot one of its own members as a district reserve elector and shall
certify his name to the chairman of the board of directors of the Federal reserve
bank of the district. The said chairman shall establish lists of the district
reserve electors, class A. thus named by banks in each of the aforesaid three
groups and shall transmit one list to each such elector in each group. Every
elector shall within fifteen days of the receipt of the said list select and certify
to the said chairman from among the names on the list pertaining to his group,
transmitted to him by the chairman, one name, not his own. as representing
his choice for Federal reserve director, class A. The name receiving the greatest
number of votes, not less than a majority, shall be designated by said chairman
as Federal reserve director for the group to which he belongs. In case no can
didate shall receive a majority of all votes cast in any group the chairman
aforesaid shall establish an eligible list, consisting of the three names receiving
the greatest number of votes on the first ballot, and shall transmit said list to
the electors in each of the groups of banks established by him. Each elector
shall at once select and certify to the said chairman from among the three
persons submitted to him his choice for Federal reserve director, class A. and
the name receiving the greatest number of such votes shall be declared by the
chairman as Federal reserve director, class A. In case of a tie vote the balloting
shall continue in the manner hereinbefore prescribed until one candidate
receives more votes than either of the others.
[Directors of class B shall be chosen by the electors of the respective groups
at the same time and in the same manner prescribed for directors of. class A,
except that they must be selected from a list of names furnished, one by each
member bank, and such names shall in no case be those of officers or directors
of any bank or banking association. They shall not accept ottice as such during
the term of their service as directors of the Federal reserve bank. They shall
be fairly representative of the commercial, agricultural, or industrial interests
of their respective districts. The Federal reserve board shall have power at
its discretion to remove any director of class B in any Federal reserve bank
B A N K I N G AND CURRENCY.
2539
if it should appear at any time that such director does not fairly represent
the commercial, agricultural, or industrial interests of his district.
[Three directors belonging to class C shall be chosen directly by the Federal
reserve board and shall be residents of the district for which they are selected,
one of whom shall be designated by said board as chairman of the board of
directors of the Federal reserve bank of the district to which he is appointed
and shall be designated as “ Federal reserve agent.” He]
D i r e c t o r s o f c l a s s B a n d c l a s s C s h a l l he a p p o i n t e d h y t h e F e d e r a l r e s e r v e
h o a rd f r o m a m o n g th o se w h o sh a ll h a v e been n o m in a te d hy th e o rg a n iz e d c iti
ze n s o f th e d is tr ic t o th e r th a n th e h a n k e rs, s u b je c t to th e a d v ic e a n d co n se n t
o f th e S en ate.
T h e a i m s h a l l he t o s e l e c t r e s i d e n t s o f t h e d i s t r i c t w h o s h a l l h e
f a ir ly re p r e s e n ta tiv e o f th e citize n s of th e d is tr ic t o th e r th a n th e hankers.
T h e c h ie f e x e c u t i v e officer o f e a c h F e d e r a l r e s e r v e h a n k s h a ll he k n o w n a s
g o v e r n o r a n d s h a l l he n o m i n a t e d b y t h e h o a r d o f d i r e c t o r s a n d c o n f i r m e d h y
t h e F e d e r a l r e s e r v e hoard.
H i s t e r m o f offi c e s h a l l h e i n d e t e r m i n a t e , s u b j e c t
( 1 ) t o t h e w i l l o f a m a j o r i t y o f t h e h o a r d o f d i r e c t o r s , o r (2 ) t h e F e d e r a l
r e s e r v e h o a rd m a y call f o r th e n o m in a tio n o f a su ccessor.
I n th e tra n sa c tio n o f bu sin ess b e tw e e n th e F e d e ra l re se rv e hoard an d each
o f th e F e d e r a l r e s e r v e h a n k s, th e n a tio n a l h o a rd s h a ll he r e p r e s e n te d h y i t s
a p p o i n t e e , w h o shall be a person of tested banking experience, and shall be
designated as “ Federal reserve agent.” H e m a y he p r e s e n t a t a l l m e e t i n g s o f
th e h o a rd o f d ir e c to r s a t w h ic h b u s in e s s is o fficially t r a n s a c te d , a n d s h a ll h a v e
u n r e s t r i c t e d a c c e s s t o t h e h o o k s a n d p a p e r s o f t h e h a n k [and in addition to
his duties as chairman of the board of directors of the Federal reserve bank of
the district to which he is appointed.]. He shall be required to maintain under
regulations to be established by the Federal reserve board a local office of said
board, which shall be situated on the premises of the Federal reserve bank of
the district. He shall make regular reports to the Federal reserve board and
shall act as its official representative for the performance of the functions
conferred upon it by this act. He shall receive an annual compensation to be
fixed by the Federal reserve board and paid monthly [by the Federal reserve
bank to which he is designated] f r o m i t s t r e a s u r y u p o n v o u c h e r s i s s u e d b y
o r d e r o f th e s a id hoard.
Directors of Federal reserve banks shall receive, in addition to any compensa
tion otherwise provided, a reasonable allowance for necessary expenses in
attending meetings of their respective boards, which amount shall be paid by
the respective Federal reserve banks. Any compensation that may be provided
by boards of directors of Federal reserve banks for members of such boards
shall be subject to review by the Federal reserve board.
The reserve bank organization committee may, in organizing Federal reserve
banks for the first time, call such meetings of bank directors in the several dis
tricts as may be necessary to carry out the purposes of this act and may exercise
the functions herein conferred upon the chairman of the board of directors of
each Federal reserve bank pending the complete organization of such bank.
At the first meeting of the full board of directors of each Federal reserve bank
after organization it shall be the duty of the directors of classes A and B and G,
respectively, to designate one of the members of each class whose term of office
shall expire in one year from the first of January nearest to date of such meet
ing, one whose term of office shall expire at the end of two years from said date,
and one whose term of office shall expire at the end of three years from said
date. Thereafter every director of a Federal reserve bank chosen as herein
before provided shall hold office for a term of three years; but the [chairman of
the board of directors of each Federal reserve bank designated by the Federal
reserve board, as hereinbefore described, shall be removable at the pleasure of
the said board without notice, and his successor shall hold office during the
unexpired term of the director in whose place he was appointed]. Vacancies
that may occur in the several classes of directors of Federal reserve banks may
be filled in the manner provided for the original selection of such directors, such
appointees to hold office for the unexpired terms of their predecessors.
MEMBER BANKS—THREE CLASSES.
S e c . 7. T h a t i n c o n n e c t i o n w i t h e a c h F e d e r a l r e s e r v e h a n k t h e r e s h a l l he t h r e e
c la s se s o f m e m b e r hanks, as f o llo w s:
C la ss A . T h e n a tio n a l banks.
C la ss B. T h e S ta te hanks a n d tr u s t co m p a n ie s th a t c o m p ly w ith th e re g u la
tio n s o f th e F e d e ra l r e s e r v e hoard co n cern in g th e re d isc o u n t o f c o m m e r c ia l
paper.
2540
B A N K I N G AND CURRENCY .
C l a s s C. T h e h a n k s t h a t b e c o m e m e m b e r s o f t h e F e d e r a l c l e a r i n g h o u s e .
E a c h n a tio n a l b a n k a n d ea ch S t a t e b a n k a n d t r u s t c o m p a n y in th e U n ite d
S ta te s on th e m a in la n d m a y becom e a m e m b e r of th e F e d e ra l re s e r v e s y s te m fo r
clea rin g -h o u se p u rp o ses, a n d th e c o n d itio n o f m e m b e r s h ip sh a ll be th e d e p o s itin g
o f su ffic ie n t f u n d s to s e t t l e th e d a i l y b a la n c e s , a lso th e c o m p lia n c e w i t h th e o t h e r
cle a rin g -h o u se r e g u la tio n s to be is s u e d b y th e F e d e r a l r e s e r v e board.
T o e n title a S t a t e b a n k o r t r u s t c o m p a n y to th e r ig h t to r e d is c o u n t c o m
m e r c ia l p a p e r as h e re in a fte r p ro v id e d it sh all c o m p ly icith th e re g u la tio n s b y
th e F e d e r a l r e s e r v e b o a rd o n th is su b je c t, ich ich sh a ll n o t r e q u e s t t h a t b a n k in g
c a p ita l be d e p o s ite d w ith th e F e d e ra l r e s e r v e s y s te m .
T o s a f e g u a r d th e n a tio n a l b a n k s a g a in s t ru n s b y d e p o s ito r s a n d to s a f e
g u a r d th e c itiz e n s a g a in st lo sses a n d in co n ven ien ces f r o m in so lv e n t n a tio n a l
ban ks, th e F e d e r a l r e s e r v e b o a rd sh a ll is s u e r e g u la tio n s w h e r e b y each n a tio n a l
b a n k s h a ll be e n t i t l e d to r e d i s c o u n t c o m m e r c i a l p a p e r , a n d a lso , ic h e n n e c e s
s a r y , s e c u re d ir e c t lo a n s f r o m th e F e d e r a l r e s e r v e s y s t e m to th e a m o u n t o w in g
to d e p o s ito r s : P ro v id e d , h o w e v e r, T h a i th e lia b ility o f th e F e d e ra l r e s e r v e
s y s te m a n d o f th e G o v e r n m e n t of th e U n ite d S ta te s f o r lo sses fr o m th is s o u r c e
s h a ll be li m i te d to th e a m o u n t o f th e p ro fits o f th e F e d e r a l r e s e r v e s y s t e m f o r t h e
p re ced in g ten y e a rs.
(See pages 1841-1842 of Hearings.)
FEDERAL RESERVE BOARD.
S ec. [11] 8. That there shall be created a Federal reserve board, which shall
consist of [seven] f i r e members, including the Secretary of the Treasury, [the
Secretary of Agriculture, and the Comptroller of the Currency] who shall be
[members] a m e m b e r ex officio, and four members appointed by the President
of the United States, by and with the advice and consent of the Senate I- In
selecting the four appointive members of the Federal reserve board, not more
than one of whom shall be selected from any one Federal reserve district,
the President shall have due regard to a fair representation of different geo
graphical divisions of the country. The four members of the Federal reserve
board appointed by the President and confirmed as aforesaid], w h o shall devote
their entire time to the business of the Federal reserve board and shall each
receive an annual salary of $10,000, together with an allowance for actual
necessary traveling expenses [and the Comptroller of the Currency, as ex
officio member of said Federal reserve board, shall, in addition to the salary
now paid him as comptroller, receive the sum of $5,000 annually for his.
services as a member of said board]. Of the four members thus appointed by
the President [not more than two shall be of the same political party, and]
at least one Tof whom] shall be a person experienced in banking. [One shall
be designated by the President to serve for two, one for four, one for six,
and one for eight years, respectively, and thereafter each member so appointed
shall serve for a term of eight years unless sooner removed for cause by the
President.] T h e t e r m o f offi c e s h a l l b e f o u r y e a r s u n l e s s s o o n e r r e c a l l e d b y t h e
P re sid e n t.
(Pages 1787. 1816, and 2526 of Hearings.) Of the four persons thus
appointed, one shfill be designated by the President as manager and one as vice
manager of the Federal reserve board. The manager of the Federal reserve
board, subject to the supervision of the Secretary of the Treasury and Federal
reserve board, shall be the active executive officer of the Federal reserve board.
[The Federal reserve board shall have power to levy semiannually upon the
Federal reserve banks, in proportion to their capital stock, an assessment suffi
cient to pay its estimated expenses for the half year succeeding the levying of
such assessment, together with any deficit carried forward from the pi-eceding
half year.]
The first meeting of the Federal reserve board shall be held in Washington,
District of Columbia, as soon as may be after the passage of this act. at a date
to be fixed by the reserve bank organization committee. The Secretary of the
Treasury shall be ex officio chairman of the Federal reserve board. No member
of the Federal reserve board shall be an officer or director of any bank or
banking institution or Federal reserve bank nor hold stock in any bank or
banking institution; and before entering upon his duties as a member of the
Federal reserve board he shall certify under oath to the Secretary of the
Treasury that he has complied with this requirement. Whenever a vacancy
shall occur, other than by expiration of term, among the four members of the
Federal reserve board appointed by the President, as above provided, a suc
cessor shall be appointed by the President, with the advice and consent of the
B A N K I N G AN D CURRENCY .
2541
Senate, to fill such vacancy, and when appointed shall hold office for the unexpired term of the member whose place he is selected to fill.
The Federal reserve board shall annually make a report of its fiscal opera
tions to the Speaker of the House of Representatives, who shall cause the same
to be printed for the information of the Congress.
Section three hundred and twenty-four of the Revised Statutes of the United
States shall be amended so as to read as follows: “ There shall be in the De
partment of the Treasury a bureau charged, except as in this act otherwise
provided, with the execution of all laws passed by Congress relating to the issue
and regulation of currency issued by or through banking associations, the chief
officer of which bureau shall be called the Comptroller of the Currency, and
shall perform his duties under the general direction of the Secretary of the
Treasury, acting as the chairman of the Federal reserve board:” P r o v i d e d ,
h o w e v e r . That nothing herein contained shall be construed to affect any power
now vested by law in the Comptroller of the Currency or the Secretary of the
Treasury.
P o w e r s a n d d u tie s o f F e d e ra l r e se r v e hoard.
S ec . [1 2 ] 9. That the Federal reserve board hereinbefore established shall
be authorized and empowered:
(a) To examine at its discretion the accounts, books, and affairs of each
Federal reserve bank and to require such statements and reports as it may
deem necessary. The said board shall publish once each week a statement
showing the condition of each Federal reserve bank and a consolidated state
ment for all Federal reserve banks. Such statements shall show in detail the
assets and liabilities of such Federal reserve banks, single and combined, and
shall furnish full information regarding the character of the lawful money held
as reserve and the amount, nature, and maturities of the paper owned by Fed
eral reserve banks.
(ai)
To c o n tro l a c e n tr a l g o ld r e s e r v e f o r th e ben efit o f th e e n tir e N a tio n .
(b) To permit or require, in time of emergency, Federal reserve banks to
rediscount the discounted prime paper of other Federal reserve banks[, at'least
five members of the Federal reserve board being present when such action is
taken and all present consenting to the requirement]. The exercise of this
compulsory rediscount power by the Federal reserve board shall be subject to
an interest charge to the accommodated bank of not less than one nor greater
than three per centum above the higher of the rates prevailing in the districts
immediately affected.
(c) To suspend for a period not exceeding thirty days (and to renew such
suspension for periods not to exceed fifteen days) any and every, reserve require
ment specified in this act: P r o v i d e d , That it shall establish a graduated tax
upon the amounts by which the reserve requirements of this act may be per
mitted to fall below the level hereinafter specified, such tax to be uniform in its
application to all banks; but said board shall not suspend the reserve require
ments with reference to Federal reserve notes.
(d) To supervise and regulate the issue and retirement of Federal reserve
notes [and to] i n c l u d i n g t h e p r e s c r i b i n g o f [prescribe] the form and tenor of
such notes, e x c e p t t h a t t h e n o t e s s h a l l b e i s s u e d i n t h e n a m e o f t h e F e d e r a l
reserve sy stem .
»
( d § ) . To fo r m u la te th e m e th o d w h e r e b y th e in d e x n u m b e r o r ga u g e s h o w in g
t h e p u r c h a s i n g p o w e r o f m o n e y (see paragraph b of section 3) s h a l l b e c o n
stru c te d , a n d be m a in ta in e d .
(e) To add to the number of cities classified as reserve and central reserve
cities under existing law in which national banking associations are subject
to the reserve requirements set forth in section twenty of this act; or to re
classify existing reserve and central reserve cities and to designate the banks
therein situated as country banks at its discretion.
(f) To suspend the officials of Federal reserve banks and, for cause stated in
writing with opportunity of hearing, require the removal of said officials for
incompetency, dereliction of duty, fraud, or deceit, such removal to be subject to
approval by the President of the United States.
(g) To require the writing off of doubtful or worthless assets upon the books
and balance sheets of Federal reserve banks.
(h) To suspend, for cause relating to violation of any of the provisions of
Ibis act, the operations of any Federal reserve bank and appoint a receiver
therefor.
(i) To perform the duties, functions, or services specified or implied in
this act.
2542
B A N K I N G AND CU E B E N C Y .
[FEDERAL ADVISORY COUNCIL.]
( In q u irie s an d a d v ic e .)
S ec . [13.] 10. There is hereby created a Federal advisory council, which
shall consist of as many members as there are Federal reserve districts. Each
Federal reserve bank by its board of directors shall annually select from its
own Federal reserve district one member of said council, who shall receive no
compensation for his services, but may be reimbursed for actual necessary
expenses. The meetings of said advisory council shall be held at Washington,
District of Columbia, at least four times each year, and oftener if called by
the Federal reserve board. The council may select its own officers and adopt
its own methods of procedure, and a majority of its members shall constitute
a quorum for the transaction of business. Vacancies in the council shall be
filled by the respective reserve banks, and members selected to fill vacancies
shall serve for the unexpired term.
[The Federal advisory council shall have power (1) to meet and confer
directly with the Federal reserve board on general business conditions: (2) to
make oral or written representations concerning matters within the jurisdiction
of said board; (3) to call for complete information and to make recommenda
tions in regard to discount rates, rediscount business, note issues, reserve con
ditions in the various districts, the purchase and sale of gold or securities by
reserve banks, open-market operations by said banks, and the general affairs
of the reserve banking system.]
T h a t th e r e p r e s e n ta tiv e s o f th e h a n k ers on th e h o a rd s o f d ire c to rs o f th e
F e d e ra l re se r v e h anks a n d e v e r y n a tio n a l o rg a n isa tio n o f citize n s w a y in q u ire
o f t h e F e d e r a l r e s e r v e h o a r d c o n c e r n i n g i t s a f f a i r s a n d a n s w e r s h a l l he w a d e .
A ls o , re p re s e n ta tiv e s of th e said o rg a n iza tio n s w a y rig h tfu lly te n d e r advice.
{See page 1789 of Hearings.)
REDISCOUNTS.
S ec. 11. T h a t h a n k s i n c l a s s e s A a n d B w a y , a t a n offi c e o f t h e F e d e r a l r e s e r v e
h an k w i t h i n th e d is tr ic t w h e r e in th e a p p ly in g hank is lo ca ted , re d isc o u n t n o tes
a n d hills o f e x c h a n g e t h a t a r is e o u t o f c o m m e r c ia l t r a n s a c tio n s a s h e r e i n a f t e r
•d efin ed.
T h e p a p e r t h a t s h a l l he e l i g i b l e t o r e d i s c o u n t i v i t h i n t h e m e a n i n g o f t h i s a c t
s h a l l c o n s i s t o f notes, bills of exchange and acceptances issued or drawn for
agricultural, industrial, or commercial purposes, or the proceeds of which have
been used, or [may] a r c to be used, for such purposes, the Federal reserve
board to have the right to [determine or] define the character of paper thus
eligible; but such definition shall not include notes or bills issued or drawn for
the purpose of carrying or trading in stock, bonds, or other investment securities,
nor shall anything herein contained be construed to prohibit the rediscounting
of notes and bills of exchange secured by staple agricultural products, or
other goods, wares, or merchandise.
T h e s e c u r ity to th e F e d e r a l r e s e r v e h a n k s sh a ll in c lu d e th e in d o r s e m e n t o f
th e hanks.
T h e m a t u r i t y o f t h e p a p e r e l i g i b l e t o rediscount s h a l l h e s t a t e d f r o m t i m e
to tim e b y th e F e d e ra l r e s e r v e h oard, to g e th e r w ith such o th e r re g u la tio n s as
it m a y d eem proper.
The aggregate of [such] notes and bills, based on the exportation or importa
tion of goods, and bearing the signature or indorsement of any one person,
company, firm, or corporation rediscounted for any one bank shall at no time
exceed ten per centum of the unimpaired capital and surplus of said bank;
but this restriction shall not apply to the discount of bills of exchange drawn in
good faith against actually existing values.
Any national bank may, at its discretion, accept drafts or bills of exchange
drawn upon it having not more than six months’ sight to run and growing out
of transactions involving the importation or exportation of good*; but no bank
shall accept such bills to an amount equal at any time in the aggregate to more
than one-balf the face value of its paid-up and unimpaired capital.
Section fifty-two hundred and two of the Revised Statutes of the United
State? is hereby amended so as to read as follows: No association shall at
any time be indebted, or in any way liable, to an amount exceeding the amount
of its capital stock at such time actually paid in and remaining undiminished
by losses or otherwise, except on account of demands of the nature following:
First Notes of circulation.
B A N K I N G AND CUKRENCY.
2543
Second. Moneys deposited with or collected by the association.
Third. Bills of exchange or drafts drawn against money actually on deposit
to the credit of the association, or due thereto.
Fourth. Liabilities to the stockholders of the association for dividends and
reserve profits.
Fifth. Inabilities incurred under the provisions of sections [Two, five, and
fourteen] e le v e n of the Federal reserve act.
LOANS TO MEMBER BANKS.
(From the Owen-Glass bill.)
S ec. [14.] 12. Whenever in the opinion of
board o f d ire c to rs o f a F ed era l r e s e r v e bank
[the Federal Reserve Board] a
the public interest [so] requires
[the Federal Reserve Board may authorize the reserve bank of the district to]
th a t th e b a n k s h a ll discount the direct obligations of member banks, secured
by the pledge and deposit of satisfactory securities, a u t h o r it y so to d o is h e r e b y
g r a n te d .
(See section 7, above.) I ; but in no case shall the amount so loaned
by a Federal reserve bank exceed three-fourths of the actual value of the secur
ities so pledged or one-half the amount of the paid-up and unimpaired capital
of the member bank.]
OPEN-MARKET OPERATIONS.
S ec. [15] 13. That any Federal reserve bank may, under rules and regula
tions prescribed by the Federal reserve board, purchase and sell in the open
market, either from or to domestic or foreign banks, firms, corporations, or in
dividuals, prime bankers’ bills, and bills of exchange of the kinds and maturities
by this act made eligible for rediscount, and cable transfers.
[ rediscounts .]
D e p o s its .
S ec. 14. That any Federal reserve bank may receive from any member bank
deposits of current funds in lawful money, national-bank notes, Federal reserve
notes, or checks and drafts upon solvent banks, payable upon presentation; or,
solely for exchange purposes, may receive from other Federal reserve banks
deposits of current funds in lawful money, national-bank notes, or checks and
drafts upon solvent banks, payable upon presentation.
R e s a l e o f c o m m e r c ia l p a p er.
S ec . 15. T h a t w h e n e v e r m e m b e r ba n k s o f c la s s A o r B p o s s e s s e x c e s s c a s h
t h e y m a y p u r c h a s e in te r e s t -b e a r in g p a p e r fr o m th e F e d e r a l r e s e r v e b a n k in
t h e ir r e s p e c t i v e d is tr ic ts .
T h e F e d e r a l r e s e r v e b oa rd sh a ll p r e s c r ib e r u le s
u n d e r w h ic h t h e r e s e r v e b a n k s sh a ll o ff e r to r e s e ll t h e p a p e r t h e y h a v e p u r
c h a se d .
note is s u e s .
S ec. [17] 16. That Federal reserve notes, to be issued at the discretion of
the Federal reserve board for the purpose of making advances to Federal re
serve banks as hereinafter set forth and for no other purpose, are hereby au
thorized. The said notes shall be obligations of the [United States] F e d e r a l
r e s e r v e s y s t e m and shall be [receivable for all taxes, customs, and other public
duesl le g a l te n d e r . They shall be redeemed in gold [or lawful money] on de
mand [at the Treasury Department of the United States, in the city of Washinton, District of Columbia, or at any Federal reserve bank] a t t h e office o f th e
F e d e r a l r e s e r v e b o a rd in e a c h o f t h e F e d e r a l r e s e r v e b a n k s.
Any Federal reserve bank may, upon vote of its directors, make application
to the local Federal reserve agent for such an amount of the Federal reserve
notes hereinbefore provided for as it may deem best. [Such application shall be
accompanied with a tender to the local Federal reserve agent of collateral in
amount equal to the sum of the Federal reserve notes thus applied for and
issued pursuant to such application. The collateral security thus offered shall
be notes and bills accepted for rediscount under the provisions of section 14 of
this act, andl D e l i v e r y o f t h e n o t e s sh a ll b e m a d e a s c a lle d f o r , an d a t th e
c lo s e o f e a c h b u s in e s s d a y th e F e d e r a l r e s e r v e b a n k s h a ll t r a n s f e r to th e F e d e r a l
254 4
B A N K I N G AND CURRE NCY .
r e s e r v e a g e n t a n a m o u n t o f a c c e p t a b le c o m m e r c ia l p a p e r talcen u n d e r a u t h o r it y o f
s e c t io n s 11 and 12 o f th is a c t, w h ic h , t o g e t h e r tv ith t h e a m o u n t o f g o ld c e r t ifi
c a t e s a n d o f g o ld r e c e iv e d , sh a ll e q u a l t h e a m o u n t o f n o t e s u sed . The Federal
reserve agent shall each day notify the Federal reserve board of issues and
withdrawals of notes to and by the Federal reserve bank to which he is ac
credited. The said Federal reserve board shall be authorized at any time to
call upon a Federal reserve bank for additional security to protect the Federal
reserve notes issued to it.
[Whenever any Federal reserve bank shall pay out or disburse Federal reserve
notes issued to ir as hereinbefore provided, it shall segregate in its own vaults
and shall carry to a special reserve account on its books gold or lawful money equal
in amount to thirty-three and one-third per centum of the reserve notes so paid
out by it, such reserve to be used for the redemption of said reserve notes as
presented; but any Federal reserve bank so using any part of such reserve to
redeem notes shall immediately carry to said reserve account an amount of gold
or lawful money sufficient to make said reserve equal to thirty-three and onethird per centum of its outstanding Federal reserve notes.] Notes [so] paid
out b y e a c h F e d e r a l r e s e r v e b a n k shall bear upon their faces a distinctive letter
and serial number[, which shall be assigned by the Federal reserve board to
each Federal reserve bank]. Whenever Federal reserve notes issued through
one Federal reserve bank shall be received by another Federal reserve bank
they shall be returned for redemption to the Federal reserve bank through
which they were originally issued[, or shall be charged oft against Govrenment
deposits and returned to the Treasury of the United Slates, or shall be pre
sented to the said Treasury for redemption]. No Federal reserve hank shall
pay out notes issued through another under penalty of a tax of ten per centum
upon the face value of notes so paid out. [Notes presented for redemption at
the Treasury of the United States shall be paid and returned to the Federal
reserve banks through which they were originally issued, and Federal reserve
notes received by the Treasury otherwise than for redemption shall be ex
changed for lawful money out of the five per centum redemption fund herein
after provided and returned as hereinbefore provided to the reserve bank
through which they were originally issued.]
[The Federal reserve board shall have power, in its discretion, to require Fed
eral reserve banks to maintain on deposit in the Treasury of the United States
a sum in gold equal to five per centum of such amount of Federal reserve notes
as may be issued to them under the provisions of this act; but such five per
centum shall he counted and included as part of the thirty-three and one-third
per centum reserve hereinbefore required.] The said board shall also have the
right to grant in whole or in part or to reject entirely the application of any
Federal reserve bank for Federal reserve notes; but to the extent and in the
amount that such application may be granted the Federal reserve hoard shall,
through its local Federal reserve agent, deposit Federal reserve notes with the
bank so applying, and such bank shall be charged with the amount
such notes
and shall pay such rate of interest on said amount as may be established by the
Federal reserve board, [which rate shall not be less than one-half of one per
centum per annum,] and the amount of such Federal reserve notes so issued to
any such bank shall, upon delivery, become a first and paramount lien on all the
assets of such bank.
[Any Federal reserve bank may at any time reduce its liability for outstand
ing Federal reserve notes by the deposit of Federal reserve notes, whether
issued to such bank or to some other reserve bank, or lawful money of the United
States, or gold bullion, with any Federal reserve agent or with the Treasurer of
the United States, and such reduction .shall be accompanied by a corresponding
reduction in the required reserve fund of lawful money set apart for the redemp
tion of said notes and by the release of a corresponding amount of the collateral
security deposited with the local Federal reserve agent.]
Any Federal reserve bank may at its discretion withdraw collateral deposited
with the local Federal reserve agent for the protection of Federal reserve notes
deposited with it and shall at the same time substitute other collateral of equal
value approved by the Federal reserve agent under regulations to be prescribed
by the Federal reserve board.
[It shall be the duty of every Federal reserve bank to receive on deposit, at
par and without charge for exchange or collection, checks and drafts drawn
upon any of its depositors or by any of its depositors upon any other depositor
and checks and drafts drawn by any depositor in any other Federal reserve
bank upon funds to the credit of said depositor in said reserve bank last men-
B A N K I N G AND CURRENCY .
2545
tioned, nothing kereiu contained to be construed as probibting member banks
from making reasonable charges to cover actual expenses incurred in collecting
and remitting funds for their patrons. The Federal reserve board shall make
and promulgate from time to time regulations governing the transfer of funds
at par among Federal reserve banks, and may at its discretion exercise the func
tions of a clearing bouse for such Federal reserve banks, or may designate a
Federal reserve bank to exercise such functions, and may also require each such
bank to exercise the functions of a clearing bouse for its member banks.] T h e
F e d e ra l r e s e r v e board sh a ll issu e re g u la tio n s p ro v id in g fo r a c lea rin g h ouse fo r
t h e e n t i r e N a t i o n on th e m a i n l a n d .
T h e r a t e s a t 'w h i c h f u n d s s h a l l b e t r a n s
f e r r e d th ro u g h th e sa id s y s te m sh a ll be fixed f r o m tim e to tim e b y th e F e d e r a l
r e s e r v e b o a rd , a n d i t s d e c is io n a f t e r a p u b lic h e a r in g s h a ll be final. T h e h e a r
in gs sh a ll be p u b lish ed .
S ec. [18] 17. That so much of the provisions of section fifty-one hundred and
fifty-nine of the Revised Statutes of the United States, and section four of the
act of June twentieth, eighteen hundred and seventy-four, and section eight of
the act of July twelfth, eighteen hundred and eighty-two, and of any other
provisions of existing statutes, as require that before any national banking
association shall he authorized to commence banking business it shall transfer
and deliver to the Treasurer of the United States a stated amount of United
States registered bonds be, and the same is hereby, repealed.
BANIv RESERVES.
S ec. [20] 1 8 . That from and after the date when the Secretary of the Treas
ury shall have officially announced, in such manner as he may elect, the fact
that a Federal reserve bank has been established in any designated district,
every [banking association] n a t i o n a l b a n k within said district [which shall have
subscribed for stock in such Federal reserve bank] shall be required to estab
lish and maintain reserves as follows:
(a) If a country bank as defined by existing law, it shall hold and maintain
a reserve equal to twelve per centum of the aggregate of its deposits, not includ
ing savings deposits hereinafter provided for. Five-twelfths of such reserve
shall consist of [money which national banks may under existing law count as
legal reserve,] l e g a l - t e n d e r n o t e s held actually in the bank's own vaults; [and
for a period of fourteen 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 Federal reserve bank of its district.] The remainder of the
twelve per centum reserve [hereinbefore required] may, [for a period of thirtysix months from and after the date fixed by the Secretary of the Treasury as
hereinbefore provided,] consist of balances due from national banks' in reserve
or central reserve cities as now defined by law a n d b a l a n c e s d u e f r o m a F e d e r a l
re se rv e bank or banks.
[From and after a date thirty-six months subsequent to
the date fixed by the Secretary of the Treasury as hereinbefore provided the
said remainder of the twelve per centum reserve required of each country bank
shall consist either in whole or in part of reserve money in the bank’s own vaults
or of credit balance with the Federal reserve bank of its district.]
(b) If a reserve city bank as defined by existing law, it shall hold and main
tain, for a period of sixty days from the date fixed by the Secretary of the
Treasury as hereinbefore provided, a reserve equal to twenty per centum of the
aggregate amount of its deposits, not including savings deposits hereinafter
provided for, and permanently thereafter eighteen per centum. At least onehalf of such reserve shall consist of [money which national banks may under
existing law count as legal reserve.] l e g a l - t e n d e r n o t e s held actually in the
bank’s own vaults. [After sixty days from the date aforesaid, and for a period
of one year, at least three-eighteenths and permanently thereafter at least
five-eighteenths of such reserve shall consist of a credit balance with the Federal
reserve bank of its district.] The remainder of the reserve [in this paragraph
required] may[, for a period of thirty-six months from and after the date fixed
by the Secretary of the Treasury as hereinbefore provided,] consist of balances
due from national banks in central reserve cities as now defined by law a n d
b alan ces du e fr o m a F e d e ra l re s e r v e ban k or ban ks.
[From and after a date
thirty-six months subsequent to the date fixed by the Secretary of the Treasury
as hereinbefore provided, the said remainder of the eighteen per centum reserve
required of each reserve city bank shall consist either in whole or in part of
reserve money in the bank’s own vaults or of credit balance with the Federal
reserve bank of its district.]
2546
B A N K I N G AND CURRE NCY .
(c)
If a central reserve city bank as defined by existing law, it shall hold
and maintain for a period of sixty days from the date fixed by the Secretary
of the Treasury as hereinbefore provided, a reserve equal to twenty per centum
of the aggregate amount of its deposits, not including savings deposits here
inafter provided for, and permanently thereafter [eighteen] t w e l v e per
centum. [At least one-half of such] T h i s reserve shall consist of [money which
national banks may under existing law count as legal reserve,] l e g a l t e n d e r
n o t e s , held actually in the bank’s own vaults a n d b a l a n c e s d u e f r o m a F e d e r a l
r e s e r v e ban lc o r b a n k s .
[After sixty days from the date aforesaid, and there
after for a period of one year, at least three-eighteenths and permanently
thereafter at least five-eighteenths of such reserve shall consist of a credit
balance with the Federal reserve bank of its district. The remainder of the
eighteen per centum reserve required of each central reserve city bank shall
consist either in whole or in part of reserve money actually held in its own
vaults or of credit balance writh the Federal reserve bank of its district.]
Sec. [21] 1 9 . That so much of sections two and three of the act of June
twentieth, eighteen hundred and seventy-four, entitled “An act fixing the
amount of United States notes, providing for a I'edistribution of the national
bank currency, and for other purposes,” as provides that the fund deposited
by any national banking association with the Treasurer of the United States
for the redemption of its notes shall be counted as a part of its lawful reserve
as provided in the act aforesaid, be, and the same is hereby, repealed. And
from and after the passage of this act such fund of five per centum shall in
no case be counted by any national banking association as a part of its lawful
reserve.
A NEW TITLE.
Following is a proposal for a new title for the bill:
“A b i l l to p r o v i d e f o r t h e e s t a b l i s h m e n t o f F e d e r a l r e s e r v e b a n k s , t o e s t a b l i s h
a u n ified c o n tro l o f th e p u rc h a s in g p o w e r o f m o n e y a n d t h a t sh a ll a im to p r o
m o te s t a b i l i t y , to in s u r e c o m p e titio n in th e lo a n in g o f m o n e y , s a f e g u a r d th e
so lv e n c y o f banks, g u a ra n te e th e s a f e ty o f d e p o sits in n a tio n a l ban ks, a n d fo r
o th e r pu rp o ses."
Mr. S hiisley . Gentlemen, there is an important detail in connection with the
proposed law that I merely touched upon in my statement of October 6 and 7.
In the House bill there is a proposal that of the four members of the Federal
reserve board who are to be other than Cabinet members and the Comptroller
of the Currency—
“ One shall be designated by the President to serve for two, one for four, one
for six, and one for eight years, respectively, and thereafter each member so
appointed shall serve for a term of eight years unless sooner removed for cause
by the President.” (Sec. 11, lines 16-20, p. IS.)
The effect of this proposal if enacted into law would be to abolish to some
extent the people’s self-government in connection with the monetary system.
The proposal is that the term of office of a majority of the seven members of the
Federal reserve board shall be eight years, and therefore is nearly as oligarchical
as the plan whereby the people elect Senators for six years and a Chief Execu
tive for four years, thereby making it possible that the people’s will as expressed
at an election of Representatives may be blocked for two or four years. The
proposal for the Federal reserve board is that it might be nearly two years
after the people had turned a set of leaders out of power before they could get
control of the Federal reserve board. To realize the far-reaching nature of
this proposal let us briefly review the history of the Government of our country.
The Revolutionary War was successfully fought under a system of selfgovernment by the people. The people’s will prevailed because of a system of
government in which the nomination and the election of members of the legisla
tures and the governors was comparatively simple and direct, in combination
with a system whereby the voters instructed their representatives at will, and
the legislatures elected the members of the Congress, subject to recall at any
time. And Congress controlled the national executive department.
It was through the use of this system that the colonists fought the mother
country and, with the aid of France and Divine Providence, won their freedom.
With the coming of peace and the opening of the country to trade with Eng
land the small amount of gold and silver that was in the country was largely
shipped abroad to pay for purchases. This export of the gold and silver re
sulted in falling prices for commodities and the usual hard times. The control
of the volume of money was in each of the 13 States, and, as usual, there was
B A N K I N G AND CURRENCY .
254 7
much debate as to what should be done about issuing paper currency. In New
Hampshire the voters at town meeting balloted upon a proposed State law for
the issuance of more paper currency and rejected the proposal. In Massachu
setts the volume of money was such that prices for commodities fell tremen
dously and mortgages were foreclosed at a mere fraction of what had been the
selling prices for property. The creditor class controlled the legislature, and
continued to do so for several years, which gave rise to Shay’s rebellion during
the latter part of 1786 and the first few months of 1787. The Constitutional
Convention for the proposing of amendment to the Articles of Confederation met
•early in 1787, and it was a reactionary organization, having been elected by the
existing legislatures. The people were not permitted to elect the delegates. It
was so reactionary that of the 56 patriots who 11 years before had signed the
Declaration of Independence only 6 were elected as delegates to the National
Constitutional Convention.
In other words, the Federalists were in control. Instead of carrying out
the instructions whereby they held office, namely, to propose amendments to the
then-existing system of National Government, they at once closed the doors
of the convention to the public and proceeded to plan a new and a reactionary
system of government, one that would, if placed in operation, effectually abolish
self-government by the people. The people were to be denied the right to instruct
fhe men in office, thereby making the few in office a set of elected rulers; and
only one of the four sets of officials in the National Government were to be
elected by the people.
In the campaign for the election of delegates to the State conventions that
were to pass upon this proposal it was described in various ways, among others
in a set of letters by leading Federalists in what has come to be termed “ The
Federalist.” In Letter No. X it is plainly stated that the will of the majority
ought not to be permitted to prevail. The plan proposed was “ The delegation
of the Government to a small number of citizens elected by the rest.”
And the letter continues:
“ The effect is to refine and enlarge the public views by passing them through
the medium of a chosen body of citizens.” (P. 57, Lodge’s edition.)
But the reactionists did not fully succeed. The only way that they could get
the approval of the needed number of States for the proposed limitations on the
people’s power was to agree with the patriots that the First Congress would
submit amendments restricting the power of Congress. This Massachusetts
plan, as it was termed, resulted in the first 10 amendments materially limiting
the power of Congress.
And eight years later the people’s leaders succeeded in establishing party gov
ernment. Washington was to retire from office and the patriots nominated Jef
ferson for the Presidency, and as they had developed quite an organization
throughout the country they almost succeeded in securing control of the entire
Government. They secured a majority of three in the House, and thus could
stop some of the reactionary measures.
But two years later, owing to unfortunate conditions in France, a country that
had made a failure of an attempt at popular government. the Republicans in
the United States lost control of the House and the Federalists came in’o full
control. They acted so in violation of the doctrines of popular government that
in 1800 the people turned them out of the Presidency, the House, and the Senate
and the incoming organization, headed by Jefferson, was pledged to majority
rule and all of the other doctrines of the people’s rule, and the pledges were
kept.
Thus the people recovered their liberties to a very large degree. But there
still remained the six-year term of office for the Senators and four years for
the President, so that a people’s victory in an election of Members of the House
might not give them the control of the Government. That system of checks
upon the people’s rule is unknown in most of the counti’ies in Europe. In
England, France, Italy, and most of (he European countries the party organi
zation in control in the most popular branch of the legislative body has become
the ruling power throughout the nation.
And here in the United States of America the tendency is to open a channel
so that the party organization that is successful at the polls shall take charge
of the Government and be given an opportunity to promote the general welfare,
instead of dividing the control of the Government between two sets of party
leaders, so that one can ve'o the acts of the other.
Therefore the forthcoming currency and banking law should provide that
whenever a party organization shall elect the head of the Government he shall
2548
B A N K I N G AND CU RRE N CY .
be authorized to carry out in the administrative department the pledges made
to the people; for example, carry out the pledges as to the control of the price
level and the other features of the*currency and banking system that are under
the control of the Federal reserve board. The control within this hoard should
be the same as in the Department of the Interior and the other departments,
so that the head of the Government, whom the people elect, shall at once enter
upon control as soon as he is sworn into office. It would not do to provide
that the departments should be placed under boards not controlled by the peo
ple’s elected representative, nor will it do to provide that the Federal reserve
board shall not be responsive to the people’s will at a presidential election. Inorder to make the needed change in the bill there should first be dropped the
provision for private capital stock and a vast amount of bank reserves. Then
the conditions would be such that it would clearly appear that the control of
the Federal reserve board should be in the head of the Government, elected by
the people, the same as the control of the Treasury Department.
I now turn to another subject, and one upon which I have been asked to speak.
Some of the witnesses before this comnr'ttee have not recognized that during
recent years there has been a scarcity of fluid capital, but declare that there
has been a scarcity of money. That is a serious error.
Each year an immense volume of consumable articles are produced through
out the world, termed “ fluid capital.” as distinguished from fixed capital, such as
the railroads. The result of establishing a unified control of the interest rate
in this country will be that intelligence will be used in adjusting the interest
rate for money, so that it will be fed out at rates that will conserve the volume
of products. Money and bank credits are used to purchase the consumable arti
cles, and the interest rate should be such as to spread out the consumption over
the entire year and not run into a shortage. That will be accomplished through
the control of the interest rate by the Federal reserve board if it properly per
forms its duties.
The principal thing in this connection is to distinguish between a scarcity
of consumable things; that is, fluid capital and scarcity of money.
One more point. I have been asked if the gauge for the measurement of the
purchasing power of money should include houses, lands, railroads, and other
forms of fixed investments.
The proper answer, I believe, is no, because there are so many other factors
than the volume of money that affect the prices of houses, lands, and railroads.
The recent law for railroad valuation has affected the prices of railway stocks,
and the changes in the density of population in each community affects the
prices of land and of houses, whereas the prices for products in the primary
markets—that is, the leading wholesale markets—are at once affected by
changes in the interest rate for money. Thus the prices for commodities at
wholesale have come to be used to measure the purchasing power of money.
Economists are agreed on that point.
That concludes what I wish to present.
(The chairman presented the following, with request that it be
printed in the record:)
R eport
of
Currency Committee of t h e U tica
A ssociation .
(N. Y.) C redit M e n ’s
T o t h e o ffic er s a n d m e m b e r s o f t h e U tic a C r ed it M en 's A s s o c ia tio n .
The entire work of this committee during the past year has been in connec
tion with the efforts of the commercial interests of this country to bring about
a proper and adequate reform of our banking and currency laws. Owing to the
great lack of knowledge of business men generally upon the subject, the com
mittee has devoted a considerable part of its efforts to forwarding the campaign
of education which has been carried on by the national association.
Under date of February 17 we issued to the members of our association, and
to business generally in this vicinity, over S00 of the national association’s
leaflets No. 1, together with a circular letter from the Utica association calling
particular attention to the leaflet and the points covered by same.
On May 23 we issued in a similar manner, the national association leaflet
No. 2.
On January 18. under the auspices of the Utica association, a meeting was
held at Hotel Utica, to which a general invitation was extended to anyone in
terested. and which meeting was addressed by Edmund D. Fisher, deputy comp
troller of New York City, an acknowledged authority on banking and finance.
B A N K I N G AND CURRENCY .
2549
Another important part of the committee’s work consisted in issuing to our
members and business men in this vicinity bulletins requesting them to urge
upon the various authorities in Washington proper consideration of this im
portant subject.
We feel that the work done by the national association in its various branches
has contributed very largely to the progress already made in this matter, and
we also feel that the most important work lies ahead and that the immediate
future is the most critical point in the progress of this much-needed legislation.
It is a well-known fact that practically all legislation in countries such as ours
must, to a certain extent, be in the nature of a compromise, and that it is im
possible to obtain the passage of any law that will please all.
The national committee on banking and currency, and also your local commit
tee, have carefully considered the hill now before Congress, and while they feel
that it is not all that could be desired, they believe that an honest and earnest
effort is being made to give us a law that will overcome the principal defects in
our present system. We feel that any criticisms should be made in a friendly
and helpful spirit, and that we should aim to make only such as are of a con
structive nature. After careful deliberation, your committee feels that it can
do no better than indorse the changes to the so-called Glass-Owen bill recom
mended by the banking and currency committee of the national association,
and which are embodied in a brief presented by them to the Senate Committee
on Banking and Currency at a hearing which was accorded them on September
24. a copy of which brief it attached and made a part of this report.
We therefore offer the following resolutions:
Whereas it is a well-known fact that the waste incident to financial crises has
always been a serious burden to the business interests of the country; and
Whereas the Utica Association of Credit Men includes in its membership prac
tically all of the larger and more important commercial interests of Utica
and vicinity, and is a part of the National Association of Credit Men. repre
senting the larger part of the business interests of the United States; and
Whereas the banking and currency committee of said association has carefully
considered the so-called Glass-Owen currency bill and changes recommended
in sam e: Now, therefore, he it
R e s o l v e d , That this association urges upon the proper authorities at Wash
ington and in particular upon the Senate Committee on Banking and Currency
the necessity of the following changes in order that the bill when enacted into
law will fully meet the situation and give us the relief from the recurring crises
and financial panics which it is aimed to obtain:
I. That the number of Federal reserve banks be materially reduced. A
smaller number, not over six, would insure banks of larger capital and resources
and would overcome to a great extent the present serious defect of scattered
reserves and would simplify the supervisory work of the Federal reserve board.
TI. That either the Federal reserve banks have a representation on the Fed
eral reserve board or the powers of the advisory board be increased and that the
advisory board be allowed to select its own officers and that two of such officers
receive salaries, maintain an office where the office of the Federal reserve board
is located, and attend the meetings of the Federal reserve board but without a
vote. We believe that the influence of these two members of the advisory
board, supported by public sentiment, would be more effective than were they
granted voting powers.
III. That the Federal reserve notes should not he the obligation of, nor be
guaranteed by the Government, but be the direct obligation of the bank that
issues them and redeemed by that bank i n fjo ld on demand. Making the
Government guarantee the notes presupposes that the Government is to be a
beneficiary in some way or receive a valuable consideration through the issue
of them, and to compel the Treasury to redeem them on demand presupposes
that the Treasury will have the means of acquiring the gold required for such
purposes. Being a direct and first lien upon the assets of the issuing bank and
secured by prime commercial paper and other high-class securities acceptable for
rediscount under the provisions of the act and a gold reserve of at least 33J
per cent there will be no doubt that such notes without further security would
circulate freely at par and perform their functions properly and adequately.
That the reserve against notes issued should be gold exclusively, and that
the words “ lawful money ” as applied to reserves for the redemption of notes
should be stricken from the bill.
IV. That the interest he not paid by Federal reserve banks on deposits of
S. Doc. 232, 63-1—vol 3-----40
2550
B A N K I N G AND C U B E E N C Y .
any sort, but that if it is to be paid on Government moneys the same rate should
be paid to banks as an inducement to them to deposit that part of their reserve
which the measure leave optional with them to keep in their own vaults or to
deposit with the Federal reserve bank.
V.
That the provision for saving departments in connection with national
banks be stricken out entirely. We believe that commercial and investment
banking should be kept as nearly separate and distinct as possible.
R e s o l v e d , That certified copies of these resolutions be forwarded to Hon.
Elihu Root and Hon. James A. O’Gorman and to Hon. Robert L. Owen, chair
man of the Senate Committee on Banking and Currency, and that they be
urged to give them their most careful consideration and that they be assured
that the criticisms or suggestions are offered in the most friendly spirit and
with the sole object of contributing to the end that is desired.
Respectfully submitted.
W . I. T abek.
F. W . S e s s io n s .
A. H. D obson , C h a i r m a n .
A B rief P resented to t h e S enate Committee by t h e B a n k in g and Currency
Committee of t h e N ational A ssociation of C redit M e n .
Our commercial history shows that the waste attending financial crises falls
heaviest upon business, and business men are therefore directly interested in
the adoption of a banking and currency system that will meet the needs of a
growing commerce and save them from the occasional heavy waste and the con
stant menace of an ineffectual system.
The banking and currency committee of the National Association of Credit
Men has closely examined the proposed Federal reserve act to ascertain its
powers as a regulative measure to provide for the nation’s banking and currency
requirements and to save business from the depression and waste of financial
crises.
The committee is convinced that the spirit of the proposed act is constructive.
The framers of the bill could not foresee all the situations that such a measure
is destined to meet, therefore Congress should receive in a friendly spirit the
criticism which is directed by bankers and merchants against some of its
provisions which, if not changed, may impair its efficiency as a governmental
instrument of regulation. Spch criticism should not be regarded as prejudiced,
but as coming in a spirit of helpfulness from those whose experience qualifies
them to forecast the effect of the proposed law upon the business of the
country.
The committee offers the objections hereinafter set forth in the friendliest
spirit. It is believed that the changes suggested are essential to win the con
fidence of the people and make the meausre a safe and effective means of ac
complishing the purpose for which it is intended.
Other changes, suggested by a careful study of the measure, but which seem
to be of minor importance now, can safely be left for consideration until after
the bill has been enacted into law and its practical application has demon
strated the need and value of such changes.
The committee suggests and urges the following changes:
I.
T H E NUM BER OF FEDERAL RESERVE B A N K S.
The minimum number of Federal reserve districts and Federal reserve banks
required by the proposed act. namely, 12, should be materially reduced.
The needs to be met and the benefits to be derived from an adequate reserve
system are best assured through banking associations of large capital and re
sources. A smaller number of Federal reserve banks would be more efficient
in consolidating a,nd mobilizing reserves and protecting and conserving the
Nation’s supply of gold than tbe minimum number mentioned in the bill, and
would concentrate and economize the supervisory work of the board of control.
The needs of different sections of the country can be met by branches of
Federal reserve banks just as effectually as that service may be performed by
the parent banks.
II.
CONTROL AND M ANAGEM ENT.
The Federal reserve board is to possess very great powers and is to perform a
public function of far-reaching importance. Therefore its members should be
above suspicion of inefficiency, prejudice, and political control. They should
possess high qualifications, based on a profound knowledge of and a wide ex-
B A N K I N G AND CURRENCY.
2 551
perience in the theory and practice of finance. We can see no menace in hav
ing the Federal reserve banks represented upon this hoax’d, but if the Federal
reserve banks are denied representation upon the Federal reserve board, then
the powers of the advisory boai’d should be increased. This board should be
allowed to select its officers, and two of such officers should receive salaries,
maintain an office where the office of the Federal reserve board is located, and
attend the meetings of the Federal reserve board, but without a vote. The in
fluence of these two members of the advisory board, supported by public senti
ment, will be more effective than were they granted voting powers.
III. FEDERAL RESERVE NOTES.
These notes should not be the obligation of nor should they be guaranteed by
the Government, as there is no provision in the bill for the Treasui’y to acquire
and maintain the gold reserve necessary for their redemption. They should be
the direct obligation of the bank that issues them and redeemed by that bank in
gold on demand.
To make the Government guarantee the Federal reserve notes and compel the
Treasury to l’edeem them on demand presupposes:
A. That the Government is to be a beneficiary in some way or receive a val
uable consideration through the issue of said notes.
B. That the Treasury will have the means to acquire the gold required for
redemption purposes.
As the Government will not receive a valuable consideration through the
issue of these notes, and all Government moneys will be deposited in the Fed
eral reserve banks under the provisions of this measure, leaving the Treasury
powerless to acquire gold except by issuing bonds, it will be dangei’ous to the
credit of the Government to impose upon it this redemption requirement.
As a direct and first lien upon the assets of the issuing bank and secured by
prime commercial paper, acceptances and other high-grade securities, acceptable
for rediscount under the provisions of the proposed act, and a gold reserve of
33 J per cent, there need not be any doubt that such notes without any other
security will circulate freely at par and perform their functions properly and
adequately.
The reserve of not less than 33J per cent and not more than 40 per cent held
by the issuing banks for the l-edemption of these notes should consist of gold
exclusively. The words “ lawful money,” as applied to reserves for the redemp
tion of notes, should be stricken from the bill.
IV. INTEREST ON DEPOSITS.
From an economic standpoint the Federal reserve banks should not pay
interest on deposits therein, but if interest is to be paid on Government moneys,
the same rate slioud be paid to banks as an inducement to them to deposit that
part of their reserve which the measure leaves optional with them to keep in
their own vaults or on deposit with a Federal reserve bank. There should be
no preferred depositors in Federal reserve banks.
V.
SAVINGS DEPARTMENTS IN NATIONAL B A N K S.
That provision should be stricken out entirely. It is dangerous. A careful
reading of that provision of the bill impels one to believe that unless the Federal
reserve board exercised very close scrutiny and established strict regulations
very nearly all of the functions performed by the commercial department of
a bank could be exercised by the savings department upon a very small and in
adequate reserve, thereby defeating the reserve requirements of the bill as ap
plied to national banks and jeopardizing the security of depositors.
We urge the eliminations and changes suggested in these five objections as
directly concerning essential parts of the proposed act. and without which its
powers to do the work for which it is directly intended may be seriously ques
tioned.
The committee urges upon legislators, business, and banking men. in consider
ing banking and currency legislation, that is in its judgment the greatest of
our present national questions, a spirit of deep patriotism, so that the general
and not special interest may be served.
(Hearing held Sept. 23, 1913.)
(Thereupon, at 5.10 o’clock p. m., the committee adjourned until
tomorrow, Friday, October 17, 1913. at 10.30 o’clock a. m.)
2552
B A N K I N G AND CURRENCY .
F R ID A Y . OCTOBER 17. 1913.
Committee
ox
B anking and Currency.
U nited S tates S enate.
Washington, D. C.
The committee assembled at 10.45 o'clock a. m.
Present: Senators Hitchcock (acting chairman), Reed. Pomerene,
Shafroth, Hollis, Nelson, Bristow, and Weeks.
Senator S hafroth. Prof. Jenks, will you please give your name,
your business, and your experience in banking?
STATEMENT OF PROF. JEREMIAH W. JENKS, PROFESSOR OF GOV
ERNMENT, NEW YORK UNIVERSITY, NEW YORK CITY.
Prof. J enks . My name is Jeremiah W. Jenks and I am professor
of government in New York University. What more information
would you like along this line?
Senator S hafroth. Well, your experience in any matters con
cerning economics or banking.
Prof. J enks . I have been professor of economics for something
over 20 years, and have taught along these lines more or less.
At the time that the question of the establishment of a new mone
tary system for the Philippines was under consideration I was asked
by the War Department to visit the English and Dutch colonies,
to look into their monetary systems, and advise on the legislation for
the monetary system in the Philippines. I made a report on that,
and a year or two later at the request of Secretary Root, at that time
Secretary of War, I went to the Philippines again to advise further
with reference to the establishment of that system.
I was also a member of the Commission on International Exchange
that, at the request of the Chinese Government----Senator S hafroth (interposing). That commission was asked to
advise with them as to the establishment of a monetary system?
Senator N elson. Y ou were also on the Industrial Commission, were
you not?
Prof. J enks . I was not a member of the Industrial Commission,
but ■was special agent in charge of their investigation of industrial
combinations.
Senator B ristoav. Have you evrer been engaged in the banking
business ?
Prof. J enks . Not at all.
Senator B ristoav. Y ou are just a student of these problems?
Prof. J enks . I am just a student of these problems.
Senator S hafroth. N ow, Prof. Jenks, you can tell us what you
think of the bill, and what features of the bill are good and what
features, in your opinion, are bad.
Prof. J enks . I have been looking o\rer the bill Avith a great deal of
interest, and it seems to me that, fundamentally, it is good, and that
there is A’erv good reason for believing that it will improve very
decidedly our present very defedW e banking system.
The three special points that have seemed to me of dominant inter
est are, first, that with reference to the issue of bank notes, because
I think that our banking system has needed, almost more than any-
BANKING AND CURRENCY.
2553
thing else, a system of currency that would have sufficient elasticity
to adapt the supply of currency to the needs of business from time to
time. I shall have one or two suggestions to make on that point, but
it seems to me that, on the whole, the bill covers that point quite
satisfactorily.
Secondly, heretofore we have had nothing that we could speak of
as a real banking system for the country—a unified system. The
bill aims to cover that feature; and although I think some changes
in the bill as it stands now should be made on that point, it will, with
some changes, meet that need quite satisfactorily.
In the third place, we have hitherto lacked any organization by
which the bank reserves against deposits and against the issue of
notes also could be easity mobilized to meet the needs of business in
the different sections of the country at any time. The bill is making
provision for that, which, again, I think is not quite satisfactory,
but is clearly looking toward that; and it is likely, with some amend
ments, to accomplish that fairly well.
Most important of all, and underlying all of these, is the desira
bility that the currency system of the country should be on an abso
lutely sound basis; that- it be a system so based upon gold that there
can be no question in the mind of any person here or abroad that it
is really sound from that viewpoint. There must be confidence on
the part of the business men, here and abroad, as to the real stability
of the system.
Along that line also, I think it desirable that new measures be
taken so that the gold reserve of the country will be maintained in
sufficient quantity and with a sufficient degree of stability so that con
fidence will not be disturbed.
There, again, it seems to me desirable to have some slight modifi
cations made in the bill.
Those are the four most important needs that I had in mind.
There are one or two other minor matters. Perhaps it would be well
if I were to speak of those four points in that order, and then let
other questions come up afterwards.
Senator S hafroth. Very well; that will be agreeable to us.
Prof. J enks . Regarding the note issue, my own opinion has been—
as I think it has been the opinion of most people who have been stu
dents of currency and banking—that it is better to have the elastic
part of any currency system bank notes, rather than Government
notes.
On the other hand, I have myself felt, in looking through this bill
with a good deal of care, that although these are Government notes,
the provisions for the issue of these notes, for their redemption, and
for the reserve against them, are such that they possess practically all
of the features of a bank-note currency issue with a Government
guaranty.
Under those circumstances, while I myself should prefer to see it
provided frankly and openly that they are bank notes, with, if it
'seems desirable, a Government guaranty—although I think they can
be protected so that such guaranty would not be necessary—I think
there is no very serious objection to them as they stand, because they
are quite different in nature from the ordinary (government note that
proved so disastrous in our earlier history and in the history of
2554
B A N K I N G AND CURRENCY .
almost all countries where Government notes have been directly
issued.
Senator R eed. N ow, may I interrupt you there? I came in a little
late and did not get your name.
Prof. J enks . Jenks.
Senator N elson. He is Prof. Jenks, of New York University.
Senator R eed. Y ou referred to the disastrous results which fol
lowed from the issuance of Government notes. Do you refer to the
greenbacks in their early history?
Prof. J enks . I think that is a very good illustration.
Senator R eed. What other Government notes do you have in
mind?
Prof. J enks . I have in mind some of the French Government
notes; some of the French assignats of the earlier days.
Senator R eed. They were issued without proper safeguards, were
they not?
Prof. J enks . Yes; issued without proper safeguards; and also
without the possibility of ascertaining what the business demands
called for, and without proper provision for redemption.
Senator R eed. Yes.
Prof. J enks . It seems to me that, as regards the plan proposed in
the bill, those defects are very largely covered----Senator R eed (interposing). Well, Prof. Jenks, do you not think
that the trouble with the Government note was not the fact that the
Government issued it instead of the bank but that it was an im
provident issue?
Prof. J enks . I think that is very largely true; but that brings up
also another phase of the matter—...
Senator R eed (interposing). Well, just a moment, if I may cut off
your answer; we will give you plenty of latitude.
Prof. J enks . Yes; certainly.
Senator R eed. The experience of the world with bank notes has
been about a thousand times as disastrous, has it not, as the ex
perience with Government notes—for the very same reason that the
proper safeguards were not taken ?
Prof. J enks . It has been often disastrous.
Senator R eed. S o that the “ unsafety ”—if I may use that sort of
an adjective—of the issue does not depend upon the question of
whether the Government issues it or a bank issues it, but upon the
conditions under which it is issued?
Prof. J enks . I would agree to that. On the other hand, it is, I
think, also true that the notes issued by the banks have a better op
portunity—the people who are in charge of the bank issue, if they
are the bankers themselves, have a better opportunity of adjusting
them to the needs of business than Government officials have.
Senator R eed. D o you remember the days of wildcat banking in
this country ?
.
Prof. J enks . At the time of wildcat banking in this country con- .
ditions were such that the difficulty was the other way; the people
who were in charge of issuing those bank notes had an opportunity
of issuing them fraudulently; they were not properly watched or
safeguarded.
Senator R eed, Those were the evils in that system.
B A N K I N G AND CU B E E N C Y .
2555
Prof. J enks . Yes; there were many evils in that system.
Senator R eed. I was interested in getting your opinion, because I
have never been able to fathom the reason for the assertion which
has been made that a bank note was perfectly good until the United
States Government wrote its guaranty on it, and then it at once be
came an element of danger and a poor kind of currency.
Prof. J enks . The matter depends, as I said before, upon the pro
visions for adapting it to the needs of the country and also to the
securing of its ultimate safety. And, as I said before you came in,
it seems to me that the provisions of this bill, while making Govern
ment notes, are substantially identical with providing what a bank
note would be, if properly supervised and guarded by the Govern
ment, with an added Government guaranty, because the Government
itself makes no provision whatever for the redemption of the notes
by itself until after the banks have exhausted all of their resources.
Senator R eed. Does not the virtue of the banking system and the
strength of the Government make it safe?
Prof. J enks . T o a certain extent that is true. I should prefer it
the other way myself, for almost all banks the world over have been
in the habit of looking at this question from the standpoint of the
bank note; and I think that many of the attacks which have been
made upon this bill by the banks because they are Government notes
instead of bank notes have been made without looking at the funda
mental provisions made in the bill.
Senator R eed. I am glad to have your analysis of the way the
bankers look at it. While the bankers look at it that way, 99 per
cent of the people of the United States would rather have a Govern
ment note than a bank note. And it seems to me that that feeling is
a great element of safety for the Government note.
Prof. J enks . I differ in my estimate as to how people look at it.
I should say that, aside from the bankers, the business men of the
country, the leading merchants, the leading importers, the leading
manufacturers, and so on, would be more inclined to look at the
matter in the other way than in the way you put it.
Senator R eed. They are the 1 per cent of the people of the United
States, but I am talking about the other 99 per cent.
Prof. J enks . There, again, we should differ as to the percentage.
The fundamental thing, after all----Senator S hafrotii (interposing). What has been the matter with
■our greenbacks, I should like to know?
Prof. J enks . The fundamental trouble with our greenbacks? I
am glad you raised the question. I was going to raise it myself in a
different way.
Senator N elson. You had better let the greenbacks alone; I give
you fair warning. [Laughter.]
Prof. J enks . I am Avilling to leave them alone.
The point, of course, is this, as regards the Government issue of
greenbacks: It was an emergency issue made at a time when the
Government was very much in need.
Senator R eed. And the Government was in an emergency.
Prof. J enks . I say the Government itself was in a very serious
emergency.
255 6
B A N K I N G AND CURRE NCY .
Senator S h a fr o t h . The Government saved interest on $300,000.000 or $400,000,000 for 30 or 40 years.
Prof. J e n k s . I am inclined to think that it cost a great deal more
than that saving, because of the depreciation of the notes.
Senator S h a fr o t h . That was not a result of the notes, but of the
war condition.
Senator N elso n . Y ou overlook the fact that the people who took
that money were our soldiers. I carried a musket and a rifle, and I
carried those greenbacks in my pocket, and thought, as Fitz Green
Halleck expressed it, we were “ ready to smoke the pipes in peace
and carry the tomahawks in war.”
Prof. J e n k s . Yes.
Senator N elso n . N ow , we had enough faith in the Government to
take that money, and we never raised an issue on the depreciation.
That came from the fellows higher up that gobbled up the money
after we got through with it. [Laughter.]
Prof. J e n k s . I agree with that; but it would have been better for
you, if instead of carrying a 40-cent or a 50-cent dollar you had been
able to carry a 100-cent dollar. It may be that the Government had
no other alternative; but it would take most of the day to discuss
that question.
But granting it that it was an emergency matter, a case of necessity
at the time, it was, after all. forcing the soldiers and others into a
situation that was very unfortunate. Prices were double what they
otherwise would have been; perhaps somewhat more than that at
times.
Then, when it came to the getting them back ultimately to the
gold standard, by contracting the currency, the only way possible,
over a series of years, it led to a depreciation of business that was
very serious. I think we would all agree on those facts.
Senator N elson . It was very helpful during the war in paying
old debts. [Laughter.]
Prof. J e n k s . That is a viewpoint, however. I think, that in the
piping times of peace that we have now we should hardly like to take
as a principle.
Senator R ep:d. Prof. Jenks, I just want to call your attention to
some figures. I am not just making an argument on the greenbacks.
But there has been so much said about it. Now, I have always had
an idea that the only trouble with the greenback issue wTas the size
of the Confederate Army. [Laughter.]
And I want to call your attention to some figures. I find that this
is the situation:
Specie payments were suspended in 1862 and remained suspended
until 1879. The greenbacks—the average gold value of the United
States note ran in this way: In 1862 was 63 cents on the dollar.
Senator N elson . I guess in 1864 it was the lowest.
Senator R eed . In 1863 it was 68.9 cents. Tn 1864 it was 49.2 cents.
Senator Nelson is right.
Senator N elson . Yes.
Senator R eed . In 1865 it was 63.6 cents. In 1866—now wye have
got through the Avar—it was 71 cents; in 1867, 72.4 cents; in 1868.
71.6 cents; in 1869, 75.2 cents; in 1870. 87 cents; in 1871, 89.5 cents;
in 1872, 89 cents; in 1873, 87.9 cents; in 1874. 89.9 cents; in 1875 it
B A N K I N G AND CUBRENCY.
2557
dropped back to 87 cents; in 187G, it was 89.9 cents; in 1877, 94.4
cents; in 1878, a year before the resumption of specie payments, it had
gone to 99.2 cents.
So, I think that the war had something to do with that; and when
we commenced to get our debts paid off and get some money in the
Treasury, it got to be pretty good money.
Prof. J e n k s . We began retiring them, and it was known that we
were perfectly certain to retire them.
Senator R eed . And in 1879 we resumed specie payment.
Prof. J e n k s . Certainly. As soon as people became convinced that
the greenbacks were going to be redeemed, and enough of them were
redeemed, of course they went up in value.
Senator R eed . But that is not all. They went up before that.
Prof. J e n k s . Of course, they were going up during that period.
But when we do get depreciation, and it becomes essential to contract
the currency to restore its value, that act tends toward the depression
of business generally.
Senator S h a fr o t h . There have been no discounts on them since
1879, 34 years, have there?
Prof. J e n k s . N o.
Senator H itc h c o c k . Prof. Jenks, are you arguing against the issue
of United States notes?
Senator N elson , We had better drop greenbacks and get back to
this bill.
Prof. J e n k s . N o, Senator, what I was arguing for was this: I said
that under the circumstances my own opinion had been in favor of
bank notes rather than Government notes, but that all of the pro
visions that have been made in this bill have given the Government
notes practically the character of an excellent quality of bank notes,
with a Government guaranty back of them.
So it seems to me that the difference between those who are advo
cating Government notes, as provided in the bill, and those who are
advocating bank notes, is really very slight; the difference is largely
a matter of name.
Under these conditions, personally, I have little objection to the
bill as it stands on this point, although I should prefer to have it put
the other way—straight bank notes.
Senator H itc h c o c k . Have you made any study which would
enable you to decide whether the reserve provided for in the Treasury
for the redemption of these notes is adequate?
Prof. J e n k s . I have thought this with reference to that question:
The proviso made for the reserve in the Treasury is 5 per cent; and,
of course, it can call upon the reserve banks to have that supple
mented at any time, if necessary. I imagine that would be sufficient,
Of course it might happen that there could be a sudden demand upon
the Treasury from some section of the country that it -would be a
little difficult to meet out of that 5 per cent that came from that sec
tion of the country, but I think if you take the whole Treasury
reserve, and the fact that it can be supplemented immediately by
telegraph if necessary, I do not see why that is not sufficient.
Senator H itch co ck . D o y o u think that 334 per c en t reserve pro
vided for in the bill is ample?
Prof. J e n k s . I had a suggestion to make on that. I think it is
much better to have that reserve handled in a somewhat different
2558
B A N K I N G AND CURRENCY .
way. The proviso in the bill as it stood earlier—some amendments
have been made—was that the Federal reserve board should have the
right to suspend that provision with reference to reserves, and no
provision was made in the first place with reference to a tax upon a
deficiency of reserves. That has been changed.
My own judgment upon that matter would favor the form in
which the bill stands now as regards bank notes. The Federal re
serve board should not be called upon under any circumstances to
suspend the provisions of the law, but that the law shall provide a
tax for any deficiency in reserves. I prefer to make the reserve a
little higher than 33^ per cent—say, 35 per cent—and then impose a
tax for every 1 per cent below that 35 per cent, and a steadily in
creasing tax, so that the pressure would come pretty soon—say, by
the time the reserve got down to 30 per cent—so that the banks would
only under the most extreme emergency be inclined to let the reserves
go lower.
I did have some objection to the suggestion that you could put the
reserve at 50 per cent and then tax it H per cent for every 2^ per cent
deficiency. A 50 per cent reserve is unnecessarily high.
The thought occurred to me that you could start with about 35
per cent reserve and tax every deficiency; 1 per cent for every 1 per
cent fall, until the reserve reached 30 per cent and then increase your
tax to
per cent for every 1 per cent of decrease. The tax would
thus be 12^ per cent when the reserves were 20 per cent. The rate
might increase more rapidly if it seemed best.
Senator H itc h c o c k . What advantage is there in taxing that de
ficiency in reserve rather than increasing the charge for the notes?
Prof. J e n k s . I think the point is quite different. I will speak of
the two separately, if I may.
Senator H itc h c o c k . Yes; certainly.
Prof. J e n k s . As regards the deficiency in reserve, the thought is
this: We do not provide for a reserve of just 33^ per cent, or what
ever per cent we take, with the idea that there can be no going below
that. We expect the bank, in case of emergency, is going to violate
that provision. And it is a very bad thing for the country, I think,
to have a banker or any other man think he can violate a law as it
stands.
Now, what you want to do is this: You want to have a reserve large
enough so that you can feel that at all times it is safe, and then when
the pressure comes for the extension of credit in the time of a threat
ening crisis you want to be able to make the man who takes the
credit under those circumstances pay for it, and pay high enough
so that he will not want to take very much, but take just what is
necessary to save his business.
The bank, of course, will extend the credit or will not extend the
credit as it sees fit; the bank ought to be willing to extend the credit
just as far as it safely can.
If the bank has to pay a considerable tax upon the deficiency in re
serve it will keep stiffening up the terms under which it makes the
loan, without absolutely stopping, in such a way that it will, in many
cases doubtless prevent the bankruptcy of individual concerns, and
at the same time will not be violating the law. That much as covers
the reserves.
B A N K I N G AND CUKKENCY.
2559
It seems to me that you have a sufficient degree of elasticity to
insure the safety of the system and to protect the business men of
the country, because you can under these emergencies give them
accommodation without violating the law.
On the other hand, you are making your terms severe enough so
that there is no danger of your reserves getting below a perfectly
safe amount at all times.
Now, that is a perfectly automatic process, and every one of our
laws ought to work automatically, just as far as thev can, and you
ought not to confer upon any board or any individual the right to
exercise discretion more than is necessary. The banks have to exer
cise discretion anyway with reference to the credit of the person
who wants the loan, but when it comes to the demand for suspension
of the law I do not see how the Federal reserve board can act really
intelligently on a question of that kind.
Let us assume a case like this: The Federal reserve board has its
seat in Washington. They, of course, have their Federal reserve
agents reporting to them from all over the country. There comes a
pressure, let us say, in a distant part of the country, San Francisco,
a very severe pressure that comes suddenly; they will have to take the
judgment of the Federal reserve agent out in that section as to
whether, on the whole, they should suspend that provision. They
are not really in a position, as a board, to take intelligent action in
the case, based upon their own knowledge, because, if action is taken,
it ought to be taken within 24 hours.
Senator H itc h c o c k . I agree with you fully, Prof. Jenks; but
would not an increase in the interest rate or the tax charged for the
use of the currency by the reserve bank have the same effect ?
Prof. J e n k s . Yes; in part; but that also requires special discretion,
and is not automatic. May I take that up separately, and it will
answer your question ?
Senator N elson . In connection with that subject, there are two
questions in connection with this matter of currency that I would
like to call your attention to. One question was suggested the other
day by one gentleman who appeared before the committee, and that
is that after these notes—the regional-bank notes—have been issued
under the bill they are required to be redeemed by the bank issuing
them.
Prof. J e n k s . Yes.
Senator N elson . Or, if they came into the hands of another re
gional bank, they have got to be sent to the issuing bank.
Prof. J e n k s . Yes.
Senator N elson . N ow , the question that was raised the other day
was: After those notes are received in that way can they be put out
into circulation again, or have they exhausted themselves?
Prof. J e n k s . I should prefer, myself, having them canceled.
Senator N elson . Well, is the bill clear on that? That is the
point.
Prof. J e n k s . I do not think so.
Senator N elson . That question was raised—as to whether the notes
when received are retired, or can they be put out again into circula
tion. That is a very important question.
Prof. J e n k s . I think it is.
2560
B A N K I N G AND CURRENCY .
Senator N elson . N ow , the Bank of England notes, you know,
after they are once redeemed, that is the end of them.
Prof. J e n k s . Yes; that is the end of it.
Senator N elso n . And the question is whether----Senator H itch co ck (interposing). There is a radical difference in
the two cases, because in the case of the Bank of England when a
note comes in gold is paid out for it.
Senator N elson . Certainly; I understand that.
Senator H itc h c o c k . Or a credit is given for it upon the books of
the bank. But in this case when the notes come in the Federal reserve
bank may pay over to the Government of the United States the
amount it has borrowed, and its commercial paper may still be segre
gated for the security of that loan.
Senator N elson . Well, it m a y owe the money to the regional bank
upon the commercial paper deposited.
Senator H itc h c o c k . No ; I mean the regional bank which receives
this note from the Government may still owe to the Government of
the United States the amount that it borrowed when it got the note,
and these securities may still be on deposit with the Government for
the payment of that note.
Senator N elson . But it d id not borrow from the Government.
Senator H itc h c o c k . Certainly it did.
Senator B ristow . Yes; it borrowed from the Government.
Senator H itc h c o c k . The regional bank, in order to get currency,
has got to segregate a certain amount of its notes, its commercial
paper. Now, then, it procures a loan, say, for 30 days by the segre
gation of a particular batch of paper, and it gets currency.
Senator N elson . It gets it for its notes.
Senator H itc h c o c k . It has borrowed this for 30 days. It procures
$50,000 of currency. Now,' suppose $10,000 of that currency comes in.
Why should it be required to cancel it when it still owes the amount
to the Government of the United States?
Senator N elson . It simply owes it on the commercial paper that
it has put up.
Senator H itch co ck . No; i t owes it. It is an absolute obligation
to the United States Treasury.
Senator N elson . As an indorser of the commercial paper; that
is all.
Senator B ristow . B u t how is it to get back this commercial paper
from the Government ?
Senator H itc h c o c k . It still has an obligation of $50,000. The
only way to get back that $50,000 is to return either gold or cur
rency. In the meanwhile the time has only half run, and $10,000 of
those identical notes come in. Why should not the bank continue
using those notes in its business until the 30 days have expired?
Senator N elson . That is the question.
Senator H itc h c o c k . I am drawing a distinction----Senator N elson (interposing). I suggest the bill is not clear.
Senator H itc h c o c k . I am drawing a distinction between the Bank
of England, which borrows nothing, and the reserve bank, which
does make a loan.
Senator N elson . It is not a loan from the Government, strictly
speaking. The Government is acting simply as a depository. The
B A N K I N G AND CURRENCY.
2561
bank deposits this commercial paper with the Government, with the
bank’s indorsement, and the bank is only liable to the Government
upon that paper as an indorser. The principal liability is upon the
man who executed the commercial paper. Ts not that so?
Senator H itc h c o c k . N o ; the reserve b a n k has procured this
$50,000 of currency.
Senator N elson . It has procured it how?
Senator H itc h c o c k . B y depositing commercial paper which it has
in its assets.
Senator N elson . I know, and that commercial paper is the prom
ises of A, B, C, and D.
Senator H itc h c o c k . Yes; but the only security for the reserve
bank----Senator N elson (continuing). And the bank that deposits that—
the member bank—indorses that and is liable as indorser.
Senator H itc h c o c k . The member bank indorses it to the regional
reserve bank, and then the regional reserve owns the security dis
counted. Now, owning this paper, it wants to procure $50,000 of
currency from the Government. It segregates this paper in its vault
instead of sending it on to Washington. Now. then, it has borrowed
$50,000 on this collateral security. When the 30 days are out it
can pay the $50,000 in cash or return its notes, the currency, to the
Government—either one.
Senator N elson . Oh, not return the notes to the Government;
return them to the member bank that got the notes.
Senator H itc h c o c k . No ; I am not talking about the commercial
notes; they are paid; they are canceled. I am talking about the
currency notes.
Senator N elson . They are exactly the same.
Senator H itch co ck . N o ; the currency notes are secured from the
Treasury.
Senator N elson . They are not secured from the Treasury. The
only security for the notes is the notes deposited with the bank with
the indorsement.
Senator H itc h c o c k . Senator, I think we are confusing terms by
using notes. Let us resort to “ currency.” I will say this currency
comes from the United States Treasury to the reserve bank, and the
reserve bank deposits collateral as security for its loan. That col
lateral represents the notes which have been discounted for the mem
ber banks. Now, then, if the reserve bank has procured this currency
for 30 days, say, at the regular rate of interest or tax, when the 30
days have expired the reserve bank can either pay in gold or pay it
in the currency which it has secured.
Senator N elson . Yes; but we will put a case. Let us say here is
a member bank which goes to the regional bank with $1,000 of com
mercial paper, and says, “ I want currency for this. I want cur
rency of your regional bank for this commercial paper. I have in
dorsed it,” and the commercial paper is left there on deposit with
the regional bank.
Senator H itch co ck . Oh, it is not left; it is discounted. These are
banks of discount.
Senator N elson . N o ; it is left there. The member bank does not
keep that paper; it is left with the regional bank.
2562
B A N K I N G AND CURRE NCY .
Senator H itc h c o c k . I say it is discounted there.
Senator N e lso n . The bill does not even say that he has to put up
notes.
Senator H itc h c o c k . I understand there are two methods by which
the member bank can secure either credit or currency. It may borrow
and deposit security or it may discount its commercial paper.
Senator N elson . That commercial paper is due from time to time,
and suppose that is paid; in the meanwhile—suppose the commercial
paper is redeemed in the meanwhile; paid from time to time.
Senator H itc h c o c k . Yes.
Senator N elson . The note----Senator H itch co ck (interposing). What notes?
Senator N elson . Just put yourself in this position: I am a member
bank and you are a regional bank.
Senator H itc h c o c k . Yes.
Senator N elson . I come to you and deposit $100,000 of notes, com
mercial paper. I want to get circulation.
Senator H itc h c o c k . Yes.
Senator N elson . Y ou give me circulation.
Senator H itc h c o c k . Yes.
Senator N elson . In the meantime, as those notes fall due, I am
redeeming them. I send you money for those notes, and keep re
deeming them.
Senator H itc h c o c k . Y ou mean the commercial paper?
Senator N elson . The commercial paper, yes. I keep redeeming
those notes as they are due.
Senator H itc h c o c k . Y ou have nothing to do with them.
Senator N elson . Of course I have. I have indorsed them.
Senator H itc h c o c k . No ; the reserve bank owns them.
Senator N elson . Yes; but I am indorser.
Senator H itc h c o c k . But the reserve bank owns that commercial
paper. When it becomes due it sends it out for collection.
Senator N elson . Have not I the right to pay it? I am an in
dorser on it.
Senator H itc h c o c k . Yes; but you won’t be when it is paid, if th e
maker pays it.
Senator N elson . The maker may pay it. Suppose the notes are
paid; never mind whether they are paid by the maker of the notes
or the indorser; thejr are paid, and I shall keep redeeming them.
They are redeemed and paid oif, and still the notes are out in cir
culation.
Senator H itc h c o c k . Y ou mean the currency is out in circulation.
Senator N elson . Yes; the currency is out in circulation, but the
notes in the meantime are redeemed.
Senator H itc h c o c k . That is all right. The reserve bank mean
while is making other loans. That identical currency does not have
to be returned when the commercial paper is paid.
Senator N elson . Won’t it lead to inflation? That is the question.
Senator H itc h c o c k . I think not, because other loans are being
demanded all the time, and the amount of advances which the reserve
bank will require of the Treasury will depend upon the aggregate
demand which the member banks are making upon it for discounts.
Senator N elson . It is not of the reserve bank. The demand fo r
currency comes from the member banks upon the reserve bank.
B A N K I N G AND CURRENCY .
2563
Senator H e e d . Senator Hitchcock, I think what Senator Nelson
has in mind—it bothers me a little now—is this: A bank goes down
with $100,000 of promissory notes and. it goes to the regional bank
and puts up this $100,000 of notes.
Senator N elson . And indorses them.
Senator R e e d . And indorses them, and thereupon the regional
bank issues or delivers $66,000 of currency and sets aside $34,000 of'
gold. Now, the transaction is thus far complete.
Senator H itc h c o c k . No; I think you stated it erroneously, Sena
tor. When a member bank presents $100,000 in notes for discount,,
commercial paper for discount, it gets $100,000.
Senator R eed . Does it get $100,000 and the other bank set aside
$33,000? I do not care either way. There is $100,000 then out. It
is out in paper currency, and that bank, which deposited the promis
sory notes, has used that paper currency and it has gone into the busi
ness of the country. At the end of the 30 days this $100,000 in prom
issory notes which was deposited as collateral is paid into the re
gional bank. The $100,000 of paper currency is still out in circu
lation, and the regional bank has now $100,000 of ordinary money
in its vaults and has in circulation $100,000 of its notes. Now, what
is the provision for the retirement—compulsory retirement of those
notes ?
Senator N elson . Let me add to that example, there: Suppose the
member bank, after taking out this currency, taking out this neiv
currency, and while this is outstanding—suppose the makers of
these notes that have been deposited for circulation, of the member
bank—suppose they come in and redeem these in national-bank notes.
In that way, you will have a double quantity of currency. If you
will have those promissory.notes that were deposited as security for
circulation, and you will have them redeemed by national-bank notes
and then you wiil have the paper currency outstanding.
Senator H itc h c o c k . Those national-bank notes are redeemable
at the Treasury in gold, so that if you call on the Treasury for gold,
you will get gold for them.
Senator R eed . Y ou have got to put in this bill a provision, if it
is not already here in some form, that when that $100,000 promissory
note has been paid, the regional bank shall thereupon retire $100,000
of its currency notes.
Senator N elso n . Can you have it elastic without that? I would
like to hear Prof. Jenks on this point.
Prof. J e n k s . May I explain the way it has seemed to me the bill
intended to have this?
Senator R eed . We ought to be doing that instead of arguing this
with each other, but occasionally that is the case with us.
Prof. J e n k s . It is extremely important for me to know what the
bill means. I had supposed the case was a little different from the
way Senator Nelson expressed it. May I take the same illustration?
Senator N elso n . Yes.
Prof. J e n k s . When the member bank wants to have $100,000
of these notes, that it can loan out, o f course, to 50 or 100 differ
ent people, it takes the promissory notes from its customers as
you suggest, indorses them, deposits them with the regional bank,
and asks for $100,000 worth of notes, and gets the $100,000, I think,
2564
B A N K I N G AND CURRENCY .
as Senator Hitchcock suggested. The regional bank itself, of course,
is compelled to keep, in addition to that $100,000 worth of indorsed
commercial paper, 33^ per cent of lawful money, also, as a reserve.
Now, Senator Hitchcock suggests that as those individual notes be
come due they will be sent out for collection. They, presumably,
will be sent to the member bank and be collected through the mem
ber bank. But. as I understand the matter, as long as that member
bank keeps that $100,000 worth of notes, which Senator Nelson says
are out in circulation, it must keep, also, $100,000 worth of commer
cial paper in the vaults of the regional reserve bank. Now, this indi
vidual note, we will say, for $1,000 that is paid, must be replaced by
another note for $1,000 that will meet the approval of the reserve
agent. So there is a continual exchange, say day after day, almost,
of these small individual notes indorsed bv tiie various member
banks, that are held against the notes issued from the regional re
serve bank. They must keep, all of the time, the full amount there,
but it is not the same notes all the time.
Senator H itc h c o c k . N o ; it is not a segregated lot of paper, it is
just a limit that has to be kept.
Prof. J e n k s . It is fluctuating every day. Now. here, I might add
one thing that I think is an objection to this procedure. This Fed
eral reserve agent at a large Federal reserve bank will have com
ing up for approval 100 or perhaps 1,000 different commercial notes
every day. He has to be sending out some for collection, and he has
to have others coming in to take their place. I do not see, myself,
how he is going to be able to exercise any large amount of discre
tion. Neither do I see, under those circumstances, why there should
be an absolute segregation of those notes. What he can do as a prac
tical matter, and that is all he can do as a practical matter, is to see
that there is kept against the notes that the bank has out an equal
amount of paper which he considers good. Now, if they should be
taken off one shelf in the vaults and put over onto another shelf,
instead of merely having an entry made in the bank’s books, I can
not see that the process would be improved. If, instead of saying
you would segregate in the vaults of the bank a sufficient amount of
commercial paper, you would say you would segregate on the books
of the bank an equal amount of commercial paper, that shall have
the approval of the Federal reserve agent, it seems to me it is abso
lutely the same thing in practice. But, nevertheless, if you leave in
your bill that it is to be segregated in the vault, it simply means that
every one of those piles of notes has to be pulled over every day,
practically, and perhaps 1,000 notes taken out and another 1,000 put
in, and the Federal reserve agent could not do it.
Senator P o m erene . Your thought there is that means p h y sic a l
segregation ?
Prof. J e n k s . I so understand the bill. If it does not mean physi
cal segregation then it means what I suggest, that it ought to be
segregated on the books of the bank. That, I think, is essential.
Now, may I add a word to what Senator Nelson suggested in re
gard to inflation. Supposing, as the Senator says, that one man, to
make the illustration specific, has borrowed $5,000. He has taken
that $5,000 out in these new notes. Fie comes and pays them off with
national bank notes. There, as you see, the national bank notes are
B A N K I N G AND CUBRENCY.
2565
paid in, and the new notes are out in circulation. There is no infla
tion as long as those national bank notes stay in the bank. What
the bank would do in a case of that kind I suppose is this: When it
gets those national bank notes in its vault—I am speaking of the
member bank—it may, if it wants to, send that $5,000 of notes into
the regional reserve bank and say, “ I would like to cancel $5,000 of
my obligation,” which I suppose it has a right to do. But it is more
likely, I should suppose, for the time being at any rate, to hold those
as part of its reserve and get the chance to put out other notes, the
new Government notes, as best it can.
S e n a to r N elson . S o , o th e r t h a n th a t , it w i l l le a d to n o d u p lic a
tio n o r in fla tio n ?
Prof. J e n k s . The point about inflation, as I think wTas suggested
a little while ago, depends pretty largely upon the bankers them-'
selves and depends upon how careful they are as to getting good
security for the notes. Now, that is what I wTas going to bring out
in a little different way. I think there is great danger under this
bill of depleting the gold reserve of the country.
Senator N elson . Before you go into that, I was going to ask you
another question in connection with the subject. What provision
is there in tile bill for the regional banks acquiring the necessary
gold reserve, assuming the reserve must be in gold, instead of lawful
money—what provision is there in the bill; how can those regional
banks secure under this bill an ample gold reserve ? What machin
ery is there in the bill?
Prof. J e n k s . There is no machinery in the bill by which they can
secure a gold reserve, as I understand it. Of course the bill says,
regarding the reserve, “ gold or lawful money.” There is no provi
sion in the bill, as I understand it, that covers that point, except that
the different member banks, to organize the regional reserve bank,
have to pay in 10 per cent of their capital. I suppose that will be
paid in in cash.
Senator N elson . Suppose we make these notes redeemable in gold;
ought we not in that case to require the subscription to the stock, or
a part of it, to be paid in in gold ?
Prof. J e n k s . I would quite agree with that, Senator; I think so.
Senator N elson . S o that the regional bank could start with some
gold as a reserve.
Prof. J e n k s . I think so. I would quite agree to that.
S e n a to r W e e k s . W h e n y o u s a y c a sh , y o u m e a n g o ld ?
Prof. J e n k s . I mean lawful money.
Senator P o m eren e . They would have the Government deposit, and
of course there is a substantial amount of gold.
Senator N elson . That is a fluctuating amount.
Prof. J e n k s . Yes; but would it not be a wiser plan, as the Senator
suggested, to have the capital subscription paid in part at least in
gold? Because I was going to suggest that the reserve against these
notes be kept in gold instead of “ lawful money.” I suggest that
for this reason: If the banks are as careful as I should suppose they
would be, considering their responsibilities and considering also the
responsibilities of the regional reserve banks, and the fact that the
Federal board is watching them all the time—if they are careful
as to the quality of the commercial paper they take, I do not see any
S. Doc. 232, 63-1—vol 3------ 41
2566
B A N K I N G AND CURRE NCY .
danger of any extreme or dangerous inflation. Whenever the de
mands of business get larger the notes would come out, and when
ever those notes are paid off the cash—whether it be in these notes
themselves or in the national-bank notes or gold—goes into the
vaults of the banks and goes from there into the vaults of the Federal
reserve banks, as they redeem their obligations there. And if the
Federal reserve bank wants to get rid of its obligation it will go
back into the United States Treasury, and with this procedure there
is no inflation. But, on the other hand, I can not help but feel there
is danger of the country losing too much gold, and for this reason:
These bank notes, of course, are not available for reserves at all.
The consequence is that when any of these banks take in over their
counters greenbacks, or gold certificates, or silver certificates—either
the gold or the silver certificates—they will hold those. They won’t
pay them out. because they are all available for reserve, and they
will want to hold them, of course, as reserve. They will pay out
the new notes, just as now, with national-bank notes, and hold the
others for reserve, and they will keep paying them back again into
the regional reserve bank. Now. the consequence is, if there comes
any slackening in business at all in any way they will have been
pushing out those notes as fast as possible, and there will be a tend
ency toward inflation. It will be a slight tendency, I think, be
cause that takes care of itself. There will be enough of a tendency
probably, to push prices just a trifle up—not seriously, but enougl
to make a demand for the export of money. Now, the almost in
evitable result, if you have even a little surplus of money in the
country, is a tendency toward the export of money, and the only
currency wre can export is, of course, gold. I am inclined to think,
with the enormous business demands, because the people are borrow
ing all the banks will let them, the banks will -want to loan money
just as long as there is a profit in it and as long as they think it is
safe; that the banks will always pay out the notes and hold back
the gold as a reserve. But there is a tendency toward inflation. I
do not think it is a dangerous tendency, except to this extent, that
it is almost sure to lead to a considerable export of gold. Now, I
think, if you adopt Senator Nelson’s suggestion and say that the re
serve must be kept in gold----Senator P om erene (interposing). You mean the 33 per cent?
Prof. J e n k s . Yes—should be kept in gold, then we have a demand
for gold in this country that would be quite wrnrth while, and it would
be but a short time until we could make arrangements to simplify
the currency by having some of these other forms of currency retired.
May I say another word in reference to that export of gold? We
have, at the present time, a very large amount of gold in the coun
try—a very large gold reserve. If, through the substitution of these
new notes for gold it should lead to an export of gold in an amount,
say, of several hundred millions—because I believe that is entirely
possible—it would, beyond any question, tend toward an increase of
world prices, which we all feel is not a good thing for the country
now. I believe that is really a serious danger—not so much of getting
too many notes out. but the substitution of notes for other forms of
money—that would lead to the export of gold.
Senator N elson . Prof. Jenks, we h av e an abundance of gold in
this country for any amount of currency we need, have we not ?
B A N K IN G AND CURRENCY.
2 567
Prof. J e n k s . Surely; I think so.
Senator N elson . And all we have to do is to husband that and
keep it so that it won’t slip away from us.
Prof. J e n k s . I think so. That brings up another point along that
same line. Isn’t it a good thing to make provision just as soon as it
can reasonably be done for the retirement of a considerable quantity
of national-bank notes—I, myself, would say the greenbacks, too?
We are not going to have the use made of these new notes to so great
an extent as I think would be, on the whole, desirable unless we
make provision for the retirement of some other form of currency.
Senator N elso n . Will you allow me to make a suggestion ?
Prof. J e n k s . Certainly.
Senator N elson . Would it not be wiser to leave the greenbacks
alone and provide for the gradual retirement of the national-bank
notes ?
Prof. J e n k s . Personally I should favor the retirement of the
national-bank notes first.
Senator N elso n . S o that you would have one kind of bank notes;
that is to say, practically, as you stated a moment ago, bank notes
with a Government -guaranty ?
Prof. J e n k s * Yes; in essence.
Senator N elson . And it wrnuld be better to have this currency
gradually supplant the national-bank currency?
Prof. J e n k s . I agree with that.
Senator N elson . But you must let greenback alone.
Prof. J e n k s . I probably shall, in view of the feeling shown here.
[Laughter.]
Senator H itc h c o c k . N ow , I think you assented to a suggestion
made by Senator Nelson, that the banks in joining this new system
should be required to pa}' their capital of $105,000,000 in gold?
Senator P om eren e . Only a part o f it.
Senator N elson . I did not suggest the entire subscription; I said
at least a part of it.
Prof. J e n k s . The point of the matter, I think, Senator, hangs on
just this: If we are going to make these notes redeemable in gold
it is desirable that we provide some means for the regional reserve
banks to secure gold, and I can see no simpler or better way than to
say they shall pay at least part' of the capital subscription in gold,
and in that way cover that.
Senator H itch co ck . We already have pretty good evidence it is
going to be a serious matter for the banks joining the association to
part with this large amount of cash capital, because at the present
time we only have in these national banks about 8 or 9 per cent of
their deposits actually in gold or lawful money; and if their re
serves are to be depleted by taking gold or legal tender out of it, it
is going to make much more difficult their joining the association
and is going to require them to call in loans for the purpose of raising
the means.
Prof. J e n k s . Would it not be sufficient to provide, as I understand
was really implied in the Senator’s question, that the gold could be
paid in more or less gradually?
Senator H itc h c o c k . Y ou mean the capital?
Prof. J e n k s . Y ou could pay in the capital in installments also,
because the demands will not come upon it immediately; but if you
2568
B A N K I N G AND CURRE NCY ,
give a few months’ time—six months—they ought to be able to get
the gold.
Senator H itc h c o c k . Y ou mean the individual banks joining this
association?
Prof. J e n k s . Yes. If they call in loans, as you suggest, they would
not need to call them in to any great extent, because the large major
ity of those loans mature in six months. It would check things
slightly. But, at the same time, their customers have need for loans
every day, and they would be glad to get loans through the new note
system.
Senator H itc h c o c k . What I mean when I said they would call in
their loans----Prof. J e n k s (interposing). You mean it w ould check the amount
that is put out?
Senator H itc h c o c k . I mean when notes come due, they would re
quire their payment instead of renewing them. Under the present
system the body of loans throughout the country does not fluctuate
from season to season. It would to some extent.
Prof. J e n k s . When the notes come in, if they want them renewed,
they would renew them in credit. They are not required to be paid,
but they could make another lean in these new notes.
Senator H itc h c o c k . There seems to be a contraction of credit
almost inevitable in the banks if they are going to be required to pay
cash. It has even been suggested that the banks be permitted to
make a part payment of cash and a part payment of commercial
paper, discounted simultaneously. But if you take the other course
and require the banks to pay all in gold or in legal tender, you are
going to add to the apprehension that already exists.
Prof. J e n k s . It may be arranged in this way, as I said before:
Supposing they would pay part in gold and part in commercial paper.
That would, of course, keep working toward the place where the time
limit would expire, so that gradually you could substitute one for the
other. But they do not need to get this large gold reserve immedi
ately, because they will only need to redeem those notes as the notes
come out, and are presented for payment, and these notes are only
going to be gradually substituted for the other forms of money. It
is sufficient if the substitution of the gold for the other type of secur
ity is made in proportion to the issue of the notes themselves.
Senator S h a fr o t h . What is the use of having such a large gold
reserve in these regional banks, when $150,000,000 has been ample to
sustain the whole structure of national bank notes and the green
backs—probably a billion of dollars?
Prof. J e n k s . There are two reasons, I think. The first reason is
because it is of prime importance that there be no question of the
quality of these notes in order to secure confidence; and, the second
reason, the one I have given before, that, unless we do make a pro
vision for these banks to hold gold to a very considerable extent in
their reserves, we are almost sure to have a large export of gold
because of the substitution of these notes for the other forms of
currency.
And if we export gold to any very great extent it will, in the first
place, lessen confidence in the security of the new system, and in the
second place, if as much as four or five hundred millions go out in the
B A N K I N G AND CURRENCY.
2569
course of a year or two, that would have a tendency toward increas
ing prices in the world’s market, and I do not think we want to do
anything----Senator S h a fr o t h . D o you think any money will go out of the
country except for the purpose of settling balances against us?
Prof. J e n k s . Those balances, of course, shift with the course of
trade, and it is, as far as I am aware, the universal experience—and
if I may go back again to the old technical expression we have heard
so much of, Gresham’s law—that if you put into competition in
any one country different kinds of currency the currency that, on
the whole, is the cheapest for the people is the currency that is going
to stay.
Senator S hafroth. Unless it is redeemable in gold?
Prof. J enks . Well, unless it is redeemable in gold. Now, if you
are going to make them redeemable in gold----Senator S h a fro th (interposing). The question purely is whether
there should be a gold reservoir in the United States Treasury for
the purpose of doing this, or whether we should have gold in each
regional bank.
P r o f . J e n k s . I sh o u ld say b o th .
Senator S h a fr o t h . That w o u ld ta k e fo u r or five tim es as m uch
gold.
P r o f . J e n k s . Yes; a n d I th in k it is a v ery d esirab le th in g .
Senator S h a f r o t ii . I do not believe in locking up the gold for fun.
Prof. J e n k s . But is it locking up gold for fun? Here is the situa
tion, and I think it is what Senator Nelson has in mind as to the
danger of inflation. When you have a dollar in gold you can not loan
more than that dollar, but if you can issue notes on that dollar you
can issue, if there is anybody who will give you good security for
them, three or four times the amount of the gold, and still have a
reasonable degree of safety. Three to one gives all the safety we want.
When it comes to putting this money into circulation, the banks are
going to prefer to put out these notes instead of their national-bank
notes or the gold certificates; they are going to put those out, and by
putting them out it drives these others all into the reserves, and it
will only mean the very slightest inflation. Prices will go up a
little here, and as soon as prices go up only a little here, we shall
find that we are in a position to export gold.
Senator H itc h c o c k . The exports o f merchandise will be checked;
prices rising will check the export in merchandise, and that com
pels the gold to go?
Prof. J e n k s . That is it. It is a matter simply of the cost of ship
ping gold to Europe. If we can make a.demand in the banks for re
serves of some hundreds of millions of gold, then we will check that
tendency. It is as the Senator says, if these notes are absolutely re
deemable in gold and we keep enough gold here we are not going to
ship it abroad. Even then there is a tendency toward expansion, be
cause for every dollar in gold the notes are perfectly safe, 3 to 1,
and that is all the law requires. I believe in the bank-note system,
largely because it can adapt itself so easily to the necessities of
trade. But I should think it extremely unfortunate if we were to
export, in the course of the first two or three years. $400,000,000 or
$500,000,000 of gold.
2570
B A N K IN G AND CURRENCY .
Senator S h a fr o t h . We have had some very large inflation in the
issuance of banking currency, expanding'from two hundred and
some odd millions in 1909 up to $750,000,000 now, and yet we see no
movement of gold going away.
Prof. J e n k s . I simply do not believe that there has been an in
inflation beyond the demands of business.
Senator S h a fr o t h . But there has been a large amount of new
money used ?
Prof. J e n k s . That is true.
Senator W e e k s . It has not increased any more rapidly than the
business demanded it?
Prof. J e n k s . I do not think so.
Senator W e e k s . I do not think so, either.
Prof. J e n k s . I do not think there has been any inflation, except
a temporary inflation.
Senator W e e k s . Where there is an increased demand there is go
ing to be an increased inflation now?
Prof. J e n k s . May I explain that again? May I explain this with
reference to the question of inflation. When business has been best,
at times our national banks have issued considerable quantities of
notes, but no more than business needed. When there came a slack
ening of business, we may have had a little too much currency at
times, and at times we know gold has gone abroad. That export has
not been enough to be at all serious. I think these new notes are
likely to bring about a condition which is a good deal more serious,
and that for this reason: There is a better opportunity for the banks
to make money, to make their profits in loaning these notes and hold
ing the other kinds of lawful money in reserve. These new notes
can not be held in reserves. Whenever they get currency available
for reserve they are going to keep that in their vaults instead of the
new notes. Whenever they are called upon to make a loan they will
pay out the new notes. That is good judgment.
Senator W ee k s . D o you think they ought to be made legal reserves ?
Prof. J e n k s . No ; I do not think so. What I think should be done
is this: To make provision as fast as can be done for the retirement
of our national-bank notes and see to it that we keep our gold here.
If we retire the national-bank notes as soon as we can, then I should
say that will make a void for a lot of these notes. I should be glad
to see the system come down to nothing except gold and these notes
and small currency. I think it would be wise to have these notes in
denominations of not less than $5. I should leave the small coins
and small certificates for the ordinary small change, because that is
not so elastic as $5 notes an,d notes above that. I should be glad to
see the present national-bank notes retired as soon as possible. Then
if we have enough gold here we are perfectly safe. If we send
abroad $500,000,000 of gold, or two-thirds of that, we shall feel it
in increasing prices.
Senator W e e k s . I want to discuss the question of sending gold
abroad. Say Europe owes us money and we owe Europe money all
the time; if that condition obtains either way, eventually the debt
has got to be paid. We may delay the payment of the debt bv various
artificial means and the payment of the debt may be delayed, because
the creditor in that case may find it to its advantage to loan its
credit in the debtor country.
B A N K IN G AND CURRENCY .
2 571
Now, suppose we have a balance of trade against us—it is not
usual, but suppose we do have a balance of trade against us for a
couple of hundred million dollars. In the ordinary course of business,
if it were an individual transaction, we would have to pay that, and we
can only pay it by shipping gold. That is one of the things you have
in mind.
Let us suppose the interest rate is materially higher in this country
than it is abroad, which is ordinarily the case. Is it not true that
that money is likely to be loaned in this country so that we would
not ship gold unless there was some scare which would induce the
owner of that money abroad to draw it home and loan it out there at
a lower rate? When this system is established—assuming it will be
established—are we not going to have the means of preventing the
shipment of gold under such conditions? For instance, we should,
in my judgment, authorize the regional banks to invest some part of
their capital and deposits in foreign bills, and instead of shipping
gold we simply would send home their evidence of indebtedness
against us, or we may increase our interest rate and should do it,
which would have a moral influence in checking the exportation of
gold.
By various other artificial means, such as Mr. Fisher indicated to
us yesterday, in selling them short-time notes, either municipal or
Government notes, it has been suggested that we refund some of these
2 per cent bonds in short-time Government notes, and use them for
that purpose. Do you not think we can in that way, if that whole
question is treated properly and scientifically and practically, that
we can control the question of gold exportation from this country
so that there will not be any probability of our losing gold in an
amount that would embarrass us? That is a pretty comprehensive
question.
Prof. J e n k s . That is a pretty comprehensive question. As regards
the way in which the question is put, I think I should agree to every
individual statement, but at the same time I would answer the ques
tion you have asked in the affirmative again, that there is danger,
I think. May I explain that?
In the first place, these various measures that you have suggested
are, part of them, at any rate, as you say, artificial methods. Take,
for example, the raising of the rate of discount. I suppose you mean
by the Federal reserve board?
Senator W e e k s . I do, and the raising of the rate of discount would
have a tendency to induce the owner of the money to loan it here
because he could get a higher rate.
Prof. J e n k s . That is perfectly true.
Senator H itc h c o c k . We only postpone the day of settlement.
Senator W ee k s . S o that we can settle in some other way.
Prof. J e n k s . There is where the point comes. It is an artificial
method that must be applied by a group of men who are not really
in touch with business, although they are in touch so far as get
ting reports is concerned. It is an artificial method that has to be
employed from day to day. Is it not better to have a system that
works substantially automatically, so that it will adjust itself? There
are times when it is a good thing for this country to export gold and
there are other times when it is a good thing to import gold. It all
2572
B A N K I N G AND CURRENCY .
depends upon the natural course of prices. As you say, Senator, we
may at times postpone settlement. We may at times, perhaps, hasten
settlement, if you want to.
But all of that is ignoring this fundamental condition that the
banks are going to want to substitute these new notes for the money
we now have r»n hand. As has been said repeatedly, there is money
enough now in circulation to do our business very well under ordi
nary conditions. But if we are going to get the new notes into cir
culation we must either retire some other currency that we have in
circulation now, or else we are bound to have, if these new notes are
put into circulation, a surplus of currency, which will mean that we
shall ship gold. I do not think it will make inflation to such an
extent that it would be likely to cause a crisis. I think it would be
much simpler for gold to flow abroad, as it would, unless we adopt
these artificial means. But if we do adopt them, there is no telling
just where we are going to stop, because this process is going to keep
on for years. Why should it not?
If you are a banker you are going to use these new notes. If we
provide that the gold shall be in the reserves there is a reason why
the gold will stay here, and then we shall soon retire some of these
other forms of currency, which I think should be done.
Senator W eek s . I think so, too. I have grave doubt -whether the
condition which you indicate is likely to exist; yet if there is any
probability of it I admit that precaution should be taken to prevent
it, and that is why I am in favor of a bank-note circulation, because
I think that is absolutely responsive to trade, and it is impossible, as
a practicable proposition, to get out more circulation than the needs
of business require.
Prof. J e n k s . I think that is so when you have a sound system to
begin with.
May I state, in a little different way, the conditions under which
gold goes abroad? You say that in the trade between different coun
tries and this country, if the balance is against us we shall have to
pay, or if it is the other -way we shall get the balance.
What do we pay that balance in? The statement is ordinarily
made, and especially by banks, that we have to pay that in money.
As a matter of fact we always pay balances in whatever is the cheap
est to pay them in. That simply means this, that if we have a pretty
big wheat crop, so that the price of wheat is low, we are paying those
balances in wTheat; and if we are having a big cotton crop and the
price of cotton is low, they are being paid in cotton.
Senator W e e k s . But the net balance is being paid in gold?
Prof. J e n k s . Yes; although you suggested a moment ago that it
will be done by artificial means. The net balance is not necessarily
paid in gold. It is, of course, when we come to the bank statements,
but ordinarily it shall be paid in other things. What I am afraid of
in this system, as it stands, and what I think is almost certain to
happen, is that we will find it cheaper to pay in gold than in anything
else. That means that whenever anything occurs to increase prices
here a little bit, then other people want to sell here.
Senator H itch co ck . Exports are checked?
Prof. J e n k s . Exports are checked and the imports are increased
at the same time.
B A N K IN G AND CURBENCY.
2573
Senator H itc h c o c k . Exports o f merchandise are checked and im
ports are stimulated.
.
S e n a to r W e e k s . Y ou f o r g e t t h a t t h i s ta r iff b il l is g o in g to s o
s t im u la t e o u r f o r e ig n tr a d e t h a t th e r e w ill n o t b e a n y q u e s tio n a b o u t
th e s e t tle m e n t o f o u r in d e b te d n e s s .
Senator H itc h c o c k . It is also going to stimulate our exports.
Senator W e e k s . That is what I mean.
Prof. J e n k s . S o far as I have seen the signs in the stores, they
think it is going to stimulate the imports. But it is immaterial. I
always feel that this currency question is much more important than
the tariff question.
Senator H itc h c o c k . Certainly.
Prof J e n k s . I feel pretty strongly on this matter, that there is
this tendency toward an expansion which may not run to the danger
ous length of overspeculation, or to the extent of bringing on a crisis,
but which is almost certain to run to the extent of a pretty large
export of gold.
Senator H itc h c o c k . Can you give us any idea, Prof. Jenks, of the
effect of an expanding currency upon the prices of commodities?
Prof. J e n k s . Well, yes; speaking generally, I think so.
Senator H itch co ck . Does an increase in the supply of gold tend
to increase prices?
Prof. J e n k s . Yes; beyond all doubt.
Senator H itc h c o c k . Does an increase in the supply of paper cur
rency have the same effect ?
P r o f . J e n k s . U n le s s t h a t is im m e d ia t e ly so r e s p o n s iv e to th e d e
m a n d s o f b u sin e ss th a t th e r e is r e a lly n o m o r e m o n e y in c ir c u la tio n
th a n is n e e d e d to m e e t it s im m e d ia t e d e m a n d s .
Senator H itc h c o c k . Does a n in crease in b a n k c re d its h av e th a t
effect ?
Prof. J e n k s . It all has the same effect.
Senator H itc h c o c k . Of raising prices.
Senator S h a fr o t h . T o the same extent as gold?
Prof. J e n k s . N o. We are fixed on a gold basis, as practically all
the leading commercial nations of the world are. This gold basis
is really the basis of practically all of the currency in these different
nations, and also to a very considerable extent—it is in the terms of
gold that we have all these credits. Whenever we have any new
device in the currency system that tends to make the use of gold more
effective, that has much the same effect as if we were to increase the
amount of gold. I think that the putting of this new currency into
circulation here is going to make gold more effective; if it does, it
will have the same tendency, and so far as that is true, it will have
the same effect in increasing prices that an increase in the srold supply
would have.
Senator H itc h c o c k . It is proposed in this bill to very materially
reduce the limit on reserves held by 7,000 national banks. What
effect is that likely to have upon the volume of currency and upon
prices ?
Prof. J e n k s . I should say again that while I am inclined to ap
prove of that myself, I nevertheless feel that the effect is as your
question intimates, practically the same as increasing the amount of
currency. By currency we mean money in circulation, in distinction
2574
B A N K I N G AND CURRENCY .
from the money locked up in the vaults of the banks and that in any
country.
Perhaps, I may venture to suggest something that I was saving to
Senator Shafroth a little while ago, that as regards this question of
the effect of the increased supply of gold upon prices, I feel that that
is by far the most important element in the increase in prices that we
have had the world over since 1897. In the same way again, the
quantity of gold was by far the most important element in the de
crease in prices that we had between 1872 and 1873 and 1897. I was
saying to one of the members of the committee that I had made at
two different periods some special studies which seemed to make that
clear.
In 1897 I was asked to read a paper before the New York State
Bankers’ Association on “ The causes of the fall of prices since 1873.”
By means of diagrams that showed the course of prices and the out
put of gold and silver and things of that kind, taking account of
minor influences that always come in. it seemed to be clearly estab
lished that the chief reason for the fall in prices was the lessening
output of gold, together with what Avas of still more importance, the
very largely increased demand for gold in Europe, as several of the
countries went over to the gold standard.
Then about a year and a half ago I was asked to read a paper
before the State Bankers’ Association of Michigan, and I suggested
the question of “ The causes of the increase in prices,” and I applied
the same principles, and see if they would work. Taking absolutely
the same data, bringing them up to date, it established, with substan
tial clearness, that the main cause of the increase in prices had been
the very largely increased output of gold without a corresponding
increased demand for it.
Senator S h a fr o th . Has there been, at the same time, a great in
crease in the use of bank currency in France and German)7?
P r o f . J e n k s . T h e r e h a s b e e n ; it is a ll a lo n g th e lin e . I n a ll c o u n
t r ie s o f th e w o r ld , Ave a re g e t t in g m o r e a n d m o r e to s u b s tit u te m e th o d s
o f b u sin e ss f o r g o ld . Y o u ta k e , fo r e x a m p le , o u r oAvn c o u n tr y . O u r
c o u n t r y h a s m o r e f u l l y deAre lo p e d , p a r t ic u la r ly in th e e a ste r n p a r t,
th e u se o f c h e c k s th a n p r o b a b ly a n y o th e r c o u n tr y . I n G e r m a n y
t h e y d o n o t b e g in to u se th e n u m b e r o f c h e c k s t h a t Ave d o. B u t n e v e r
t h e le s s th e y a re g e t t in g t o u se th e m m o re a n d m o r e d u r in g th e la st 10
o r 15 y e a r s fa r m o r e th a n e a r lie r .
Senator H ttchcock . On the whole then, there has been since 1897
all over the world a great increase in the volume of the circulating7
medium ?
P r o f . J e n k s . B e y o n d a ll d o u b t. I n a d d it io n to th a t th e r e h a v e
b e e n im p r o v e d m e th o d s , so th a t it h a s te n d e d to s t im u la te th e e ffe c t.
T h a t is th e p o in t in t h is b ill. Y o u a re g o in g to im p r o v e y o u r m e th o d
of h a n d lin g g o ld so m u c h th a t it w ill m a k e it m o re se r v ic e a b le th a n
b e fo r e . T h e r e is t h a t te n d e n c y tOAvard e x p a n s io n o f c u r r e n c y u n le s s
w e r e tir e m o r e la r g e ly so m e o f th e o th e r m e d ia o f c ir c u la tio n . I f y o u
w ill r e tir e o th e r c u r r e n c y a n d r e q u ir e g o ld as r e se r v e , w e s h a ll k eep
our gold.
Senator N elson . I see your theory is that the rise and fall of prices
is governed by the volume of currency ?
Prof. J e n k s . Not entirely, but that is the most fundamental thing.
B A N K IN G AND CURRENCY.
2575
Senator N elso n . Have you not overlooked the fact that in this
country at least one of the main causes is that production has n o t
kept pace with the demands for consumption; is that not a great
factor ?
Take it, for instance, in the matter of beef just now. It is not cur
rency, it is because the ranch business is becoming obsolete, and we
are raising less cattle in this country, and beef is becoming scarcer.
Prof. J e n k s . I quite agree with that. My point is this: If you
take any individual article like beef, you, of course, will find your
immediate answer in the relation of the demand to the supply. If
you take the great mass of commodities—of course, the best estimate
that we have of those are in the figures collected by the Government—
we get the average price as nearly as possible. Take those the world
over and you will find a very decided increase in prices, some special
commodities down and some up.
Senator N elson . There is no great difference in th e volume o f cur
rency in this country this year and last year?
Prof. J e n k s . No ; that is perfectly true.
Senator N elson . N ow , then, I want to call your attention to this
fact. Have you observed the difference between the price of corn
this year and last year, and the price of cotton this year and last year,
and also the price of potatoes this year and last year. Can you charge
those differences to the volume of currency ?
Prof. J e n k s . That is the point I made a moment ago, when you
take single individual articles, and that is especialy true of agricul
tural products, because when you take those you will find a tem
porary explanation from year to year in these local influences you
spoke of. If you draw a chart of the course of general prices over a
series of years there will be very little fluctuation from year to year
but you will find the great waves of change over periods of years.
Senator N elson . I s it not a fact with this country, Prof. Jenks,
that our population, our body of consumers has been increasing faster
than our producers have, especially producers of raw material?
Prof. J e n k s . I t is certainly true as regards the producers of raw
material, but as regards the manufacturers it is not true.
Senator N elson . Compare the difference between our urban and
rural population, you can see the great change.
Prof. J e n k s . I quite agree with that in regard to individual cases.
Senator N elson . The urban population is a body o f consumers,
while the rural population is a body of producers?
Prof. J e n k s . Yes; I grant that with regard to individual cases.
Senator B ristow . Has not this vast increase in agricultural prices
had a tendency to lift the entire price level ?
Prof. J e n k s . Beyond question. On the other hand, there have
been some counter influences.
Senator B ristow . Not in agriculture?
Prof. J e n k s . Not so much; a little in improved methods.
Senator B ristow . D o you not think this increase in the price of
agricultural products is due practically wholly to what Senator
Nelson called the congestion of the population in the centers?
Prof. J e n k s . If you add to that also the difference in crops. As I
was saying the other day, I am not sure that the short corn crop this
year is not going to offset some of the effects of the traiff, because that
2576
B A N K I N G AND CURKENCY.
affects very materially the general level. Those are annual fluctua
tions.
Senator B ristow . I can see that a short corn crop would, because
the wheat is not very high and corn is very high, relatively.
Prof. J e n k s . Yes.
Senator B ristow . But you take this movement from the farm to
the city, and it seems to me that that is as much responsible for the
advance in prices as the circulating medium.
Prof. J e n k s . That, beyond any question, is considerably so all over
the world, because that tendency is practically universal. But at the
same time, if you will go back over a period of 50 or 75 years and
note the general changes in prices, you will find that the funda
mental reason is, the output and use of gold, to my mind—of course,
there are differences of opinion—but to my mind, that is more im
portant than any other one of these things.
Senator R eed . What is?
Prof. J e n k s . The supply of gold as it relates to the demand for it.
Senator S iiafroth . Mr. Barry testified before the committee a few
days ago, and he said that while there has been an apparent rise in
the price of commodities, that so far as fixed investments are con
cerned, the prices are no higher than they were 12 or 15 years ago.
He cited the stocks of railroads and urban property, and things of
that kind. What do you think of that theory?
Prof. J e n k s . That is true to a considerable extent, but I do not
think it affects the question particularly. It is not true as to railroads.
Senator R eed . Nor as to railroad stocks, either.
Prof. J e n k s . It is as regards a good many stocks.
Senator R eed . But the general average price of railroad stocks,
except those companies that have absolutely flooded their treasury
with watered stock, is much higher, the aggregate of the stock is
higher—I mean the value of the whole stock issue is greater, but the
value of an individual share may not be so great, because they have
issued so many shares.
Senator S hafroth . I think the increase in farm lands has been
going up because of the increase in the prices of products.
Prof. J e n k s . There is another point in connection with that also.
There is always a tendency in all countries as the demand for farm
products increases, and the people have to use more and more in
tensive methods of agriculture to go to lands that originally were not
quite so fertile as the other lands, and there is always a tendency
for the price of agricultural products to go up, and that will continue.
Senator R eed . May I get back to a matter that concerns the bill?
You stated, in discussing the difference between bank circulation and
other forms, that one of the virtues of the bank circulation was that
it responded to the business needs of the country. Now, I understand
you to say that there has been going on in this country in recent years
a real expansion outside of the mere matter of the amount of money,
growing from the fact of an additional use of money through checks,
so that the same dollar may be used many times in a day without
passing from the place of deposit. That has been going on ex
tensively ?
Prof. J e n k s . Yes.
Senator R eed . There has been an increase of gold, which has been
an expansion. Now, on top of all that expansion, is it not true that
B A N K I N G AN D CUBRENCY .
2577
the national bank circulation, instead of retiring, as it ought to have
done under those circumstances, has been increasing right along in
this country?
Prof. J e n k s . There is this other point, though, that the demands
of business have also increased very greatly. And when we are speak
ing of an increase of the currency we always ought to speak of it in
relation to the demand for the currency.
Senator R eed . But the demands of business—and we are coming
right to the point I wanted to get at—always multiply in the face of
an inflation, do they not?
Prof. J e n k s . Surely.
S e n a to r R eed . S o th a t a s y o u g e t in f la tio n y o u g e t m o r e d e m a n d
a n d th e n m o r e in f la tio n to m e e t th e d e m a n d , a n d th e s e b a n k n o te s
t h a t a re s u p p o s e d to b e a n a u to m a tic c h e c k a n d to r e d u c e th a t d e
m a n d h a v e u t t e r ly f a ile d to d o it , a n d h a v e g o n e r ig h t a lo n g w ith th e
in f la tio n , a n d th e r e f o r e I th in k , P r o fe s s o r , th a t t h a t is a n id le d r e a m
t h a t h a s b een p u t b e fo r e u s m a n y tim e s — th a t t h e b a n k n o te s w ill
r e tir e a u to m a tic a lly .
P ro f. J e n k s . O u r n a tio n a l-b a n k notes w ill n o t, n o t o u r p re se n t
notes.
Senator R eed . Certainly not. In 1911 there were $687,000,000,
dropping the odd dollars. In 1912 there were $705,000,000, and
there is a steady increase of those notes almost from the first, with
the exception of a very few years when there was a decrease, and it
seems to me those facts demonstrate that a bank-note circulation fol
lows an inflation just like any other character of money.
Senator W eek s . Will you allow me to make this suggestion? I do
not know anyone who ever contended that the national-bank currency
which we have outstanding fluctuated with the volume of trade. The
trouble with the circulation is that it has depended on the price of
Government bonds rather than on the needs of the commercial com
munity. If a bank could make 1 per cent or 2 per cent, or some other
per cent on circulation, or a prospective profit on the principal of the
bond which it purchased, then it would take out additional circu
lation.
Senator PI itc h c o c k . Why will it not be so in this case? I f a bank
can make money by borrowing from the reserve bank, why will not
the result be to stimulate loans?
Senator W e e k s . Because the security which the bank holds is paid,
and it has no need for the circulation any longer. In the case of the
Government bond the security was never paid.
Prof. J e n k s . Yes. I was about to say that I do not agree to Sena
tor Reed’s proposition for practically the same reason. Our present
bank-note issue is not a bank-not issue in anything like the same
sense as provided in this bill, or like a bank-note issue in Germany,
France, or Canada. Canada is one of the best illustrations we have.
Senator R eed . I beg pardon for interrupting----Prof. J e n k s (interposing). Before you ask another question, I was
going to suggest some means by which, I think, this system would
now contract, and I was going to make one or two suggestions with
respect to a method of making it contract still more promptly.
Senator R eed . That is what I wanted to get; but before we come
to that let us consider this. I will waive the present bank note as a
2578
B A N K IN G AND CURRE NCY .
demonstration, although to my mind it has not been fully answered,
although I think that the considerations offered are entitled to weight.
But I go back to the proposition I made a minute ago, to which you
assented, that an increase in the volume of money increases prices,
thus making a demand for more money. The increase in prices and
the increase in volume of money stimulate industry, stimulate busi
ness, apparently, at least, and the greater the quantity the greater
the demand. Thus we have an endless chain, if you please, constantly
in operation. The appetite grows by what it feeds upon. And there
fore I do not believe, and I have to be convinced, that there is any
bank-note issue in the world or that can be devised that will auto
matically retire itself unless there is attached to its issue conditions
forcing its retirement. T want to hear how that is going to be done
under this bill.
Prof. J e n k s . I am very glad you put the question in that way.
I think there are two things to be said about that, and I quite agree
with you when you say they either have to be forced to retirement
or else there must be some inducement. Inducement is better than
force----Senator R e e d (interposing). When I say “ forced,” I only mean
that there must be a force created to cause their retirement. That
force may be in the form of an absolute command or it may be in
the attaching of conditions which make it desirable to get rid of
that piece of paper.
Prof. J e n k s . Yes. Now, as regards your first proposition. I would
agree that an expanding currency—other things equal, unless there is
a corresponding expansion of business—does tend toward increasing
prices: and also that a tendency toward increase in prices does tend
to make business go on faster. People want to expand their credits,
and that is the fundamental cause of most of our crises, if they are
monetary crises. And the trouble has been ordinarily, whenever we
have had a monetary crisis, that there has not been this inducement
toward a contraction of the currency. That has been the danger in
many cases where we have had Government note issues or specula
tive bank-note issues not properly controlled.
There are two ways in which we can see to it that the currency does
lessen when a normal business demand slackens. One is along the
line of the German system, by which, when we get a certain amount
of money out we put a tax on any larger amount and leave the banks
to raise their rates of interest.
Senator R eed . I call that a force.
Prof. J e n k s . That is a force. Another way, which, on the whole,
I think, better, is the plan that is used in Canada. It is this: Each
bank being anxious to get its own notes out so far as it can with
safety, takes up the notes of every other bank and sends them back
for redemption immediately. Now, as has been intimated here a
number of times this morning, and was said a moment ago by the
Senator----Senator R eed . That certainly is a force, but it is not applied bv
the Government but by the other banks.
Prof. J e n k s . AH the better, because it is much more nearly auto
matic. They are both forces: that is true.
B A N K IN G AND CURRENCY.
2579
Let me suggest again that when a man makes a loan and gets these
notes out there are that many in circulation. If he pay back his
debts in notes, either of that bank or any other bank, that lessens the
circulation by an equal amount, so that ordinarily in the course of
business we have the expansion of the currency and contraction of the
currency just in accordance with the normal demands.
Now, may I speak of the system you have in the bill. You have a
system under which people will borrow. They will get these notes
into circulation. We are speaking now, of course, of the member
banks. When the notes are paid into the member bank, whether they
are paid in these notes or in the notes of another Federal reserve
bank, they will be held in the vaults of the member bank, and will
be paid out over and over again. The system will not work auto
matically in the way it does in Canada. That is, they will not be
sending any of the notes of the other banks back, and if those notes
get quite a long way from home, there will be a considerable element
of expansion.
Now, there are two ways in which that can be covered. The bill
itself covers that in part by taxing the notes that are advanced to the
separate regional banks, and if it seems that the demand is getting
too strong the tax rate would be raised. That, again, is not a u to m a tic .
Senator N e e d . That rests in human discretion.
Prof. J e n k s . And that I do not think is wise. I was going to make
another suggestion that perhaps may help. The amendment that was
made to the bill providing that no reserve bank should issue the notes
of another reserve bank was a very wise one, and that they redeem
the notes of any other reserve banks that may come into their hands.
That is wise. Why not extend that principle further? There are two
ways: In the first place, say that no member bank shall pay out over
its counter any notes except those of its own regional bank. That
would strengthen the law a great deal along that line. The only
objection I can see to that is the cost of shipping the notes that come
in from any other regional bank back to the home regional bank,
and I think the home regional bank could very well afford to pay
that. That would go a long way toward strengthening the redemp
tion system. That would bring it much more near the Canadian
system.
Senator P o m e r e n e . Would the Federal board, under the terms of
this bill, have that authority?
Prof. J e n k s . I had not supposed it would have that authority;
and it seems to me the wise thing to do is to provide for that in the
bill. And, further, what makes the Canadian banks return notes so
promptly is that they are making money by doing it. Why not
apply that same principle here?
Senator P o m e r e n e . Let me see if I understand your limitation.
Assuming that there is a regional bank in New York and a member
bank of the Chicago regional bank would receive a New York note;
then you would have that returned to New York, would you?
Prof. J e n k s . What I mean is this: Supposing a member bank in
Chicago—not the regional bank—gets this New York note. It would
be allowed to lend that out over its counter, as I understand it, under
this bill. It is only the Chicago regional bank that can not issue it
2580
B A N K I N G AND CU RRE N CY .
Senator P o m e r e n e . I understand that, but that does not quite an
swer the thought I had in my mind. Would you refuse to permit the
member bank of the Chicago regional bank to pay out a Chicago note
also ?
Prof. J e n k s . Oh, no.
Senator P o m e r e n e . That is, I mean after it had been once paid in.
Prof. J e n k s . That I do not think is of very great consequence,
whether it does that or not. The bill, as I understand, provides that
it could pay out its own regional bank notes over and over again.
Personally I should like to have every regional bank not allowed to
pay out its own notes the second time, as was intimated before—
practically the Bank of England plan. It would be a little more ex
pensive, but, in the first place, it -would be an absolute check against
counterfeiting, as these notes are being retired all the time; and an
other advantage would be, as in England, that you are in touch with
your circulation all the time. But I think that is of much less im
portance.
Senator R eed . Are you not thereby circumscribing this to such an
extent it would cease to have any value as money ?
Prof. J e n k s . Not at all, I think.
Senator R e e d . Let me see if I understand you. Suppose I run a
member bank in Kansas City; Senator Bristow runs a member bank
across the street. I go over to Senator Bristow’s bank and get
$100,000 from the regional bank on 30, 00, and 90 day paper.
Prof. J e n k s . Y ou mean from h is Federal reserve bank?
Senator R eed . No ; from you, as a Federal reserve bank. A man
comes in to borrow $100,000, and I pay it to him in cash. He walks
across the street to Senator Bristow’s bank and deposits that $100,000.
Senator Bristow then has practically to cancel it.
Prof. J e n k s . N o ; I do not mean that at all. The point I make
is this: Suppose that you get $100,000 from your regional bank in
Kansas City. There is no reason why you can not pay that out back
and forth as much as you like. But suppose a customer comes in,
and when he makes his deposit with you he deposits some notes from
the Chicago regional bank. Then I should say you should not take
those and loan the Chicago reserve bank notes over your counter.
Senator R eed . What value do I get out of them? What good
are they to me if I can not lend them out ?
Prof. J e n k s . Y ou can get them redeemed through your regional
bank.
Senator R eed. I must send those in to be redeemed?
Prof. J e n k s . Y ou must send them to your regional b an k , which
is across the street, as you say. Your regional bank would charge
them against the Chicago bank.
Senator R eed . I can not find this bank across the street; it is 600
miles away.
Prof. J e n k s . Then you send them to your regional bank, wherever
it is, and the regional bank should pay----Senator R eed (interposing). And have a constant stream of money
going in every day by express?
Prof. J e n k s . Absolutely; a stream of notes for redemption. Not
necessarily by express; I should make a sound provision to use the
parcel post these days.
B A N K I N G AN D CURRENCY .
2 581
Senator R e e d . And I send these bills by parcel post?
Prof. J e n k s . I think I should.
Senator K e e d . I should want to cancel them before I send them,
then.
Prof. J e n k s . That is something you can arrange. There is this
point to that, Senator----Senator R eed (interposing). Is there not a plan that is much
simpler than that and that will absolutely work? Let me suggest
it to you.
Prof. J e n k s . I have not finished with m y plan yet.
Senator K e e d . I thought you had. Proceed, then.
Prof. J e n k s . I was going to say that I do not think that plan is
as cumbersome as it might appear to be. In the first place, we know
it is workable, because it is the plan that is worked continually in
Canada and has been worked for years, and they pay the express
charges without difficulty and are glad to do so for the sake of get
ting the notes of rival banks out of circulation.
Now, if you are a member of the Kansas City regional bank you
are going to get 40 per cent of the profits they may make. You
would be rather glad to have that currency circulation reasonably
profitable.
Senator K eed . We are going to take that out of this bill, I think.
_Prof. J e n k s . That is something, of course, I have not any discre
tion about.
S e n a to r K e e d . I d o n o t knoAV, b u t I a m j u s t j u d g i n g b y th e t a l k .
P r o f . J e n k s . I a m n o t su r e t h a t it w o u ld b e w is e to ta k e it o u t,
b e ca u se h e r e w o u ld be a n in d u c e m e n t to k e e p y o u r c ir c u la tio n doAvn.
N o w , i f in s te a d o f p a y in g th a t c u r r e n c y fr o m C h ic a g o o u t oA^er a n d
o v e r a g a in o v e r y o u r c o u n te r A vhenever y o u g e t th e c h a n c e y o u se n d
it to y o u r r e g io n a l b a n k y o u c o m p e l th e m to r e d e e m it. Y o u d o n o t
n e e d t o se n d it e v e r y n ig h t , b u t c e r t a in ly .a s o f t e n as e v e r y w e e k , a n d
y o u w o u ld Are r y li k e ly s e n d it e v e r y t w o or th r e e d a y s , a s in C a n a d a .
A n d y o u r r e g io n a l b a n k c o u ld a ffo r d to p a y th e e x p r e s s c h a r g e s in
o r d e r to lun^e th a t d o n e , a n d y o u c o u ld a ffo r d to h a v e th e m p a id to
g e t th e m o u t o f c ir c u la tio n in y o u r r e g io n .
T h e n th e r e is a n o th e r t h i n g a b o u t i t : B y f a r th e la r g e s t p r o p o r tio n
o f th e b a n k n o te s in c ir c u la tio n in y o u r r e g io n w o u ld be th o s e o f y o u r
o w n r e g io n a l b a n k , o f c o u r se . T h e r e Avould b e relatiAre ly feAV fr o m
th e C h ic a g o r e g io n o r th e S a n F r a n c is c o r e g io n . T h a t w o u ld h e lp
v e r y d e c id e d ly t h is s itu a tio n .
Another thing that would help still more is this: Why should you
charge interest to the regional banks for having these notes issued to
them unless it is necessary to keep the rate fluctuating from time to
time to contract the currency? If the Federal reserve board charges
interest to the regional bank, that interest is almost sure to be added
to the loans to the customers throughout the country, and why should
a farmer in Texas or a grain grower in Minnesota pay a half per cent
or 1 per cent, or 2 per cent, maybe, for his bank notes, to put revenue
into the Federal Treasury, unless the plan is absolutely necessary to
contract the currency? If it is, I say by all means do it.
B u t i t se e m s t o m e th a t b y f a r th e b e tte r s y s te m , a n d o n e th a t
w o u ld te n d to k e e p t h e r a te o f in t e r e s t s o m e w h a t loAver, o n e t h a t
w o u ld m a k e th e b il l f a r m o r e a u to m a tic , a ls o r e la t iv e ly le s s e n in g the
S. Doc. 232, 63-1—vol 3------42
2 582
B A N K IN G AND CURRE NCY .
power of the Federal reserve board, would be not to charge interest
and to let them have the profit that is suggested; but to provide they
shall issue over their counters only the notes of their own Federal
reserve bank and send the others back for redemption. Then you
will get a system that will work practically as automatically as the
one in Canada, I am inclined to think.
Senator R e e d . I may suggest something that may be utterly chi
merical, but I make the suggestion. Suppose we write into this bill
that when money has been issued by any Federal reserve bank it shall
at the end of not to exceed 90 days—or some other period—turn over
to the agent of the Government an amount of these bank notes—I
call them that to distinguish them—equal to the amount that is issued.
That is to say, a reserve bank to-day issues upon proper collateral
to member banks $1,000 000. At the end of 90 days that Federal re
serve bank must turn over to the Federal reserve agent $1,000,000 of
their circulation, and if it can not do that it has to turn in other
money. Now, you have expanded the currency by $1,000,000 and you
have provided absolutely to end that expansion at the end of 90 days,
which is the maturity of the paper that was put up. What is the use
of all this circumlocution? Why not just do it? Maybe I am
wrong----Prof. J e n k s (interposing). I really think you are.
Senator R eed . If I am, I should like to have somebody point out
where.
Senator H itch co ck . I rather sympathize with that position of
Senator Reed. It seems to me the plan you propose, Professor, and
which seems to be contemplated by this bill, is going to involve tre
mendous shipping of currency. It is going away from civilized
methods and getting back to the dark ages where actual transfers
had to be made. At the present time it is a mere matter of credit
which is transferred on the books of the banks, very largely, but you
propose the physical shipment of currency.
Prof. J e n k s . Only the physical shipment of currency from sec
tions of the country remote from where you are doing your business.
Senator H itc h c o c k . But this is a country which does business in
a very homogeneous way. We have no national lines, and business
does not run according to State lines.
Prof. J e n k s . The essential thing, of course, is to see that you have
your contraction prompt; that jmu get your bills out of the way and
redeemed.
Senator R eed . And then, if this is workable, as I suggested, you
do not have to keep the printing presses running printing new money
and a lot of clerks destroying it. You set aside this money when it
comes into the Federal reserve bank, this $1,000,000; you take
$1,000,000 of these notes out of circulation and put them over with
the Federal reserve agent and he holds them. Day after to-morrow
that bank needs another $1,000,000 for a similar transaction. It
comes over and gets $1,000,000 of this currency that has been through
the channels of trade and takes it and loans it out, and at the end of
90 days it has to retire that $1,000,000 again, and you do not have to
keep the printing presses running. Maybe there is a hole in all
that----Senator P o m e r e n e (interposing). You make a fixed quantity of it?
B A N K IN G AND CURRENCY.
2583
Senator R eed . No; that does not make it a fixed quantity.
Senator P o m eren e . There is $1,000,000 issued, and you destroy
$1,000,000 at the end of 90 days.
Senator R eed . That is exactly the point. The point is, we have
issued this $1,000,000 for the purpose of floating certain commercial
transactions which we have been told all along are to pay this off.
They are to do it within 90 days. At the end of 90 days, therefore,
the use of this money for that particular transaction lias ceased. If
you leave it out longer you have an inflation. N oav, this provides
that the bank shall take it by direct methods—not by the indirect
method of canceling bills that come into the wrong place—shall take
up $1,000,000 of that currency.
Suppose we have $150,000^000 out, for the sake of illustration;
that is, what we think is safe. We have issued $100,000,000. To-day
the banks issue $5,000,00 more. Now, we have $105,000,000 out.
To-morrow there is $5,000,000 more of this paper that has to be
taken up. It is carried over here and retired with the Federal agent.
The next day they need $5,000,000 more. They have taken out of the
aggregate that is circulating around, and they have this money over
there with the Federal reserve agent. They have gathered it up, and
they simply take it and issue it upon this collateral. Then every
time that collateral comes due—every 90 days—they have to have a
contraction that equals the expansion, and that 90 days does not
mean each period of 90 days; you are contracting and expanding all
the time.
Prof. J enks . That is the question, I think, the Senator here had
in mind, and I was going to ask a question. What you mean, I under
stand, is this, that on every day a provision shall be made that there
must be paid in to the Federal reserve agent as much money, or as
many notes, or the equivalent of those notes, as was taken out 90 days
before.
Senator R eed . Yes.
P r o f . J e n k s . S o it k e e p s u p a c o n tin u o u s p r o c e ss. S o f a r a s t h a t is
c o n c e r n e d , t h a t is p r a c t ic a lly p r o v id e d in th e b ill n o w , a n d I d o n o t
see th a t it a ffe c ts th e s itu a tio n .
Senator R eed . If that is provided, that ends it. does it not?
Prof. J e n k s . I do not think it does quite. What is provided is
this, that the Federal reserve agent has reported to him every day, of
course, what the situation of these accounts is. If a collateral note
is paid off, he is either going to have the Government notes back or
have some other collateral notes substituted.
N oav, if the business is e x p a n d in g , the chances are 10 to 1 that he
does not get these bank notes in; and I do not quite see noAV that
he ought to get the notes in, because he has substituted, Ave will say,
for the $50,000 of collateral notes that are due to-day $50,000 others;
and I am inclined to think that your plan Avould involve a good deal
more shipment of money than mine would.
Senator R eed . T do not think it involves any.
Prof. J e n k s . In this way: These loans are not made by the re
gional banks themselves, but through the different member banks
that are scattered 100, 200, or 500 miles away.
N oav, if tho se a c tu a l p h y sical notes th a t are sen t o u t fro m th is re
g io n al b a n k hav e to go back to th e re g io n a l b a n k so th a t th ey can be
2584
B A N K I N G AND CURRE NCY .
turned over at the end of 90 days and the equivalent amount of them
substituted, you have got a good deal more of shipment under your
plan than I have under mine. Perhaps, however, I misunderstood
you.
Senator R eed . No ; I think you have gone into a detail that I did
not take up.
Prof. J e n k s . Yes.
Senator R eed . Well, the member bank now owes the regional bank
$1,000,000, which it got from the regional bank 90 days ago?
Prof. J e n k s . Yes.
Senator R eed . And its collateral is up with that regional bank?
Prof. J e n k s . Yes.
Senator R eed. If the regional bank collects that collateral, it has
now got in its vaults all the money it loaned out, and the $1,000,000
is still kiting around the country somewhere—the $1,000,000 of
currency.
Now, the question is, how to get that back.
If you provide that the bank which got the accommodation wipes
out its obligation by either—its obligation is already wiped out by
the payment of this collateral if it is done in that way. I do not
assume that it will be done in that way; I asume that those collateral
notes will be collected by the member bank and remitted to the re
gional bank; and I asume that there will be passed through that
regional bank, consequently, a large flow of this currency; that it
will go there in vast quantities and that all it has got to do is to
take the $1,000,000 of that that is coming in, retire it from circulation
for the time, and turn it over to the Federal Government.
S e n a to r P o m eren e . I s it y o u r c o n te n t io n th a t t h i s $ 1 ,0 0 0 ,0 0 0 sh a ll
be se t a sid e a t th e e n d o f 90 d a y s?
Senator R eed . Set aside; yes; at the end of a given period. In
other words, I go down to a bank—I look at the transaction in this
way: I go down with my credits to a Federal reserve bank, with
$1,000,000 of promissory notes.
Prof. J e n k s . Yes.
Senator R eed . N ow , I in fact borrow from the Federal Govern
ment, for temporary use, $1,000,000 of this currency. The purpose
is now, if I understand the thought of this bill, to carry me until the
transaction involved in that 90-day paper which I put up has been
completed and the paper has liquidated itself. That is the theory
of this bill. Now, at the end of 90 days, that collateral has all
matured.
Senator N elson . And is paid.
Senator R eed . And is paid. Now, either the member bank has
collected that or the regional bank has collected it. Assuming, for
the present, that the regional bank has collected it, then at the end
of 90 days, the regional bank is whole. It has got its money back,
but it has got $1,000,000 of its notes floating around.
But, coming to that regional bank must be a constant stream of
this bank currency, and I would make it the duty of the officers of
that bank, at the end of 90 days, to take $1,000,000 of those notes and
retire them. Then the transaction is completed; it is over.
If the member bank was to collect the collateral, it would be reim
bursed now. And then I would make it the duty of the member
B A N K I N G AND CUBRENCY.
2 585
bank in that case to notify the regional bank, and the regional bank
would deduct from the amount of credit to that member bank
$1,000,000 and retire at once $1,000,000 of this paper.
Why is not that workable? I am not a practical banker—but you
have got to pay that debt; and they have been telling us the reason
there was not any inflation in this bill, or any dangerous inflation,
and the reason it was a safe money was because the money was issued
upon promissory notes, which represented an actual commercial
transaction which liquidated itself. Now, that is----Senator N elson (interposing). Now, if I understand, Senator
Reed, will you allow me to put your question into shorter form ?
Senator R eed . Certainly. You generally can do that better than
am’body I know.
Senator N elson . If you would not take any offense, I would like
to do it.
Senator R eed . No ; I would not take any offense at all.
Senator N elson . Would that be better, when one of those regional
reserve notes, or currency, is redeemed by the Federal reserve bank,
that that was the end of that note; that it was retired from circula
tion? Would not that cover the point?
Senator R eed . That is what I mean.
Senator N elson . Would not that be the safest way of regulating
the currency automatically?
Prof. J e n k s . As far as I understand, the bill does that now pretty
well, except that it does not cancel its own notes.
S e n a to r S h a f r o t h . I t h o ld s th e m .
Prof. J e n k s . It holds them. But there is a point that I am not
quite sure I understand, and that is this: I think that most of these,
notes will be collected through the member banks.
Senator N elson . Y ou mean redeemed?
Prof. J e n k s . Yes; redeemed. Well, now, I ought to put it this
way: I ought not to have said “ note.” I mean the commercial paper.
Senator N elson . The collateral for the currency.
Prof. J e n k s . Yes; the 90-dav paper which the Federal reserve
bank is holding will be sent back to the member bank for collection.
When that is collected it will be paid in these notes—this currency—
and if it is paid in these.notes, the proper credit is given to the mem
ber bank and some other commercial paper substituted in the regional
bank.
But, nowq why should that member bank—why should that cancel
the currency note from its own regional bank? And the present bill
does not provide that it should. It lets it hold that as long as it
wants to. And I think that is all right; that will avoid shipping
the notes back and forth. If they are to be shipped back and forth,
as the Senator suggests, there would be a great deal of shipping.
Senator R eed . I do not think there would be any at all, if we
follow it on. Let us take this transaction: You are a regional bank
and I am a member bank.
Prof. J e n k s . Yes.
Senator R eed . And I go to you and say, “ I want to borrow
$ 1 ,000,000.”
Prof. J e n k s . Yes.
Senator R e e d . And I say, “ Here is $ 1 ,0 0 0 ,0 0 0 collateral.” It i s put
up with you simply to make you say, “ I i s s u e my obligation for
2 586
B A N K I N G AND CURRE NCY .
$1,000,000.” It is due in 90 days. At the end of 90 days I have got
to take it up. You give me the money. I take it home to my bank
and loan it out.
The 90 days expires. I owe you $1,000,000. I have a balance there
with you. I have been maintaining a balance. You charge me
$1,000,000, and instantly substitute $1,000,000 for these notes that
have been coming through your window, putting them with the
representative of the Federal Government, who locks them up; they
are no longer in circulation.
Now, I have no credit with the bank whatever. Of course I have
to send you the money, or I have to send you a draft for that
$1,000,000 on some other bank. And almost all of it will be done
in that way. And all there is in the whole scheme of physical labor
is the book entries and the action of the Federal reserve agent com
ing over to the bank across the aisle each day, and saying, “ There
is $1,000,000 of this paper to be retired; give it*to me.” And he takes
it and locks it up.
Prof. J enks . Let me ask you one question further. Now, suppos
ing when he comes over and asks for that $1,000,000 I should say.
“ I have not $1,000,000 here in the notes that have been coming in.
but I have,” we will say, “ $700,000 in those notes, and I will turn over
$300,000 to you in lawful money.”
Senator R ee d . That is all right. The money has been shrunk that
much. Now. you know mighty quick, when you get the notes, you
will say to him, “ I want to swap those notes for lawful monejV
Prof. J e n k s . I understand that the bill provides for that at the
present time, with this exception, that if the notes that are on hand
at the Federal reserve bank are its own notes it turns them over and
they are held there to be issued again. If they are the notes from
some other regional bank, they are canceled and sent back for re
demption.
Senator R eed. I am not in favor of issuing a sectional currency in
this country. So far as I am concerned, I want a dollar that has got
the Government of the United States stamped on it; good not only in
every part of this country, but I would like to see it good in every
part of the world.
Senator H itc h c o c k . I think it might be a pretty serious embar
rassment to the western reserve bank to have suddenly dumped upon
it a large volume of the reserve notes of another bank, because it
can not pay those notes out without a penalty of 10 per cent. It can
not hold them in its reserves, which it is obliged to maintain. It has
got to suffer all the loss while it is sending them to the Treasury for
redemption.
You take a western reserve bank; perhaps it would be a week or
10 days before it could get that back from the Treasury. And I
agree with Senator Reed that there ought to be some way in which
these reserve notes ought to be as good for any use in one part of the
country as in another.
Prof. J e n k s . They are as good till they reach the reserve bank. I
do not see how they can be as good for reissue and still insure their
prompt redemption so as to contract the currency. So far as that
point of delay that you are making just now is concerned, that would
seem to be a matter of the credit, that could be arranged with the
Treasury and reserve agent promptly. There is no delay necessary.
*
B A N K I N G AND CURRENCY.
2 587
Senator R e e d . Why will not the currency be made absolutely stable
for this reason? Let us take the illustration a little differently.
Prof. J e n k s . Yes.
Senator R e e d . Take your illustration. Here is $ 1 ,0 0 0 ,0 0 0 , which
it is the duty of Senator Bristow, as Federal reserve agent, in your
regional bank, to see that the $ 1 ,0 0 0 ,0 0 0 that I have got from you is
retired to-morrow.
Prof. J e n k s . Yes.
Senator R ee d . To-morrow morning he comes in to you and savs:
“ Hei*e is that paper that you issued to Senator Reed’s bank and it
is due and I want you to retire it.”
You say, “ We have only $700,000 of his paper.” “All right,” says
Senator Bristow, “ give me your $700,000 and give me $300,000 gold.”
And he takes that over and puts it in the Government till.
The gold that you have there is a complete answer to any danger
or any question of inflation. You have it there to redeem these notes
on demand. You have it there for every purpose. It is a little
better than your note.
The whole scheme amounts to no more than this, that I issue my
check and I start it kiting around the country. It comes due and
you are my agent of redemption. Well, when it comes due the check
is not there. You say, “All right, let the check stay out for $100,
give me $100 in gold, and I will retire that gold from circulation.”
There is the same amount of circulation out, and while that circula
tion which is out is not of the highest type, as long as the gold is
there locked up to represent it and redeem it at any moment it is
pretty good.
Prof. J e n k s . Y e s; th a t is all r ig h t.
Senator N elson . Prof. Jenks, you must not think that we are
spending time unnecessarily----Prof. J e n k s (interposing). I think that is an extremely important
point, Senator Nelson. It is a new matter that I had not seen before.
Senator N elson . This matter which Senator Reed and others have
been discussing is to me very important.
Prof. J e n k s . Certainly, it is important.
Senator N elson . Let me put a case like this to you: We will say
that you are a member bank and that Senator Reed is a regional
bank.
Prof. J e n k s . Yes.
Senator N elson . And you d ep o sit with him $100,000 of commercial
paper due in 90 days.
Prof. J e n k s . Yes.
Senator N elson . And you get $100,000 in his notes?
Prof. J e n k s . Notes; yes.
Senator N elson . Or currency.
Prof. J e n k s . Yes.
Senator N elson . Y ou loan that out to people around the table
here, let us say.
Prof. J e n k s . Yes.
Senator N elson . By and by that currency comes back to Senator
Ileed for redemption, and he has to redeem it.
Prof. J e n k s . Yes.
Senator N elson . In the meantime the 90 days have run and that
commercial paper is paid. It has been paid to the bank that issued
2588
B A N K I N G AND CU RRE N CY .
the notes. The commercial paper has been paid; the 90-day paper
has been paid; and there are the proceeds of that 90-day paper with
Senator Reed and there are the notes. Now, should not the proceeds
of those notes that have been paid wipe out that currency? If you
are going to keep that currency in circulation after you have got
the commercial paper redeemed, you must put other commercial paper
in there in place of it.
Prof. J e n k s . Surely.
Senator N e l s o n . S o, if you put other commercial paper in place
of it you must return the money that has been collected on the 90-day
paper to the member bank.
Prof. J e n k s . Unless you are substituting one piece o f commercial
paper for another.
Senator N e l s o n . If you change it before they are paid.
Prof. J e n k s . Yes.
S e n a to r N e l s o n . B u t i f y o u d o n o t c h a n g e i t b e fo r e th e y a r e p a id ,
w h a t th e n ?
Senator H it c h c o c k . We have been going on the assumption that
the Federal reserve bank secured this currency from the Government
upon a definite length of time.
Prof. J e n k s . I d id not s u p p o s e so.
Senator N e l s o n . Oh, no.
Senator R eed . N o ; I did not mean that. The Federal Treasury
gives to its reserve agent—will furnish its reserve agent with a large
amount of these bills and instruct him how he is to pay them out.
And he will have it on hand in these banks all the time, undoubtedly.
Prof. J e n k s . Oh, yes; undoubtedly. He could not go to Wash
ington every time any demand came in.
Senator H it c h c o c k . They will change from day to day.
Senator R eed . And every day the Federal reserve board w ill be
notified as to hdw much money there is out.
Prof. J e n k s . Yes.
Senator R eed . And when they see that there is more money out
than the law allows—and I am in favor of putting an absolute limit
upon it—they, of course, stop. And beneath that point which I hope
the law will fix they will have a discretion, and if they see that there
is too much money going out will raise the interest rate; so that the
interest rate to-morrow will be so much. Or they will say, “ We will
not issue any more.” I know you shake your head, Prof. Jenks, at
the absolute limit of the law.
Prof. J e n k s . Yes.
Senator R eed . But I have got more confidence in the law than
I have in the best human judgment when it comes to matters of this
kind.
Prof. J e n k s . I agree to that also, but I should think----Senator R eed (interposing). There should be a limit. I think it
might be generously fixed.
Prof. J e n k s . Yes.
Senator R eed . But there should b e some point that this board can
not exceed until Congress and the President pass another law chang
ing it.
Prof. J e n k s . Why not put the limit on the basis o f your reserve,
which will make it all absolutely safe? Then you have got it ad
justed to the demand of business, whatever it may be.
B A N K I N G AND CURRENCY .
2589
Senator H it c h c o c k . One o’clock has come, shall w e take a recess?
Senator S h a f r o t h . I suggest, Mr. Chairman, that we meet again
at half past 2.
Senator H it c h c o c k . All right. We will take a recess until half
past 2.
(Thereupon, at 1.05 o’clock p. m., the committee took a recess until
half past 2 o’clock.)
AFTER RECESS.
Senator H it c h c o c k . Prof. Jenks, will you resume your statement ?
Senator N e l s o n . I would like, Mr. Chairman, to get back to a
question that is not clear to me at all; and I am going to put the
question in a little different form from that in which I put it this
morning. Prof. Jenks, this currency issued by the regional banks
is nothing but the promissory notes of the regional banks which are
guaranteed by the Government?
Prof. J e n k s . Substantially that.
Senator N e l s o n . A promissory note to obtain money.
Prof. J e n k s . Yes.
Senator N e l s o n . Well, we will say that you are a member bank and
I am a regional bank. You deposit with me $100,000 in notes—
90-dav commercial paper—and you get $100,000 of that currency from
me. Y ou put that currency in circulation, it goes around, and ulti
mately it comes back to me?
Prof. J e n k s . Yes.
Senator N e l s o n . I redeem it as the regional bank. Now, it may
not come back until after all that commercial paper has been paid
and collected.
Prof. J e n k s . Yes.
Senator N e l s o n . We will suppose that you did not want to renew
those notes or put in new notes. You allowed the notes to be paid,
they were collected, and the money went to the regional bank, and
the reserve notes that were issued upon it came back to the regional
bank. Now, in that case are not the notes paid?
Prof. J e n k s . The notes are paid.
Senator N e l s o n . The notes are paid, and they ought to be extin
guished, and there would be no warrant to put them in circulation
again in such a case. Now, the only warrant for keeping those notes
in circulation, Prof. Jenks, seems to me this, that in order to con
tinue them in circulation the regional bank must keep paper there—
substitute paper for the 90-day paper?
Prof. J e n k s . Yes.
Senator N e l s o n . And keep a continuing stream of that paper?
Prof. J e n k s . Yes.
S e n a to r N e l s o n . A s s o o n a s y o u c e a se to d o th a t , a n d th e la s t
d e p o s it o f n o te s y o u h a v e l e f t th e r e a re p a id o r r e d e e m e d , a n d th e
m o n e y g o e s b a c k to t h e r e g io n a l b a n k t h a t is s u e d th e n o te s , th o s e
r e g io n a l n o te s a re p a id , a re t h e y n o t?
Prof. J e n k s . Those regional notes are paid—redeemed.
Senator N e l so n . They are redeemed.
Prof. J e n k s . Yes.
Senator N e l s o n . And they ought not to be in circulation again.
Do you understand my question ? I will put it again, so that you
can understand it.
2590
B A N K IN G AND CURRENCY .
Senator H it c h c o c k . Yes; I would like to hear you restate it.
Senator N e l s o n . Suppose Prof. Jenks is a member bank and I
am a regional bank. He deposits commercial paper, 90-day paper,
with me, and I issue to him $100,000 in this new currency. He puts
the currency out; it travels around through the world and finally
comes back to me, the issuing bank. In the meantime those notes—
that commercial paper that he deposited with me has become due
and it is paid. Paid in to me, the regional bank.
Now, does not that, when those notes—suppose he does not care
about renewing the notes or giving more notes.
Senator P o m e r e n e . Renewing the collateral, you mean?
Senator N e l s o n . Yes; renewing the collateral. He allows those
notes to be paid to me, the regional bank, in full. I get the money
and the regional notes that are issued for that commercial paper
come back to me. Now, are not those notes paid, those notes of the
regional bank?
Senator H it c h c o c k . Well, my judgment would be that, as fast as
the commercial paper is paid to the regional reserve bank, that bank
will see its reserve increasing.
Senator N e l s o n . Yes.
Senator I I it c iic o c k . And as its reserve increases it will reduce its
obligation to the Government by turning in notes or gold without
waiting for the particular currency to return; that it will be a daily
transaction, that as the reserve of the regional bank increases by
reason of the payment of commercial paper the regional bank will
reduce its obligation to the Government, and it will not wait for the
particular currency to come back; and when that comes back it may
either be paid out for other loans or it may be turned over to the
agent of the Government in the regional bank.
Senator N e l s o n . N o. But as a matter of fact this new currency,
while it is in form the obligation of the Government, is really the
obligation of the bank, and it is a debt that you owe to the bank.
Senator H it c h c o c k . Yes; but I----Senator N e l so n (interposing). And if that debt has been paid,
why should those notes circulate any longer?
Senator H it c h c o c k . It is like a national-bank note now. The na
tional-bank note comes in for redemption at the bank. A man may
come in and present it and get gold for it. But within five minutes
afterwards the national bank, if it has a demand for loans, will pay it
out to a man borrowing money, or will pay it out to a depositor who
is withdrawing money.
Senator N e l s o n . But you see the Government bonds as security
are a continuing security which remain there.
Senator H it c h c o c k . And for that reason the bank is not able to
reduce its currency. It remains stationary. But under this new sys
tem, from day to day, as its cash reserve rises, it will pay off its
currency obligation to the Government. It will not wait for any
particular currency to come back; and on the other hand it will, even
after it has come back, continue to keep it out until it has additional
use for it and the state of its reserves requires its use.
Senator N e l s o n . Yes.
Senator H it c h c o c k . I think it is the reserve in the bank which is
going to govern the volume of currency. Do you not agree with me.
Prof. Jenks ?
B A N K IN G AND CURRENCY .
2591
Senator N e l s o n . Let us go back to Prof. Jenks as the member
bank. He has got this currency from me, the regional bank.
Senator H it c h c o c k . I think y o u are mistaken there.
Senator N e l s o n . And the currency he gets is the promissory note
of the regional bank.
Senator H it c h c o c k . I think you are mistaken that he necessarily
gets currency for it. If he runs a bank and he desires to discount
paper with you----Senator N elson (interposing). There are two kinds of discount.
I am putting a case where he discounts paper with the regional bank
for the purpose of getting currency issued by that bank.
Senator H it c h c o c k . Well, let us say lie discounts paper with you.
It is for him to say whether he wants it in the form of notes of your
bank or currency, but whichever way he gets it. he gets something
which he can use in his business.
Senator N e l s o n . What do I get?
Senator H it c h c o c k . He d o es not n e c e s s a rily g e t currency.
Senator N e l s o n . I am taking the case where the discount is made
purely for the purpose of getting currency.
Senator H it c h c o c k . Y ou may get gold.
Senator N e l s o n . Not necessarily. I deposit this paper under the
provisions of the bill, and say, “ T want to get currency for it.”
Senator H it c h c o c k . The bill does not give him any right to say
that he wants currency for it.
Senator N e l so n . But, upon application, he may do so. It is, of
course, in the discretion of the board to issue it.
Senator H it c h c o c k . N o ; it is in the discretion of the bank; but
it uses that currency just as it uses gold or national-bank notes. And
upon an}T application from a member bank—it will depend upon
what that member bank wants—as to what that bank gets. Tt may
merely ivant a credit upon the books of the reserve bank.
Senator H o l l is . He has got a right to assume that he will get
currency upon his application.
Senator H it c h c o c k . He has a right to assume that he will get
currency, but it is not treated differently from any other form.
Senator N e l s o n . But what is that currency, except a promissory
note of the bank to pay it----Senator H it c h c o c k (interposing). That is right. Here is a
national bank----Senator N elson (interposing). But he has deposited with me as
security for the redemption of that currency commercial paper due
in 90 days.
Senator H it c h c o c k . Tt is not for the redemption of that currency.
Tt is for the payment of the notes----Senator N elson (interposing). It is for the redemption of pay
ment of that currency.
Senator H it c h c o c k . No ; I think not.
Senator N e l s o n . The currency is issued on that commercial paper
and on nothing else.
Senator H it c h c o c k . I think you are mistaken, because that paper
can be changed from day to day.
Senator N e l s o n . Suppose he does not want to change it?
Senator H itchcock. If he leaves it to you, as the reserve bank, you
can change it from day to day.
2 592
B A N K I N G AND CURRENCY .
Senator N elson . H ow can I change it, unless you have new sets
of men who have given new notes to the member bank?
Senator H itchcock . No ; the bill gives the reserve bank the power
to change that security from day to day.
Senator N elson. But how can the reserve bank change it?
Senator H itchcock . Very easily. If Prof. Jenks has deposited
$100,000 commercial paper with you and taken out either currency
or credit, the very next day—you deposit that wTith the Government
agent—and the very next day you can go to the Government agent
and say: “ I want to withdraw $50,000 of that paper and I will give
you $50,000 of other paper in its stead.
Senator N e l s o n . But suppose Prof. Jenks does not care to do
that? Suppose he lets that paper go to maturity and the money is
paid in? Suppose he does not care to substitute other paper for it?
Senator H ollis. Then at the end of 90 days he walks in and gives
you lawful currency to take the place of that issued to you; and he
owns that absolutely because he has paid you for it; and those bank
notes stay out to take the place of the lawful currency you turned in.
Prof. J e n k s . May I answer the Senator’s question as I understand
it ? It seems to me that he is perfectly right when he says this, that
whenever those notes which have been issued for this $100,000 of
collateral come in and are presented to the bank and redeemed that
closes that transaction, and those notes are redeemed and that ends it.
Senator N elson. And they should not be issued again.
Prof. J e n k s . And the Senator says they should not be issued
again. Now that might be put in in this way: They may be canceled
completely and some new notes of the same denomination printed;
but in case the bank and the Government think it is wise, instead of
having that extra expense of printing, they might have these same
notes go out again; it is the same printing, but it is really a new
transaction; it is substantially a new note.
It is just the same as if I were to issue my personal promissory
note to the Senator for an obligation, if it would be likely that he
would take it payable to bearer on demand, and without interest.
Then, whenever I pay that note off he gives it back. Suppose, a
week later, I have not torn that note up and I want to borrow some
more money from him; if he wants to take the same piece of paper
back again that is all right. It is a new note, of course. It would be
unusual, but if I have in hand that form it may be used.
Senator N elson. It is a new note?
Prof. J e n k s . It is a new note absolutely. So I say this: If the
note has been redeemed, and either that paper or some other piece of
paper is put out, it is in reality a new note, a new obligation.
Senator N elson . And should have a new deposit o f commercial
paper back of it ?
Prof. J e n k s . Oh, certainly, it would have a new deposit of com
mercial paper back of it.
Senator P omerene . Does not the difference here arise from the fact
that we provide that the reserve notes are not issued on the initiative
o f the member bank, but upon the initiative of the reserve bank?
Senator H itchcock. Yes.
Senator P omerene . And all that fhe member bank is concerned
with is to get the proceeds of its discounted or rediscounted paper?
And it is a question, primarily, for the reserve bank to make applica-
B A N K I N G AN D CURRENCY .
2593
tion to the agent of the Federal Government for the reserve notes?
And it is a question between the reserve bank and the agent as to
when that collateral shall be renewed; and it is not a matter about
which the member bank concerns itself?
Prof. J e n k s . But, as I understand Senator Nelson’s question----Senator N elso n (interposing). Well, Prof. Jenks, will you tell
me this: How can the reserve agent and the member bank renew
those notes without action of the makers of them? They have got
to be renewed by the makers of the notes, have they not?
Senator P o m e r e n e . The reserve bank might take notes from the
New York bank, or the Syracuse bank—I mean collateral notes—or
the Buffalo bank, or any other bank; and it is a question between that
reserve bank and the agent as to when this paper shall be redeemed
and what additional collateral may be hypothecated from time to
time.
Mr. F is ii e r . The point I understand Senator Nelson to make is
this, that when the reserve bank finally returns these notes to the
reserve agent and as the}7' are redeemed and he takes something else
instead, whether that closes that transaction. As I understand it, it
does close that transaction.
Senator P o m e r e n e . I think so.
Prof. J e n k s . But it is still possible, under the law—and I judge is
contemplated under the bill—that these same pieces of paper may
be reissued a second time for new collateral put up. They do not
need to print new paper every time.
Senator P o m e r e n e . No ; I should think not; I do not so understand
the bill.
Prof. J e n k s . I judge, also, if these notes are redeemed by the
Treasury, that the Treasury sends those notes back to the Federal
reserve bank and that the Federal reserve bank is authorized to put
them into circulation again against proper collateral. They do not
need to reprint ever}r time; that is the point; but it is practically
a new issue of notes every time after they have been redeemed once.
Senator P o m e r e n e . Yes.
Senator H itchcock. N ow, do you think the effect of this is going
to make it easier for banks to lend money?
Prof. J e n k s . I think that, as the bill stands, it is going to make
the banks rather more desirous of lending money, because there is a
chance of a somewhat better profit than under the present nationalbank note system. Under the present system, as I understand it, the
direct profit of the banks on circulation is kept pretty low, below 4
per cent, including the interest on the bonds, as a rule. Under this
system the profit of the banks would be substantially on the amount
loaned above the reserve, whatever the rate of interest might be at
the place where they were making the loans, less the interest that
might be charged by the Government for the issuance of the note at
the Federal reserve bank. That would presumably be the case.
That, I should suppose, would be rather more than under the present
circumstances, so I think they would be a little more eager to get the
notes into circulation.
Senator H it c h c o c k . N o w , if a man comes into a national bank in
the city to borrow money, if he is perfectly good the bank will not be
able to lend him because it is so near the limit of the reserve.
2594
B A N K IN G AND CURRENCY.
Prof. J e n k s . Yes.
Senator H itc h c o c k . If he goes into such a bank, after this bill
passes, that bank will be perfectly free to lend him, if his credit is
good, because of its ability to rediscount his note or any other note
like it at the reserve bank, and the operation would be profitable.
Prof. J e n k s . Yes.
Senator H itch co ck . N ow , I want to ask you, under those circum
stances, whether the result will not be that there will be a probable
expansion of bank loans?
Prof. J e n k s . I think there is likely to be some expansion of loans.
I do not see any1 reason for thinking there is going to be any very
large expansion of bank loans. The reason for that is, that at the
present time, although a bank may decline a loan, and sometimes I*
suppose has to. because it is near the limit of the reserve, that does
not very often happen. It is only in times of extreme emergency that
it happens. And there is where, it seems to me, is the special ad
vantage of this bill. It is in times of real emergency when there is
really a great emergency that the bank wants to go bejmnd a certain
fixed limit. Under this bill, by means of rediscounts, it can. And.
further than that, this bill allows the bank, without violating the
law, to go below the fixed reserve of 33-?,- per cent, as you have it
in the bill.
Senator H itc h c o c k . Has not the experience of Germany been,
with a system very similar to this, that there have been periodic ex
pansions of credit which have been followed by a severe strain upon
their b a n k i n g system and then a depression because of the contrac
tion ?
Prof. J e n k s . I think we are bound to have anyway, no matter
what system we have, certain periods of expansion and* following
them, periods of relative depression, but we ought not to say that the
expansion would be the cause of the contraction. Contraction is part
of the phenomenon, but I do not think it is strictly because of expan
sion. If I may explain a little further what I mean by that, I should
say that ordinarily most of the panics we have had come from what
w7e might call simply the weakness of human nature. When business
is running on well and there is a tendency toward prosperity,
every business man is anxious to expand his business, of course.
He is making a good profit, and he goes to a bank and gets credit,
and he continues expanding that credit as much as possible. The
bank shares that same feeling. It says, “ This man is good, and I
will loan him freely” ; and so the whole movement of the country,
at times, is toward expansion of credit. There is practically no limit.
But if credit keeps on expanding and everybody is borrowing, the
people begin to get speculative; they take more and more risks, and
the banks share in that feeling for a while. But finally the banks
see things are going too far, because they are likely to be conservative
on that line, and then they will say to the borrowers, “ I have got to
stiffen my rates a little,” and they begin to check down on credits.
When they do check down on loans, naturally that makes the man
who has been borrowing have some trouble to pay his obligations and
there is a tendency toward stress. Now, if the banks start this
process early enough, by putting the discount rate up promptly and
keeping the brakes on steadily, that may prevent a too great expan-
B A N K IN G AND CURRENCY .
2595
sion, and then, perhaps, a sudden panic. But I do not see how, con
sidering human nature as it is, we are going to avoid those times of
expansion, followed afterwards, perhaps, by times of rather rigid
depression. Then, in a little while the same process is repeated. I
think that is inevitable in human nature. The difficulty we want to
avoid is as many bankruptcies as possible. As soon as people get
to this highest period of expansion, under the present circumstances
when there are one or two failures the banks feel the danger and
begin to contract loans. The banks who have deposits with the re
serve banks call on them, and the reserve banks find their reserves
called out by the smaller banks all over the country. Each one is
grasping to get its reserve out, and they shut down suddenly and too
emphatically upon loans; then the big failures come and we have a
panic.
Senator H itchcock . I think it was in March or April the bank
statement showed a very low level for the reserves. They were down
to the danger line, and since March, up to September, the banks have
been strengthening their reserves, because it was seen they were down
to the danger line. Now, suppose in March the banks had not been
able to see the danger line indicated by the low reserve; suppose they
had been able to go to the reserve bank and get additional currency
to lend their depositors; then that danger line would not have been
seen, the natural contraction would not have resulted, and we would
have gone on expanding credit in this country. Would not that
have led to a worse disaster if the banks had been in a position to
put that off by rediscounting paper?
Prof. J e n k s . I do not think there is that danger, for this reason:
When we are getting down toward the danger line under this sys
tem—provision is made here that the reserves shall be a certain fixed
amount—then we can see it is time to contract the credits.
Senator H itchcock . Y ou mean the reserve kept, not in the indi
vidual banks, but in the regional bank?
Prof. J e n k s . In both.
Senator H itc h c o c k . I do not see how the individual bank would
know, because the individual bank, if it finds its reserve low, all it
has to do is to rediscount paper with the regional bank and fortify
itself with cash.
Prof. J e n k s . Of course that would appear also in the falling re
serve of the regional bank when it did that.
Senator H itc h c o c k . That would at once strengthen its reserve
and every bank could do the same thing.
Prof. J e n k s . The regional bank, when it saw things going that
way. would say, “ We are not prepared to discount paper except at
a higher rate.”
Senator H itc h c o c k . The re g io n a l b a n k ?
Prof. J e n k s . The regional bank directors, as well as other banks,
will be able to see it in time.
Senator H itc h c o c k . Where do they see it?
Prof. J e n k s . The Federal reserve board notices the reserves are
getting low and it will notify the banks. Its statements are to be
published weekly, as 1 understand it; at any rate, so that the whole
country will be notified if the country does get into that situation.
Tender those circumstances the presumption is that the regional
2596
B A N K I N G AND CURRENCY .
banks would already have begun to put on the brakes, anyway, at
about the same time. But, if they do not, it is the business of the
Federal reserve board to say you must.
Senator H itch co ck . Suppose the reserve of the regional bank ap
pears to be getting low, down to 33 per cent—and you favor allow
ing them to go lower in the banks?
Prof. J e n k s . Yes; and put the tax high enough to stop it.
Senator H itc h c o c k . Suppose they had gotten down to 33 per cent.
Now, a bank having applied for currency, can go there and get, say,
a million dollars of currency from the Government, and set aside
$300,000 for reserve and have $700,000 for----Prof. J e n k s . Oh, I beg your pardon, it does not set aside 33 per
cent of that; it has to set aside 33 per cent in gold, which is quite
a different proposition.
Senator H itch co ck . It is not so very different, because by putting
out that currency it draws gold in. Gold is coming in over its counter
all the time. It could not set aside the reserve out of that partic
ular million dollars, but by getting that million dollars of currency
it would be only required to keep $333,000 of gold or legal tender,
so it would have $667,000 to advance the banks.
Prof. J e n k s . If it keeps the requisite amount of gold back of it
continually, and is careful with reference to the credit of the peo
ple to whom it is making its loans, it is safe. But of course there is
always that danger, and I think that always will be true under what
ever S3rstem you get. We shall expand in times of good credit, of
real prosperity, all along the line, and the regional bank will be do
ing the same as the individual member banks. There is always
danger of that. That can not, so far as I can see, be absolutely
avoided. Under the proposed system, when we are on the verge of
a crisis, with our reserves down to substantially 33 per cent, and a
case comes in where a bank is on the verge of bankruptcy unless it
gets a little help to carry it over and it can put up good collateral, the
reserve bank will say, “ Very well, you can have that, but you must
pay a good high rate.” And the presumption is, seeing that coming,
they will be putting up the rate before the crisis comes, and that is
what is done in Germany and France continually. As soon as they
see the reserves diminishing they put up the discount rate, and that
does put the brakes on.
Senator H itc h c o c k . Y ou rely, then, on the Federal reserve bank
checking the loans of the member banks?
Prof. J e n k s . The reliance is all along the line, but the ultimate
reliance is upon the Federal reserve board. Next the reliance is
upon the boards of directors of the regional reserve banks, and then,
beyond that, upon the boards of directors of the member banks, and
that is one of the great advantages in this bill—you have there one
great system. Really, if the proper requirements are made for hav
ing the regional banks and the Federal reserve board working to
gether, you have one great system, where, as the law is now, you have
25,000 different fellows working in different ways.
Senator H itch co ck . Suppose John Smith comes into the bank now
and applies for a loan and the banker tells him : “ I am sorry, Smith;
you have perfectly good credit, but I am not able to loan you because
there is such a strong demand for money and we are down to our
reserve limit.” That is an answer to John Smith.
B A N K I N G AND CUKRENCY.
259 7
Suppose, now, under the new order of things, John Smith comes
into a bank and the bank says, “ We are sorry, Smith, we can not
lend you; we are down to our reserve.” Smith says, “ That does not
make any difference; you can discount your paper with the reserve
bank.” That is no answer to Smith.
Prof. J e n k s . I think it is an answer to Smith, because the bank
would put it this way: If John Smith is perfectly good and the bank
is confident he is all right, then it is up to the bank to rediscount his
paper and accommodate him.
Senator H itc h c o c k . N ow , then,, apply that to the tens of thousands
of borrowers and the thousands of banks; is not that one influence
alone going to expand bank loans?
Prof. J e n k s . It will, some, but I think it will do no harm, and the
reason for that is this, that John Smith is told: “ Under the present
circumstances you realize that the rate of discount has gone up, and
instead of your paying
per cent, as I have been charging you
before, because you are a good customer and have rather large loans,
I have got to make it G-| per cent,” and that will rather open his
eyes. And especially if it goes to 7, he will say, “ I guess I will hold
off a little bit.”
Senator B ristow . When it goes to 7 what is the bank paying the
Government for the money ?
Prof. J e n k s . What the bank would be paying the Government for
the money would depend upon ivhat the board of directors of the
regional bank says, with the approval of the Federal reserve board.
Senator B ristow . H ow much would you, in your judgment, think
that ought to be?
Prof. J e n k s . I do not believe I have much of a judgment on that
matter. I do not think that question could be answered categorically
in that way. It would all be dependent upon the circumstances of
business at that time.
Senator P o m erene . That would be a variable quantity ?
Prof. J e n k s . Yes.
Senator B ristow . Here is John Smith and his loan is turned down,
and he says, “ I will have to charge 7 per cent,” when you have only
been charging 6. He knows; he is an intelligent man and under
stands this bill. He knows on good security you can get money at
the bank. You decline to do it and give those reasons. Now, sup
pose you lend this money at 7 per cent, how much is the bank to pay
the Government for the use of that money?
Senator N elson . The bill presupposes a tax of not less than a half
of 1 per cent upon the currency.
Prof. J e n k s . I do not think that covers it. Senator. It presup
poses that tax, which I personally may be inclined to object to, but
the point, I think, is rather dependent upon the discount rate. Now,
I should suppose that the discount rate of the regional bank, in ordi
nary times, would not be high. I am not a banker; I have not much
of an idea, but I should say, really, it would be very low—2 per cent,
perhaps.
Senator B ristow . T wo per cent?
Prof. J e n k s . Remember, I do not want to be held to that as a
definite thing, but I say when you get to this condition of affairs you
S. Doe. 232, 63-1— vol 3------ 43
2598
B A N K IN G AND CURRENCY .
are speaking of, then I should expect the regional bank to put the
rate up to 4 or 5 or 6 per cent, perhaps. You see, there is quite a
difference between the question you are putting to me and the ques
tion that comes up in the Reichsbank in Germany or the Bank of
England, or any of those that have a fixed rate of discount, and
that difference is essentially this: In this country we are to deal only
with the banks, but they also deal with the individual concerns.
They go into the market in competition with other banks. The pur
pose of this bill, I think, is very wise. I t does not deal with John
Smith, no matter how big a man John Smith may be. It deals with
other banks. And, moreover, the purpose of this Federal reserve
bank is not to make profits. Its reserves are to back up the indi
vidual reserves throughout the country. It would, I should suppose,
under the circumstances throughout the country, keep its interest
rate down low enough so that it could pay the 5 per cent or 6 per
cent and, if anything beyond that, enough to make it reasonably
safe. But I do not think it should keep the rate of interest high
enough to make big profits for the regional bank. They let the
profits—and it in fact will have to—go to the member banks, or the
member banks would not be in business with them.
Senator B ristow . N ow , Professor, there are a number of sides to
this. If this regional bank is loaning these member banks money
for 2 or 3 or 4 per cent less than that member bank is asking its
customers, your system will not stand 12 months in this country.
Prof. J e n k s . Let us put the matter in this way: AVhen the regional
bank is rediscounting the paper of the member bank it is, after all,
not of itself taking any large profits, while, if it would charge more
than 1 or 2 per cent, the individual bank would not come to it. Why
should it? The citizen knows that you are the manager of the local
bank; you can loan money at 5 per cent, and where you get your
money to loan, ordinarily, is from the deposits, on which you pay no
interest at all. You have to keep a third of your deposits in your
vaults in order to keep yourself safe and in order to be within the
law, and you are getting a large part of what you loan for nothing.
Senator B ristow . That is not the fact, though.
Prof. J e n k s . Not quite. Of course, we know in a bank with large
deposits it has to pay 2 per cent.
Senator B ristow . The country banks pay more than that for the
large part of their deposits.
Prof. J e n k s . I suppose they do sometimes.
Senator B ristow . Usually.
Senator S h a fr o t h . Most of the banks will require accounts of
$5,000 balance before they will pay any interest.
Prof. J e n k s . I was going to sav also in the case of most of the
banks in the larger cities they require the small depositors to have an
account of at least $200 with no interest.
Senator B ristow . Y ou take the average banks, and they pay inter
est on deposits of $200 to $500 on time certificates of deposit, the rates
running all the way from 3, 4, or 5 per cent.
Prof. J e n k s . That is another situation—the time deposit—that is
another matter. We are talking about demand business. On de
mand business they do not.
Senator B ristow . No ; on demand business they don’t.
B A N K I N G AND CURRE NCY .
2599
Prof. J e n k s . On demand business, they do not, and a very con
siderable portion of their loans are made on these deposits.
Senator S h a er o th . Three-fourths of them.
Prof. J e n k s . Yes. Now, if they do that, why should they ordi
narily go to the regional banks and pay any large amount of inter
est? In case of emergency, they will.
Senator B ristow . I will tell you why: They have loaned out all
of their deposits, and along comes a farmer that is good, and they
do not want to refuse him. He wants more money, and they are
going to accommodate him. They can not turn him down. They
have an excuse now. We are dealing with human nature.
Prof J e n k s . Certainly. That is an emergency.
Senator B ristow . He comes into my bank; our relations are very
cordial, and he says, “ I want $5,000.” I will say, “ Now, I don’t
know, our reserve is down, and I do not know what is coming, and I
do not like to spare it.” Pie will say, “ Well, that is true,” and he
will be satisfied. Pie will have to be. But now, he will say, “ We
have a new system here; we have a Federal reserve bank here that
you are a stockholder in, and they will discount your paper and give
you the money to loan to me, and I want i t ; I need it.” That bank
is going to ask for that money.
Prof. J e n k s . Oh, yes. And, for that matter, under those circum
stances, which is a real emergency circumstance, he will pay the
regional bank whatever they ask to be able to let him have it, if
necessary.
Senator B ristow . Yes. Now, then, he says, “ Here, your bank
charges me 7 per cent, and it comes down here to Washington and
gets the money for four,” and it gets the money from the Govern
ment, as the public understands this to be, because if that is not what
it means, then you are buncoing the public.
Prof. J e n k s . Under those circumstances which are not the normal
I should say they will charge the going rate there, whatever that is.
Senator B ristow . Professor, that is going to happen in every bank
in the United States, just as sure as this law goes into effect, and I
think you are up against a pretty serious proposition.
Senator W e e k s . It seems to me you have probably fixed, in your
mind, the rate of interest that will be charged by the reserve banks
much lower than it will be in actual practice.
Prof. J e n k s . Excuse me, I had not fixed any rate, at all.
Senator W e e k s . I mean the rate you stated. That is the French
bank rate.
Prof. J e n k s . Yes.
Senator W e e k s . But the actual result in European countries is
that the rates have been substantially the same in the joint-stock
banks and the central banks for a long period of years.
Prof. J e n k s . Yes.
Senator S iia fr o t h . It is a little h ig h e r in th e joint-stock banks?
Senator W ee k s . Frequently; sometimes higher and sometimes
lower. I agree with Senator Bristow that if there were to be a dif
ference in the rate of 2 or 3 per cent the people would not stand
for it.
Prof J e n k s . I agree to that, too, Senator.
Senator W e e k s . I do not think that would be a good thing. I
think it would be a bad system, but I think, being in a developing
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B A N K IN G AND CURRENCY .
country as we are, the rate of the reserve bank should be higher than
the European banks, and it would gradually equalize and lower the
rates in the United States.
Prof. J e n k s . Yes; I agree to what you say on that point.
Senator N elson . But here is one point that strikes me: If a mem
ber bank can not charge a greater rate of interest than that paid to
the reserve bank----Prof. J e n k s . It must.
Senator N elson (continuing). It would have no profit; it would
have the expenses of borrowing the money and loaning it again
without any profit whatsoever.
Prof. J e n k s . I do not understand Senator Bristow to imply that
the rate should be the same.
Senator B ristow . I think the people might stand for 1 per cent,
probably, or a half per cent, or something like that.
Prof. J e n k s . Wasn’t the point this, Senator, that the charge made
by the smaller national banks would be made independently of the
regional banks ? The regional banks are primarily a reservoir to use
when the member banks are pushed somewhat.
Senator B ristow . I will tell you, Professor, what I think. I think
we are creating machinery here that invites me to go to my own bank
and ask for credit when otherwise I would not, because I know there
is a great reservoir here where this banker can get the money. I
think that. I think we are creating too complex a machinery, a "more
complex machinery than is necessary to take care of a simple problem.
What we need is an elastic currency.
Prof. J e n k s . Yes.
Senator B ristow . And, they say, mobilization of reserves. The
result of these hearings shows that there is not much to that. That is
theoretical more than practical, because these reserves are being used
every day now just about as much as they can. The fact is we have
6 per cent reserve in national banks, or a very little more. But, be
that as it may, if there was some automatic way by which the bank
at Salina, Kans.—that is where I live—could make me a loan, and let
the loan depend on its action and its ability, but when the crisis
came upon the center—the crisis, I think, never originates outside
the center; it is never in the country; it is always in the center—when
the crisis comes, so that the center can not get money to pay out to
the exterior regions when they want it, but let it go to the Govern
ment with its assets and get that money. If New York, in 1907—
that is where the crisis started—could have gone to the Federal sub
treasury with assets that were good and gotten $500,000,000. which is
down here printed now, there would never have been any panic. Now,
why can not we make some simple addition to the present facilities
without taking the chance. Nobody knows what this bill will do. We
can guess at i t ; we can theorize on it, but what will be the practical
operation of it is an experiment.
Prof. J e n k s . Of course, that is true with reference to almost any
new thing. But it seems to me, on the other hand, Senator, that
unless you do have the machinery of something of the type pro
vided here, you are not going to get what you have put down as the
first consideration, and that is, your elastic currency. That is some
thing that must be provided for readily and steadily all the time.
B A N K IN G AND CURRENCY.
2 601
This point you made last, with reference to the time of emergency
is what is provided for in this bill, first, in the way of their being
ultimately in a position to rediscount—and it is not expected that
they will rediscount from day to day, as I understand it—to redis
count pretty freely, and to get notes to practically an unlimited
amount as long as they can put up the security.
Senator B ristow. If they shall not have to do it from day to day.
But we have no currency except this and the greenbacks; and the
national-bank notes are to pass out?
Prof J e n ic s . U lt im a t e ly .
Senator B ristow . All the currency we have is to be this currency,
regulated by human judgment?
Prof. J e n k s . Regulated by the demand of the local banks th e m
selves. That is what it will amount to. I would not say it was en
tirely regulated by human judgment.
Senator B ristow . Would it not be? If the local banks want to
issue these notes when it needs them, and then let them nominally
retire and let the Government guarantee them?
Prof. J enics . I, myself, said at the beginning of the hearing that
my own personal preference would be for bank notes, properly se
cured. I said, so far as this bill is concerned, I think it is excellent
along that line; although they were Government notes, they were
issued only through the banks on the demand of the banks, with the
banks responsible first, and responsible in practically all points up
to the double liability of the stockholders and that the Government
was only ultimately responsible, so that in effect. I think you have in
this system here substantially what you are asking for, a bank note
with a Government guaranty. That is what I think it really is,
under a different name.
Senator B ristow . Yes; that is the theory advanced here by a
number of people. Say that it is a bank note with a Government
guaranty. Why should it not be arranged so that I could go into a
bank at home, and if I borrow, say, $1,000, the bank gives me credit
for $1,000; I simply deposit that. That is the way it is done, and
that amount is there subject to my check.
Prof. J e n k s . It is, now.
Senator B ristow . N ow , if I wanted currency instead of credit,
instead of a check book, why should not the bank give me its notes
instead of a check book?
Prof. J enics . A s I said before, I think that this, with very slight
modifications, could be so arranged that it would give its own note.
I should say that substantially now the bank in giving these Govern
ment notes—is giving its own notes, because it is responsible for
them just the same as if they were its own notes.
Senator B ristow . If that is true, why do we want the bank at
Salina, Kans., to pay 5 per cent down here at its regional bank, and
take 10 per cent out of the capital stock, and drain that little com
munity of that much of its accumulations in order to do that?
Prof. J e n k s . I think, perhaps, I see now the difference of opinion
which we would have. I should say the reason why it had, the
chief reason why it had to do that is because it is desirable to have
a real system that will give a mobilization of reserves back here,
so that if your bank finds itself more or less pinched at any time it
2 602
B A N K IN G AND CURRENCY.
will be in a position to handle its reserves, whether or not it could
under the absolutely independent circumstances it is in now. Even
under our present system your bank out there has to keep a deposit
in a reserve bank, and it is probable that it would anyway, even if
it did not have to, as a matter of convenience.
Senator B fisto w . N ow , Professor, I think that the hearings we
have had here have demonstrated this to my mind, that the reserve
which we now have is much more elastic and more mobile than the
reserve will be in the regional bank. It comes about in this way:
Take the bank at Salina, Kans. It keeps its reserves at Kansas City,
Chicago, and New York. Say it has $1,000,000 deposits; it will keep
$90,000; we will say it has $30,000 in each of these cities. Now, in
the course of its business it will sell exchange, probably $30,000 worth
in one day on Kansas City and have very little demand on New York.
Now, it has a little above the 9 per cent always. It has to be
to make this secure. If it has more than 6 per "cent in its vaults
the amount runs up from $60,000 in the vaults until it is $75,000. It
can go below $15,000. It has reserves in all of these cities; it can
take out every dollar it has in New York or Chicago or Kansas City,
if the sum total amounts to that, and so the bankers have told us that
some days they do sell their entire account in Chicago, and the next
day or the next week there may be a run in some other city. But
in all of the cities and at home they have that mobilization and
versatility, while now they have to have 5 per cent at home and 5
per cent in the regional banks, and they can not credit one with the
other.
Prof. J e n k s . Under the new system I believe the larger part of this
will be done substantially as it is now, so far as that is concerned; but
they must keep these minimum reserves, and as you say, the larger
part of the business they will probably handle as they do now.
Senator B ristow . Then you will be impounding 5 per cent in this
way here, which is of no use to them except as an insurance.
Prof. J e n k s . There is the point. And, of course, there is a little
bit more than that. There is the insurance, which is quite worth
while, because these times of stress come every few years anyway, and
in addition to that they are getting some return on this 5 per cent.
Senator B ristow . On the capital; not on the deposits ?
Prof. J e n k s . On the capital; not on the deposits.
Senator B ristow . In times of stress the experience of the country
is, and I think it would be admitted by all of us now, that the country
banker never has any trouble to get money from his reserve agent if
that reserve agent can get the money.
Prof. J e n k s . That is th e p o in t.
Senator B ristow . He does not have any trouble. Most of them
get enough. The testimony here has been that the country banker’s
reserve agent takes care of the country banker. If the reserve agent
can take care of himself by going to the Treasury, as he could now,
if it were made a little more flexible, and get this Government money
we have printed down here, which has all the qualities which our
timid friends want, there would be no trouble. Now, what is the use,
as a practical proposition, in our taking the chances on disaster here
when we can remedy the defect by such a simple process ?
Prof. J e n k s . Could not the question be put fully as well the other
way? What is the use of our taking the risk of not having a pro-
B A N K I N G AN D CURRENCY .
2603
vision of this kind, which is secure and certain, for something that
would not be so sure and certain the other way? Just let me add
one word further. Suppose we were to adopt the system you have in
mind, and say we would permit—I do not know whether you mean
the large private or national banks in the central reserve cities to get
money there ?
Senator B ristow . Any bank which has the assets.
Prof. J e n k s . And then leave it to them to determine how they shall
take care of their customers. There is a great deal of competition
among the different bankers for currency all over the country in
times of stress like that, and my impression is that the large majority
of the people would prefer to have an institution of this kind pro
vided in the bill, where they know they can go and there can be no
chance for any question of discrimination on the part of some private
banker who will have some customers he would be much more likely
to want to take care of than of others.
Senator B ristow . I would let any bank that had collateral come in
and get relief, any bank that wanted it. But, so far as the practical
operation is concerned, if he had an opportunity to go to the subtreasury which might be located in a reserve city and get relief, there
is not a correspondent that would not take care of him because they
know they could not hold him up.
Prof. J e n k s . Yes.
Senator N elson . I want to call your attention to this difference:
Take a bank in a central reserve city; it is required to keep a reserve
of 25 per cent, and technically under the law it has no right to pay
that out. Now, this 5 per cent fund in the reserve bank can be used
as a basis for discount ?
Prof. J e n k s . Yes.
Senator N elson . There is not that inhibition against the use of
that by the reserve bank that there is in the case of the central reserve
bank?
Prof. J e n k s . That is true.
Senator N elson . S o it can be made 5 per cent, and while it is a
fixed amount it is not as fixed as under the central reserve system;
it can be made the basis of discount by the regional bank, whereas
under the other system the 25 per cent under the law could not be
used at all.
Prof. J e n k s . That is true. There was still another point I was
going to make with reference to what has been said before. That
question in regard to a subtreasury opens up the very broad question
of the single central bank of the question of a Federal reserve board
with active banking power, and, of course, that is an entirely different
question.
Senator B ristow . I would like to have your judgment on that as
compared with this.
Prof. J e n k s . My own personal feeling on the matter is again
largely on account of this matter of the mobilization of reserves, that
the best system would be a single Federal reserve bank with branches
that should be established where it is necessary, rather than a Fed
eral reserve board.
Unless you can have that central bank, and have that handled in a
way that would be for the interest of the country under very careful
Government direction, I think the Federal reserve board should have
2604
B A N K I N G AND CURRENCY.
its powers as far as possible supervisory rather than immediately
directive. That is one criticism that can be very properly made
against this bill, that in a number of cases the Federal reserve board
has so many powers given it, and it has such discretion given it, that
it is in itself practically a central bank.
Senator B ristow . Why not make it in fact a central bank and let
it operate the bank just like.a board of directors operate the regional
bank?
Prof. J e n k s . Personally, I should favor that.
Senator N elson . Would it not be better to have one central bank
under the control of the Federal board, with all the powers that this
board has, than to have a number of reserve banks?
Prof. J e n k s . I think there is no question about that.
Senator N elson . Would it not be perfectly safe if it w as under
Government control?
Prof. J e n k s . I think so; that is m y own personal preference.
Senator N elson . Could not the reserves be utilized much better
and be more available if there is 1 bank than 10 or 12?
Prof. J e n k s . That is my judgment, clearly. I think the number
of 10 or 12 is a very serious defect in the bill. If that number were
put at 3 or 4, with the board so organized that they could have pretty
ready intercommunication, I think that would do fairly well. I per
sonally would prefer 1. I think it would be better.
Senator B ristow . I am trying, and I am glad to say this for the
record, that I would like us to develop a system that will serve the
country the best. I do not care who is the author of it or who gets
the credit for it.
Prof. J e n k s . Surely.
Senator B ristow . It is the best thing for all of us to devise and
work out some scheme that will satisfy the people better by giving
them the best service.
Prof. J e n k s . Clearly.
Senator B ristow . I have been exceedingly hostile to the Aldrich
scheme of a central bank. I believe it would be controlled by a few
men for selfish purposes. That is my judgment. That practical plan
which has been suggested here occasionally seems to me would be so
much more simple than the one suggested in the bill: the control of it
would be the same, because it would be controlled by the Government
itself; and then if there was anything in the mobilization of reserves
you get the best that can possibly be had, because you have a single
reservoir, and then any bank that wanted to become a member would
avail itself of the privileges, whether it was a State, national, or
private bank, if they met certain requirements.
Prof. J e n k s . I had not understood when von used the word “ sub
treasury ” that you had in mind a single central bank.
Senator B ristow . I did not.
Prof. J e n k s . I should have agreed with you more promptly if I
had thought that was what you meant. I supposed you meant some
Government official whose main business was something else, and that
I think is an impossibility. If you are going to have a central bank
to do this business you want expert managers who know the business
through and through and whose business it is to look after it.
Senator N elson . And they want to be men independent of the
banks ?
B A N K I N G AN D CURRENCY.
260 5
Prof. J e n k s . Yes; I would agree to that.
Senator N elson . Absolutely under the control of the Federal Gov
ernment.
Prof. J e n k s . I should agree to that. I think I should prefer this,
however, since we are speaking of this Federal reserve board: It
would be better if we had a single bank with a board of directors.
If we are going to have anything like the Federal reserve board
named in the bill, I should like to have it made clear that the banks
that are supplying the capital have some minority representation. I
should not care to have them appoint the directors. I favor some
thing of this kind, that out of a board of seven or nine they appoint
two or three, or select a number of men from whom the President
would make the appointments.
Senator N elson . Present a list?
Prof. J e n k s . Present a list. If they were to have a choice of three
out of nine, I should sav they should present a list of, say, 9 or 10,
from whom the President could select three appointees.
Senator N elson . Or two out of seven ?
Prof. J e n k s . Let them present a list of six or eight, and let the
President take any two out of that list, or reject them all and ask
for another list if he did not care to select any out of the list that was
first submitted.
The banks, after all, are putting up the capital. They have great
interest in it. In fact, they are the customers; they are the depositors.
Everybody has a great interest in it, and it is extremely important
that any system we have should have the confidence of the com
munity, including the confidence of the bankers.
Let them have a direct representation, with men who have had
experience. If they nominate 10 men, the President could take any
2 out of their list, and they would know they were men whose judg
ment they could trust, and they would know everything that was
going on, and I think that would be better than the system proposed
in this bill.
Senator N elson . Y ou think that would be better than the advisoryboard system?
Prof. J e n k s . I think so. If we are going to have the present sys
tem with the advisory board, I think the advisory board’s functions
ought to be changed. Say the chairman and the vice chairman of the
advisory board be given the right to sit, without vote, with the Fed
eral reserve board, so that they would know everything that was go
ing on and have a chance to express their opinions in regard to all
matters that Avere up for consideration. I think the common people
of the country, who are interested in these banks, because most of
them are depositors or are interested in the bank notes, I think they
would prefer that. I was very strongly opposed to the Aldrich bill
because I thought it was economically unsound to give so much con
trol to the banks. The representation of the Government was an
ex officio representation. I think the banks ought to have a repre
sentation, but distinctly a minority representation.
While we are speaking in regard to the board may I add that if
we are going to have a Federal reserve board such as is proposed here
it would be much better if ex officio members were not put upon it?
What can the Secretary of the Treasury do in the way of actual direc
tion when it nearly kills any Secretary of the Treasury to do his
2606
B A N K I N G AND CURRENCY .
present work? If he is chairman of the board, that implies that he
is going to appoint committees. He can not give the work the atten
tion which it ought to have. It seems to me that while the Govern
ment should have representation, and, for that matter, should have
the controlling representation, it should surely be a representation by
men who are appointed because they know the business and can give
their whole time to it.
Senator N elso n . Devote their whole time to it?
Prof. J e n k s . Devote their whole time to it. They can call on the
Secretary of the Treasury for any information within his power to
give, and they can do the same with the Secretary of Agriculture and
the Comptroller of the Currency. There is another point, however,
about the Comptroller of the Currency. He is in a position to ex
amine these banks. He will be playing in two capacities. I think
that is rather unfortunate. I think the Federal reserve board would
be distinctly better if the three ex-officio members were left off.
Senator N elson . Some people have suggested that we take off two
and leave the Secretary of the Treasury on alone. What do you
think of that ?
Prof. J e n k s . I should be inclined to leave the Comptroller of the
Currency on rather than the Secretary of the Treasury, if I were to
leave any of them, because his business is primarily with the bankers,
and the business of the Secretary of the Treasury is primarily not
with the bankers.
Senator N elson . The business of the Secretary of the Treasury is
with the entire fiscal system of the United States ?
Prof. J e n k s . Yes. And, moreover, the Treasury Department is
so enormous and the demands are so strong that no man as Secretary
of the Treasury can give any attention to this business that is worth
while.
Senator N elson . Y ou think it would be better to leave on the
Comptroller of the Currency rather than the Secretary of the Treas
ury?
Prof. J e n k s . Yes; of the two I should prefer to leave on the
Comptroller of the Currency. He is devoting his time entirely to the
banking question, but to a different phase of the banking question,
so I should think it would be better if none of them were left on and
the entire board be made up of men who would give their full atten
tion and time to it.
When it comes to the inauguration of this system, with the selection
of Federal reserve districts, I think to make of these three men an
organization committee, as is proposed in the bill, can not be a prac
tical thing. They can not give any time to this very difficult task
of organizing the system to begin with. They will have to deputize
it to secretaries and clerks. Instead of doing that, why not appoint
three or five men who are men of the right type for the organization
committee to begin with? That is simply in addition to the other.
It seems to me a mistake, especially at the inauguration of the system,
when they are going to make the whole plan, to put on men who are
not expert bankers and who can not give any time to it. Why not
put in three men that the President can pick out who are really ex
perts and let them give their whole time to it and get the thing done
B A N K I N G AND CURRE NCY .
2607
Senator H itc h c o c k . The sentiment of the committee is strong in
that direction.
Prof. J e n k s . I think as regards the board also, the ex officio mem
bers really can not do the work that ought to be done. If the board
is going to have the powers given by this bill, it is extremely im
portant that the members of the board should be able to give their
whole time to the work. Xo man ought to take a position on that
board if he is not an expert and is not willing to give his whole time
to it. He ought to be well paid for it, and expect to give his whole
time to it.
Senator B ristow . Y ou spoke of the banks having representation
on this board because they were the stockholders. How would it do
to have the stock of this central bank a voluntary subscription?
Prof. J e n k s . I had a suggestion along that line that I thought of
putting before the committee later, but since you raise the question
I will put it before you now. I do not feel that I can speak with
quite the degree of positiveness about this that I should like to, but
1 think it is worth consideration. I think it is rather unfortunate to
drive national banks into this system, or drive anybody into the sys
tem. It seems to me that, on the whole, the wise plan, as I said about
the notes, is to make a system that seems best for the country, and
make it so attractive that most of the banks would want to come in.
Now, this brings up the question of the bonds and of the way in
which the banks come in. As it stands at this time you are practically
to force them into the system. Would it do to say this to the banks:
You have your 2 per cent bonds now on which you are issuing cir
culation. You may come in or you may stay out just as you like. If
you stay out you keep your 2 per cents and continue as now; if you
come in we will exchange the twos for threes and we will give
you all the privileges of the system. If you do not come in you will
get none of the privileges, but at the same time you are free to do as
you please. I think the banks have some reason to feel that when the
2 per cents were issued they were supposed to hold them until 1930,
and we can say to them, at the end of that time, “ You will have to
give up your circulation, and in the meantime you may be free to do
as you like.”
Then, in case the banks do not take enough stock to supply the
capital that you want, say $100,000,000, open the subscriptioq to
private- individuals to take the rest. Then, of course, the banks are
in this position: If they have not come in within the time of that
subscription, and want to come in afterwards, they must find their
stock; they will have to buy from somebody else. In that case you
would be sure of your capital, and as sure of your control as you are
now. You would not have a great group of people feeling that they
were hurt and were rather disposed to stay out, or feeling that they
were being coerced, or anything of that kind. I rather think that
under those circumstances most of them would want to come in.
Senator S iia f r o t ii . Would not that policy lead to the principal
object of the reserve banks being to make money, because their stock
holders being paid stockholders, they naturally would want to get
as big a dividend as possible?
Senator B ristow . Why not limit the dividend?
Prof. J e n k s . There is another side to that. May I just add a word
along that line? I rather think there will be no trouble, because you
2608
B A N K I N G AND CURRENCY .
have what is substantially, at any rate, a 5 per cent guaranteed divi
dend. It is not quite that, but I think it would amount to a 5 per
cent dividend, and if you leave also a 40 per cent return on the
amounts above that on the stock invested, you would have no trouble
in getting investors, and you would find banks coming in and bidding
for it before a great while, and I think you would have your stock
above par.
Senator S h a fr o t h . If you start with $285,000,000 of deposits by
the Government and $400,000,000 of reserves and $150,000,000 of gold
reserves, you have over $800,000,000 to start with, and you are bound
to make money out of that?
Prof. J e n k s . I think so. It seems to me that in all governmental
matters it is a desirable thing to make the legislation rather attractive
than compulsory, so far as it can be made so, and at the same time
the rules must be rigid, in order to prevent abuse. I think most of the
banks rather than keep their 2 percents and stay out would prefer
to take their 3 percents and come in and give up their circulation
and take their privilege of rediscounting; and incidentally that would
bring about the other thought, which I think Senator Nelson has in
mind, that we should get rid of all the present national-bank notes
very promptly and substitute the other notes for them.
Senator H itc h c o c k . I would like to see how you can figure out
a profit for the regional banks.
Prof. J e n k s . I do not know that we can.
Senator H itc h c o c k . Suppose they make a margin of 1 per cent
on their loans to member banks?
Prof. J e n k s . It seems to be the opinion of a number of people here
that they can not make more; that if they do there will be trouble
on the part of the people; they would not stand for it at all.
Senator H itch co ck . What do you think would be a proper mar
gin?
Prof. J e n k s . On that question, as I said before, I should prefer
not to give any figures, because I do not know. I am not a banker;
I have not been in that kind of business at all, but there is this situa
tion that is certain with reference to that: If they were to go into
the regular banking business they could make large profits. They
are not supposed to do that, but I should suppose that with the de
posits they have and the loans they will make to other banks, it may
be expected they will charge enough so they would be sure to pay
their 5 per cent dividend and something beyond that, at any rate.
Senator S h a fr o t h . T o adopt the suggestion of the Senator from
Kansas would make them make more money, if there is only to be
a difference between the amount of discount and the amount the Gov
ernment pays in relation to the matter. They must charge 4 or 5
per cent, If it goes to 5 per cent, it goes into their treasury.
Prof. J e n k s . If you make the division a little differently and allow
the Government to get more, would the people stand for that, too ?
Senator B ristow . But when they discount a note they get all but
just a bare margin, enough to permit the member bank to come out
even.
Senator H itc h c o c k . Of course, that is all guesswork. I want to
ask a few questions about something you suggested, Prof. Jenks,
sometime ago. Do you think this bill provides for such a mobiliza-
B A N K IN G AND CUBKEN CY.
2 609
tion of reserves as is brought about by the European organization of
a central bank?
P r o f . J e n k s . N o, I d o n o t ; I th in k th e r e a r e too m a n y r e g io n a l
b a n k s.
Senator H itchcock . Suppose there were only one bank. Would
that be such a mobilization as they have in Europe ?
P r o f . J e n k s . I see n o reaso n w h y i t sh o u ld n o t.
Senator H itch co ck . Take the Credit Lyonnais, in France. It is
a customer of the Bank of France, but the law does not compel the
Credit Lyonnais to keep any per cent of its deposits in its own vaults
So the result is it only keeps till money in its own vaults. The rest
of the money is loaned up virtually. That is absolute mobilization;
the reserves are all in use; they are all centralized in the Bank of
France. But in the system we have here the banks are required to
keep a certain per cent of their reserve in cash in their vaults, and
what is cash in their vaults is not mobilized. They are required to
keep another certain per cent with the reserve agent, and only twothirds of that is permitted to be used, so that is only mobilized to the
extent of two-thirds, is it not? Is not our mobilization in efficiency
far below the European mobilization?
Prof. J e n k s . Under the bill as it stands it clearly is. If we were to
have a single central reserve bank with its branches in different places,
or even have two or three, or even four, your reserve banks would
be in a much better position by charging one branch and crediting
another with funds; to transfer their credits from one section of the
country to another than they are now under this bill. Under this
bill there is a provision for reserves here and there in different sec
tions of the country. And even although there is a provision made
in the bill that the Federal reserve board may compel them to redis
count—and if you are going to have the 12 regional banks, I see no
way out of that—I do not think that is a normal, easy, ready way
to do it. I think it is desirable they keep in their vaults a certain
amount, say, 5 per cent, for cashing notes as they come in, for pay
ing depositors, etc. They must keep a certain amount there, and
it does not seem to me that is too large.
But when it comes to going back to the larger reserves, they ought
to be held so they can be distributed wherever they are needed in
different sections of the country, and I do not see how with 12 banks,
even with your Federal reserve board to order them to rediscount,
you are going to get that reserve in anything like as fluid a condition
as they have in the European systems.
Senator H itch co ck . Perhaps the mobilization of reserves is not
as good an expression as efficiency of deposits.
P r o f . J e n k s . E ffic ie n c y o f th e r e so u r c e s.
Senator H ttciicock . Yes; where they do not need reserves in any
shape at all.
Prof. J e n k s . The efficiency of the resources of the banks, I think,
would be greatly increased with a central bank.
S e n a to r H itchcock . I s th e r e n o t a n o th e r r e a so n w h y th is is n o t
e ffe c tiv e , t h a t th e b a n k s th a t d o n o t b e lo n g to th e s y s te m a re n o t
a llo w e d t o d e p o s it, so , as f a r a s t h e y a r e c o n c e r n e d , th e r e w o u ld be
ju s t a s m u c h s c a t t e r in g o f d e p o s its as th e r e is n o w ?
Prof. J e n k s . Yes; though that depends upon what their credit is
with the banks in the reserve cities, and, as indicated by Senator
2610
B A N K I N G AND CURRE NCY .
Bristow some time ago, by the condition of those banks themselves
in time of stress.
Senator H itc h c o c k . H ow do you estimate the relative importance
of the mobilization of reserves as compared with providing an
elastic currency? Which is more important?
Prof. J e n k s . It is hard to answer where both seem so absolutely
essential. My own feeling is that the thing of most importance now,
under the present circumstances, taking the matter as a whole, is
the question of the elasticity of the currency. I should put second
the question of the disposal of the reserve. If we include in the
question of the elasticity of the currency the system we have here
for increasing that currency promptly, I should say that is far and
away the more important.
Senator H itc h c o c k . That is what will save us from disasters in
the shape of panics?
Prof. J e n k s . Yes; under our present system of issuing notes I
should think it would be the other way. But with the system you
provide in the bill, where the}^ can rediscount and get notes directly,
I should say the note issue is far and away the more important.
Senator S h a fr o t h . They dovetail into each other; when the re
serve gets low, the notes issue.
Senator B ristow . The reserve is a minor quantity when you can
get the notes.
Senator S h a fr o t h . What would you think of this, Mr. Chair
man: Provide that these reserves which are specified in this bill as
a minimum could be drawn upon by the banks upon the consent of
some person like either the Comptroller of the Currency or the
president of the regional bank, so that instead of having it fixed
as it were, and the bank trying to get along without doing that in
emergencies, letting them go into that and run it down to zero ?
Senator H itch co ck . I think the professor’s suggestion about that
is the best, that the banks be permitted to run below the limit on
condition of their paying the tax upon their percentage of deficiency.
Senator S h a fr o t h . That is good; but as a matter of fact, if you
ao not get that it seems to me that there ought to be some power
that can give it in times of emergency.
Senator H itc h c o c k . 1 much prefer the automatic method.
Prof. J e n k s . Of course, your bill now provides that the Federal
reserve board may suspend that provision, which, I think, is unfor
tunate. But, on the other hand, this automatic provision—suppos
ing you had a rule that there shall be 35 per cent of reservesr and
that for every 1 per cent your reserve drops below that you charge
a 1 per cent tax. It is suggested, I believe, that when you get below
30 per cent you charge 1-J per cent. Then you are in this position:
When you get down to 30 per cent reserve you are going to pay 5 per
cent; when you get down to 29 per cent you pay 6 | per cent; when
you get down to 28 per cent you are going to pay 8 per cent, and so
on. By the time you are down to 25 per cent reserve you can not
make any loan at all unless a man is practically on the verge of bank
ruptcy—as in a case I heard of during the panic, when a large con
cern needed very much to borrow $5,000,000—it was a huge concern.
It got it at 6 per cent and paid $1,000,000 bonus. Well, that was
better than going into bankruptcy.
B A N K I N G AND CURRENCY .
2611
Senator S h a fr o t h . Prof. Jenks, could you put down in concrete
form that amendment you suggested, and exactly where it is to
come in ?
Prof. J e n k s . Yes.
Senator S h a fr o t h . And will you take with you one of these bills
and make in it all other changes that you think advisable, and mark
it “Amendments suggested by Prof. Jenks ” ?
Prof. J e n k s . I should be pleased to do that.
Senator B ristow . I would like to ask you to amend this bill so as
to provide for a central Federal reserve bank—a central bank gov
erned by a Federal board. I have a preference—although I do not
want to suggest it to you; of course, you would use your own judg
ment—for independent stock holding, the same as the Bank of France,
so that the public would subscribe to the stock. Then any repu
table banking institution that wanted to keep a reserve with this
Federal bank could, by virtue of keeping that reserve, come to it for
aid in time of need and get it on the proper collateral.
Prof. J e n k s . I should have no objection to either of those.
Senator B ristow . Then any banking institution that was sound
and had collateral could get it in time of need, and it would not
break up in any way our democratic banking system, which, I think,
is the pride of our country.
Prof. J e n k s . For that matter, this present bill does not break up
our present banking system.
Senator B ristow . Oh, I think it does; I think it breaks it up. This
other could not. There is this concentration----Prof. J e n k s (interposing). I am not sure about that. 1 think
the concentration in the other would be pretty nearly as much as
in this; because, I think, if you are to have a bank of that kind, a
national bank of that type, it should be the sole source of the issuing
of notes. Ultimately, as I think it should be, it would almost of
necessity need to establish a good many branches.
Senator B ristow . Of course, you have to have branches. But,
Professor, suppose this Federal bank here in Washington could stand
behind the notes of any banking institution in the country that had a
proper standing—that was regularly examined by the Comptroller
of the Currency, or whatever means we have for examining these
banks—and that such a bank could issue up to the amount of its
capital stock, whatever it is, of these bank notes?
Prof. J e n k s . If by that you mean an independent issue of notes
by that bank, I should not favor that; no. If you are going to have
a central Federal bank, I should favor making it such a bank sub
stantially as the Bank of Germany, as far as the note issue is con
cerned.
Senator B ristow . I do not know but what you are right; yes. It
would issue notes and discount, and the Government would be behind
it, because it would be a Government institution.
Prof. J e n k s . That would be the point. I should be glad to do
that.
Senator N elson . Would you have no limitation at all behind the
note issue?
Prof. J e n k s . N o ; I would not in definite numbers of dollars. As
regards definite figures there, it seems to me-----
2612
B A N K I N G AND CURRE NCY .
Senator N elson (interposing). I mean definite proportions.
Prof. J e n k s . Compared with the reserves? I would.
Senator N elson . I mean of these reserve banks, of the amount of
notes they could take out. Would you allow’ them to come in and
apply on their commercial paper for any amount they saw fit?
Prof. J e n k s . I would leave it discretionary with the central bank,
of course, but I would limit only by the character of the paper you
are going to put in and the amount of reserve that was kept.
Senator N elson . But not otherwise?
Prof. J e n k s . N o.
Senator N elson . Y ou wmuld not limit it in proportion to the stock
a n d capital of the bank?
Prof. J e n k s . N o ; I do not think I wmuld. In a good many
countries they do put the limitation at the amount of the capital
stock, as in Canada. I do not see why that is necessary.
Senator N elso n . I know there is a limitation in Canada. What
is that?
Prof. J e n k s . The capital stock. They can issue up to the capital
stock and not beyond, except from October 1 to January 31, when to
move the crops they may issue, in addition, up to 15 per cent of the
capital and surplus on payment of a tax. I do not think a fixed
amount is a desirable thing myself. I do not see any reason why
there should be any limit except a limit of absolute safely.
Senator N elson . If we limit it to the capital stock, we could know
then, in a general way, that they never could exceed that limit.
Prof. J e n k s . We might want them to exceed that limit.
Senator N elson . I do not think so. If this system prevails, we
would never want them to exceed the amount of capital, if we get
all the national banks into it.
Prof. J e n k s . Y ou mean the amount of the capital stock of the
central reserve bank ? I think we will.
Senator N elson . The capital and surplus. The law contemplates
they shall have a surplus of 20 per cent.
Prof. J e n k s . Yes. I do not see any reason for that kind of lim
itation.
Senator N elson . Would there not be danger, unless there were
some kind of limitation, that we might get an undue inflation of our
currency—that it might lead to undue speculation and to going a
little too fast, as we commonly say?
Prof. J e n k s . I do not feel that there is that danger, provided we
have the proper supervision and provided we make our restrictions
pretty rigid as regards the keeping of the reserves. I think the de
mands of business will attend to that and the proper methods of
redemption also—a good many redemption centers.
Senator N elson . Have not our troubles in the past come rather
from poor banking than from bad currency; that is, from the banks
unduly extending credits?
Prof. J e n k s . It is still wrorse than that, I should say, Senator.
Take the panic of 1837 for example. It was not merely that they
were extending credits, but they were only too anxious—dishonestly
so—to get these notes out that did not cost them anything.
Senator N elson . Of course that is no criterion, that old State
bank currency. I can remember as a boy seeing some of that old
B A N K I N G AND CURRENCY.
2613
stuff. But take the panic of 1893, and especially the panic of 1907,
which the people at large call the bankers’ panic. It did not arise
from any vicious or unpropitious economic conditions in the coun
try. The country as a rule was in a prosperous condition, and money
was abundant in the country as a whole. It grew out of vicious
banking and overextention of credit and an insufficiency of reserves.
Prof. J e n k s . May I add just a word to that? In the main, I
should say that was true, but it seems to me when it came to the
panic finally it practically came from this, that there had been very
prosperous years, there had been undue extension of credit until it
was reaching the danger point, and then these larger banks that had
been extending credit were practically forced to shut down on loans
to a very considerable extent.
Senator N elson . And shut down on their reserves. They would
not respond on their reserves.
Prof. J e n k s . H ow could they? Because here were the banks all
over the country, each one anxious to strengthen its own reserves and
pulling out its deposits from the others.
Senator N elson . D o you know, Prof. Jenks, that, as a matter of
fact, out in the Mississippi Valley a large number of our smaller
banks, the banks with capital from $100,000 down to $25,000, never
suspended at all, but kept open shop day after day, so the panic had
no effect upon them ?
Prof. J e n k s . I know that, but it did have a little effect in some
places. I remember going to a bank for some little loan, and the
cashier said, “ What do you want it for? We are taking care of our
depositors and customers. If you need money to pay obliga
tions ”----Senator N elson (interposing). That was a case where you wanted
to borrow. I am speaking about depositors. Our depositors could
draw on their accounts without limit.
Prof. J e n k s . Oh, yes; they could where I was.
Senator N elson . That showed the healthy condition of the Mis
sissippi Valley, which is the heart of the agricultural part of the
country. We were in a good condition out there.
Prof. J e n k s . Yes; and at the same time I do not think, Senator,
it is quite right to say you were in good condition as long as they
were shutting down on loans on good security.
Senator N elson . Why were we shutting down? Because under
this vicious system of reserves our reserves were tied up in the East.
Prof. J e n k s . That is so, certainly.
Senator N elson . If our banks had had their supplies at home they
could have supplied the local demand.
Senator H itc h c o c k . N ow , Prof. Jenks, I understand you feel
there is some probability of an expansion of credits under this new
system ?
Prof. J e n k s . Yes.
Senator H itch co ck . More than under the present system?
Prof. J e n k s . A little more; yes. Not enough, I think, to be a
serious matter, provided you look after the proper gold reserves.
But, as I said before noon, I think it will come in this way: Every
bank will want to hold in its own vaults and to keep to its credit in
the Federal reserve bank and elsewhere the lawful money that it
2614
B A N K I N G AND CU E B E N C Y .
can use as a reserve. The consequence is it is going to pay over its
counter whenever it can do so these new notes, and pull the other
kinds of currency out of circulation. It is a substitution of one for
the other. Now, under those circumstances we are going to have
piling up in our vaults rather more of this lawful money than, on the
whole, we need. My impression is it does not need to pile up enough
to have the effect of raising the rate of exchange on London and the
prices more than 1 or 2 per cent until we shall begin to see our best
money going abroad—that is, our gold. I think the expansion will
not be enough to force any panic at all to begin with, but at the same
time it is desirable that the people of this country have the utmost
confidence in the new system, whatever it may happen to be. If we
should have $50,000,000 of gold going out people will say, “ That
looks very bad; things are going bad,” even if we do not need that
here; even if it would go under normal conditions. And if it got to
$100,000,000 it would be a very serious matter on account of the effect
it would have on confidence in the country.
Now, as a matter of fact, there might not need to be more than a
very slight expansion in order to send that gold out. It would be
simply a substitution of these new notes for another kind of money
that would send gold out of the country. IVe need just expansion
enough to raise the rates of exchange so we will ship gold instead
of shipping more goods, and that does not take very much. It seems
to me that the simplest way of stating what leads to the export of
gold is this, that we always pay our foreign obligations in whatever
is the cheapest thing to pay them in. Usually we pay them almost
entirely in goods of some kind or other, but in times when money is
peculiarly plentiful and prices here are getting a little high on that
account, then we export gold. And that is a good thing under
ordinary circumstances. If we have a good stable system, whenever
business is in such a condition that prices here go up a little it is a
good thing for something to go abroad. It comes back in the same
way, and there is no trouble about that if your system is sound.
Senator H itc h c o c k . One o f the evils complained o f in th is c o u n try
At the present time is the high cost of living.
Prof. J e n k s . That is what I was saying before, that the high cost
of living would be affected by that only to a very slight extent in
the first instance. It might put up prices a trifle, but not enough. I
think, to detect it. It would be felt somewhat by people doing the
exchange business, sending the gold abroad. But within three or
four years, if we let three or four hundred millions of gold go abroad,
or even more than that, as we could without endangering our system
at all, I think we should have another increase in world prices that
would be unfortunate.
Senator H itch co ck . And in the cost of living ?
Prof. J e n k s . Certainly.
Senator H itch co ck . Why, then, do you favor a bill of this sort
when it involves this danger ?
Prof. J e n k s . Here is exactly why I favor it. As I suggested be
fore, we have under the present conditions the most inelastic system
that any country in the world that pretends to do business has.
Senator H itch co ck . I s our system any less elastic than that of
England ?
B A N K IN G AND CURRENCY.
2 615
Prof. J e n k s . Distinctly so.
Senator H itc h c o c k . They issue no notes at all, except $90,000,000,
that are not represented by gold. The rest are all gold certificates,
practically.
Prof. J e n k s . They have enough notes in hand to do their ordinary
business, and now and then they can issue an unlimited amount
against the deposit of gold.
Senator H itc h c o c k . But they are nothing but gold certificates.
Prof. J e n k s . That is eventually true.
Senator H itc h c o c k . What elasticity is there in the currency of the
Bank of England ? The Bank of England to-day can not issue a note
except gold is deposited. When the gold comes out the note goes in.
Prof. J e n k s . There is this, however, that tends to make their sys
tem—but not as far as that point is concerned—very elastic, and that
is the elasticity of their credits. But as regards our currency, in
connection with our reserves, we will have a good elastic currency if
we provide for the proper system of redemption, which I think we
have done in part, but that, as I said before, I think, ought to be ex
tended further along that line.
Senator H itch co ck . I want to get back to what Senator Bristow
said----Prof. J e n k s (interposing). May I just finish what I was saying
here before you take that up? I do not think there is any material
risk under this new system that can compare at all with the benefits
under the new system, provided you will see to it that the reserves
as fast as you can do it are put on a gold basis. You could do it
within a year—six months, I think. And as long as your reserves
for the redemption of these notes are to be in gold, if you will also
make arrangements for the retirement as fast as necessary of the
national-bank notes or of some of our other substitutes for money, so
that these elastic notes will have the opportunity of circulation, you
will have an excellent system. There is no danger of overexpansion if
you make your gold reserves larger.
Senator N elson . Prof. Jenks, is it not a fact that London is the
seat of the international exchange market of the world ?
Prof. J e n k s . I suppose it is; yes.
Senator N elson . And they require less currency, because it is a
world clearing house, so that all the currency they require there is to
settle balances on their international transactions ?
Prof. J e n k s . Yes; that is largely true.
Senator N elson . N ow , you take it, I believe, that these notes should
be absolutely and unconditionally redeemed in gold ?
Prof. J e n k s . 1 should myself favor that; yes.
Senator N elson . This bill proposes in one feature that we enter
the international exchange market, as we ought to do, in order to do
our business with foreign countries through our own banks. Now,
we could not go into that field unless we have our notes, our currency,
absolutely and unconditionally on a gold basis, could we ?
Prof. J e n k s . There is no doubt about that.
Senator N elson . And under this system our regional banks here
could establish branch banks in London, and those banks could, for
this country, act as accepting houses and accept bills of exchange,
and in that way we could carry on our business. In order to transact
2616
B A N K I N G AND CURRE NCY .
our business now we have to rely on what they call accepting houses
over there to accept our checks and bills of exchange. It is only after
they have been accepted there by a merchant or bank or accepting
house in London that they will accept them and allow them to cir
culate at par. Is not that true?
Prof. J e n k s . Yes.
Senator N elson . N ow , we can, under this system, if I understand
the purpose of it, if we adhere strictly to the gold standard, enter
that field, and compete with the Europeans, at least so far as our
own foreign trade is concerned.
Prof. J e n k s . I see no reason why we should not.
Senator N elson . And we need to do it.
Prof. J e n k s . I think so.
Senator N elson . And we a re n o t in it at a ll now.
Prof. J e n k s . N o.
Senator H itc h c o c k . Here is a difference between currency and
bank credits that I should like to have you clear up. I should like
to see how under this bill any currency at all can be issued without
inflation. If this plan is put into operation, we are going to have
$100,000,000 of capital that the regional banks can lend. They are
going to have Government deposits, say, of $150,000,000, of which
thejr can lend two-thirds, or $100,000,000. They are going to have
$450,000,000 of deposits of banks, of which they can lend $300,000,000. So that before they advance any currency at all to the banks
of the United States they will have $500,000,000 of cash that they
can lend to the individual banks. Now, does it not follow, therefore,
that bank loans may be swollen to the extent of $500,000,000 before
any currency is issued?
Prof. J e n k s . I s not the implication of that question that you are
getting this $500,000,000 without taking it from any place? Is not
that money that you are speaking of now taken from places where
it is loanable now? The Government deposits, for example, are—not
entirely, but to a considerable extent—in other banks now.
Senator H itch co ck . Not very much. There has been only about
$60,000,000 in the banks until very lately.
Prof. J e n k s . Some of them are. And what comes from other
banks into this regional bank here can be loaned now.
Senator H itc h c o c k . Oh, yes; ordinarily the Government has to
keep about $60,000,000 in bank, but it has about $150,000,000 in the
Treasury, which now is to be put into the regional bank. So I have
made it very moderate when I say the Government deposits will be
about $150,000,000, of which $100,000,000 can be loaned. The capital
of $100,000,000 is taken out of other banks, and to some extent that
is now being used probably. But the reserves amounting to $450,000,000 are largely located in bank vaults now, and not available,
because the reserves are not used except to a partial extent. So it
seems to me inevitable that these reserve banks will have actual cash
funds to lend to the extent of three or four hundred, or possibly five
hundred millions before they will call on the Government for any
currency at all; and you are going to have an inflation of bank credits
without any addition to the currency or any elastic character given
to it.
Prof. J e n k s . There is this, i t seems to me, that covers the question
of bank credits as well as the bank currency. You are not going to
B A N K I N G AND CURRENCY.
2617
lend to people that are not going to make some use of the money
and pay for it; so far as the expansion is concerned along the line of
either credit or currency, that depends, I think, entirely upon the
control that your banking system has over the lending of that money.
Moreover, my own feeling is that there is rather more of that
money loanable now than you had in mind, but that is a matter of
detail.
Senator H itch co ck . These reserve banks will have large funds at
their disposal to lend before they ask for any currency at all.
Prof. J e n k s . Yes. But then there is also this about it. They
can not go directly to the lending public. They, of course, may ad
vance to the other banks; otherwise they do not use it.
Senator H itc h c o c k . Yes.
Prof. J e n k s . And, as I understand the essential purpose of this
bill—and the same thing would be true of a national bank—it is to
back up the other banks when they need help.
Now, if the other banks need that, here is a great reservoir that
can be drawn upon, just as now we have from time to time in the
Treasury lying idle, considerable money and in time of emergency
the Secretary of the Treasury has, in exceptional cases, put it out
into circulation. This will come out in a much more normal, easy,
businesslike way than has been done heretofore.
Senator H itch co ck . We w ill assume that there is some truth in
these figures given here; and the idea has just occurred to me, and
I want to ask you what the effect will be in this big expansion of
bank credits and loans, without a corresponding increase in actual
currency; is that a healthy thing?
Prof. J e n k s . Why, I consider it not in the least unhealthy to have
the banks have resources by which they could suppfy the business
interests of the country freely at rather low rates.
One advantage that I hope is going to come from this system is on
the whole something of a reduction in the rates of interest through
out the country. So far as this system is going to make our loanable
capital more easily available, and more promptly available than it
is now, so far there is going to be a tendency to a slight reduction
in the rate of interest, and I think that is desirable. That is the only
effect, so far as I can see.
The fact is, of course, that no bank is going to loan money unless
there is a legitimate demand for it for business purposes; and under
those circumstances it is rather desirable to have the capital so mobil
ized that it can be readily supplied at reasonable rates.
I would like, if that covers that question, to take up a question
which I did not finish this forenoon, which you, Senator Hitchcock,
as well as Senator Peed, were asking me about, because it is connected
with this.
Senator Reed, in speaking of the redemption of these bank notes,
spoke as if he were opposed to having the notes of the different re
gional banks distinguished one from the other; and he put the ques
tion somewhat in this way: In case one of the member banks goes to
the Federal reserve bank and borrows $1,000,000, and takes that
$1,000,000 in notes and deposits securities that would mature, we will
say, in 90 days, Senator Reed’s thought was that this bill should con
tain a provision—the law should contain a provision—that at the
2618
B A N K I N G AND CUKRENCY.
end of 90 days the Federal reserve bank should account to the Federal
reserve agent for $1,000,000 in notes, so far as it had notes in hand;
and beyond that, in gold, provided gold is what is made the reserve;
otherwise in lawful money; and his idea was that that should be em
bodied in the law.
He asked me what objection I had to that. And the committee ad
journed before that was brought out fully. What brought that ques
tion out was the statement I had made earlier that I thought it would
be desirable to extend the system forbidding the regional bank from
paying out over its counter the notes of another regional bank. In
case the system that the Senator was speaking about were put into
effect, and the $1,000,000 had to be immediately accounted for in
either notes or lawful money, I do not see that the system would
work at all, because I do not see why any of the local banks, the mem
ber banks, would take out notes under those circumstances.
The reason wiry banks take out notes and issue notes instead of gold
over their counter is because they can hold the gold as reserve, and
they can issue three to one on it.
Now, in case they had to account at the end of 90 days either with
the notes themselves, to begin with, or the money that had been used
as a reserve, lawful money, they would not make that profit because
they would have to call in loans to meet the obligation; and they
simply would not take it out, the currency. If you limit the question
to any one bank, one can easily see how that would be. The bank de
posits its collateral in the form, we will say, of 90-dav paper, and
takes out its bank notes, which it pays out over the counter. At the
time that commercial paper is redeemable it is taken up, to be sure,
but its place is supplied in nine cases out of ten by still other paper
that is put in—commercial paper that is put in there instead.
And in that way, by keeping their notes out and keeping the secur
ity—only continually changing the commercial paper—and the re
serve of one-third, they are able to make a profit on two-thirds; that
is, on three times as much as they would if they had to lend the gold
itself.
It seems to me that the Senator’s plan would practically force them,
in some way or other, to redeem those bank notes every three months
or to pay up the full amount in lawful money; and if they were to
pay up the full amount in lawful money they would not make any
profit on it.
Now, as a matter of fact, if each one of the member banks was in
the same situation as this one bank that I have spoken of. the Federal
reserve bank would not be getting in, from day to day, enough bank
notes so that it could pay back all of the loans that were out. It
would probably get back, we will say, a quarter or a third, and the
rest would have to be paid over in the lawful money of the country
that they are holding as reserves, and that would take the profit all
away.
Senator H itc h c o c k . Well, it can pay it in the notes o f other banks.
Prof. J e n k s . But they could not possibly get in the notes of other
banks enough to cover. The main notes of other reserve banks that
it got would be those that were sent in to pay obligations of member
banks. They would not get the notes of other reserve banks in, any
more than they would get in the notes of their own bank, unless the
B A N K I N G AND C UBE E NCY.
2 619
proviso which I suggested were put in, that no member bank was
allowed to pay out over its own counter the notes of any reserve
bank other than its own. Then they would get the notes; otherwise,
not. How would thej^ do so ? Suppose you were a member bank and
had deposited $1,000,000 in gold commercial paper, and had taken in
$1,000,000 of notes and were loaning them from day to day. You
are keeping in your vaults or with the reserve bank cash to redeem
any presented. But when it comes to a man paying the loan back to
you, and he pays it in your own notes, you will not send them to the
reserve bank; you will lend them to somebody else. Under the sys
tem as proposed in the bill, if, instead of paying you the notes of
your own bank he pays the notes of another Federal reserve bank,
you will do the same thing with them. There is no reason why you
should send those notes in; you will loan those notes to somebody
else the next day. The consequence is that you are not going to have
a steady, regular redemption of the notes in this system.
Senator H itc h c o c k . That will lead to inflation.
Prof. J e n k s . I fear it will, more or less. I think that is some
thing of a danger.
Senator H itch co ck . Would not danger also result from the fact
that all State banks would be permitted to use these funds as a
part of their reserves?
Prof. J e n k s . That is another matter that I think—I do not know
that that makes any very serious difference, because they can use
the national bank notes for reserves now.
Senator H itch co ck . And th e y do use th em v ery la rg e ly .
Prof. J e n k s . Yes; they do use them to considerable extent. But
there is this point to be made: It does not seem to me in this bill
that we have gone far enough in way of providing for a steady,
regular contraction.
Now, the only way we have provided for the contraction is: That
when the member bank gets in a number of these notes—that is,
when they find that people are not borrowing enough money from
them so that they are getting a pretty large supply of these notes
on hand—then if they want to reduce their credits with the Federal
reserve bank they will send them in ; they do not want to pay interest
on them any more.
Then, the Federal reserve bank will turn them in also, and they
will be redeemed. But that will not happen excepting from time
to time when the bank feels that it is carrying more of these notes
than is desirable to carry.
On the other hand, if you make this further provision that not
only the Federal reserve bank must not pay out over its counter any
notes except its own notes, but that none of its members shall pay out
over its counter any notes of any Federal reserve bank except its
own, those notes of other banks will be coming in every day to a
very considerable extent; the cost will be the cost of shipping some
of those notes. But that, in my judgment, is a relatively small item
as compared with a steady, regular contraction; and the reason for
the contraction will be the same as in the Canadian system.
Senator H itch co ck . Y ou will have to penalize the bank for pay
ing these out, will you not?
Prof. J e n k s . Certainly; as now you will penalize the Federal
reserve bank.
2620
B A N K I N G AND CURRENCY .
Senator H itchcock . That is another objection, then, to their be
longing to the association ?
Prof. J e n k s . No ; I would more than overcome that by issuing the
notes to the Federal reserve bank without am^ tax, and there would
be a decided difference arising from that. Your provision in the
bill is that you must charge a minimum of one-half of 1 per cent tax.
I would take that tax off. This other provision for sending the notes
back would be only, if I remember rightly, according to the rate
under which the express companies carry currency now—I think it
would not be over one twenty-fifth or one-fortieth of 1 per cent.
Senator H itchcock . Let us see, then; there is another dilemma.
If you issue this currency to the reserve bank without any charge, of
course you either make a very large profit for the reserve bank which
pays that currency out to its members, or else you make a very low
rate of interest?
Prof. J e n k s . Exactly. I think a low rate of interest is desirable.
Senator PIitchcock . If you make a low rate of interest you stimu
late borrowing and lead to inflation?
Prof. J e n k s . If you keep a proper supervision over credits it need
not do so. I do not think there is any danger of inflation.
Senator H itchcock . Then I come back to my former illustration
of John Smith coming into a bank to borrow money. Let us suppose
you are running a bank, w7e will say, at Wichita, Ivans., and John
Smith comes in to borrow money from you now, and under the pres
ent conditions you have not the money to lend John Smith, because
your reserves are down to your legal limit, and you tell John Smith
that.
But, after a while this new system is put into operation, and you
are a member bank and John Smith comes in to borrow money of
you, and you tell John Smith that you would like to accommodate
him but can not do so because your reserves are down, and John
Smith thereupon says to you:
That does not make any difference if jTour reserves are down; you can always
get currency from your Federal reserve bank at a low rate of interest, and
therefore you can accommodate me if you want to.
There are thousands of member banks and hundreds of thousands
of John Smiths, and how can you possibly avoid a great increase in
the borrowing of money, because you have removed the great barrier
which the banks now have in their reserve requirements. But there
is no check at all if that bank can get indefinite rediscount from the
reserve bank upon that paper.
Prof. J e n k s . There is this to be said all along the line; Your na^
tional bank also has to keep its reserves against its deposits. But
entirely aside from that, the whole question lies here: Is it not a
desirable thing to have, on the whole, a low rate of interest and a
lower rate of interest than we have now? One reason why I think it
would be desirable to remove this half per cent tax is because I think
it would, in all probability, lower the average rate of interest through
out all the Middle West and the West and the South by one-half per
cent; and I think that would be a very desirable thing to do, provided
you can be sure of your security.
Now, I think if John Smith comes in and can put up the proper
security and can show he is going to use the money in a proper way—•
B A N K I N G AND CUK EENCY .
2621
and if he is one of my customers I know whether he is going to use it
properly or not; otherwise I would not let him have it—I do not see
why the loan should not be made. If, instead of charging him 7 per
cent, I can let him have the money at 6 per cent or, better, at 5 per
cent, it will be a good thing.
Senator H itch co ck . N ow , take the case of John Smith again.
Suppose he is going into the sheep business, and another John Smith
is going into the sheep business, and another is going into the sheep
business, and you get a great many John Smiths who are going into
the sheep business. It looks profitable, but we all know that at times
it has been enormously overdone, and has been followed by great
losses all around. But suppose another John Smith is going into
buying farms and another John Smith is going into the exploitation
of an electric road. Where is going to be the check that the bank now
has on the limit of its reserve against overlending? We know that
there comes a time when they overlend. We know that there comes a
period in every country where there is overexpansion and credit
extended until disaster follows. How are you going to avoid it in
this instance?
Prof. J e n k s . But we know also that after that period of disaster
there comes a period when credits are checked a good deal more than
they ought to be, and everybody goes the other way.
Senator H itc h c o c k . Yes; and then they go the other way.
Prof. J e n k s . I do not think it is possible to avoid those periods.
That is human nature, and it is going to come. But I think it will
go a long way to prevent reaching the breaking point if this plan
is adopted.
Now, as to John Smith going into the sheep business and going
into the farming business, we are not going to lend any money at all
to John Smith, except on what we call bank paper, that is to say,
it must be short-time paper; 90-day paper; the large majority of it
should not be over 90 days.
Senator H itc h c o c k . That is, the reserve banks will not, but the
individual banks will lend a great deal of money on paper that is
not available with the reserve banks; they do not expect to rediscount
all the paper they take in.
Prof. J e n k s . That is doubtless true. But with that pressure on
them, that they can not dispose of any paper with the Federal re
serve bank that runs beyond 90 days, they have got that restraint
upon them; and the question with them is what proportion of their
paper shall go out for a period longer than 90 days—and the propor
tion ought to be kept pretty low.
Senator B ristow . Prof, jenks, you say that you have got that an
swer to John Smith, that they can not lend it to him because his note
does not mature in-90 days.
Prof. J e n k s . I said let him have it whenever you could.
Senator B ristow . Yes; but if I understand your theory, that limits
the credits to 90-day loans, which would be a safer loan than the
loan to John Smith who was going into the sheep business, or en
larging his farming business.
Suppose that, instead of John Smith being in the sheep business,
he sees a fine opportunity to prosecute some commercial business—
say to buy and sell wheat, to go into the grain business—and he buys
2622
B A N K I N G AND CURRENCY .
his wheat and he buys it for the purpose of holding it for, we will
say, 60 or 90 days, thinking the price is going to advance. He buys
the wheat which he is going to sell, and he gives a 90-day note for
it; and here is your merchantable product. And wheat goes down.
That note is not as good as a six-months’ note of the farmer who
rew the wheat, because the farmer has got his farm and other things
esides the wheat.
Now, you are taking the note that depends upon the wheat, which
the man is likely to lose and break up on, and you are refusing the
note of the farmer who has bought cattle and given a six-months’
note—as he will have to do in order to market his cattle.
Prof. J e n k s . S o far as that is concerned, that is a matter for the
judgment of the banker as to the nature of the credit. Of course
it is true in our larger centers where wheat—using your illustration—
is held in large quantities and is salable any day, that a great deal of
money is loaned by the banks on elevator certificates; and if they
allow a reasonable margin there it is a perfectly safe loan when that
is done. But, on the other hand, if the wheat were, we will say, in
the farmer’s barn, it would be an entirely different proposition; the
banks could not realize on it,
Senator B ristow . Why could they not?
Prof. J e n k s . There is no b a n k that, as a practical matter, could go
out on the farm and sell a man’s wheat out of his barn. On the other
h a n d , if the person who has given the note has his wheat in an ele
vator and has a receipt for it that he has assigned, that is an easy
thing; and where the wheat is sold from day to day on the board
of trade, it can dispose of it at any time within 24 hours.
The same thing holds on loans on farming lands. I would not
say that I am positively opposed to this provision of the bill with
regard to farm loans; but I should very much prefer that this pro
vision relating to farm loans and to the savings be dropped out and
provided for in other laws. There are sytems of agricultural credits
to which it would apply better than it would apply in this bill. That
subject I should like to see in another bill.
The chief reason for my belief that mortgage loans are not good
bank loans is they are too slow, they are not realizable; they are all
right as a good security.
g
S e n a to r N elson . I s n o t t h a t th e c a se w ith th e s e lo n g - t im e r a ilr o a d
b o n d s w h ic h a r e s o ld o n th e m a r k e t ?
Prof. J e n k s . That is a different thing.
Senator N elson . They are not matured; they are simply auctioned
off.
Prof. J e n k s . A s I understand, those will not be accepted anyhow
as a basis for circulation.
Senator N elson . But the big New York banks have been loaning
on them, and they call them their secondary reserves.
Prof. J e n k s . Yes; that is call loans; and this bill will dispose of
th a t largely, I th in k .
Senator N elson . We had a banker here from Minnesota who was
speaking of the panic of 1893. He had said he had real estate mort
gages; and of all the securities he had in his bank—of all the com
mercial paper he had in his bank he found those farm mortgages the
most liquid. [Laughter.]
B A N K I N G AND CUKRENCY.
2 623
And he found that the life-insurance companies and other investors
were ready to take them like hot cakes, that they would take them
in preference to any other paper he had. And I knew of a case in
that same panic where two banks in southern Minnesota stopped
runs on their banks by passing out to the people who had certificates
of deposit in those banks martgages which they held. They told
their depositors, “ We lent out that money to your neighbors on these
mortgages.” They passed out the mortgages to them and that stopped
the run. [Laughter.]
Prof. J e n k s . I hope you will grant that those are very exceptional
circumstances: and the people did not get cash, though their fears
were stopped by the mortgages.
Senator N elso n . Oh, no; if you lived out in a farming community
such as we have in the Mississippi Valley, where there are little
country banks, you would find that the universal sentiment is that the
safest loans they have are those kinds of loans.
Let me also tell you this: I live in a town where we have three
banks; and the trouble with our banks is that they get more money on
deposit than they can loan out. They used to invest it in what they
call “ m ill” paper and “ flour” in Minneapolis for 4^ or 5 per cent.
By and by they bought the notes of a big Milwaukee brokerage house
and it went into bankruptcy. They lost a good deal of money. They
do not know how much money that institution had out. And the
banks, while they invested in that kind of paper, were paying 8
per cent dividends. Instead of that in the last two years they have
invested in Dakota real estate mortgages; and they have got twice
the dividend and they have never had any trouble about the cur
rency. Now, that is the way it works and your theories do not tally
with our experince in the West.
Prof. J e n k s . I was going to say that the main trouble there as re
gards the illustration you gave was that the loan made to the mill
people was made on poor security really; it went to pieces.
Senator N elson . The security itself was good enough, but they
had overloaned.
P r o f . J e n k s . Y e s ; th e r e is th e p o in t.
Senator B ristow. It is commercial paper that is floating all over
the country now.
Prof. J e n k s . Merely because paper is commercial paper is no rea
son one should lend on it. You want the paper which you as a
banker approve because you know the parties and the nature of the
security. You do not take any commercial paper that comes in.
I must say I think there is likely to be a weakness in this system
as regards the Federal reserve banks. I think that a good many
of our country banks sometimes do take commercial paper that is not
first class. I do not see how the Federal reserve agent is going to
exercise any great intelligence in examining that; he has got to get
the indorsement of the local bank.
Senator N elson . Well, let us take this case: A railroad bond is
secured by a mortgage, and that is considered good security for these
call loans—liquid security.
Prof. J e n k s . That is the reason----Senator N elson (interposing). Now, in the case of a farm loan, it
is a note secured by a mortgage, but sometimes it is a bond. It is
2624
B A N K I N G AND CUKRENCY.
exactly on the same footing. And it is simply the question whether
there is a market for those securities.
Prof. J e n k s . That is it.
Senator N elson . They have no stock exchange for those mort
gages ; but there is a constant demand for them; and the insurance
companies and the savings banks in the East can see that. They pre
fer them to railroad bonds. There is a good market for them; and
that makes them just as liquid as those securities they have on the
Stock Exchange in New York. That is wdiat you overlook.
Prof. J e n k s . N o. I agree with that; but I do not entirely; and the
reason for that is this: With reference to those farm mortgages, it
happened that the university I was connected with earlier in my ex
perience, Cornell University, had, some years ago, some $2,000,000, if
I remember rightly, in farm mortgages, and they practically did not
lose one dollar.
Senator N elson . Yes.
Prof. J e n k s . And they were getting their returns in. But they
did not have to realize on them on short notice. If they had been in
the position of many banks here that are likely to be called on to pay
out deposits in 24 hours, those loans would not have been a good kind
of loan for them.
On the other hand, if they had had bonds of the New York Central
Railroad they would not have paid so much interest, and would not
have been any more secure—perhaps not as good security as the farm
loans.
Senator N elso n . But in the midst of a panic, such as 1907, those
bonds were no more salable, because the people that had made call
loans could not borrow the money from another bank on them. They
had to get the money, and the result was that they were sacrificed on
the stock exchange.
Prof. J e n k s . 1 was going to say, with reference to those loans, that
you can sell them on the stock exchange at any time—at a price. Of
course the margin on the loans—the banker is supposed to be and is
pretty careful to see that the margin is big enough so that it is se
cure.
Senator N elson . Mr. Vanderlip, the head of the biggest bank in
the country, says he is certain that, in the case of panic or money
stringency, those were the worst kind of loans, that they were any
thing but liquid; and he thought the great virtue of this bill was
getting away from those loans altogether.
Prof. J e n k s . I quite agree with that; I think this bill, if put into
effect, will to a very considerable extent turn investments, not only
of New York banks, but other banks, away from call loans and stockexchange loans into commercial loans up the State and elsewhere.
Not only the big banks in New York make these call loans, but the
smaller banks throughout the country, not merely put their money
into New York banks at 2 per cent and have them loan it out, but
they will send it to New York and say:
Loan this for me on the call market at 6 per cent or 7 per cent or 8 per cent, if
money is tight.
Now, it is a bad thing for small country banks to speculate on the
stock exchange on those call loans.
B A N K I N G AND CURRENCY .
2 625
Senator N elson . The national banks are partly driven to that be
cause they have been cut off from the very best loans—real-estate
loans.
Prof. J e n k s . Yes.
Senator N elso n . N ow , I want to ask you on another feature of
this bill, and that is the savings-bank attachment to this bill. Do
you think that it is advisable, especially in reference to the smaller
commercial national banks?
Prof. J e n k s . I was going to say—may I just add a word more on
farm loans, and then I will answer that question.
Senator N elson . Yes.
Prof. J e n k s . A s regards the farm loans, I think this is rather
closely connected with the savings loans in a certain way, or with the
savings department. In the case of most savings deposits, you take
those savings with the understanding that you are to have notice be
fore paying, 30 or 60 days’ notice—some notice.
Senator N elson . Yes.
Prof. J e n k s . N ow , I should say that, as a basis for a savings de
partment, where, when you are called upon to pay, you have a right
to the 30 or 60 day notice, then this kind of security you are speak
ing of is all right.
Senator N elson . Are you aware o f the fact, Prof. Jenks, that the
small banks of the country practically are running a savings depart
ment?
Prof. J e n k s . I understood that they were.
Senator N elson . Yes. They pay interest on time deposits.
Prof. J e n k s . Yes; I understood so.
Senator N elson . If you limited the real-estate mortgages instead
of basing them on capital—if you allowed them to lend 25 per cent
of their time deposits on real estate, that would make it perfectly safe.
Prof. J e n k s . I was wondering why that change had been made in
this bill. In the earlier form of the bill there was a provision for
time deposits, that has been stricken out of this bill—I think unwisely.
Senator N elson . I do not knowThow that came in. I think it is the
result of the caucus in the other House. [Laughter.]
Prof. J e n k s . I think, myself, in regard to time loans, that it is a
different thing. I have known savings banks in Illinois, where they
are not restricted as these New York savings banks are, to have a
very large part of their securities in good farm mortgages.
Senator N elson . I want to tell you, Prof. Jenks, you go back in
the interior, in the Mississippi Valley, and you will find the small
banks with $25,000 capital, and they have been a great blessing, and
the banks with $50,000 and $100,000.
Prof. J e n k s . Yes; I grant that.
Senator N elson . Y ou will find, on the average, that sometimes
two-thirds of their deposits are time deposits—really savings de
posits.
Prof. J e n k s . Yes.
Senator N elson . Why should not they, on that class of deposits,
which are practically like savings-bank deposits, why should not they
be allowed to lend a limited amount of their time deposits on realestate mortgages?
2626
B A N K IN G AND C U RREN CY .
Prof. J enks . I think they should be.
Senator N elson. I am glad you finally agreed with me.
[Laughter.]
Prof. J enks . I not merely finally agreed; I agreed at the begin
ning. I had not understood we were talking about time deposits; I
thought we were talking about demand deposits.
Senator N elson. If instead of a professor you were a farmer out
West, you would be better qualified to speak about that. I hope
you will take that in a Christian spirit. [Laughter.]
Prof. J enks . Certainly.
Senator P omerene. Professor, why would it not be wise, in view
of the fact there are savings deposits in the national banks now,
as I understand it, not permitted, perhaps, from the legal standpoint,
but conducted rather by permission of the Comptroller of the Cur
rency than by any legislative rule—why might it not be well to pro
vide by a section in this statute for the plan now in force and omit,
if I may say, so cumbersome a purpose in this bill?
Prof. J enks . What I have said formerly with reference to this
farm loan and savings department was this: That I thought provi
sion should be made for agricultural loans, but made elsewhere.
This bill is primarily a special currency matter. Now, why is it not
wise, considering the extreme difficulty of this bill, to hold to the
one main purpose of the bill and get that as nearly perfect as possi
ble and take up, when you have the time, the matter of the agricul
tural loans and these savings loans, too? I think that would come
in more naturally than the farm loans would, but you can handle
that independently. I think one of the great needs of the country
is an agricultural-loan system.
Senator P omerene. I think so, too. You made a statement a while
ago that there were other farm-credit systems which were preferable.
Did you have any particular system in mind ?
Prof. J enks . I have in mind the mutual cooperative loan systems
they have in Europe—Germany and elsewhere. They are quite
closely allied, as regards the general plan, to cooperative loan and
building associations and organizations of that kind. The general
idea is much the same. I do not think that belongs in this bill.
Senator H ollis. That is already covered in a bill introduced by
Mr. Fletcher.
Senator M artine. We have in the Senate now what is known as
the Fletcher bill, covering this whole thing.
Prof. J enks . Exactly. Why should we put it in here? I think
you are quite right on that.
Senator B ristow. But that deals with an entirely different kind
of country.
Prof. J enks . That is true.
Senator B ristow. And if the banks in the small communities must
be able to acquire all the deposits that are available, both time de
posits and otherwise, or you rid the small communities of the facili
ties which they normally have now. If the banks are permitted, as
they are now and ought to be, to take in all of those securities, then,
in order that that community may have all the advantages of its
B A N K IN G AND CU RREN CY .
2 627
own resources in loaning to its own people for the good of its own
community, they ought to have the opportunity to make this class
of loans when they have the time deposits, it seems to me.
Prof. J enks . A s the Senator suggests, on the time deposits I have
no objection.
Senator B ristow. That is all we contended for.
Prof. J enks . Y ou see, that provision was made in an earlier bill.
There was a certain proposition for the time deposits, but that was
dropped out of here. I have no objection to the time deposits.
Senator H it c h c o c k . Professor, do you think a uniform rate of
interest should be established throughout the United States?
Prof. J enks . I do not believe that is quite practicable. The con
ditions are quite different in different sections of the country, and I
do not believe the conditions are such it would be practicable.
Senator H itchcock. D o you think that one rate of interest should
be charged to a reserve bank in the East and a different rate of inter
est should be charged to a reserve bank in the South for the use of
currency ?
Prof. J enks . Y ou remember my own preference is that the cur
rency should be issued without any charge to either of them. But
then, it seems to me, the situation is this: The rate of discount should
be determined largely by the conditions of that section.
Senator H itchcock. Y ou think the directors of each Federal re
serve bank should regulate the rate of interest?
Prof. J enks . Yes. I think if you retain the bill that way it would
regulate the interest, subject to the approval of the Federal reserve
board. But I would let the iniative be taken by the local people, sub
ject to the supervision of the board.
Senator H itchcock. That means, practically, you would give to the
Federal reserve board the power to establish one rate of interest in
the East and another rate of interest in the West?
Prof. J enks . Ultimately; but practically I should suppose the Fed
eral reserve board, under most circumstances, would expect that the
local reserve boards would handle that wisely.
Senator H itchcock. N ow, then, this is a Government facility we
are providing: Should we charge the people in one State one price for
a Government facility and the people in another State a different
price ?
Prof. J enks . I do not think that is quite the right way to put it.
It is this: The people in a locality are asking for an accommodation,
and they pay for the accommodation the normal market rate, and the
Government permits it to have the accommodation at the normal
market rate. Now, if the normal market rate in Illinois is different
from that in Massachusetts, well and good.
Senator H itchcock. Y ou say this is not a Government facility?
Prof. J enks . N o ; I say they are going to ask for this facility, and
why should not they pay for it ?
Senator H itchcock. Why should a man in Nebraska pay, to the
same public corporation, backed by the Government, having special
privileges from the Government, a higher rate for the use of the
facility than the man in Massachusetts? Why should the bank in
2628
B A N K IN G AND CU RREN CY .
Nebraska pay a higher rate when it has contributed one-tenth of its
capital and one-fifth of its deposits to the reserve bank, than the
bank in Massachusetts, which has made the same contribution ?
Prof. J enks . I think the situation is this, that it is only in the
rather exceptional cases that these Government facilities are fur
nished. As regards the normal course of business the rate of inter
est is determined largely by what can be made on the capital invested,
and there can be probably more made on it there than in the East
and other places, because the supply is not so great?
Senator H itchcock. I would have to question that right off.
Prof. J enks . Local conditions largely determine, I think, the rate
of profit on the investment of capital.
Senator H itchcock. N o rate of profit has been higher than has
been made by the manufacturers of the E ast; no bank profit has been
greater than the bank profit in New York City, anywffiere in the
world. And, on the other hand, there are out West borrowers with
just as good securities as in the East, and I can not see the reason
why a bank in Nebraska should pay more for the use of the Govern
ment facility there than should be paid for postage stamps there—
something provided by all the people.
Prof. J enks . The only difficulty as I can see—as a mater of fact,
the rate of interest is largely determined by the profits that are
made on capital in a normal investment as compared with the supply
of capital there. Now, we do find higher rates of interest in prac
tically all of the interior and relatively speaking undeveloped sec
tions of the country, because of that added profit and because of
that added demand, as compared with the supply. Those are the
conditions that fix, that will regulate the normal rate of interest.
That is what all the people pay for it there. Now, under those
exceptional circumstances, the people go to the bank for accommoda
tion, and they are granted the accommodation along the lines of
what they are accustomed to pay, and along the lines of what regular
business pays.
Senator H itchcock. Of course I would have to dispute your
assumption.
Prof. J enks . Let me add a word; if you can show that the regu
lar business rate of interest is the same throughout the country, sub
stantially, then I would agree with you.
Senator LIitchcock. What we are going to do is to unify the
country, to unify the banking system, which has been diverse. I
think your argument falls to the ground there. But if your argu
ment is true, then a man with a profitable business should be charged
a higher rate of interest than a man with an unprofitable business.
Prof. J enks . N o ; I do not think that follows. The profit of a
man’s business is not dependent entirely upon local conditions; it is
dependent, to a very considerable extent, upon his skill, enterprise,
and knowledge of the business, and things of that kind. That is
where the chief source of his individual profit comes, and that does
not determine the interest rate. The idea I had in mind and what
I said was that the average profit upon capital, as compared with
the capital that is available, determines the usual rate of interest,
ordinarily. Now, it may be that under this system the facilities will
B A N K IN G AND CU RREN CY .
2629
be improved a great deal, and if capital becomes as plentiful and
profitable in the West and South as it is in the East, or substantially
the same, that will of itself equalize the rate of interest. I think
the bill has a tendency that way, but I do not think it will be uniform
throughout the country.
Senator H itchcock. Then you think a man doing business in the
West who is prompt in paying his notes should be charged a higher
rate of interest than a man in the East who is equally prompt in
paying his notes simply because he happens to live out in the
country?
Prof. J enks . That is not all.
Senator H itchcock (continuing). Where capital has been scarce,
when the purpose of this bill is to unify the country and make the
whole banking system into one?
Prof. J enks . Let us put it the other way: Suppose you are a
banker loaning money out in Nebraska. You find there is a demand
for the capital you have there, so that you can loan it out on good
security at 6 per cent right along; whereas, on equally good security,
we find the supply of money in Massachusetts is such that a man is
borrowing at 4 or 5 per cent. Now, you have a supply of money and
you can get 6 per cent for i t ; you are not going to lend it at 4 or 5.
When a man comes to you and asks for a loan you say, “ Certainly,
T will give you the loan, and I will give it to you at the normal rate.
If you are not prepared to take that loan at that rate, here is Jones,
next door to you, who is ready to take it.” That is the way the busi
ness is done. The bank gets the current rate charged in the region
where it is. I t is the one that fixes that rate. Now, when it comes
to get this additional help from the Government bank, why of course
he applies, furnishes his security, and he gets it, and the rate of inter
est in the different sections of the country is determined by the local
conditions largely.
Senator B ristow. Y ou understand the bill, as it stands now, gives
each regional bank the power to fix the rate of interest they will
charge to the member bank?
Prof. J enks . Yes.
Senator H itchcock. And has to charge each member bank the
same rate?
Prof. J enks . Yes.
Senator H itchcock. Y ou also understand the bill gives the central
board the power to require the reserve banks to modify that rate of
interest ?
Prof. J enks . I understood so. My understanding of the bill was
this, that the local reserve boards, the directors, fix the rate first, and
they then have to get the approval of the Federal reserve board.
Now, if they try to fix a rate higher than the Federal reserve board
thinks wise, the Federal reserve board won’t approve it, and it has to
be put down. I think that is right.
Senator S hafroth. I think it has, perhaps, under this provision
which says, “ to supervise and regulate the issue and retirement of
Federal reserve notes and to prescribe the form and tenor of such
2630
B A N K IN G AND C U B E E N C Y .
notes.” That provision, evidently, implies the power to fix the rates
of interest, and all that, and determine the rate of discount and the
issuance of notes.
Senator H itchcock. I think, virtually, the Federal reserve board
has such large powers that it could influence the reserve banks by
control of the public deposit of the issuance of currency, and that a
hint to them to raise or lower rates wmuld be followed.
Senator S hafroth. Then there is a further provision here, “ to
perform the duties, functions, or services specified or implied in this
act.”
Prof. J e n k s . Yes.
Senator H itchcock. Is there anything further?
Prof. J enks . I was simply going to add a word in connection with
what you just said. I think, myself, the Federal reserve board should
use its influence, as far as it can do so without disturbing condi
tions, to make a uniform rate of interest. It does not seem to me the
business conditions of the country are such that they could now make
it uniform, but I think, ultimately, you may have the rate of interest
the same throughout the country, and I think they should use their
influence to that end.
I would just like to add one word more in connection with what I
said a while ago. It will take only a minute. It is this: I was speak
ing, some little time ago, with reference to the Federal reserve board
and its constitution. It seems to me that whatever the composition
of the Federal reserve board may be, provision should be so made
that you would have only one member retiring each year, so that the
board would really be a continuous board; and I think the time
should be long enough so that no one President can possibly appoint
a majority of the board after the first one has been appointed.
Senator H itchcock. What would you think of having those mem
bers subject to recall by vote of the House of Representatives?
Prof. J enks . I should not favor that at all.
Senator H i t c h c o c k . Appointed by the President, confirmed b y the
Senate, and subject to recall by the House of Representatives?
Prof. J enks . I should object to the second part.
Senator H itchcock. For what reason ?
Prof. J enks . I think it is extremely desirable, in the light of what
we have had going on in NewTYork for the last few weeks, to keep
anything like party politics out of the currency system, and I can
not help feeling that a vote of the House of Representatives on any
thing of that kind would be sure to be colored by party lines.
Senator H i t c h c o c k . Suppose that it turned out that a member
of the board was misusing his office?
Prof. J enks . I have not the slightest objection to having a mem
ber of the board removed.
Senator H itchcock. Removed by vote of the House of Representa
tives without impeachment ?
Prof. J enks . N o : I should say removed by the President, with
charges filed, giving sufficient reasons.
Senator H itchcock. Y ou would rather trust the President than the
House of Representatives?
2631
B A N K IN G AND CURREN CY .
Prof. J enks . On anything of that kind. [Laughter.]
Senator N elson. I have received a letter from Mr. G. D. La Bar,
president of the First National Bank of Brainerd, Minn., which I
desire to have go in the record.
Senator H itchcock. Without objection the letter will be incor
porated in the record.
(The letter referred to is as follows:)
T h e F ir st N a tio na l B a n k ,
B r a in e r d , M inn ., O c t o b e r
Hon. K n u t e N el so n ,
14,
1913.
U n ite d S ta te s S e n a to r , W a s h in g to n , D . G.
My D ear S i r : I s tlie currency bill in the shape that it passed the House
at all likely to go through the Senate? If so, how is a country national bank
to compete with State banks? We are compelled to pay interest on time de
posits—as practically all State banks do—and at the same time we are obliged
to take the required amount of stock in the Federal bank, with an annual re
turn of not to exceed 5 per cent, and also to carry the required percentage of
deposits in the Federal bank as reserve, and on which balance we receive no
interest whatever.
State banks would not be required to take stock in the Federal bank and re
ceive not to exceed 5 per cent returns. Neither would they be compelled to
carry a certain definite percentage of their deposits with the Federal bank as
reserve and receive no interest whatever on such a balance. It is certainly a
serious handicap for national banks that are compelled to qualify under the
present bill.
We have heretofore been able to receive 2 per cent interest on reserve bal
ances, which, in a measure, partially offsets the interest we have paid on de
posits. We must continue to maintain some sort of balances in large cities
for the purpose of drawing drafts to make the usual commercial transfers.
It seems to us that the new bill will have a tendency to contract rather than
increase the loaning inclination of the country banks, particularly among con
servative bankers, who dislike rediscounting paper, and having certain definite
obligations maturing in large amounts at definite dates instead of the usual
moderate withdrawals of deposits. I do not recall that we have rediscounted
any paper in 20 years, and I am consequently very fearful of the new bill with
its many peculiar and objectionable features.
The savings department plan of segregating assets does not appeal to us
as practical or just.
Is it not possible to pass some bill which will enable banks to issue emergency
currency with proper collateral, charging a sufficiently high tax, so that the
same will be quickly retired, which, in addition to our present banking laws,
would answer the requirements of the country much better than the pro]>osed bill?
It certainly seems to us that the banks should have some voice in the matter,
and that their suggestions should be given consideration and not entirely be
littled and made to appear to the country at large as emanating from the big
New York banks. We certainly have a few ideas of our own, and do not want
to have our business endangered in the manner that it appears to us will be
the case by the present Glass-Owen bill.
I have been with this bank over 30 years and have a considerable financial
interest in it. We have built our bank slowly, but steadily and solidly, and we
believe that we have been a factor in the upbuilding of the city, county, and even
outside territory.
We trust that the provisions of whatever currency bill that is passed will not
be so objectionable that it will compel us to change into the State system in
stead of continuing as a national bank.
Respectfully,
G. D. La Bar,
P r e s id e n t.
Senator H ollis. Mr. Chairman, I wish to put in the record a
letter which I have received from Mr. Frank H. Foster, cashier of
2632
BANKING AND CUKRENCY.
the Claremont ^National Bank, of Claremont, N. H., having special
reference to the savings-bank provisions.
Senator H itchcock. Without objection the letter will be incor
porated in the record.
(The letter referred to is as follows:)
C la rem o nt N a tio na l B a n k ,
Hon. H en r y F . H o l l is ,
C la r e m o n t, N. H ., S e p t e m b e r 13, 1913.
U n ite d S ta t e s S e n a te , W a s h in g to n , D . C.
M y D ear S e n a t o r : I have received your kind letter of September 9 and am
much interested to learn that the savings-department section of the Federal
reserve act will receive careful attention by the Senate committee.
I am going to take the liberty to present a number of criticisms which occur
to me on the section as it stands, which I assure you are offered in an entirely
friendly spirit. It is my hope, which I am sure is shared by most national
bankers in New Hampshire, that the act will be passed and in such form
that it will not result in a wholesale surrender of national-bank charters.
Such result would be deplorable, both from the standpoint of the general
public interest and the credit of the administration. It would inevitably bring
heavy financial loss to all national banks through the depreciation in the
market price of the 2 per cent bonds, which would follow any general with
drawal from the national system ; a loss which would fall with equal severity
upon banks which remained in the system. As I understand it, any national
bank surrendering its charter is obliged to deposit lawful money to the amount
of its outstanding circulating notes, and the bonds would then be released to
it and would, of course, come on the market. Should any considerable per
centage of the $800,000,000 or so of twos now held by the banks be thrown on
the market they would have to be sold practically on the basis of their in
vestment value, and the market price, under these circumstances, might easily
fall to 75 or 80.
Beginning with the phraseology of section 27: The section seems to take
away with one hand what it offers with the other. First, on page 45, lines
2, 3, 4, and 5, and on page 46, lines 1 to 10, the purpose seems to be announced
to exempt savings departments from restrictions existing in the present nationalbank act. But there follows, on pages 46, 47, and 48, a set of new restrictions
in regard to investments far more drastic than any existing in the present law.
Second, on page 45, lines 20 and 21, it seems to authorize savings departments
to make loans on personal security, while the restrictive clauses, lettered A to
F, on pages 46 and 47, eliminate loans on personal security altogether.
Furthermore, the language of the section is certainly ambiguous as to.the
status of savings departments now being operated by national banks under the
present law, as it does not expressly state that such departments may not
continue to be operated as at present.
Another criticism to which the section seems to me to be fairly open relates
to the provisions requiring segregation of assets for savings-department busi
ness. It seems to me that segregation of assets is of little importance so long
as no prior lien is created in favor of savings depositors upon assets so segre
gated. It is difficult to see wherein protection to depositors in savings depart
ments would result, unless they were protected from loss made by the banks in
their commercial departments. On the other hand, it is probable that the
amount of capital stock segregated would in most cases constitute a smaller
margin of protection to the savings depositors than they now have, where the
whole capital, surplus, and undivided profits of the bank stand as a general
guaranty fund for protection of all the depositors. I find that in the State of
New Hampshire at the present time, as shown by the last published abstract
from the comptroller’s office, the national banks have in their capital, surplus,
and undivided profits and stockholders’ liability a guaranty fund equal to 60
per cent of their total deposits of all classes, and the percentage for the whole
of New England is 52. In view of this very liberal protection to depositors, I
can not see how the public interest calls for any separation of assets for the
special protection of one class.
B A N K IN G AND C U EB EN C Y .
2 633
Again, on page 49, lines 1 to 13, a requirement is inserted in regard to de
posits carried in other banks, making it necessary to carry separate accounts
for such funds of the savings departments as may be deposited with other
banks. This seems to be unnecessarily burdensome. Again, there is the pro
vision, in lines 11, 12, and 13, forbidding the savings departments of the na
tional banks to keep any current funds on deposit in the commercial department
of the same bank. It seems to me that is the very place where they ought to
be kept—at least a portion of them. As to the clause relative to a notice of
withdrawal being required of savings depositors, that would be of very doubtful
value to any bank. The requiring of such notice would only be resorted to in
times of stress, and would in such case be a danger signal which would seri
ously imperil the bank in its commercial department. We have always gone
on the theory that our assets must be kept invested in such a manner that we
could meet heavy withdrawals without requiring any notice, and that to re
quire such notice would come so near to being an act of insolvency in the eyes
of the public that it would be of very little value to us.
The restriction upon investments of mutual savings banks imposed by New
England and New York States, where such banks have been familiar to the
public for many years, have been imposed, as I view it, mainly for the reason
that the depositors are the bank, and any losses sustained must fall directly
upon the depositors, whereas in national banks an entirely different situation
exists, the stockholders necessarily assuming all risk of loss up to the amount
of their stock and 100 per cent liability in addition. It does not seem logical to
apply restrictions and regulations to national banks which may be entirely wise
and proper in the case of purely mutual institutions. The management of every
national bank must be credited writh an honest purpose to safeguard not only
the money of its depositors but also the interest of the stockholders, who must
stand in the breach absolutely whenever a loss occurs.
If I were to be asked to make recommendations, they would take form some
what as follows:
(a) Require no segregation of capital or assets.
(ft) Allow not exceeding 50 per cent of savings deposits to be invested in
loans on real estate in the State, Territory, or district where the bank is located,
such loans being limited to 60 per cent of the value of the property.
(c) Allow, say, 20 per cent of savings deposits to be invested, subject to the
approval of the comptroller, obtained in advance of such investments, in the
stocks of railroads or other public-service corporations in the United States
which have regularly earned and paid dividends for five years next preceding
date of such investments.
( d ) Require 9 per cent reserve against savings deposits, one-third cash in
bank, one-tliird with regional reserve bank, and one-third with reserve agents.
If the principle of segregation of assets and restriction of savings deposits
to certain specified classes of securities is to be retained in the bill, the lines
should certainly not be so drawn as to needlessly exclude from the field of
investment good notes, bonds, and mortgages obtainable in the locality in which
the bank is doing business. As the restrictive clauses stand a great majority
of country banks would be unable to invest any considerable percentage of their
savings deposits at home, as will be seen by an examination of the clauses in
detail, as follow s:
(a) Page 46, line 15. Farm mortgages having not over five years to run and
not exceeding 50 per cent of the assessed valuation of the property. Savings
banks in New England are allowed to make loans on any real estate without
definite maturity up to 60 per cent in some States and 70 per cent in others of
the value of the property, and it is left to the discretion of the bank itself to
determine the value for the purpose of loaning.
( d ) Page 47, line 6. Under this clause all municipal bonds in the States of
New Hampshire and Vermont would be ruled out by the 25,000 population
limitation except bonds of the cities of Burlington, Manchester, and Nashua.
Whether these would come in at all under the 5 per cent debt limitation I have
not ascertained. Most of the States, in defining what municipal bonds may be
purchased by mutual savings banks, do not prescribe any population limit.
Some of them prescribe a 5 per cent debt limit, exclusive of debt incurred for
2634
B A N K IN G AND CU RREN CY .
waterworks in the case of cities, and a 3 per cent limit exclusive of waterworks
bonds in the case of towns,
(e)
The limitations imposed in this clause seem rather unscientific for the
reason that many second mortgages or general lien railroad bonds are better
secured than some first-mortgage bonds, as is well known to anybody at all
familiar with such securities. For instance, some railroads and public utilities
are built largely out of the proceeds of their first-mortgage bonds, which might
not be a desirable security for a bank under any circumstances, whereas such
active bonds as American Telephone & Telegraph Co. general lien bonds, or the
convertible bonds of the same company, which are not mortgage bonds at all,
would be a perfectly conservative investment of bank funds, readily marketable
at all times.
( /) Bonds of real estate corporations are not to be had in this part of the
country, or at least I know of none such ever having been offered to us.
It seems to me that these proposed restrictions display the futility of attempt
ing, by statute, to lay down rigid rules within which investments must be made
governing banks all over the United States. Doubtless the purpose is a laud
able one, but if the banking business of the country is to be strengthened and
broadened the field for investment must not be narrowed to the vanishing point
and a wide range must be left for the judgment and discretion of the officers
of the bank itself, who must be credited with an honest purpose to safeguard
the interests of their depositors and to loan the funds in their charge in such a
way as to further the commercial interests of the communities which they are
serving.
It does not strike me that it would be practicable to require that savings
departments of national banks make their investments in conformity to the laws
governing mutual savings banks in the States where they are located. It might
work all right in New Hampshire, but mutual savings banks are little known
outside the Northeastern part of the country, and the diversity and voluminous
minutiae of the many State laws governing savings-bank investments, together
with the practical nonexistence of mutual savings banks in some of the States,
would make the administration of such a system very arduous to the authorities
at Washington, and I believe unsatisfactory as well.
I wish it were possible for the new act to enlarge the powers of national
banks to permit them to compete on more equal terms with trust companies—
that is, to empower them, under proper regulations, to act as trustees and
executors. I believe thoroughly in the proposition that a Federal bank charter
should convey broad enough powers to enable the bank operating under it to
transact any legitimate branch of banking, including the functions of trustee
ship normally incidental thereto.
In conclusion, I feel impelled to strongly urge the elimination of the savingsdepartment section altogether, or, if that should not meet with the approval of
the committee, the substitution for it of a few short clauses reducing somewhat
the reserve required against such deposits from the present 15 per cent and
authorizing the investment of some portion of savings deposits in loans secured
by real-estate mortgages and some reasonable percentage in approved railroad
or public-service corporation stocks, leaving the existing field of investments
otherwise untouched.
Thanking you for the opportunity given me to present these suggestions, I
remain,
Very truly, yours,
F r a n k H . F oster , C a s h ie r .
Senator H itchcock. The committee will now stand adjourned
until Monday at 10.30 o’clock a. m.
(Thereupon, at 5.20 o’clock p. m., the committee adjourned until
Monday, October 20, 1913, at 10.30 o’clock a. m.)
B A N K IN G AND C U E B E N C Y .
2 635
MONDAY, OCTOBER 20, 1913.
C o m m it t e e
on
B a n k in g a n d C u r r e n c y ,
U n it e d S tates S e n a t e ,
Washington, D. G.
The committee assembled at 10.40 o’clock a. m.
Present: Senators Plitchcock (acting chairman), O’Gorman, Heed,
Pomerene, Shafroth, Hollis, Bristow, Weeks.
Senator H it c h c o c k . The committee w ill come to order, and we will
hear this morning from Mr. Victor Morawetz.
STATEMENT OF VICTOR MORAWETZ, ESQ., OF NEW YORK, N. Y.
Senator H it c h c o c k . Will you please give your name, address, a n d
business, Mr. Morawetz, so that we may have them in the record.
Mr. M o r a w etz . Victor Morawetz, New York.
Senator H it c h c o c k . And your occupation?
Mr. M o r a w etz . I am a lawyer.
Senator O’G orman. And you have, I believe, specialized in corpora
tion and banking law ?
Mr. M o r a w etz . I was for a period of 12 years chairman of the
executive committee of the Atchison, Topeka & Santa Fe Railroad
Co., having special charge of its financial affairs, and I am now a
director of the National Bank of Commerce, of New York.
Senator H ollis. Y ou might tell us what textbooks you have pub
lished and on what subjects.
Mr. M o r a w etz . I h a v e g iv e n s p e c ia l a tte n tio n to b a n k in g a n d
c u r r e n c y q u e s tio n s f o r th e la s t five o r six y e a rs , a n d h a v e p u b lis h e d
a s m a ll b o o k a n d n u m e ro u s p a m p h le ts t r e a t i n g on th is im p o r ta n t
s u b je c t.
Senator H it c h c o c k . 'Will you please proceed with your statement
in your own way, and I would like to ask whether you care to be
interrupted with questions, from time to time, or whether you prefer
to finish your statement in consecutive order?
Mr. M o r a w etz . I prefer to be interrupted by questions whenever
any member of the committee finds that I am not entirely clear or
wishes additional information.
Gentlemen, for more than four years I have written and spoken
in opposition to the central bank or Aldrich banking and currency
plan. I have advocated the adoption of the regional or divisional
reserve bank plan, which is, in substance, the plan embodied in the
bill now before this committee. All my prejudices, therefore, are in
favor of this plan. I am anxious to have the bill, now before the
committee, perfected, so that it will carry into effect the plan which
T have been advocating, and which I believe to be the best and most
practicable plan for this country.
However, careful examination of the House bill before the com
mittee, No. 7837, has convinced me that it contains a number of very
serious defects, and that if it should become a law without amend
ment it would fail to carry into effect the beneficient purposes of
its authors.
The first point to which I shall address myself is the issue of the
notes provided for in this bill. The bill provides for an issue of notes
which is to be printed by the Government and delivered to the banks,
2636
B A N K IN G AND C U RREN CY .
which subsequently are to issue these notes. The bill says that the
notes are to be Government obligations. Presumably, therefore, they
are to be in the form of promissory notes of the Government. But
the Government is not to issue any one of these notes; they are all to
be issued by the banks.
The Government is not to pay any one of these notes; they are
all to be paid by the banks. It is clear, therefore, that these notes
are to be entirely unlike the present issue of greenbacks, which are
promissory notes issued bv the Government to pay its debts, and
which are to be paid by the Government out of its funds. Under
existing law the Government has pledged itself to maintain a very
large reserve of gold for their payment.
The proposed notes, in truth and fact, are to be bank notes, al
though in form they are Government notes. They are, in truth and
in fact, to be like our present national-bank notes, except that they
are not to be secured by a deposit of Government 2 per cent bonds,
but they are to be an asset currency secured by a first lien on the
assets of the banks, and with a provision that the banks are to keep
a reserve of 33| per cent for their payment.'
The Government also is to be liable on these notes, nominally as
maker, but really as guarantor. That is the honest fact concerning
these notes.
Now, I have no quarrel with that arrangement except as to its
form. It is artificial, and to many it is and to many it will be mis
leading.
Senator H itchcock. Will you stop there to let us know how you
think it will be misleading?
Mr. M orawetz. It is misleading to all those who do not study the
provisions of this bill and ascertain the real facts underlying a cer
tain amount of disguise.
The framers of this bill have been subjected to criticism, and I
think very unjust criticism, within the last week on the ground that
the bill provides for the issue of more greenbacks—fiat money, if
you please. I say that criticism is unjust because these notes are
not, in fact, to be Government notes; they are not to be issued by the
Government; not one of them is issued by the Government. They
are really notes of the banks, guaranteed by the Government.
Furthermore, it seems to me that this arrangement is likely to prove
more or less misleading to those of our citizens who still adhere to
the ideas which were prevalent 20 or 30 years ago, that it is desirable
to pay the debts of the Government in its promissory notes and to
have outstanding currency consisting of Government fiat money.
They will not get under this bill what they may suppose they are
getting.
And there is another consideration. It seems to me that a due re
gard for the opinion of foreign nations and of posterity is a reason
for adopting a more direct method of issuing these notes. People
will wonder why on earth the Congress of the United States found
it necessary or desirable to resort to this indirect way of issuing
what really amounted to guaranteed bank notes, and it is somewhat
galling to my pride as an American citizen to think of the reasons
which would have to be assigned to explain why these notes were put
in this form.
B A N K IN G AND CU RBEN CY .
2637
Senator O’G orman. Let me ask you, Mr. Morawetz, is it unusual
for Governments to guarantee bank issues?
Mr. M orawetz. Very unusual.
Senator O’G orman. D o any Governments guarantee bank issues?
Mr. M orawetz. I do not know of any Government which, in terms,
guarantees the notes of any bank, though the great foreign central
banks are so closely allied to the Governments that I believe there
exists a practical guaranty by the Governments for their ultimate
redemption. I should not myself see any objection to the Govern
ment of the United States guaranteeing this issue of bank notes.
They will be perfectly good, and personally I see no objection to
placing the guaranty of the Government on them.
Senator O’G orman. Then, so far as the responsibility of the Gov
ernment is concerned, it will make no difference whether the Gov
ernment becomes the primary responsible party for the purpose of
redeeming the notes or whether it is acting as a guarantor behind
the bank? In either event the Government is responsible for the
notes ?
Mr. M ora w etz . In either event the Government would be second
arily responsible.
Senator O’G orman. In one case secondarily responsible and in one
case primarily responsible ?
Mr. M orawetz. In both cases secondarily responsible, because this
bill would have to be read into the notes; it would be a part of the
notes, and this bill says, in so many words, that the notes are to be
paid by the banks; they are to be the primary obligors, and that the
notes are merely loaned by the Government to the banks as accommo
dation paper.
Senator O’G orman. Then, in either event the Government be
comes responsible for the notes?
Mr. M o r a w etz . Yes, sir.
Senator O’G orman. And as I understand you, up to the present
time you only criticize the method or the form ?
Mr. M orawetz. Yes, sir; I criticize only the form. I think it
important that the form should be right, because of the reasons I
have assigned and because of the precedent it m ight establish in the
minds of many people who would not understand the real facts of
the situation.
Senator O’G orman. D o you see any advantage in the form pro
posed by the pending bill with respect to the enlarged confidence
that might result from the Government apparently being the respon
sible party behind the notes?
Mr. M orawetz. None whatever. If people should attach greater
faith to these notes because they are executed by the Government as
principal obligor, then they would be misled, because the Government
is not the principal obligor, and it will not have a dollar of money
of its own for their payment. It can draw only on the banks to get
the money to pay these notes if they should be presented to the Gov
ernment.
Senator W eeks. Y ou suggested, Mr. Morawetz, that if it were nec
essary to explain the reason for issuing the notes in this form in the
future it would be an embarrassing thing to do.
Mr. M orawetz. I think so.
2638
B A N K IN G AND C U RREN CY .
Senator W eeks. What reason do you think could be assigned for
issuing them in this form?
Mr. M orawetz. Political reasons.
Senator W eeks. Any other ?
Mr. M orawetz. I include in political reasons the platform of the
Democratic Party.
Senator W eeks. Then you mean party reasons ?
Mr. M orawetz. Party reasons; yes.
Senator W eeks. An}'' other reasons?
Mr. M orawetz. I know of none.
Senator H itchcock. Suppose we assume, Mr. Morawetz, that
among the 90,000,000 people in the United States there is a certain
proportion, perhaps a large proportion, of people of an undiscrimi
nating character, not able to understand the science of money, who
will look upon these notes as money, and who think, primarily in
their own minds, that money should be issued by the Government and
that if issued by the banks, it gives the bank an unfair advantage
and opens the possibility of imperilling the rights and interests of
the common people, would you still say, taking that fact into ac
count, that the Government, representing all the people, should nev
ertheless legislate so as to create bank notes which many of that class
of people lack confidence in and which they reprehended as not
desirable ?
Mr. M orawetz. My answer, in the first place, is that the facts are
not as assumed. We have to-day outstanding $720,000,000 of na
tional-bank notes which are accepted as good as gold by the people
of this country. These national-bank notes have not even on their
face the guaranty of the Government, but they are indirectly guar
anteed by the Government under the legislation pursuant to which
they were issued. So, the assumption that it is necessary to issue
these notes in the form of Government notes is entirely unfounded;
but even if it were so I should not consider it justifiable to issue the
notes in this form, and I should educate the people to the true situ
ation.
Senator H itchcock. It is true, as you say, that throughout the
country there is this confidence in these particular bank notes, but I
think it is also true that there is a very considerable sentiment
among the people that the issuance of those notes constitutes a spe
cial privilege to that class of banks, out of which they have made a
great deal of money, as they think, at the expense of the people.
Does not that prejudice constitute, at least in part, the sentiment for
the retirement of those notes? I do not share it, but that does exist,
does it not ?
Mr. M orawetz. I think, Mr. Chairman, it will be harder to de
fend before the people the loaning of the notes of this Government
as accommodation paper to the banks than to defend the guaranty
of properly constituted bank notes by the Government, because, as I
have stated, this paper is simply accommodation paper which the
Government is to lend to the banks.
Senator O’G orman. Will you pardon me right there while I ask
you a question, Mr. Morawetz ?
Mr. M orawetz. Certainly.
Senator O’Gorman. Would your view regarding the obligation of
the Government be affected at all if it appeared that the Government
B A N K IN G A N D CUKKENCY.
2639
would receive a substantial consideration from the banks of the
country for the assumption of this liability? For instance, I have
in mind what has been suggested more than once, that the profits
of the regional banks, if we have regional banks, in excess of the
5 or 6 per cent that will be returned to the member banks as a return
on their capital contribution, that the excess of surplus ought to go
to the Government, and it has been estimated that that would amount
to many millions each year. What do you think of the proposition
that in return for that affirmative benefit to the Government, the
Government, to advance the system generally, should undertake to
issue these notes and become primarily responsible ?
Mr. M o r a w etz . I attach no importance whatever to that con
sideration. In the first place the Government of this country is not
in the business of selling its credit. The fact that the Government
may receive a profit from these regional reserve banks is no reason
for the issue of the notes, or for the lending of the credit of the Gov
ernment. The only reason why the Government might be warranted
in lending its credit in this way is to benefit the whole country by
providing it with an unquestionably sound issue of currency. Per
sonally 1 hope that the regional reserve banks will be managed so
that there will be no profit m them. I hope they will be managed in
such a way as to keep our banking and currency system on an abso
lutely firm and sound basis. That is the benefit to be obtained by
this scheme, and none other.
Senator W eeks. Has it occurred to you, Mr. Morawetz, that there
is a good deal of confusion in the minds of not only the average
citizen but in the minds of many who have given some consideration
to this subject as to the difference between money and credit instru
ments, and that many men who have taken the position, leaders and
teachers in this subject, have believed that it was the duty of the
Government to issue credit instruments as well as money ?
Mr. M o r a w etz . N o doubt there is that idea prevalent among many
of the people, including some of the political leaders in this country,
but it is not so anywhere else.
It has been asserted that the provisions of this bill for the issue
of notes may lead to an inflation of the currency, with all the dangers
consequent to an inflation of the currency. I do not share those
fears. I f we are to have in this country a flexible currency which
will be subject to contraction as well as expansion, and which will
adjust itself to the business needs of the country, it is absolutely neces
sary to place somewhere the power to control the issue of the notes,
to lim it their issue, to force their contraction when necessary.
Under his bill the several regional reserve banks are to have
the power to issue notes subject, however, to an absolute veto power
in the Federal reserve board representing the Government. This
arrangement, therefore, is more conservative and safer than the
Canadian plan, under which the banks have the power to issue notes
without this outside check placed upon them. The only possible
danger of inflation, of an excessive issue of currency under this plan,
will arise from the number of regional banks. The more of these
banks there are the more danger is there that they will put out more
currency than the country really needs. If the number of these
banks were limited to five or six, I should say that the danger of
2640
B A N K IN G AND CU RREN CY .
inflation would be removed entirely, even without the veto power
of this central board.
Senator H itchcock. Can you outline how you think this tendency
toward inflation will occur? As it stands now----Senator B ristow (interposing). If Senator Hitchcock will allow
me, before you go into that matter, I would like to ask a question. I
understand you feel that there should be imposed in some board the
authority to say when there shall be a contraction and when there
shall be an expansion?
Mr. M orawetz. Not to say when there shall be an expansion, but
to force a contraction when the country requires it.
Senator B ristow. And that would be a matter of judgment?
Mr. M orawetz. Yes, sir.
Senator B ristow. H ow are you going to provide against the very
wide diversity of opinion that prevails among men as to what would
be an expansion and what would not be?
Mr. M orawetz. It is a banking problem which experienced bank
ers do not have much difficulty in dealing with. It is a question
which arises wherever there is a central bank, and in Canada, where
there are nearly 30 banks, 10 or 12 of them, however, being leading
banks, and practically ruling the others. They have no difficulty
in these cases in determining the volume of notes that is safe.
Senator B ristow. This Federal board is not a bankers’ board. It
is a political board; it is a board appointed by the President to ex
ercise political functions. Otherwise it would not be made a Govern
ment board. Government is politics; I do not mean partisan poli
tics, but its functions are political.
Senator S hafroth. A people’s board, you mean?
Mr. M orawetz. It is a governmental board.
Senator B ristow. A governmental board. One political school of
thought in regard to banking matters may be in control or another
political school of thought may be in control. If Mr. Bryan was at
the head of that board he might say the currency out was not suffiicent; that we did not have enough. If Mr. Aldrich was at the head
of that board he might say it was excessive, and that there ought to
be contraction. The difference of opinion among men is so varied
that might there not be danger of precipitating this matter into
politics and making it become a political question instead of a busi
ness question?
Mr. M orawtetz. If you please, I will take up the question of party
politics entering into this plan a little later. What I wish to say now
is that I do not fear that there will be inflation of the currency so
long as the number of the regional banks is limited. If there were
no central board of control, there would be no danger of inflation,
provided that the banks are required to keep an adequate reserve for
the payment of the notes on demand. I should consider that the
danger of inflation would exist even if there were no veto power in
the central board.
Senator H itchcock. We have had discussed at these hearings this
question of possible inflation, and I was going to ask you to outline
briefly the processes under this bill by which inflation might result.
I do not know whether you mean an inflation of bank credits or an
inflation of currency, or both?
B A N K IN G AND CU B E E N C Y .
2641
Mr. M orawetz. I do not know how there could be inflation under
this bill if you have a fairly intelligent management of these regional
reserve banks.
Senator H itchcock. I understood you to suggest there might be,
under this bill.
Mr. M orawetz. It has been asserted. I say I do not agree with the
criticism.
Senator O’G orman. Did you not say whether there would be infla
tion or not might depend upon the number of banks ?
Mr. M orawetz. Yes; I do say that if you increase the number of
these banks so largely as to prevent them from adopting a uniform
policy they might put out so many of these notes unless restrained
as to practically force all the gold and lawful money in circulation
into the bank vaults, thereby increasing enormously the reserves and
credit power of the banks.
It is this process which in Canada has resulted in this situation:
The only currency in Canada which is current among the people
consists of bank notes and small government notes and subsidiary
coin. All the gold in Canada has been taken into the banks, which
have issued their notes in exchange.
Senator O’G orman. D o you think there would be greater danger
of inflation with 12 regional banks than with 5 ?
t Mr. M orawetz. I think so. The same process has caused the na
tional-bank notes all to be outstanding. They have displaced, taken
the place of, that much lawful money, because every bank when it
receives currency combs it out, keeps the lawful money, and issues
its notes when currency is demanded. But to the people the notes
and the lawful money and the gold are of equivalent value. When
a man has more currency than he wants to carry in his pocket or
keep in his till he does not pick out the national-bank notes and de
posit them in the bank. He takes his currency without regard to its
description and deposits it. But the bank immediately combs it out,
as I have stated, and keeps the lawful money while issuing its notes
whenever it can pay its debts in that way. By that process bank
notes will become the circulating medium among the people as far
as the people will take them and as far as the law permits them to
be issued, while the gold or other lawful money will be taken into
the banks.
Senator H itchcock. What is the provision in Canada regarding
the redemption of these bank notes? Suppose a bank receives one
of its own notes, can it pay it out again?
Mr. M orawetz. I think not; no.
Senator H itchcock. Suppose the bank receives the note of another
bank?
Mr. M orawetz. I do not know whether they are permitted to pay
it out, but I know the practice is to send them in for redemption.
Senator W eeks. Well, they are permitted to pay it out?
Mr. Morawetz. They are permitted to pay it out.
Senator W eeks. And whether they pay it out or not is dependent
on whether it is profitable to put out their own notes?
Mr. M orawetz. Yes.
Senator W eeks. If it is profitable to put out their own notes they
do so and send the notes of the other banks in for redemption.
264 2
B A N K IN G AND CU RREN CY .
Mr. M orawetz. But this process of substituting notes for money
in circulation among the people will go on without regard to whether
or not there are easy redemption opportunities. When a bank sends
the notes of another bank in for redemption in lawful money, that
does not put the lawful money into circulation; it merel}r transfers
it from one bank to another bank. It is in my judgment a delusion
to imagine that easy redemption opportunities will restrict this proc
ess of substituting bank notes for gold or other lawful money in
circulation among the people. The only thing; that will restrict that
process is an absolute limit on the amount of bank notes which can
be issued.
Senator H itchcock. D o you think that lim it should be placed
w ith in the the judgm ent o f a supervising board?
Mr. M orawetz. It has to be somewhere. Now, I should be satis
fied if that limit were placed in the regional reserve bank with a veto
power on the part of a Government board.
In the plan which I outlined some years ago for the creation of
regional reserve banks, and for the issue of bank notes by them, I
contemplated that the regional reserve banks would have a central
bureau consisting of representatives of these banks, who would de
termine what amount of notes might be issued by the banks.
As I shall point out a little later. I think some such provision would
be a beneficial one in this bill—I mean the constitution of a central
board to deal with the issue of notes by the regional banks, instead
of having each one separately deal with the Government.
Senator H itchcock. Is not the power to limit or fix the volume
of the currency the power to affect prices?
Mr. M orawetz. I do not think so.
Senator H itchcock. Can you conceive of a condition of a con
siderable expansion of the currency that does not advance prices and
stimulate business; or can you conceive of a contraction of currency
that will not force sales and reduce prices? Are those not the in
evitable consequences of those conditions?
Mr. M orawetz. There is a good deal of loose reasoning, as it seems
to me, about the functions of currency. Nothing the banks can do;
nothing the Government can do will put a dollar more of currency
in actual circulation among the people. The people will carry in
their pockets, and in their tills whatever amount of currency they
find convenient; and no matter what quantity of the currency may
be printed, they will not carry any more. If there is a surplus,
they will deposit in the banks.
Senator H itchcock. Does not the quantity in circulation in the
pockets of the people, or in the tills, depend upon the activity of
business, and is not the activity of business largely affected by the
ease of loans?
Mr. M orawetz. N ow you come to the real point. Business may be
affected by the credit situation in the country—the ability to borrow
from the banks. And this credit situation depends, first, on the
ability of the banks to grant credit; secondly, upon their willingness
to grant credits; and thirdly, on the confidence of the people in the
future; their willingness to take credit and to embark in enterprises.
The only way in which an increase of the currency—we will assume
of course that the currency is all kept at a parity with gold—the only
B A N K IN G AND CU RREN CY .
2643
way in which an increase of the issue of bank notes can affect this
situation in the least is by displacing gold, or lawful money, in circu
lation among the people; driving that into the bank vaults and thus
increasing the reserves of the banks and their power to grant credit.
Senator H itchcock. Suppose a law was passed compelling the
banks to increase reserves; would not that inevitably contract the
currency ?
Mr. M orawetz. No ; it would not contract the currency; it would
contract their power to make loans.
Senator H itchcock. Well, I mean under a note-issuing power.
Suppose there was a power to issue currency, controlled as proposed
in this bill, or as you suggest, by the banks; then suppose there were
changes made in the law which increased the reserves from 33^ to 50
per cent; would not that inevitably contract the currency ?
Mr. M orawetz. It would not contract—it depends upon what you
mean by contracting the currency. It would contract the power of
the banks to make loans surely.
Senator H itchcock. And it would also contract their power to
issue their demand obligations, and that would contract the currency,
would it not?
Mr. M o r a w etz . It would not contract the amount of currency in
circulation among the people.
Senator H it c h c o c k . It would contract credits, would it not?
Mr. M orawetz. It would contract the power of the banks to make
loans; yes.
Senator O ’G orman . Therefore, it would have a restraining influ
ence upon the credits that the banks would extend throughout the
country.
Mr. M orawetz. Certainly.
Senator O ’G orman . I do not want to anticipate you, Mr. Mora
wetz ; probably you are going to touch on it again; but in view of a
remark you made a little while since, I should like to ask you a ques
tion or two. You said that the danger of inflation under a system
substantially such as is proposed in the pending bill would be less
with 5 or 6 regional banks than with 12; is that correct ?
Mr. M orawetz. Yes.
Senator O ’G orman . The danger would be still less if you had but
three regional banks, would it?
Mr. M orawetz. I think so.
Senator O ’G orman . Would not the danger be entirely removed, if
you had but one?
Mr. M orawetz. No. A central bank managed unwisely could in
flate currency just as much as 3 or 5 or 12 regional banks.
Senator O ’G orman . Yes. Now, Avould there be less danger with a
single bank than with three?
Mr. Morawetz. I doubt it. I think if you had a number of these
banks, each watching the other, it would tend toward conservatism,
rather than to the contrary.
Senator O ’G orman . Then you think it would be better to have 12
than 5?
Mr. Morawetz. N o. I think 12—I think it would be better to
have 5 than 12, for various reasons, which I will touch on a little
later.
2644
B A N K IN G AND CU R R E N C Y .
Senator O’G orman. Yes. Now, I have but one other inquiry to
make at this time. You said a little while since, while discussing
what you conceived to be the impropriety of the Federal Government
issuing these notes, or taking primary responsibility for them, that
there were certain political or party reasons which seemed to suggest
this change; and I think there was some reference made, either by
you or by some member of the committee, to some declaration of the
Democratic Party in its last national convention on the subject. Now,
was any declaration made that makes it necessary for the Democratic
Party to insist upon a Government issue, rather than a bank issue?
Mr. M orawetz. I do not think so.
Senator O’G orman. Well, I have the language here. I do not find
any such declaration.
Senator S hafroth. Will you read it into the record, Senator
O’Gorman?
Senator O’Gorman. The declaration made by the Democratic Party
at the Baltimore convention last year is as follows [reading] :
We oppose tlie so-called Aldrich bill or the establishment of a central bank—
As I read that, the central bank referred to is the central bank in
the Aldrich bill, which was a central bank to be dominated by private
interests, which was the only kind of a central bank ever discussed up
to that time—
And we believe the people of the country will be largely freed from panics and
consequent unemployment and business depression by such a systematic revision
of our banking laws as will render temporary relief in localities where such
relief is needed, with protection from control or dominion by what is known as
the Money Trust.
Banks exist for the accommodation of the public and not for the control of
business. All legislation on the subject of banking and currency should have
for its purpose the securing of these accommodations, on terms of absolute se
curity to the public, and of complete protection from the misuse of power that
wealth gives to those who possess it.
We condemn the present methods of depositing Government funds in a few
favored banks, largely situated in or controlled by Wall Street, in return for
political favors, and we pledge our party to provide by law for their deposit by
competitive bidding in the banking institutions of the country, national and
State, without discrimination as to localty, upon approved securties, and sub
ject to call by the Government.
That is the only declaration made by the party; and it does not
touch upon the subject to which your attention was invited a moment
ago.
Mr. M orawetz. I can not deny it.
Senator O’G orman. That is all, Mr. Morawetz, for the present.
Senator W eeks. Then the only reason you had in mind that could
be assigned for issuing notes in the manner proposed in this bill
does not exist?
Mr. M orawetz. It seems so.
Senator W eeks. I wanted to ask you if you recalled any instance
where a central bank had been managed with such lack of wisdom
that there had been an inflation in the country served by that bank?
Mr. M orawetz. I know of no such instance; but my information
is limited to the principal commercial countries of Europe.
Senator O’G orman. But you never knew of an instance in the his
tory of any of the important commercial countries of Europe, did
you?
B A N K IN G AND CU RREN CY .
2 645
Mr. M orawetz. None.
Now, gentleman, I wish to call attention to one provision of the
bill relating to the issue of the notes which I regard as absolutely
fatal to any sound or safe plan; and that is the provisions that the
notes shall be paid or redeemed in gold or lawful money.
The objection to this provision for the payment of the notes in
lawful money is not based on the ground that it would lead to infla
tion. There is no more danger of an undue increase of the aggregate
amount of the currency if the notes are payable in lawful money
than if the notes are payable in gold only.
But there is another danger. It is this: If the notes can be paid
in lawful money, that is to say, in silver, or in greenbacks, the inevita
ble result will be to drain off from this country its gold and sub
stitute notes in the place of the gold, without increasing the aggre
gate amount of the currency.
Senator O’G orman. I think you will find every member of the
committee in perfect accord with you in that last observation.
Senator H it c h c o c k . Well, the Senator from Colorado is not in
accord with that.
Senator O’Gorman. I am not surprised.
Senator S iiafrotii. N o ; I can not agree to that. I do not see
how you come to that conclusion, Mr. Morawetz, in view of the fact
that we have had bank notes payable in lawful money to the extent
of $740,000,000 and we have not had our gold leave the country.
Mr. M orawetz. Because of the limit of the amount of the bank
notes that could be issued, due to the limited amount of Govern
ment bonds available for their issue.
Senator S hafroth . Well, $740,000,000 is a very large amount, con
sidering what it was in 1900—$236,000,000.
Mr. M orawetz . The country has grown since then. Will you let
me take this question up in due course ?
Senator S hafroth. All right.
Mr. M orawetz. Any indebtedness which we have to pay to foreign
nations has to be paid in gold. The balances of trade have to be
settled in gold. So that it happens every year—sometimes twice a
year—that gold sufficient to cover these balances has to be shipped one
way or the other way.
Furthermore the different interest rates in this country and in
foreign countries sometimes results in shipments of currency from
the country where the interest rate is low to the country where it is
high, in order to obtain the profits resulting from the higher interest
rate.
Now, as long as notes and gold and lawful money are at a parity,
it is wholely immaterial to us in this country whether we use gold
or lawful money. Foreign nations, however, can only use the gold,
and when we have to make a payment to a foreign nation, it has to be
made in gold. But subsequently, if we need more currency—if we
require to use again the gold which we shipped abroad, what would
happen under this bill, if you can keep lawful money in the banks as
a reserve for the payment of the notes? Why, notes would be issued
and the gold would not be imported. The gold would go out; but it
would never come back, because notes would be issued whenever in
this country there is a need for the additional currency.
S. Doc. 232, 63-1—vol 3---- 16
2646
B A N K IN G AND CU RREN CY .
Senator S hafroth. When balance had to be met coming to this
country, would not they have to ship the gold in here ?
Mr. M orawetz. N o, sir. You could loan it out.
Senator S hafroth. Yes; but investments here invite capital also;
and that means the shipment of gold here. We have had shipment of
$5,000,000 gold, on the average, a year since 1878; the flow has been
inward.
Mr. M orawetz. It is true, because we have sold about 6,000 millions
of dollars of stocks and bonds to Europe.
Senator S hafroth. Well, we have had a very large export trade
also.
Mr. M orawetz. Although, on its face, our exports of physical
property exceed our imports by about $500,000,000 a year just
now----Senator P o m e r e n e (interposing). More than that.
Mr. M orawetz (continuing). The true balance is heavily against
us because of the enormous interest and dividend payments which we
make abroad, the enormous expenditures of our people abroad, and
the shipments of money by immigrants and other invisible exports.
Senator S hafroth. Yes; but that is a matter of guess, very largely,
is it not ?
Mr. M orawetz. I think not very largely. I think you can figure
it out pretty closely.
Senator S hafroth. Well, I can not find statistics on it.
Mr. M orawetz. However, I will take that up a little later; that
is a little off my question.
The point I make is that as long as these notes are payable in
lawful money the tendency will be and the result will be to deplete
the country of gold, to make silver and greenbacks constitute our
bank reserves and leave this country in a very dangerous position in
case of any contingency arising which would require a large amount
of gold for shipment. If we should have a war, or if for any other
reason a sudden demand should be made upon this country for a
large amount of gold, we might soon find gold at a premium and our
notes and silver currency at a discount.
Senator S hafroth. We had the Spanish War, didn’t we, and gold
did not go to a premium?
Mr. M orawetz. Oh, yes; that was a small matter----Senator S hafroth (interposing). Do you anticipate we are going
to have any----Mr. M orawetz (continuing). And we had not these notes out.
Senator S hafroth. We had quite a large number of national-bank
notes redeemable in lawful money.
Mr. M orawetz. It is a question of degree. This country to-day has
vastly more uncovered paper currency than any other commercial
country in the world, not absolutely, but also in proportion to the
amount of gold in the country and per capita of population. There is
not one of the leading countries in the world to-day which has any
thing like the amount of paper currency and silver that the United
States has.
Senator H itchcock. D o you call national-bank notes uncovered?
Mr. M orawetz. I do.
B A N K IN G AND CU EBEN CY .
2647
Senator H itchcock. Because a gold reserve is not provided against
them ?
Mr. M orawetz. Practically no reserve.
Senator H itchcock. Although they are protected by national
bonds?
Mr. M orawetz. That does not protect them.
Senator O’Gorman. It simply gives them the credit of the Gov
ernment.
Senator S iia er o tii . Y ou admit that the Aldrich bill was generally
favored by the bankers of this country?
Mr. M orawetz. I believe it was by the majority of the bankers;
yes.
Senator S iiaerotii. D o you not recall the fact that the currency
which was authorized to be issued under that bill provided that it
should be payable in lawful money, and did not even mention gold?
Mr. M orawetz. Yes; but that does not affect me.
I want to make a confession right here. A few years ago I sug
gested a regional bank plan providing for an issue of notes by the
regional reserve banks and I proposed that the notes should be~pay
able in lawful money. At that time I considered only the question
of inflation, and I did not consider that to make the notes payable
in lawful money would cause any inflation, but I overlooked this
other danger. I confess I made a mistake then and I hope that this
committee will not make the same mistake in the bill which you
report to the Senate.
Senator S hafrotii. H ow long ago did you get that plan up?
Mr. M orawetz. About four and a half years ago.
Senator S hafrotii. My view is that making this money payable
in lawful money has a tendency to preserve the gold reserve and
therefore to make it easier for the Government to maintain a gold
standard, because you do not have such a drain on gold. If you are
going to have gold in each one of these regional banks, you are going
to have 12 centers competing against the United States Treasury
for gold which will take three or four times as much gold, scattered
around in 12 regional banks, than it would if they were redeemable
in lawful money and the lawful money redeemable in gold. It is a
kind of buffer which the banks put up against paying it in gold, and
therefore has a tendency to maintain the gold reserve and to main
tain the gold standard. My usual illustration is, if a man has $1,000
in this currency and goes to one of these regional banks and says,
“ I want gold,” the regional bank can say, “ No; it isn’t convenient
for me to give you gold; I will give you lawful money.” Then the
man sends it down to Washington, and says, “ I want gold for my
lawful money,” and the Government says, “ Yes.” The regional
bank locks up its $1,000 and the Treasury here locks up its $1,000.
Mr. M orawetz. What money will the Government have in Wash
ington to pay for this silver in gold ?
Senator S iiafroth. Gold.
Mr. M orawetz. Where will it get it?
Senator S hafrotii. It has got $150,000,000 of gold----Mr. M orawetz (interposing). It has not a dollar, sir; not a dollar
of that belongs to the Government.
Senator S hafrotii. It has got $150,000,000 of gold reserve.
2648
B A N K IN G AND CU RREN CY .'
Mr. M orawetz. That is pledged for greenbacks alone.
Senator S hafroth. Certainly; and this proposes that there shall
be a reserve of 33^ per cent.
Mr. M orawetz. Not for the silver.
Senator S hafroth. N o ; not for the silver.
Mr. M orawetz. Y ou say a man can get his gold by going to Wash
ington and presenting his silver----Senator S hafroth (interposing). I do not know whether they
have ever settled that or not, because silver is a full legal tender,
and it seems to be taken current no matter whether the Treasury
undertakes to do it one way or the other. But he has a right to
demand gold; it is legal-tender money, and he gets it, and in that
way the Government can act as a double redeemer. That is, with
less money I can redeem greater quantities of outstanding currency
by having the reserve bank cooperate with the Government in paying
off and preserving the gold standard.
Mr. M orawetz. I candidly confess I do not see how that would
operate in that way. I know in all cases I have observed bank notes
took the place of gold in circulation.
Senator S hafroth. Did you ever hear of a national banker that
wanted to make the present national-bank notes redeea able in gold
instead of in lawful money ?
Mr. M orawetz. I do not know of any case.
Senator S hafroth. Isn't it because it has a tendency to preserve
the gold?
Mr. M orawetz. I think not.
Senator S hafroth. There is a less quantity of gold than there is
of gold and lawful money, and consequently it would be easier to
maintain the gold reserve if it were redeemable in one or the other
than if it were redeemable only in gold, it seems to me.
Mr. M orawetz. I don't think it would operate that way. I think
that the trouble with this provision is that no conservatism on the
part of the banks and no conservatism on the part of the Federal
reserve board can prevent the substitution of notes for gold as long
as the gold does not have to be kept for the redemption of the notes.
Senator S hafroth. Y ou know that the Bank of France prevents
a run on gold by reason of the fact that their paper money is payable
in gold or silver?
Mr. M orawetz. N o, sir; I paid a premium this summer for gold
in France. When I asked Morgan, Ilarges & Co. for gold they said,
“ We will give you 500 francs,” $100. “ but do not ask us for more,
because we have to pay a premium for gold when we ask for it at
the Bank of France.”
Senator S hafroth. What was the premium ?
Mr. M orawetz. A very small premium.
Senator S hafroth. A tenth of 1 per cent?
Air. M orawetz. I do not know.
Senator H itchcock. Unfortunately we have a session of the
Senate at 12 o’clock, and we shall have to take a recess. In order
that we may be close at hand during the session, we will meet this af
ternoon in the Judiciary Committee room in the Capitol.
(Thereupon the committee took a recess at 11.55 a. m. until 2 p. m).
B A N K IN G AND CURREN CY .
2649
AFTER RECESS.
Senator H it c h c o c k . Mr. Morawetz, I think you had perhaps better
proceed with your statement.
STATEMENT OF VICTOR MORAWETZ, ESQ.— Resumed.
Mr. M o ra w etz . Before the adjournment of the committee I en
deavored to point out that the provision in the pending bill allow
ing the banks to redeem the notes in lawful money inevitably would
result in driving a large amount of gold out of this country and sub
stituting notes in its place, and this result would occur without any
fault or lack of conservatism on the part of the banks or of the
Federal reserve board.
The bill provides that national banks which fail within a year
to come in under this plan shall be dissolved. If any considerable
number of the national banks should be dissolved in this way there
might ensue a very disastrous result, which apears not to have been
contemplated or considered by the authors of this bill; there would be
an enormous contraction of the currency, because the national-bank
notes of these dissolved banks would have to be taken up in lawful
money. The contraction of the currency which would occur, if only
a third of these banks failed to come in, in my judgment, would very
likely result in a very severe money stringency and possibly a great
panic. For that reason it seems to me that this provision dissolving
such of the national banks as fail to come in under this plan should be
stricken out of the bill.
If the plan is a good one, as I believe it is in substance, let the plan
be put in operation first and at the next session of Congress, or within
a year, if you please, let Congress then deal with those banks which
have remained out. It would be an enormous peril, not to the banks,
but to the country, to force the dissolution of any considerable num
ber of these national banks as long as they have their present issues of
bank notes outstanding. I am confident, from conversations which I
have had with officers of leading national banks in New York, that
all or nearly all of them will gladly join in carrying out any plan
along these lines which they believe to be economically sound. I
believe they will willingly make large sacrifices of profits rather than
stay out of any plan which they believe sound. This threat of dis
solving these banks is not really a threat of doing a great injury to the
banks themselves; the pistol is not pointed at the banks, but it is
pointed at the country. The effect of that provision is practically
to say to the banks:
You must come in under this p la n ; if you don’t the country is going to suffer
fi-orn a great money stringency and possibly a panic.
Now, I do not think that is permissible legislation.
Senator H it c h c o c k . May that money stringency be overcome b y
the issue of asset currency under this bill?
Mr. M orawetz. That is the very point. It can not be. If the
banks stay out, the reserve banks would not be strong enough, if
they can be formed at all—they won’t be strong enough to issue the
requisiste amount of these new notes to take the place of the national-
2650
B A N K IN G AND CU RREN CY .
bank notes which must be withdrawn, because you will observe for
every one of these notes that may be issued the reserve banks must
put up an equal amount of the prescribed collateral and, in addition,
a reserve in lawful money equal to 33J per cent of the notes. The
fact ought to be recognized that the cooperation of the banks is es
sential in order to make this plan a success, and the banks will give
their cooperation if they are given half a chance; but I think it is
due to them, it is due to the country, that the Government should
try to put this plan through with the cooperation of the banks and
not force it upon them in the first instance. First establish these re
serve banks with the cooperation of such of the banks as are willing to
join, and then let Congress, which always will have the mastery,
deal with such of the banks as refuse to come in.
Senator O’G orman. Would you permit the banks that refuse to
come in to avail themselves of this rediscount privilege?
Mr. M orawetz. Certainly not. Only the banks which come into
the plan and become members should have these privileges. I have
not a doubt that practically all of them, particularly the big banks
that I have come in contact with, w ill gladly come into this plan
at considerable sacrifices, if it is made economically sound.
Senator O'Gorman. Y ou see it would be quite difficult to exclude
nonparticipating banks from the privileges of the rediscount sys
tem, inasmuch as they could, by indirect and not entirely illegitimate
methods, pass their paper on to a bank that is a member of the sys
tem and that bank would in turn enjoy the advantages of the redis
count features of this system.
Mr. M orawetz. It might be so if the member banks join with the
banks that are not members to defeat the purpose of the bill.
Senator O’G orman. It is fair to say in this connection, Mr. Mora
wetz, that a number of bankers who have testified before you have,
without any reservation, expressed the opinion that this plan, if de
vised, should have all the national banks in it, and they favor the
compulsory feature of the proposed bill which compels them t<
come in or surrender their charters. It has been stated, in that same
connection, that bankers are, of course, like other people and, if it
is entirely optional with them to come in or stay out, they would be
likely to defer their coming in at all events until some one else experi
ments, and that, in that way, it might be difficult to complete this
system within any such period as the authors of the bill hope it would
require.
Mr. M orawetz. I agree that all the national banks should be re
quired to come into this plan, but I think that this requirement
should not be imposed by Congress until it can be done with safety
to the country. And it can not be done with safety to the country
until after you have established the reserve banks and assured the
success of the plan. It is possible, it is probable, that if you do not
make this plan compulsory, but make it permissive merely, there will
be established, at the outset, only three or four of these reserve
banks. Under a permissive plan, I am confident, a strong reserve
bank would be established in the eastern part of this country, New
York, Boston, Philadelphia, and the neighboring cities. There would
be enough banks there to form a strong regional reserve bank. I
mean enough would come in.
B A N K IN G AND CU RREN CY .
2651
Senator O’G orman. D o you mean by that one bank in that ter
ritory ?
Mr. M orawetz. One for that territory. I believe that another
bank could be formed without the compulsory provision, in and
around Chicago; another one could take care of the Central West,
and another one on the Pacific coast.
Senator O’G orman. Well, now, are you sure as to that Pacific coast
proposition?
Mr. M orawetz. I am not sure as to the Pacific coast proposition.
Senator O’G orman. Would it not meet your view, as you have in
dicated during the day, to start out first with the reserve board in
Washington, and then three regional banks to take the place of the
banks in the central reserve cities, New York, Chicago, and St. Louis,
and leaving the power confided to the reserve board to provide for
one, two, or three, or possibly a greater number, ultimately, of reserve
banks in excess of the initial number, as the needs of the country
seemed to require and as the disposition of the country banks ap
peared to be favorable to the plan?
Mr. M orawetz. I should start with authorizing the central board
to organize five of these banks, one for the Northeast, one for the Cen
tral West, including Chicago, one for the Pacific coast, one with its
headquarters in St. Louis for the South and Southwest, or possibly
one in St. Louis for the Southwest and another one in the South for
the Southern States—the old Southern States. That would be five.
But I should put the plan in operation as fast as any of these five
banks should be organized. If three only should be organized, let it
start with three.
Senator O’Gorman. Or if one or two ?
Mr. M o r a w etz . Yes.
Senator P omerene. Would you have those three cover the entire
country or only sections of it ?
Mr. M o r a w etz . Only se c tio n s o f it.
Senator B ristow. Then would you have a double head and operate
the old system in one part of the country and the new system in
another ?
Mr. M o r a w etz . I do not think there would be any difficulty.
Simply the banks in those sections in which a regional bank had not
been established would be in the position of nonassenting banks.
There would be no difficulty.
Senator W eeks. Y ou speak with considerable confidence of what
would be done in the East and the Middle West. Do you think that
could be done unless changes were made in the pending bill?
Mr. M orawetz. Certainly not. I think changes would have to be
made in the bill—changes not to benefit the banks financially, but
changes which experienced bankers deem necessary to sound banking.
Senator W eeks. That is substantially what you are pointing out,
or what you are intending to point out—the changes you think neces
sary or desirable?
Mr. M orawetz. Yes, sir.
Senator W eeks. N ow, do you not think, Mr. Morawetz, we have to
use the greatest care not to produce confusion and uncertainty of
what is going to come from this legislation or when it is going to take
effect?
Mr. M orawetz. Assuredly.
2652
B A N K IN G AND CU RREN CY .
Senator W eeks. Otherwise, is there not going to be a natural con
traction and hesitation and stopping of business enterprises of the
country ?
Mr. M orawetz. I believe that is going to happen no matter what
legislation you pass, and I think that a great many of the voters of
this country will charge the legislation which is passed, whatever
it may be, with being the cause of it.
Senator W eeks. Y ou recognize Ave have a very delicate proposition.
Mr. M orawetz. Y ou have a delicate proposition and you have a
delicate situation to deal wdth.
Senator W eeks. And we ought to be quite sure of Avhat Ave are
doing before we do it?
Mr. M oraavetz. Certainly.
Senator B ristoav. N oav, Mr. Morawetz, before you leaA’e that point:
You spoke of starting with three, possibly, and adding the others
later. If it Avill come in noAv as part of your remarks, just as well,
what objection Avould you have to the Federal board which is created,
having the immediate charge of the Federal bank itself?
Mr. M orawetz. Y ou mean to establish a central bank which is to
be managed by the Government?
Senator O ’G o r m a n . By the Federal board.
Senator B ristoav. By the Federal board.
Senator O ’G o r m a n . O f seven commissioners.
Senator B ristoav. Yes; of seATen commissioners. This is the idea I
had in mind, and that is, that this board which Avill not have any
ex officio officers—I do not think there ought to be any Government
officers on the board—but let them be in the active management of the
bank itself so that they are coming in direct personal contact with the
operation of the business and thus understand it. I do not say a
central bank, because according to my view it would not be a central
bank; it Avould be a Federal bank.
Senator O ’G o r m a n . A Federal bank of discount and reserve.
Senator B ristoav. A bank of discount, a bank of reserve, and a
bank of deposit of Government funds, and any reputable banking
concern which has the proper assets could discount those assets at
this bank, and let its operation be extended to the various sections of
the country so as to meet the convenience of the people.
N oav, what objection would you see to that?
Mr. M oraavetz. Well, that is, in substance, the central bank or the
Aldrich plan o\Ter again.
Senator B ristoav. N o. N ow, I beg your pardon; you do not under
stand. This we will have noAv is the Aldrich plan with the head
cut off. We have now, with the Aldrich plan, a bank managed by
bankers, oAvned by bankers, operated by bankers—a private enter
prise so far as the regional banks are concerned. N oav. the central
bank of the Aldrich plan has been left out, and in lieu of it a
Federal reserve board of supervision has been created. Now, in sub
stitution for that plan, I would create a bank that is not owned by
the bankers, that is not operated by the bankers, but that is owned by
stockholders and operated by the Federal Government for the con
venience of the banking system of the country, but not controlled by
the bankers at all.
Mr. M oraavetz. I understand. It is to be a central institution or
central bank, the capital of which is to be furnished by private indi-
B A N K IN G A N D CU RREN CY .
2658
viduals, if you please, anybody ivho wants to take stock in it or will
take stock.
Senator O’G orman. Preferably by the banks who want to come
into the system.
Mr. M orawetz. They are not to have a vote in it, but it is to lie man
aged by the Government itself through this board.
Senator B ristow. The subscriptions will be wholly voluntary.
Now, it is not a central bank, and I will tell you why: A central bank
is the center of a banking system, connected up, and it is the head
and the center. Now, it is not proposed that this shall be the center
of a banking system, but this shall be a Federal institution which will
come to the relief of the banking system of the country, the demo
cratic system ivhich now exists, when such relief is needed.
Mr. M orawetz. Of course, it is all a question of definition, whether
you call that a central bank or not. I should call it a central bank;
it performs the functions and is very similar, in substance, to several
of the great central banks in Europe which are managed by gov
ernment appointees.
Senator B ristow. I guess there is but one, and that is the Bank
of France ?
Mr. M orawetz. The Bank of Germany.
Senator B ristow. The system we are now discussing is more nearly
like the Bank of Germany than the one suggested by the question.
Mr. Morawetz. I do not think so, but that is of no consequence.
Senator B ristow. I s the Bank of France called a central bank?
That is, the Bank of France, is it not?
Mr. M orawetz. It is generally called a central bank; yes.
Senator B ristow. I have never heard it called the central bank; I
always heard it called the Bank of France.
Mr. M orawetz. That is a question of definition. I consider it a
central bank, a large central institution which is the principal de
positor}^ of the bank reserves, and whose function is not primarily
to make money for its shareholders but to act as the balance wheel
of the banking institutions of the country and to keep the finances of
the whole country sound and safe. But that is a matter of definition.
This is one of the points I expected to take up later, but I will take
it up now. To my mind, the particular objection to any such scheme,
which I call a central-bank scheme for the United States, is that it
would inevitably result in sectional controversies and inject politics
into the management of the whole system. In European countries
banking and currency questions never have been considered political
questions. In this country banking and currency questions have been
considered as fit subjects of party politics from the beginning of the
Government up to the present day. The First Bank of the United
States ended in 1816 or 1817 in bitter political controversies and in
the dissolution of the bank. The Second Bank of the United States
ended in the so-called bank war in Jackson’s time, and the bank
was dissolved, not because it was inefficient or because it was not a
useful institution but because the banking question was seized upon
by the two political parties as a suitable political issue, and Mr. Clay
and Mr. Jackson made it the principal issue of their presidential
campaigns. After the war we all know that the question of the
issue of our Government notes became a political question—not an
2654
B A N K IN G AND CU RREN CY .
economical question, to be dealt with on its merits. Sections of the
country wanted the National Government even to pay the interest on
its bonds in its own depreciated paper currency. Then for 12 years
the silver question was the principal issue between the political
parties—I mean the free coinage 'of silver at 16 to 1. After that
we had the compulsory guaranty of bank deposits as the principal
issue of a presidential campaign, and now this very question—this
very bill we have before us—is a party measure and, possibly, will
have to be forced through by party caucus.
Senator O’G orman. There is no substantial sentiment, of which
I am aware, justifying that last conjecture of yours.
Mr. M orawetz. I hope it may not be so; but I -was going on to say,
if it should be so, I do not blame anybody; I do not think anybody
here should be blamed. It is the result of the conditions which have
prevailed in this country from Washington’s time down. It is be
cause the people of this country have chosen to treat banking and
currency questions as fit subjects for party politics. What I am
leading up to is this: The moment you have a central institution
wThich is to dispense credit or take care of the banks throughout the
country you immediately will have sectional demands made upon the
central institution. At sometimes the South will want this central
institution to lend credit to the banks of the South, so that they can
help the planters to corner their cotton; at other times the West wrill
want credit from this central institution to help the farmers to carry
their products. And so it will be impossible, if you have a single
central bank or central institution in this country, to avoid these
sectional differences and sectional controversies, and the moment
sectional differences and sectional controversies arise party politics
will seize upon them and make them political issues.
Now that, to my mind, is the principal reason why one central
bank or central institution for the whole of this country is unwise.
It is wholly unnecessary. You can avoid these sectional differences
by dividing the country into districts each as big as any country in
Europe and quite big enough to have a central bank of its own. The
central-bank system has been tried and has been found to work per
fectly in every country in which it has been tried. The principle of
the system unquestionably is sound. I would simply apply that prin
ciple, and you will have to apply it if you ever have sound banking
in this country, but I would take each great division of this country
separately and give it its own regional central bank.
Senator B ristow. Mr. Morawetz, suppose we do that. You have
presented your views clearly, I think. Suppose we do that. Then
do you favor giving the central board, which we create here in
Washington the power to compel one regional bank to discount the
paper of another regional bank?
Mr. Morawetz. I am convinced that it would not be wise to give
the Federal board this power. I should give the Federal board some
powers which are not given it by this bill, but I should take away
that particular power to which you refer. If I believed that it was
necessary to give the Federal board the powder to hand over the re
serves of one regional bank to another bank, I should consider the plan
unsound. If these regional reserve banks are not strong enough to
stand independently without giving that power to the Federal
B A N K IN G AND CUKRENCY.
2 655
board T should consider that they were not adequate to serve the pur
poses for which they are created, and the whole plan, in my eyes,
would stand condemned. But I believe that if vou establish not more
than five of these banks they would be strong enough, and they would
serve all the purposes for which they were created without giving
this power to the Federal reserve board.
Senator B ristow. If it is necessary to give that power to the
Federal reserve board then the Federal reserve board would become
the tyrant of political attacks, unless upon the request of a regional
bank it would call upon some other regional bank to discount its
paper. Now, the South might be in need of help.
Mr. M orawetz. Yes.
Senator B ristow. New York or Chicago might think they could
not spare the help which the South wanted, and decline, because they
would feel their own section of the country needed all the resources.
The South would appeal to the Federal board to require them to do
it, and this would at once precipitate the political controversy which
you seek to avoid, it seems to me.
Mr. M orawetz. Exactly. And, furthermore, I think that provision
would lead to unsound banking. It would be an invitation to some
of these banks to rely upon the Federal board to help them with the
reserves of other banks; and furthermore----Senator S hafrotii (interposing). Do you think they would do
this, Senator Bristow, in view of the fact that each one of the re
serve districts has a right to present the bank paper to the reserve
bank and have money issued on it? What is the use of going to
another bank?
Senator B ristow. But the authority is in the bill; and Mr. Vanderlip and others have said that they believed that authority was neces
sary.
Senator S hafrotii. Well, it may be necessary in very extreme
cases; but I do not believe it would be necessary one time in a year.
Mr. M orawetz. With great deference to these gentlemen, i be
lieve it is not necessary.
Senator P omerene. I was going to ask you a question in that con
nection. As I understand, your position is this: That each of these
regional banks, when organized, would have sufficient strength and
power of itself to meet the demands of that particular section. Now,
if that be so, then wliat harm could come from giving the Federal
reserve board the right, in the event that an emergency should arise,
to transfer from one regional bank to another?
Mr. M orawetz. Each of these regional reserve banks, if properly
managed, would be strong enough. But if you are going to start
in by saying, “ Go on, if your reserves fall short; if you extend your
self too much we will help you by turning over some of the reserves
of the New York banks or of the Chicago banks,” you are going to
make unsound banking; and furthermore----Senator P omerene (interposing). Well, for what reason would it
be unsound banking?
Mr. M orawetz. Because the}7 would be too free with their dis
counts. They would not keep up their discount rate to the proper
point to prevent overextension in their sections of the country.
Senator S hafrotii. If there were only one central bank, however,
they would practically do the same thing, would they not? They
2656
B A N K IN G AND CU RREN CY .
could take from the reserves of the central bank and say, “ New Or
leans needs more than this, and we will give it an undue proportion.”
Mr. M orawetz. Yes.
Senator S fiafroth. Or they may say, “ California needs more and
we will give it to them.” And under one central bank it would
have exactly this same power.
Mr. M orawetz. That would result in the sectional controversies
which I want to avoid. And so this provision, I think, Avould lead
to sectional controversies and ultimately would introduce politics
into the situation.
Gentlemen, this country under its present system, without any
regional banks or central bank, has prospered beyond all other
nations. We have had occasional panics. Most of these panics
were due to unsound currency conditions which no longer exist.
Our currency to-day is all as good as gold, and there is no danger—
if it is not increased—that an}^ of it will ever become less valuable
than it is.
All that is needed now, in my judgment, to prevent a recurrence
of this scramble for money is to centralize to some extent—not wholly,
but to centralize to some extent—the reserve money, so that it will be
available when and where it is most needed. And that is the object
of these regional reserve banks.
My advice would be, as I have stated, to limit the number of the
banks to five; to establish them as fast as you can get them estab
lished by the voluntary action of the banks; and then, after you have
your plan in working order, take up the question what shall be
done with those banks which stay out, I think, ultimately, they
ought to be coerced into coming in, but only after you have estab
lished a successful plan, and after this great difficulty of the present
situation has been provided for—the difficulty arising from the out
standing national-bank notes. You can not dissolve any considerable
number of these national banks until you have made adequate pro
vision, through the regional banks, for the issue of currency to take
the place of national-bank notes which will be redeemed.
Senator B ristow. Mr. Morawetz, you approve, as I understand,
the appointment of this Federal board by the President, so that it is
an appointive board?
Mr. M orawetz. I believe that if this system is adopted there should
be a central board appointed by the President with the fullest su
pervisory powers, and also certain powers of controlling the opera
tion of the banks. But these powers of control—these discretionary
powers—should be strictly limited in such a way as to keep out sec
tional controversies and so as to prevent politics interfering with the
operations of the board.
Senator B ristow. Well, if this central board is the supreme and
superior authority, and if it is appointed by the President----Mr. M orawetz (interposing). On certain subjects only.
Senator B ristow (continuing). Yes. Now, it seems to me—this
is my view of it; it may be erroneous, of course, but I very firmly
believe that the real authority in the management of this system—
that is, the practical authority—exists in the board of management of
the regional banks.
Mr. M orawetz. It ought to be there.
Senator B ristow. N ow, why should not'-----
B A N K IN G AND CURREN CY .
2657
Mr. M orawetz (interposing). You say the board of management
of the regional banks. Do you mean the board of directors of each
bank ?
Senator B ristow. Yes; of each bank. That is the real governing
force in this system. The other authority is off here in Washing
ton—not in direct contact with the system. Of course, there may
be complaints here and there, and it interferes with the system
more or less. It might manage it wisely and it might not; but why
should not the Government appoint the board of directors of the
regional banks if these regional banks are to be the real controlling
factor in the administration of the system?
Mr. M orawetz. Because I do not think that such a management
by Government appointees would be a good management. There
have been cases in which the Government has appointed directors
of Pacific railroads. You remember there used to be Government
directors of some of the Pacific railroad companies, such as the Union
Pacific. But I think that all railroad men will agree that the Gov
ernment directors were not helpful to the good management of those
railroad companies.
Senator B ristow. They were political appointees, were they not?
Mr. M orawetz. I a m sim ply stating a fact.
Senator B ristow. Well, if it is wise for the President to appoint
the supreme board, with authority in theory, why should not he ap
point the managers who have authority in fact?
Mr. M orawetz. It is all a question of fact, not of theory. Now, as
a fact, there is no doubt in my mind whatsoever that the business
management of these institutions should be in the business men chosen
by the banks. I think you would then have a good management.
But the supervision of these institutions should be in rhe hands of a
Government board, which should consist wholly of appointees of the
President, and upon which the banks should not be represented.
Senator B ristow. Well, that is similar to the authority which the
comptroller has over the present system.
Mr. M orawetz. Yes; and something more.
Senator B ristow. Yes; and something more. That is a theoretical
supervision; and where something radical goes wrong, he takes pos
session—but it is after it has gone wrong.
Mr. M orawetz. That would not happen here. The comptroller has
7,000 and odd banks under him. Here there would be five; and you
would have a body of eight first-class men, I hope, who would be
appointed by the President, by and with the advice and consent of
the Senate; and they would be in constant direct communication with
each of these institutions and would have wider powers than the
comptroller has over the individual banks now.
Senator B r i s t o w . Mr. Morawetz, my objection to Mr. Aldrich’s plan
was that it was controlled by the banks, and that the central bank,
which was the central authority and for which in this plan the cen
tral board has been substituted—was chosen by the banks; and I be
lieve that certain great interests would control this institution so as
to promote their desires when occasion required it.
And I believe that the country is against the plan suggested by
Mr. Aldrich, because the country believes it would be controlled by
selfish interests to serve their own purposes.
2 658
B A N K I N G AND CURRENCY.
Now this system takes away the central bank and substitutes a
board. But it centers the real control which the central bank under
the Aldrich system had, in regional banks, and leaves the control of
those regional banks exactly where Mr. Aldrich would put it in his
system.
So my objection to this is that, instead of preventing the thing
which the country feared would happen in Mr. Aldrich’s bill, will
actually happen by the control of the regional banks in this bill; and
it is altogether----Mr. M orawtetz (interposing). I frankly must say that I think you
are conjuring up a specter of the imagination.
Senator B ristow . Well, then, what is the objection to Mr. Aldrich’s
system ?
Mr. M orawetz . I will come to that in a moment. These regional
banks—what will they control? All they are there for, and all they
are to accomplish is, to introduce a bond of unity among the scattered
banks of the district to enable them, in a measure, to pool reserves, so
that, in case of stress, or trouble, the reserves will be available to stave
off a run upon individual banks, or a panic of any kind, and to fur
nish a general market for commercial paper, so that the banks will
not be obliged to loan so much on stock-exchange collateral.
It is, to my mind, not a centralization scheme at all. It is a most
democratic scheme. It is to help to strengthen the individual banks,
the small banks particularly, and to make their credit—the whole of
their credit—available for the commerce of this country, instead of
forcing the individual banks to tie up a considerable part of their
resources in railroad bonds and in stock-exchange loans.
Senator B ristow . Well, why could not all that you have said in
behalf of these regional banks be said in behalf of Mr. Aldrich’s sys
tem of organization?
Mr. M o r a w etz . It could, sir; it could. The fault of th e Aldrich
plan or of any central plan, as I have endeavored to point out, is that
it inevitably will introduce sectional controversies and party politics
into the management of the whole business.
Now, I brush aside as of minor importance in the Aldrich plan
the controversy as to who shall control the board of directors of the
central institution. I know that there are many who believe that
some of the rich men of this country who would in some way, by
hook or by crook, get control of that board of directors. I do not
think so myself. I think the greater danger under the Aldrich plan
was that the scattered small banks throughout the country—the
country banks—would get the control of the management and that
unsound banking practices—possibly inflation—might be the result
under the Aldrich plan.
But, it is not a question of that; I do not care who controls the
central institution. If it were controlled by individuals to-day, next
year you would have the Government step in and take charge because
sectional controversies would certainly arise. You never could work
in this country a single central institution which would have to
establish a uniform discount rate for all the country, or different
rates for different sections, under any central bank, without having
sectional controversies occur.
Senator B ristow . Well, it has been alleged, and we are urged to
pass this bill because it is alleged, that it will break up what is com-
B A N K I N G AND CUKRENCY.
2659
monly termed the “ Money Trust ” ; and that the intention of this leg
islation is to break up the control of credits that has been complained
of, and that this legislation is intended for that purpose. Well, Mr.
Bryan, the Secretary of State, in his speech which he delivered at
Waterloo, Iowa, has stated, last week, that that was what this legis
lation was intended to do. And he intimated that those of us who
were insisting upon examining the subject with some care, before we
approved or disapproved the legislation, were simply the agents of
Wall Street in undertaking to delay legislation, because it was legis
lation that would interfere with the operations of Wall Street.
Now, with such eminent authority as that making such statements
as that, it seems to me that we can not ignore the fact that this
legislation is primarily intended, at least, to free the country from
what it is believed to be the controlling authority of certain great
financial interests. Well, if that is the case and these interests are in
control of the regional banks----Senator O ’G orman (interposing). Will you permit an interrup
tion there, Senator Bristow?
Senator B ristow . Certainly.
Senator O’Gorman. Y ou know that the authors of this bill have
never stated that that was the purpose of this legislation. They have
invariably claimed, and I think correctly, that the only need of this
legislation is to provide a system whereby the elasticity of our cur
rency can be promoted and whereby the metallic reserves of the coun
try can be concentrated—mobilized.
Senator B ristow . That is true. I think that is true. But this
other element has been----Senator O’G orman (interposing). Injected.
Senator B ristoav (continuing). Very forcibly, in a way, injected
into this question. The papers have been full of it and it leads me to
inquire if that is the purpose of this legislation, then should we not
undertake to provide against that evil? And I maintain that with
the banks in control of the actual authority, by having control of the
regional board, they are just as much in authority now—will be
under this law—as they otherwise would be.
Mr. M orawetz. Oh, no; not at all, in my judgment. This plan
makes careful provision for keeping the control of each regional
reserve bank out of the hands of any clique of banks. The division of
the board into three classes of directors, and the division of the banks
into groups for purposes of election, would wholly eliminate any
danger of that kind. The few big banks, in New York, for instance—
and those are the ones which I suppose are the “ niggers in the woodpile ”—would have very little to sav in choosing the board of direc
tors of the regional reserve bank which is to control them.
Senator B ristow . Well, now. Mr. Morawetz, you are a practical
man, and I try to be one. Do you not think that the influential
bankers in these regions will control the election of these directors?
Mr. M orawetz . I do not.
Senator B ristow . What makes you think they will not ?
Mr. M orawetz. Because of my general knowledge of mankind
and of the conditions existing.
Senator B ristoav. D o you not think they would like to control ?
Mr. M orawetz . Oh, yes; anybody would.
2660
B A N K I N G AND CURRE NCY .
Senator B ristow . Yes; any great banker would like to have con
trol of the management of this great institution with which he is
doing business.
Mr. M orawetz . Yes.
Senator B ristow . N ow , has it not been your experience that a few
powerful men can carefully organize an election and control it—or a
convention and control it ?
Mr. M orawetz . Sometimes, if it is not too big.
Senator B ristow . Did y o u ever see a convention so big that a few
powerful men could not control it ?
Mr. M orawetz . Oh, yes; I have seen a good many unexpected
results happen at presidential conventions. [Laughter.]
Senator B ristow . Yes; unexpected; that is true. But, nevertheless,
the powerful men were there. It has been suggested—and I think
with a good deal of practical sense and judgment—that men thor
oughly familiar with our region of the country can name now the
men who would control the election of the board of directors of the
regional bank. I think that a few of us can tell who will be in con
trol of the regional bank out in that section where we live.
Senator O’Gorman. Are they good men ? [Laughter.]
Senator B ristow . Yes; they are good men. But I think they have
certain interests that they would protect first, and they would think
they were doing the right thing in doing that; but it would be their
interests with which they had a personal connection, which they
would protect first.
Now, it is advocated by those who stand for these regional banks
and their methods of electing directors, that it is a very democratic
way of electing these boards of directors.
It has been my lot to attend a good many county and State con
ventions; and in a county or State convention every delegate has one
vote, whether he comes from a township and is simply a farmer or
whether he is a great lawyer living in the city^; they are all on an
equality; every man has one vote.
But it would be idle to say that the innocent farmer that comes up
from the township has as much influence in the control of the action
of that convention as the strong, aggressive man from the city.
Mr. M orawetz . Of course, intelligence everywhere ought to have,
and does have, more influence than ignorance. This county would
go to ruin in a very short time if superior ability did not give supe
rior control, superior power. It ought to be so.
Senator B ristow . N ow , in managing a convention—and this is a
convention that is to elect the directors—intelligence plays a great
part, of course, and it should do so. I do not want to discredit in
telligence. But Sam Smith will say to John Jones, “ You fellows
down in your part of the county support our man for clerk of the
court, and we will support your man for county superintendent.”
And they fix up a slate the night before the convention meets; and
the next morning it goes through—unless some clog gets in the wheels
unexpectedly.
Senator O’Gorman. I s that the way they do it in Kansas, Senator
Bristow ? [Laughter.]
Senator B ristow. That is the way they do it everywhere— New
York, California, and Texas, and everywhere else.
B A N K IN G AND CURRENCY.
2661
Senator S h a fr o t h . They do not do it when the direct primary
comes into effect.
Senator B ristow . N ow , in order to avoid the evils which have
grown up in our political life under that system, the direct primary
has been injected in and made a part of our political institutions.
Now, we propose here in this bill, in selecting directors of this power
ful institution that is to control the currency and banking system of
a vast region, the old method. There has not been a method used by
a political boss for 50 years that can not be used effectively in the
selection of these directors, in my opinion.
Mr. M orawetz . I do not agree with you as to that. I think this
is a very democratic system which will work perfectly, and I think
the other system of having the management appointed by the Gov
ernment will be sure to inject party politics into the selection of thq
directors and to introduce every vice which you very justly wish to
exclude. I think it would have just the effect which you wish it not
to have. However, of course, that is merely a matter of judgment.
Senator B ristow . I do not believe I have gotten your reasons
clearly as to why it is desirable to appoint the general supervising
board and not to appoint the actual operating board.
Mr. M orawetz . Because the one is a business board having the
business management of this banking business and the other is a
supervisory board, with only very limited powers of direction con
ferred upon it for the protection of the general interests of the whole
country.
Now, under this plan each reserve bank is required to pay the notes
of any other reserve bank which comes to it and is to collect them
from the issuing bank. There is no provision in this bill which
would enable the paying bank to recover from the issuing bank the
costs of exchange and the loss of interest. I think that ought to be
covered. Under this plan if the New York reserve bank should issue
a million dollars’ worth of notes and those notes should be sent to
California, the California bank would have to hand out a million
dollars of its gold or lawful money and it would have to then reim
burse itself by sending the notes to New York and getting its gold
back, and it would have no recourse under this bill for the exchange
or loss of interest. That certainly is a defect which ought to be
covered.
Senator H itc h c o c k . There is a provision in the bill under which
the San Francisco bank could charge those notes to the Government
account.
Mr. M orawetz . If it has a Government deposit there, and then the
Government would lose. It would stand in the breech.
Senator H itc h c o c k . The Government would then be required to
demand payment of those notes from the New York bank?
Mr. M orawetz . Yes. But there is another provision in the bill
which requires a reserve bank to receive at par as a deposit checks
drawn or drafts drawn on other reserve banks. That is subject to
the same criticism. It is not fa ir; it is not wise.
It seems to me that an essential feature of this plan is to require
these reserve banks to establish a clearing house, and each reserve
bank to keep a part of its reserve in that clearing house, not for
banking purposes, but to settle balances that can not be cleared,
2662
B A N K I N G AN D C U B E E N C Y .
whether they be upon notes or other claims, such balances to be
charged to the several banks with proper charges for exchange*
That, however, is a practical matter which the banks would easily
and readily work out for themselves. All that would be required
is to give them authority to do this under regulations to be approved
by the central board.
Now, my judgment is that inasmuch as all these provisions relat
ing to the note issues are very imperfect, and I think practically
unworkable under the present bill, the best course would be to strike
out of the present bill not only the provisions dissolving the banks
which do not come in within a year, but also all the provisions re
lating to note issues, and to take up these subjects at the next session
of Congress, or within a short time after the organization of these
banks. I do not think that provision for the issue of additional
notes is at all necessary. The United States has, as I pointed out
this morning, a superabundance of paper currency. We have more
uncovered currency, more currency which is not gold, than any other
country in the world, not only absolutely but also in proportion to
our supply of gold and per capita of population.
Senator P o m erene . That has probably, answered the question I was
going to ask you as to whether or not the ratio between the paper
currency uncovered in this country and the gold was greater or less
than the ratio between the paper currency and gold in the other
countries.
Mr. M oraw’etz . Much greater in this country. It is about twice
as big in this country as in any other great country. We have out
standing, year in and year out, more uncovered paper currency than
any of the great countries of Europe when its currency is expanded
to its utmost.
Senator S h a er o th . D o not the Dominion notes of'Canada have a
reserve of only 25 per cent behind them?
Mr. M orawetz . Yes; I will take that up in a moment.
Senator P om eren e . I s not our commerce very materially different
from that of the other countries, so that we really need more of the
currency ?
Mr. M orawetz . I speak of the ratio between the paper and the
gold. We do not need as much currency for circulation as does
France, where nearly all the debts are paid in currency, and not by
check. But in England they have practically no paper currency at
all. There are outstanding £18,000,000—under £18,000,000—under
$90,000,000 of Bank of England notes, issued against Government
deposits. Every other Bank of England note is issued against an
equivalent amount of gold locked up in the vaults of the bank, and
specifically set apart for its payment. So that Bank of England
notes, for practical purposes, are the same as our gold certificates.
Therefore in England there is gold enough to cover the currency for
practical purposes. Yet England is the principal center of com
mercial credit for the whole world, and it is also the principal source
from which the whole world draws gold when gold is needed. How
do they do it? Simply because they have a proper reserve back in
the Bank of England. It is not an enormous institution, but it is a
properly managed reserve bank, such as we want to establish under
this bill. The Bank of England is sufficient to keep financial condi-
B A N K I N G AND CUBBENCY.
2663
tions sound and strong in England, and is sufficient to enable England
to maintain her supremacy in commercial credits and in money trans
actions throughout the entire world.
In my judgment, if this bill is right, if it is worked out correctly,
conditions in this country would be perfectly safe and sound without
providing for the issue of another dollar of paper currency.
However, in urging----Senator H itchcock (interposing). Will you discuss, for a mo
ment, the paper currency of France and Germany as you have dis
cussed that of England ?
M r. M orawetz . The system in France and in Germany, o f course,
is different. The Bank of France and the Imperial Bank o f Ger
many have the power to issue notes, asset currency, to a limited ex
tent ; but they use that power very sparingly.
As I have stated several times before, they never, under any cir
cumstances, have as much uncovered paper currency in those coun
tries as we have outstanding year in and year out. Each one of these
banks is managed as a reserve bank ought to be, and I hope as these
banks are going to be managed. They use their power of issuing
notes solely as a means of keeping the financial situation in equi
librium throughout the country.
Senator H itc h c o c k . I s there any real restraint upon the Imperial
Bank of Germany in the issuing of notes except that they must
always keep a reserve of 33| per cent ?
Mr. M orawetz . Thirty-three and a third per cent. When they g et
beyond a certain point they have to pay 5 per cent tax.
Senator H itc h c o c k . Does that not seem to be a rather moderate
limitation? Is there anything very stringent there?
Mr. M o r a w etz . N o ; but, gentlemen, a tax is not necessary in Ger
many, because the management of that bank would not dream of put
ting out notes merely to make money, and the tax is not really neces
sary to deter them from putting out notes when notes ought not to be
put out.
Senator H itc h c o c k . At the time that Germany had her reserve
below 40 per cent, how much uncovered currency did that involve?
Mr. M orawetz . I do not know the figures.
Senator H itch co ck . Y ou are sure it would be less than we have?
M r. M orawetz . Oh, yes; much less. I have forgotten just what
those figures are. I think about one-half as much as we have, per
capita.
Senator H itch co ck . In France the limitation is a little less th a n
6,000,000,000 francs; a little below 6,000,000,000 francs?
M r. M orawetz . Yes; b u t they carry an enormous reserve of coin
in the Bank of France, as you know.
Senator H itch co ck . Our uncovered currency is about $200,000,000
of greenbacks----M r. M orawetz (in te rp o s in g ). $200,000,000 o f green b ack s, $600,000,000 o f silv er, an d $725,000,000 o f n a tio n a l-b a n k notes.
Senator H itch co ck . Germany has a great deal of silver ?
Mr. M orawetz . Not nearly so much. France has more silver in
proportion than Germany.
Senator H itch co ck . In speaking of uncovered currency I sup
pose you are only referring to demand currency ?
2664
B A N K I N G AND CURRENCY .
Mr. M orawetz . I am speaking of all currency which has to be
kept up to the gold standard. Silver, except subsidiary silver, is
exactly the same, for practical purposes, as paper.
Senator P om eren e . I have been informed that the actual per
capita circulation in France, and by that I mean in actual circula
tion, is about $40 per capita. In this country, while nominally we
have about $38 or $34 per capita, as a matter of fact we have only
about $17.70 per capita actual circulation. I mean that, taking the
reserves from the total money of the country, which is in fact not in
circulation.
M r. M orawetz . About $17, I think, is right. But you understand
the reason for that is that in this country we pay largely by checks.
In France scarcely anything is paid by checks. Every tradesman
always collects payments and makes payments in money.
Senator H itc h c o c k . Y ou recommend that this bill be passed after
striking out the clause authorizing the issuance of additional cur
rency ?
Mr. M orawetz . I recommend—I think really the wisest course
would be to do that, with the intention of dealing with the currency
question separately at the next session of Congress.
Senator H itc h c o c k . In that case the reserve banks would have
nothing to loan to the member banks and nothing with which to dis
count the notes of member banks, except the reserve in the vaults.
M r. M orawetz . Except capital and deposits.
Senator H itc h c o c k . Would there not be a tendency to produce a
stringency by that process of moving these reserves from their pres
ent place to the new place and not authorizing the banks which have
been created to issue currency?
Mr. M orawetz . I do not think so. Of course you would not do it
all at once. The transfers would be made gradually.
Senator S h a fr o t h . There would be no currency, in that event,
to take the place of the retired national-bank notes.
Mr. M orawetz . There would not be any retired national-bank
notes. They would remain outstanding for the present. You can
not deal with the question until you have your divisional reserve
banks successful and sufficiently strong to enable them to issue notes
in place of such of the $700,000,000 of these notes as are retired.
Senator O ’G orm an . Where would your relief come from in a time
of stress or in time of conditions such as we had in 1907 ?
Mr. M orawetz . The relief would come through the use of the
reserves which have been pooled in the divisional reserve bank.
The trouble in 1907 arose from the fact that whereas there was
plenty of reserve money each bank locked up its reserve and was
afraid to use it to help the weak banks.
Now if this reserve money has been in a central institution, in a
divisional reserve bank, it would have been available, and we would
not have had the trouble. As a matter of fact, the trouble was
stopped by this very process of pooling reserves through the clearing
house. What you want to do is—;—
Senator H itchcock (interposing). Was there not something
more than that? Did not those clearing houses issue clearing-house
currency which relieved the stringency ?
B A N K I N G AND CURRENCY.
2 665
Mr. M orawetz. Yes; but it really was not that. The clearing
house forced the banks to accept these orders upon each other, but
if the currency had been in the hands of the clearing houses so that
the clearing houses might have said, “ We will rediscount some of
your paper; here is the money,” the trouble would have been avoided.
This bill, if it works at all—and it will work—will give us five
banks working on the same principle as the Bank of England, and
each one of these banks will have a territory five times as big as the
Bank of England.
Senator P o m erene . Mr. Morawetz, I think, in answer to a ques
tion a moment ago by Senator Bristow, you made a statement that
you would take from the Federal board the power to make transfers
from one regional bank to another, but at the same time you would
give it certain other powers, but I do not think you went into that
subject.
Mr. M orawetz . Not yet.
Senator P om eren e . Have you that in mind ?
Mr. M oraavetz. I have it marked down, and I will discuss it a little
later.
Senator P o m erene . I would like to have your suggestion.
Mr. M oraavetz. I recognize fully—I think anyone must recognize
that these regional banks will haA7e to be under very strict govern
mental supervision, and that certain discretionary powers must be
vested in the governmental board. I think everybody must agree
also that the greatest possible pains should be taken to exclude party
politics from this central board.
Now, the bill as drafted here provides that of the four appointed
members not more than two shall belong to the same political party,
thus recognizing the likelihood of politics entering into it. It goes
on then and provides that three of the seven members shall be ap
pointed by the administration. In fact, two of them are to be
Cabinet officers. N oav, it seems to me that is a most unwise pro
vision, because inevitably the result wTould be to make the adminis
tration responsible in the eyes of the people for the acts of this
Federal reserve board. I strongly urge that all of the seven mem
bers of this central Federal reserve board shall be appointed by the
President, by and with the advice and consent of the Senate, and that
all the restrictions which are imposed by the bill in the selection of
the members of this board be eliminated. We must trust somebody,
and I think far and away the safest plan is to trust the President and
the Senate to get good men for this board.
Senator H itch co ck . What do you mean by “ good” men? What
type of men Avill they be ? What qualifications should they have ?
Mr. M oraavetz. Men o f h ig h c h a ra c te r, w ho are n o t in p olitics,
a n d w ho a re n o t in th e b a n k in g business.
Senator H itc h c o c k . For instance, would
you appoint a lawyer
who had never had any banking experience ?
Mr. M oraavetz. There are a great many lawyers who have not had
banking experience who, in my opinion, would probably fill this po
sition better than the average banker. The fact is, gentlemen-----Senator H itchcock (interposing). Would you appoint a college
professor ?
2666
B A N K I N G AND CURRENCY .
M r. M orawetz . Not too m a n y of them .
Senator H itc h c o c k . Would you think
there should be upon the
board any men who are familiar with the workings of a bank?
Mr. M orawetz . Yes; I think so. I think probably one or two of
them. I think it is better that they should not all be ex-bank presi
dents. As a matter of fact, men of the----Senator H itchcock (interposing). Why would you object to prac
tical bankers?
Mr. M orawtetz . I do not object to them, but I recognize the fact
that the great majority of the successful bank presidents in the
United States are routine men, who started in as clerks and worked
their way up, and who really do not know very much about finance.
They know all about discounting paper and making loans, and they
know the mechanical end of banking. Some of them, of course, are
very able financiers, but I am speaking of the average. I think there
are many successful bank presidents who would be wholly inadequate
to fill this position.
Senator S h a fr o th . Y ou were about to comment on the qualifica
tions of the lawryer as a member of this board, and you were stopped
by a question. Will you go on with that ?
Mr. M orawetz . I was about to say that there are a great many
lawyers who have acquired a general business knowledge which
would make them eminently fitted for this position.
Senator B ristow . What about newspaper men?
Mr. M orawetz . I do not know. I presume there are some news
paper men who might be fitted for the position. You can not, by
any statutory definition, insure the appointment of good men to this
office. You have got to rely on the President of the United States
and the Senate, and there is no better reliance.
Senator H itc h c o c k . I was trying to get at your idea as to what
class of men should be on this board, or what general qualifica
tions they should have. Should they be men of experience in the
financial history of the world, for instance, and familiar with the
history of banks of issue; familiar with the experience of Germany
and France and England and Canada, and with world commerce,
or should they be men who understand the details of the banking
business, or should they be college professors and theorists?
Mr. M orawetz . They should not be college professors or theorists.
Senator H itch co ck . Would a professor of political economy be
qualified?
Mr. M orawetz . No; I do not think so. His knowledge of political
economy would not disqualify him, but, I think, perhaps he would
not have sufficient practical business knowledge to enable him to fill
the position.
Senator H itc h c o c k . Would you object to nominating the eight
men in the record here? [Laughter.]
Mr. M orawte t z . I s h o u ld o b je c t; y es, sir.
Senator S h a fr o t h . Y ou might start a boom for some of your
friends. [Laughter.]
Senator O ’G orm an . Just in passing, Mr. Morawetz, so we m ay
keep this record straight, you are a lawyer yourself ?
Mr. M orawtetz . I am a lawyer.
Senator O ’G orm an . And you know something about banking?
B A N K I N G AND CUKRENCY.
2667
Mr. M orawetz . A little.
Senator B ristow . N ow , it has been the practice in the national in
stitutions to appoint a Secretary of the Treasury who has been a
banker and then let him choose his assistants from newspaper boys
who have been useful about the Capitol. Do you think that would be
a good plan for this board, or do you think that would likely happen
in the creating of this board ?
Mr. M orawetz . I do not think that would happen; no, sir.
Senator O ’G orm an . N o t under Democratic administration.
Mr. M orawetz . I think everything would depend on how this
system is started, and I am satisfied, under the present administration,
it would be started right. The standard would be high. It has been
suggested that the men on this board should be men of high stand
ing, similar to the judges of the Supreme Court, and, I think, the
Interstate Commerce Commission, likewise, has been mentioned. I
believe that if the standard were set high at the beginning it would
be kept up.
Senator O ’G orm an . Mr. Morawetz, I am clear in my own mind
that there is no reason a Secretary of Agriculture should be a member
of this reserve board. I am equally clear that the Comptroller of the
Currency should not be. I am a little in doubt as to whether there
may not be some special reason why the Secretary of the Treasury
might not be a member of the board. What is your impression as
to that?
Mr. M orawetz . I thought over that a good deal, and my first im
pression was that it was desirable the Secretary of the Treasury
should be on that board. But I have reached the firm conviction
that it would be better not to have him on that board at all, so that
the action of this board should not be considered the action of the
administration.
Senator B ristow . D o you think, Mr. Morawetz, there is any more
reason for putting the Secretary on this board than there would be
for putting the Attorney General on the Interstate Commerce Com
mission ?
Mr. M orawetz . There is some difference, but the illustration is
not inapt. Of course, the Secretary of the Treasury represents the
financial interests of the United States, and the United States will
have large dealings with the banks. Nevertheless, I think the Sec
retary of the Treasury should stand apart, and he should be supreme
in all things within his jurisdiction. If he were on this board he
would only be one-seventh of the board, and he never should be put
in that position.
Senator O ’G orm an . Then, apart from that, you would suppose that
the Secretary of the Treasury would have all of his time occupied
with the duties of that office?
Mr. M orawetz . I am very sure of it.
Senator O ’G orm an . And that it would not be fair to impose addi
tional burdens upon him?
Mr. M orawetz . I feel that way. That is another reason and a
very strong one.
Senator H itchcock. I t has beeen suggested that the Secretary of
the Treasury, however, should control to some extent the deposits
of the Government funds and, in that way, he probably would be
able to influence the system.
2668
B A N K I N G AND CURBENCY .
Mr. Morawetz. That is a different matter. If the deposit of Gov
ernment funds is to be discretionary, then, of course, the Secretary
of the Treasury should exercise that discretion. You mean the
choice of the banks?
Senator H itchcock. Not altogether. A question has been raised
here whether or not the bill wisely makes it absolutely obligatory
upon the Secretary of the Treasury to deposit in these banks every
dollar of Government funds as fast as it comes in. An emergency
might arise which would make it necessary for the Secretary of the
Treasury to accumulate funds or accumulate gold, or an emergency
might arise in which the administration might not approve a certain
policy of the board. It might feel that the policy was getting in the
direction of inflation, and that the withdrawal of Government funds
would tend to counteract it.
Mr. M orawetz. Perhaps I have a more trustful disposition than
some of the gentlemen present, but I should trust the Secretary of the
Treasury with a discretion in that regard, just as I would trust the
managers, the boards of directors of the reserve banks, with the same
measure of honesty and sense of fair dealing with which I would trust
the Government officials.
Senator S hafroth. I s it not important that the Secretary of the
Treasury should be on this board because the question as to whether
Government funds shall draw interest or not is to be determined,
and we have, at the present time, about $280,000,000 of money that
would be Government deposits?
Senator O’Gorman. If you are going to give the Government all
the surplus profits earned by the regional banks beyond the 5 or 6
per cent that will be paid to member banks as interest on their
capital contributions, what advantage is there in giving the Govern
ment interest, because you are simply making the Government pay it?
Mr. M orawetz . Then, there is another point----Senator S hafroth. It is not the way it is now.
Senator O’Gorman. No; of course not.
Mr. M orawetz . A s the bill is drawn, after paying 5 per cent
dividends on the stock, part of the surplus is to be given to de
positors by way of interest, and the Government would share in
that. I do not like the provision in the bill requiring the payment
of special interest on Government deposits.
Senator P omerene. In that connection it has been urged that the
Government should not have interest unless the member banks get
interest.
Senator O’Gorman. On their deposits?
Senator P omerene. On their deposits; but, on the other hand, the
member banks, a great many of them, if not the majority of them,
pay their depositors interest. This is particularly for the benefit
of the banks. Now, if the depositors in the member banks are to get
interest, what reason is there why the Government should not, for
the same reason, get some interest on the deposits it may have?
Mr. M orawetz. Why, because the deposits in the member banks
are used in the regular course of the banking business, whereas the
deposits of these reserve banks are not there to make money, but are
there for the purpose of rediscounting.
Senator P o m eren e . For the banks.
B A N K I N G AND CUKRENCY.
2669
Mr. M orawetz . For the benefit of the banks, yes. This bill con
tains a provision which will make it necessary at the end of 20 years
to go through all this turmoil over again, because at that time the
charters of these banks are to expire. I suggest that this limitation
be stricken out, the charters of these reserve banks being subject to
withdrawal or dissolution at any time by Congress and the bill itself
being subject to amendment, alteration, or repeal at the will of Con
gress. You will recall the cases of the first bank of the United
States and of the second bank of the United States, which had simi
lar provisions.
Senator P o m erene . That is, you would let power be vested in some
administrative branch of the Government to renew the charters?
Mr. M orawetz . N o, sir. I should have the charters run indefi
nitely until repealed. If ever there was a lesson of history which
we ought to heed, it is that such banks should not be chartered for a
limited period. The bill says:
The Federal reserve bank, so incorporated, shall have succession for a period
of 20 years from its organization, unless sooner dissolved by act of Congress.
Now, what I would provide is, “ shall have succession until dis
solved by act of Congress.” At the end of the bill, furthermore, there
is a provision that the right to amend, alter, or repeal th is’act is
hereby expressly reserved. Therefore this limitation of 20 years is
wholly unnecessary for the protection of the public, but it makes it
necessary before the expiration of 20 years to pass a new act of
Congress to keep the banks alive.
The bill does not make specific provision as to the executive man
agement of the reserve banks. It provides that there shall be a
chairman of the board of directors, who is to be appointed by the
central board. But it does not indicate what his powers shall be. In
my judgment, the executive management of the bank should under
no circumstances be in the chairman or representative of the central
board. The business management should be in a president and other
officers selected by the board, all of whom should hold office at the
will of the board. The chairman appointed by the central board
should merely preside at the meetings of the board of directors and
should perform the other functions assigned to him under this bill as
representative of the Federal board of control.
In section 15 there is a provision giving to the reserve banks the
power to fix their discount rates, subject to the review and determi
nation of the Federal board. The purpose, as I understand it, of
that reservation of power to the Federal board is to enable that board
to compel a reserve bank to raise its discount rate, if, in the opinion
of the Federal board, the bank has established too low a discount
rate that is depleting its reserves too fast by making rediscounts. 1
think that should be amended by expressing the purpose which I
understand to underly this reservation of power, namely, that the
Federal reserve board shall have power to fix the minimum discount
rate of a Federal reserve bank. No reserve bank can be kept safo
and sound if its board of directors can be compelled by some outside
authority to lend out its reserves when they think the reserve ought
not to be lent out, when the bank ought to strengthen itself. The
control over the discount rate should be simply to enable the Federal
2670
B A N K I N G AN D CU RRE N CY .
board to require the discount rate to be raised to such a point as the
Federal board thinks necessary for the safety of the banks.
Senator B ristow . Well, now, would not that lead to one reserve
bank raising, and, possibly by so doing, seek to fortify its reserve
and another bank undertake to do the same thing, and so you
will have a competition among the raserve banks for reserve?
Mr. M o r a w etz . I do not think so. Of course it is conceivable that
the management of these five regional reserve banks, if there are five,
or the management of a single reserve bank, may so manage their
affairs as to harm the interests of the country. But you have to trust
somebody.
I have already discussed the question as to the number of regional
reserve banks. I only want to say that the whole plan is enormously
weakened by having so many as 12. I do not think myself, it will
be practicable to carry out the plan at all, as under this bill they are
compelled to start with 12 of them. I doubt very much whether it
would be possible to establish 12 regional reserve banks at the present
time with the qualifications prescribed in this bill.
Senator O ’G orm an . And, as you understand this bill, if 11 of the
regional reserve banks were formed and organized and ready for
business, they could not do anything until the twelfth was organized?
M r. M orawetz . That is my understanding. But there is no possi
ble advantage that I can see from having so many. The whole object,
to my mind, of this plan is to have a separate reserve bank for each
great subdivision of the country—I mean subdivision according to
interests. The East, the South, the Central West, the Pacific States,
and possibly the Southwest. Every additional reserve bank you
establish will simply weaken the scheme. Now, the capital of these
banks is to be subscribed by the member banks. There is a provision
that each member bank shall subscribe for capital of its reserve bank
an amount equal to 20 per cent of its own capital, of which 10 per
cent is to be paid up and the other 10 per cent stand as an overhang
ing debt.
Senator O ’G orm an . It is a double liability.
Mr. M o r a w etz . It is a stock liability. Now, that provision is, to
my mind, unwise. The interests of the member banks and the regional
reserve banks are the same and their needs probably will come hand
in hand. Whenever a regional reserve bank will want to call in the
unpaid capital, the member banks will need it a great deal more than
the reserve bank. Whatever capital is subscribed should be paid up
promptly—that is, within six months or in installments; but it should
be paid up. I should limit the subscriptions of the banks to 10 per
cent of their capital, but I should authorize the regional reserve banks
to obtain additional capital by issuing and selling to the public a
5 per cent cumulative preferred stock without any voting power,
such stock to be free from taxation.
Senator H it c h c o c k . State taxation or national?
Mr. M o r a w etz . Both. It would be a very attractive investment. I
have no doubt people would subscribe for any amount of it that would
be needed, and it would greatly strengthen these banks and also
interest the public in their management. I should be glad to see it
arranged so that only a limited amount of this stock may be held by
any one person.
B A N K I N G AND CURRENCY .
2671
Senator H itc h c o c k . Free from taxation. Do you think it would
be necessary to offer such stock on a 5 per cent basis ?
Mr. M orawetz . N o ; I should say 5 per cent would be a maximum.
Senator H itc h c o c k . It seemed to me it could bear less very easily
if it is free from taxation.
Mr. M orawtetz . At the present time I do not think it should bear
less than 4 per cent.
Senator H it c h c o c k . Oh, not less than 4. I thought you said 5.
M r. M orawetz . I d id say 5.
Senator B ristow . D o you think, Mr. Morawetz. the Federal Gov
ernment would have any trouble in getting subscriptions to the Fed
eral bank stock with a 4 per cent dividend free from taxation ?
Mr. M orawetz . N o. The Government, as long as it keeps up the
gold standard and as long as it issues obligations strictly redeemable
in gold, I think, can obtain money at a 3 | per cent basis to-day.
Senator H itc h c o c k . Mr. Morawetz, do you thoroughly believe in
this system of having the banks rediscount their paper in order to
increase their business ? Of course it is un-American thoroughly; it
is a new departure. Now, are not there some evils in that we are
likely to have?
Mr. M orawetz . No. The rediscount rate will always be kept up
so high that there will be very little, if any, profit to the bank in re
discounting. There will be no profit to them in rediscounting except
as they want to replenish their reserve.
Senator H itc h c o c k . That is not the case in other countries having
a rediscount system. The rediscount rate is quite low, and it is to
encourage rediscounts.
Mr. M orawetz . They vary, of course. They are regulated accord
ing to the prevailing conditions.
Senator H itc h c o c k . Then, is it possible that the discount rate
will be high in this country and low in the European countries after
the banks in the United States have contributed a tenth of their capi
tal and impounded their reserves, neither of which is required in
European countries? If, then, they are to be subject to a high dis
count rate----Mr. M orawetz . In European countries the central bank has a capi
tal, a considerable capital, as we propose here.
Senator H itc h c o c k . But I mean none of it has been contributed
by the banks. The banks of Europe are not asked to make any sacri
fices at all to their central banks—none whatever.
M r. M oraavetz. They did that originally.
Senator H itc h c o c k . N o.
M r. M orawetz . They did originally, because the capital had to
come from somewhere.
Senator H itc h c o c k . In the case of Germany they bought up the
Bank of Prussia and there was no forced contribution from any other
banks. And in the case of the Bank of France, as I recall, a new
institution was established.
Mr. M orawetz . The capital of the bank, the money of the bank,
has been taken from somewhere.
Senator H itc h c o c k . Not necessarily from the banking capital of
the country.
M r. M orawetz . Where would it come from?
@FedFRASER